Adam Smith's "The Wealth of Nations" (Part 3/4)

Hey everyone, back again. Today we're going to continue our exploration of Adam Smith's The Wealth of Nations, now with book number four of Systems of Political Economy. And before jumping into it, if you want to follow me anywhere other than here, you can find me on Instagram at theory underscore and underscore philosophy, or on Twitter at David Guineo. If you found this on YouTube, you'll be able to find it in podcast form pretty much anywhere where you get podcasts, where there shouldn't be any ads. Or if you found it in podcast form, you'll be able to find it on YouTube, where there should be other videos as well, if you're into that at all.

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So given the title of this book being Of Systems of Political Economy, it is important to understand what political economy is for Adam Smith, where he defines it as a branch of science of a statement or legislator. And its task is to, one, essentially provide revenue or subsistence to the people, or allow them to do it themselves by, you know, getting rid of restrictions and regulations, stuff like that. Or number two, to supply the state with a revenue sufficient for the public services. So those are kind of the two responsibilities of a legislator or, you know, politician in terms of political economy, that is what they're doing with their political power to influence the economy in order to serve the people.

Now up to this point, and I think that I've already made this abundantly clear, the idea was that the more money there was circulating within a nation, in the form of gold or silver or paper money or whatever, would be an indicator of a nation's wealth, whereas for Adam Smith, he says that that actually has no actual determining factor on a nation's wealth because that could only be due to inflation or all it is really raising is the nominal value of money, of a nation's wealth, rather than its real value, which can only come from labor and the capacity to purchase labor through money.

And one of the interesting things about this chapter that he's going to, or this book I should say, that he's going to lay out, is just how bad capitalists are at capitalism, which might seem like a very strange thing to say. But one of the things that he's going to point out is that political efforts are very much influenced by greedy capitalists that end up hurting themselves in the long run, because greedy capitalists are going to try and establish monopolies so that they're the only suppliers of a certain good. And what that does is it might make them wealthy for a short period of time, it'll just bring up the prices artificially of everything else, making stuff more expensive for them in the long run, and it's going to bring down everybody's potential to actually have any kind of economic impact and to accrue any kind of real wealth in that society. But that'll unfold throughout the course of the chapter of the book here.

So political economy is focused primarily in two domains. That is, it can be concerned with commerce, or dealing with merchants, dealing with trade, everything like that, or it can deal with agriculture. So there's either the system of commerce or the system of agriculture in terms of political economy. Now of course, the only way any kind of political economy is really possible is with the existence of some kind of currency, be it gold or silver or paper money or whatever. And the reason that those have value in terms of their holding the potential to be currency is because they can't really be consumed on their own.

Any way that they are consumed, like in the case of gold, let's say it is worn down or kind of melted down to be formed into a necklace or something, it still retains its value as gold in terms of its weight. It can't be eaten or anything, at least I assume not. It can't be eaten or anything and then disappear from the market economy. It is always going to be present, unless it gets destroyed or sinks to the bottom of the ocean or whatever. But barring those possible instances, it's always going to have value. So because of this, many people thought, as I've already suggested, that the more gold a country has, therefore the better off that they will be.

So various restrictions were put in place, and he's talking about this all before the late 18th century, so we're talking about the 1700s here, the 1600s, the 1500s. And he's going all the way back, looking at various instances where this has occurred. But many legislators sought to put up restrictions to limit the exportation of gold. But they believed that if they traded with another country, in which they would be giving gold to another country for some goods, let's say wheat, for example, whatever, something that could be consumed, then at the end of the day, you're going to have consumed that wheat, and then it's going to be gone, and your gold will have been gone. So there were various restrictions put up to limit the exportation of gold, either through trade or through any other means.

Now Adam Smith doesn't like this at all. Adam Smith thinks that that's actually a way to hinder an economy's growth, because just because you're getting rid of gold doesn't actually mean that your real wealth of a nation is going down. In fact, by doing that, you are acquiring something, which is then going to feed into your economy that is going to have a beneficial effect by virtue of that, because it's obviously something that you need.

Now this is, of course, dealing with a system in which apparently everything is perfectly free, people operate purely out of their own interest, and there isn't any kind of inhibiting factors, and whether or not any such system has ever actually existed is certainly up for debate, but in any case, we have to be kind of imaginary here to actually engage with Smith. So one of the ways that Smith exists in a kind of fairy tale land, or he exists kind of fantastically, is when he writes something like this, where it says that it would be absurd to have more pots and pans than were necessary, and the quantity of gold and silver is in every country, limited by the use which there is for those metals.

Now of course, he's just talking about this in some kind of strange world in which something like just affluence or conspicuous consumption, thinking about the work of Thorstein Bevelen doesn't have any effect, when in fact we know very well, especially today, people just buy things for the sake of buying them, whereas Adam Smith says that in the case of this imaginary perfect world of supply and demand, we will only acquire what we need, essentially to be, to satisfy ourselves, to be good workers, to be good capitalists, to be good whatever. Now this is very imaginary, and it's something that we have to obviously be very mindful of going forward, because it's difficult to assess how tenable these ideas actually are.

But in any case, he uses this argument to demonstrate that trade is not going to inhibit the country that is giving up gold. So they're only going to acquire things, apparently, that they actually need. So they give up gold, but they're doing it for the sake of acquiring something that is going to enter into their economy, and that is going to work in favor of productive labor and of production more generally, which is going to be good for the country's GDP in the long run. Because remember, wealth is not measured by its nominal value, that is by the dollar value.

It is measured by how much labor it can acquire, or how many other things that are essentially stand-ins for labor it can acquire. So one of the other ideas was that if they, that is the legislators, restricted importation, then that would mean that people would have to be dependent upon their own production of a nation. So a nation maybe couldn't buy corn from a neighboring nation or whatever. So therefore they would have to ramp up their own production of corn to then meet that nation's or their own nation's demand, which maybe from the outside looking in, would be a way to actually increase GDP to increase a country's overall wealth.

Whereas Smith says that's totally absurd, because that means that you're probably going to be making it at a greater cost than you would from just buying it from a nearby nation or whatever, which is ultimately going to have a negative effect, because that is going to encroach upon pure, or freedom, pure liberty in terms of trade, which is going to in the long run, again, in a kind of fairytale land, bring down prices while maximizing the possible, you know, what the consumer can get out of it.

Because let's say one country happens to live on extremely plentiful lands where they're able to make a lot of corn quite easily, they could then sell it at a much cheaper price than another country could make it. So it would be better for both because the country can buy it for cheaper than to make it so that it could then feed its people more easily.

And so those people can be conducting other things besides just satisfying this need for gold for corn in a much more expensive way, which is going to detract from their entering into a more competitive system among other nations by making something else, or by providing some other service or whatever.

So beyond the legislators who had a kind of, according to Smith, an incorrect idea about the way that the economy worked, in a kind of conspiratorial way, Smith says that various merchants and manufacturers sought to maintain regulations so that they could maintain a monopoly on certain products.

So if there was a manufacturer that was making, I don't know, linen, then what would happen is they would influence various legislators to inhibit the importation of linen from somewhere else so that the country would be dependent upon that manufacturer. Now of course, this is absolutely what's going to happen in a free market economy because it's going to make this one person, this one manufacturer, very rich.

So it is in their interest to maintain this monopoly, at least in the short term. Now Smith is very clear that ultimately this is going to be bad for the entire system at large and for that individual manufacturer. But I don't know why Smith has so much faith in people to look ahead so far and be able to say, oh, this is going to hurt me in the end.

I should not form a monopoly that's going to make me essentially the richest person in the country right now. I shouldn't do that because in 50, 60, 100 years, it's going to affect the economy. And again, Smith is living in a fairytale land, but in any case, that's what he gives us.

Any kind of tax for Smith, any kind of regulation is going to be a hindrance on a country because it's going to be a hindrance on the free circulation of goods and capital, which is going to gravitate towards a certain equilibrium and is going to elevate all the nations involved economically or augment their economic standing and their real wealth in ways that regulations, although they try to grow an economy's wealth, are going to fail.

They aren't going to succeed at raising the wealth in the way that a free market economy will. Now at the time, Smith is obviously quite radical in his approach because he's taking on all these various misconceptions about political economy. He doesn't really have much patience for religion or anything like that. In many ways, he's really like the character Daniel.

I think his name is from There Will Be Blood. But in any case, he's also giving us here reasons to avoid national conflicts because he says that all nations will benefit more if there are no superficial ideological conflicts as long as we're engaging in trade between nations. Now of course, various nations are going to be better equipped, and this is something that I don't think he pays enough attention to, but some nations are in need of some things like access to water or food that cannot be so easily grown in some climates, in some kinds of soil, and so they are going to be more dependent upon other countries that can supply those things, which is therefore going to allow those countries that have those things to raise the prices because they know that these other countries are going to be dependent upon them. And of course, he doesn't pay any attention to that, but yeah.

So in kind of an interesting way, he says that trade was facilitated by the emergence of banks that could help with conversions because different countries would have different rates of conversion. That is, gold would be worth more in some countries than in others, and the bank would help to convert those things. And so he says in some way, the bank emerged as more of a public utility rather than a private enterprise. But like we mentioned in the last episode, it is important to maintain a close eye on these banks because predatory lending is something that can lead to inflation, which will obviously be bad for the economy and be bad for the nation at large. And likewise, regulations have been put to essentially hinder trade, to hinder exportation and importation, but it has also been put in place to encourage it, like in the case of drawbacks or bounties.

So a drawback happens when a good is imported from another country, let's say linen, with the intent of exporting it again. Now normally there would have been a fee put on that, where you can't just use a country as a kind of conduit or a kind of middle ground between trade without that country benefiting to some extent. So there would then be kind of a duty or a fee placed on a commodity that was coming in to be exported again. Now a drawback is when those are taken down, those duties or those fees are taken away in order to encourage more trade, in order to encourage more importation and then exportation. But if you might remember from the last episode, the different kinds of trade, you know there's trade that's made, like stuff made at home for foreign to be exported or stuff imported to be sold at home. But then there's also carrying trade, which is just when something is imported in order to then be exported. So a drawback would be the reduction of the fee on that process. And Smith accredits it as being useful only when you are dealing with things that cannot readily be produced at home.

So for example, if you were to have some kind of spices that were only made, for example, in India, which a country can, you know, go and trade for, bring it back home, and then from there can sell it to neighboring countries, that is useful. But if it was something that could readily be made at home, what that would do is just make the person doing the trading, that is the person importing and then exporting, more rich while leaving the rest of the country behind. So we have to kind of keep our eye on drawbacks, because although they encourage trade, they might be doing so at the expense of the general economy at large.

So likewise, bounties can be put in place, which are the reduction or the encouragement of the sale of products made at home. So for example, let's say one year there was, you know, a great year for corn in one country, and they have this surplus, they have twice as much as they need for all the people there. And corn isn't going to last forever, you know, they got to get rid of it.

So the country is going to reduce the price of the corn in order to encourage its being exported to neighboring nations. So they're going to say instead of, whatever, a dollar of corn, it's going to be 50 cents. Which Smith says is like, okay, it might look like what we are doing here is exporting things in a much more efficacious way, in a much more rapid way. But what is actually happening is that we are kind of synthetically lowering the price of a thing, which is going to ultimately affect that nation's potential to be competitive among other nations. Not to mention the fact that the reason that they're able to be sold for more is that that money is taken out of taxes, which the people in a country are going to have to pay for in order to make up for the lost cost, the lost revenue that can be generated from it.

And additionally, because the market has essentially been flooded with some kind of product, and we know from the last chapter that all products are kind of tethered together to some extent, and corn is a pretty determining factor in how much silver is going to be worth. By flooding the market with something and encouraging more trade, what that's going to mean is that a country is going to receive, that is the country who put it the bounty, is going to be receiving a lot more money in the form of gold and silver. And what that's going to do is lead to some kind of inflation, bringing up the nominal price of things, but not actually doing much to be any more, to work towards any more real wealth for the nation.

Now in addition to the possibility of drawbacks and bounties as forms of, I guess, regulation that encourage trade to some extent, he also pays a little bit of attention to what are called premiums. And premiums are just the kind of synthetic elevation of the price of a thing because of the producer's or the manufacturer's repute. So if there's a manufacturer that's super famous for what they do, like they have some special method for making a kind of chair or whatever, then that can bring up the price beyond how much actually went into it in terms of labor, in terms of raw materials, in terms of the covering of stock and profit and all that. So that's another way in which a price might be sort of artificially augmented. But Smith doesn't really pay much attention to this because he thinks that this person has obviously gained this repute, and there is some validity there.

So when we aren't dealing with government regulation, in other cases what is going to happen is that there are going to be four branches of trade, and these branches are just naturally going to regulate themselves. So there's inland trade where a merchant is going to take corn made down the road to sell in the town, for example. There's the merchant importer who's going to bring in a product from or a good from another nation to then sell to people at that nation or in that nation. There's the merchant exporter who's going to take the goods from around them in their nation to sell somewhere else. And then there's the merchant carrier, and this is the person that's going to import a good to then sell that good somewhere else to export it again. Now between these four, there's going to be a natural equilibrium that is established by virtue of apparently the law of supply and demand. And as they operate, they are going to steadily augment, that is raise, the real wealth of a nation.

Now another thing that these merchants might like is something like a treaty. And a treaty is when, let's say between two different countries, one of those countries has agreed to be the sole supplier of a specific product to the other country. So for example, let's say England will be the sole provider of tea to Scotland. You know, just humor me here. So Scotland and England have a treaty for tea.

Now all the merchants in England are obviously psyched about this because they don't have to then compete with tea producers in Ireland or whatever, or any other country. They could then hold this monopoly over the production of tea, and they can essentially sell it for whatever they want because they know they are the only suppliers of tea to Scotland. But of course, this is just ultimately going to lead to a hindrance on the economy through the formation of a monopoly, of course.

And funny enough, as a kind of an aside, because he's, in my opinion, he's really all over the place with this text, he says that in order to discourage people from being fraudulent in terms of their trade, in their accumulation of capital, he says the taxes should be reduced so that people have more money, so then they would be then less likely to commit fraud. As though greed is something that people will just get rid of as soon as they have a little bit of money, not knowing, of course, that people want to accumulate just for the sake of accumulating, and I don't know why. That doesn't figure into his analysis at all, but in any case.

And now he turns to what might be the most problematic element of this entire book so far, and that is his considering the role of colonization and what colonization necessarily means for the economy. And you know, you can't really whitewash this, Adam Smith is obviously extremely problematic in terms of his views of colonization, but there is a very interesting moment where he says that colonization was motivated by the folly of hunting after gold and silver, and the injustice of coveting the possession of a country whose harmless natives, far from having ever injured the people of Europe, had received the first adventurers with kindness and hospitality. Now this is one paragraph, or one sentence, that communicates Smith's general disdain for colonization.

Now I want to put an asterisk here and say that ultimately he acknowledges that colonization brought about great development, which is of course extremely problematic because what is that to say about indigenous people all over the world? Like was their way of life not as worthy as European ways of life, ways of being? And so obviously it's super problematic. But the original impetus behind colonization is completely mysterious for Smith. He doesn't see any reason for colonization to actually occur for this, as I just read, humanitarian reason, like encroaching upon other people's territories, but he also says it for economic reasons, where he says that it doesn't make any sense to expand your nation in such a way as to make it weaker, essentially, by establishing these colonial outposts.

Now before jumping into the specific instances that you might immediately be thinking of, like the colonization of the Americas, he considers the history of colonization a little bit more broadly. That is, he looks at the ways in which the Romans and Greeks treated colonization, where in the case of the Romans, or sorry, in the case of both Rome and Greece, colonies was a way by which the establishing of colonies was a way by which to give disgruntled citizens a piece of the pie. That is to say, okay, you know, you have a pretty bad life. Here's a little piece of land over here that no one's existing on, you know, go be satisfied over there. But this doesn't actually augment the wealth of a nation at all, because then that person is just going to go live alone and just supply for themselves, and they aren't going to be contributing to the general economy. They aren't going to be making a surplus, which can then be sold for money that someone else is going to use to then, you know, augment their own economic position. None of that is going to occur. So colonization, you know, one of the first reasons it was conducted was the belief that it was gold, you know, in these uncolonized lands.

And so they thought, oh, well, and they're submitted to the idea that as many of these European countries, Spain, England, France, believe that the more gold you had, the more gold there was in circulation, the more rich everyone was going to be. Whereas Adam Smith has already demonstrated there's actually, there's actually no way to elevate wealth. All that's going to do is cause inflation. It's going to reduce the value of gold, which is going to make everything else more expensive. So he says that people were essentially just stupid, where he says in his term, folly, which is like crazy, so to speak, where they just were submitting to the idea that more gold equals more wealth, which is totally wrong.

But despite this, the colonies proved to be extremely prosperous in terms of the European standards of prosperity. And one of the reasons that this was able to occur for him is there was a great distance between the Americas and Europe over the Atlantic Ocean. And so they were able to form their own ways of essentially living, their own ways of conducting commerce, of conducting production, and so on, that were quite novel. Now he doesn't say this explicitly, but we can kind of read it in the last sentence I wrote or I wrote, I read, where he said that, you know, the indigenous people had met the first adventurers with kindness. And we can't forget, of course, the whole thing around American Thanksgiving that was essentially an acknowledgment that the people there, the first colonizers, would have been screwed if it weren't for the indigenous people saving them and teaching them how to do all these things, which, of course, Adam Smith has no knowledge about.

But it can't be ignored that the only way that these kind of prosperous colonies were able to actually thrive, were able to exist, was from the generosity of the people who would then be screwed over and just mass slaughtered by the colonizers, both directly and indirectly in the form of viruses, in the form of, and then directly, of course, with just pure all-out violence. But the home countries, let's say, you know, England, Spain, or France, sought to encroach upon the free growth and development of the colonies by saying things like, for example, okay, the English colonies are only going to supply back to England. The French colonies are only going to supply back to France. And that essentially inhibited, it limited the possibility for trade, which brought down the possibility for more wealth, more real wealth to develop, to be accumulated.

But in any case, the colonies were beneficial to all of Europe for, I guess, two broad reasons. That is, it essentially brought up the general enjoyment, the number of enjoyments through the goods and luxuries that the people in Europe could have, because there was a lot of them in the Americas that they were just taking from indigenous populations. They were able to elevate these enjoyments, but also there was a, it allowed them to augment their industry because all of these enjoyments were, had to be paid for in some way, which encouraged the people of Europe to ramp up their industry so that they could then buy more of those things that were being discovered, you know, discovered in air quotes. Like they were already discovered, just not by Europeans.

But the greed of the mother countries or the home countries, I should say, would hinder the progress of these civilizations or these colonies, like I said, because they would want, you know, only the English colonies to supply to England instead of them being able to freely trade elsewhere. But additionally, various of these home countries would set up these taxes to be paid by the colonies, which is, of course, anyone familiar with American history would know that this was one of the big reasons that the American Revolution occurred, in that the people there were paying taxes back to England that they weren't being properly represented with.

That is, they had all this money being sent there, but they didn't actually have a say in what was going on there or how they were to conduct themselves. Now in terms of taxes, but we're going to get into it more in the next episode, but one of the things that, or some of the things that Smith sees necessary to pay for with taxes are things like, you know, a governor or, you know, basic government legislators and state people that are going to decide how money is spent in terms of perhaps industry, infrastructure, stuff like that, but also for judges, you know, for the system of law, because of course people are going to hurt other people and there's going to be need to be a way to establish law and order. So we're going to get into that more in the next episode, but just for now, that's kind of why, or the things that he thinks are important for taxes or that taxes are supposed to cover.

Now the various monopolies that were encouraged by limiting trade only back to the home country was essentially a way to benefit the producers, that is the specific capitalists and merchants who would then sell the things and trade them, but it would specifically help producers more than consumers because monopolies of course will raise the price of things and make it more difficult for the average person to buy them. And what this demanded was kind of the establishment of a whole surveillance mechanism to limit or to keep an eye on smaller manufacturers that might encroach upon that, the monopolies established by the big ones who would, you know, say, well, I could be selling my product to this other country who, you know, for whatever reason happens to want it more for a better price, but I can't because there's this monopoly formed by this one other manufacturer, which only helps them. It doesn't actually help the economy at large, which is, you know, one of the reasons why Smith thinks that these capitalists are very bad at capitalism. And this is something we're going to return to again in Marx's work where Marx says the capitalists are some of the worst capitalists, and it's really an interesting point, but we'll get into that in more detail later on.

Now so far we've been discussing this, if you've been listening, at the beginning I mentioned that political economy is broken into two big industries or two big branches. There's the political economy of commerce, but also that of agriculture. And so far we've been focused on commerce, of commercial trade, of the mercantile system, and so on. And by and large, these kinds of monopolies that are formed through, you know, state legislation and so on are meant to encourage more commerce than production, per se, to encourage more engagement within the towns in terms of exchange through these monopolies set up, meant to benefit merchants more than working people out in the country, and so on and so forth. And so we see here that there is a privileging of the towns, he uses the term towns, but we can think of it as well as cities, you know, these cities and towns through these corporations that set up these monopolies over that of the country.

So now, just before concluding the chapter, he considers more closely the system of political economy in terms of agriculture. So here he invokes the work of, I'm not going to pronounce this right, I think it's Kwisney, Kewney, I don't really know how to properly pronounce it, but in response to the privileging of the towns over the country, there was a kind of reactionary movement in the field of political economy that sought to say, sought to say, or that said that, in fact, we should be putting more of our stake in agriculture, because that is where real production occurs. And as we mentioned, in the first two episodes, Adam Smith makes a distinction between productive and unproductive labor, where unproductive labor is labor that disappears as soon as it is conducted.

So the example he gives is like a menial servant, like a butler, for example, that is just doing things just, you know, for the immediate role it will play, whereas someone engaging in like farming is going to farm enough to develop a surplus, which they can then sell, which will garner them a profit, which they can put towards making better machinery so that they can more efficiently make more and more and more and more, and that is going to elevate an economy, a country's overall wealth. So there was a reactionary movement that said, look, agriculture is much more productive, and therefore we should be privileging it over these merchants, over these manufacturers that are trying to establish these monopolies and who are essentially in bed with these politicians and legislators.

Now to this, Smith says that no, no, no, that is the wrong way to go about doing this. What we have to do is reestablish a natural equilibrium between both the system of agriculture and the system of commerce, because we need trade. We need people to be running these manufacturing zones. We need people to trade things so that people working in agriculture don't have to worry about those annoying tasks. What we have to do is get rid of the kind of political influence establishing these regulations and these restrictions that essentially allow monopolies to occur that are going to give people way too much power.

So these different fields, branches of political economy, these different kind of branches of trade and commerce and production are going to just naturally regulate themselves, which of course is another fairy tale, but in any case, it's the one that we're dealt with here or that we have to deal with here. But it's one that is going to foster a kind of steady and natural alliance between all these different fields so long as there is not this encroachment by various politicians in order to maintain monopolies or either directly or indirectly, either benevolently or maliciously try to establish various restrictions because some of these people probably think that they're actually better for the economy when, as Smith is showing, no, they're actually bad for the economy, even though Smith is writing at a time that is very, very much different than our own.

But in any case, I'm sure someone might be able to glean some relevance out of what Smith is saying. So before concluding, he gives us the kind of three or he provides us three things that a government or a sovereign in terms of the king or whatever should be focused on that, you know, they'll spend taxes on that, you know, is it going to be their only focus in a completely free economy? And those three things are the establishment of like a military to defend from invasion, the maintenance of the judicial system in the form of like, you know, judges, guards, stuff like that. And thirdly, the establishment of public works. Now he doesn't say what he means by public works.

But the next book essentially looks at how money should be spent, how taxes should be allocated, where should that money come from? Is it going to come from the consumers, the producers and so on? And what are the reasons that a country might have for procuring debt, you know, for spending more than they're necessarily bringing in? Which is, you know, he's going to look at that those three broad things in the next book.

So I hope that more or less covers this. If there's anything I excluded, anything I maybe didn't put as clearly as I could, you know, leave a comment. Let me know if you're listening to this in Apple podcast, leave a review, leave five stars that would help me out a lot. And yeah, catch you next time. Take care.