prior probability

As I mentioned in my previous two posts, Adam Smith’s famous “invisible hand” appears but once in the entire Wealth of Nations: in Book IV, Chapter 2. Is this magical hand a mere metaphor, a pious acknowledgment of divine benevolence, or just a wisecrack? Or is it something else entirely? Before we proceed to Book IV, Chapter 3 of Smith’s magnum opus, I would like to share some excerpts from my forthcoming book, Beyond Das Adam Smith Problem (with Salim Rashid), where we explore several possible interpretations of Smith’s unseen hand: divine, metaphorical, ironic, and Panglossian. (Footnotes are below the fold.)

1. Background: Three Invisible Hands

According to one Smith scholar (Harrison 2011, p. 33), “Centuries after Smith’s death, we are still struggling to fathom a two-word phrase that stands out in a thousand-page book.” In the words of another, “Few terms in the lexicon are less explanatory than Adam Smith’s ‘invisible hand’.”[1] Really? Although Adam Smith invokes an “invisible hand” only three times in the entire corpus of his works—not just in The Wealth of Nations but also in his Theory of Moral Sentiments and in his posthumously published essay on astronomy—it is no exaggeration to say that this mysterious manus has become the most famous, as well as one of the most contested, ideas in economics, and perhaps in of all the so-called “social sciences.”[2]

But is there a common thread that ties together this troika of invisible hands? Are these three sets of imaginary hands in Smith’s works reconcilable, or does the Scottish philosopher use the same words in different ways?[3] And regardless of the existence or not of a common thread, why does Smith invoke a hidden hand at all? Furthermore, whatever Smith’s motives were, what is the ontological status of this magical forelimb? Is it just a figure of speech, a metaphor standing in for equilibrium end states when competition is allowed and markets are left free?[4] Is it a divine entity, Providence?[5] Or is it a sardonic gag or punchline?[6] One of us (Rashid 1998), for example, subscribes to a rhetorical interpretation of this imaginary hand. In Rashid’s reading, Smith’s invisible hand was a mere rhetorical device, a piece of imagery, perhaps even a casual metaphor—rather than a scientific or systematic analytical tool. In short, is the invisible hand a divine entity, a mere metaphor, or a wisecrack?

2. The Divine Invisible Hand

For his part, Paul Oslington’s makes a strong case that Smith’s invisible hand refers to the guiding hand of a benevolent God.[7] According to Oslington, the term “invisible hand” was in common use during Smith’s lifetime, and its original meaning refers to the Christian idea of natural harmony through divine providence, i.e. “the possibility of special providential divine action in the economic system to guarantee its stability.”[8]

Alas, Oslington’s deistic reading of Smith’s invisible hand raises more questions than it answers. Do such invisible hand processes as language, markets, and the common law really depend on God’s benevolence or on the goodwill of a magical or godlike being? If so, if God or this divine entity is doing the work of the invisible hand, why does He (or it?) allow imperfections in these institutions, e.g. imperfect translations from one language to another, or market failures in economics, or unjust or poorly-reasoned judicial decisions in law?

3. The Metaphorical Invisible Hand

Yet another possible interpretation is that Smith invoked his invisible hand as a short-hand way of describing or standing in for the fundamental theoretical constructs in economics of “efficient markets” or “market equilibrium”, i.e. when prices are established through competition or when the amount of goods or services sought by buyers is equal to the amount of goods or services produced by sellers.[9] On this reading of the invisible hand, Smith’s magical hand is just a metaphor or figure speech, for each individual, in pursuing their own private interests, is led “as if” by an invisible hand to increase the welfare of society overall.[10]

This standard “Econ 101” interpretation, however, has three defects. One problem, as Sarah Skwire points out, is that Smith himself never used the words “as if”![11] Another, even deeper, problem is that the concept of equilibrium in economics is itself a problematic one! Some economists even deny that there is such a thing![12] Yet another problem is the Coasian one that markets are rarely efficient or perfectly competitive. In the real world, markets are full of friction: so-called “transaction costs” can prevent some markets from clearing.[13] But perhaps the main problem with the standard economics reading of the invisible hand is this: in the one instance in which he uses the term “invisible hand” in The Wealth of Nations, it’s to describe the process of capital accumulation or wealth maximization, not market efficiency or the clearing of markets. One respected economist, Warren Samuels, went as far as to suggest that Smith’s invisible hand should be “erased” from economic textbooks altogether![14]

4. The Ironic Invisible Hand

So, which of these first two competing interpretations of the invisible hand—literal or metaphorical—is the correct one? To break this interpretive impasse, Emma Rothschild, a respected economic historian at Harvard, has proposed an alternative reading: the ironic or sardonic invisible hand.[15] According to Rothschild, Smith “did not particularly esteem the invisible hand and thought of it as an ironic but useful joke.”[16] Although Rothschild concedes that the evidence for her interpretation of the invisible hand is indirect,[17] she makes two important observations: Smith refers to invisible hands three times in all—not just in The Wealth of Nations, but also in his first published book, The Theory of Moral Sentiments, as well as a third time in his posthumously published essay on the history of astronomy—and each time Smith invokes his invisible hand, it is to gently ridicule or poke fun at others. In The History of Astronomy, for example, Smith refers to “the invisible hand of Jupiter” to describe the pre-scientific theories of primitive peoples during “the first ages of the world” in which “the lowest and most pusillanimous superstition supplied the place of philosophy”:

For it may be observed, that in all Polytheistic religions, among savages, as well as in the early ages of heathen antiquity, it is the irregular events of nature only that are ascribed to the agency and power of the gods. Fire burns, and water refreshes; heavy bodies descend, and lighter substances fly upwards, by the necessity of their own nature; nor was the invisible hand of Jupiter ever apprehended to be employed in those matters. But thunder and lightning, storms and sunshine, those more irregular events, were ascribed to his favour, or his anger.” (HA, 3.2)

In contrast to his invisible hand reference in his astronomy essay, Smith invokes an invisible hand in Book 4 of The Theory of Moral Sentiments to poke fun at the rich. There, Smith invokes a trickle-down invisible hand to explain how the “natural selfishness and rapacity” of “the rich” somehow ultimately redounds to the benefit of the poor.[18] For reference, here is the complete passage:

The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species.” (TMS, IV.i.10)

For Rothschild, these invisible hand references are not meant to be taken literally or even metaphorically but rather as a mild and ironic joke, a lighthearted moment of gaiety in his otherwise dense and dignified works.

5. Conclusion: The Panglossian Invisible Hand

For our part (Guerra-Pujol & Salim, forthcoming), although we are willing to concede that her “wisecrack” theory is plausible for TMS and HA, Rothschild’s ironic interpretation of the invisible hand is far less plausible for The Wealth of Nations. Accordingly, we wish to propose a fourth possibility: what if Smith’s system of natural liberty and his invocation of an invisible hand are literary bookends, two metaphorical anchors that tie together all the many economic insights and historical digressions in The Wealth of Nations.[19] On this view, Smith invokes an “invisible hand” with the Panglossian intention of reassuring his readers that under his system of natural liberty everything will work out in the end. For reference, here is the famous (or infamous, as the case may be) “invisible hand” passage in The Wealth of Nations:

By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. (WN, IV.ii.9)

In other words, society overall will be better off when self-interested actors, who intend only their own gain, are free to pursue any trade or occupation and accumulate capital without any unnecessary legal restrictions. Our alternative interpretation of Smith’s invisible hand emphasizes the unintended consequences of individual action, an idea associated with the so-called Austrian School of economics led by Carl Menger (1840-1921), Ludwig von Mises (1881-1973, and Friedrich Hayek (1899-1992). In fact, this Panglossian interpretation can be traced back to Adam Ferguson’s oft-cited insight in his 1767 essay on the history of civil society: “Every step and every movement of the multitude, even in what are termed enlightened ages, are made with equal blindness to the future; and nations stumble upon establishments, which are indeed the result of human action, but not the execution of any human design.”[20]

More simply put, in closing, the Panglossian view of the invisible hand celebrates how our most complex and pro-social human institutions—language, markets, and the common law—have emerged over time through “bottom up” (decentralized) in contrast to “top down” (centralized) processes of self-organization, i.e. from the myriad interactions of individuals pursuing their own goals, not through deliberate design or central planning.[21]

Nota bene: I will proceed to Chapter 3 of Book IV of The Wealth of Nations on Monday, 16 February (Presidents’ Day).

Thus far this week (see here, here, and here), we have surveyed Book IV, Chapter 1 of Adam Smith’s Wealth of Nations. Next up, then, is Chapter 2, which is titled “Of Restraints upon the Importation from Foreign Countries of such Goods as can be produced at Home.” This is the first of five chapters where Smith forcefully — and to any intellectually-honest person, i.e. to any non-politician, persuasively — denounces various forms of protectionist trade policies. It is also the pivotal chapter where Smith’s famous “invisible hand” (IV.ii.9) makes its one and only appearance in Smith’s entire magnum opus. As it happens, I wrote up a detailed paragraph-by-paragraph review of Book IV, Chapter 2 last year after our rabble-rousing demagogic president announced a first round of tariffs on Canada, Mexico, and China on February 1, 2025. In fact, I wrote up 19 entries in all as follows:

1. The immortal Adam Smith (Paras. 1-2)
2. Adam Smith’s First Law (Para. 3)
3. Adam Smith’s Second Law (Para. 4)
4. The logic of the invisible hand (Paras. 5-9)
5. Adam Smith’s dire warning (Paras. 10-14)
6. Smith’s First Law Redux (Paras. 15-16)
7. Adam Smith and the conspiracy of the merchants (Paras. 17-22)
8. Das Wahre Adam Smith-Problem (“The real Adam Smith Problem”) (Para. 23)
9. Adam Smith defends the Jones Act? (Paras. 23-24, and 30)
10. Adam Smith’s defense of targeted tariffs (Para. 31)
11. Adam Smith’s digression on the necessaries of life (Paras. 32-36)
12. Two more Smithian exceptions to free trade: revenge and inertia (Paras. 37-38)
13. Adam Smith’s qualified defense of reciprocal tariffs (Para. 39)
14. Adam Smith’s fourth and final exception to free trade (Para. 40)
15. Adam Smith, absolute advantage, and free trade (Para. 41)
16. The aftermath of the Seven Years’ War and Adam Smith’s defense of natural liberty (Para. 42)
17. Adam Smith on the politics of free trade (Para. 43)
18. Adam Smith’s theory of the second best (Para. 44)
19. Adam Smith on the freedom of trade: a coda (Para. 45)

In my next post, I will say a few more words about Adam Smith’s invisible hand. For now, however, it suffices to say that if the Battle of Britain was Albion’s “finest hour”, [1] then Book IV, Chapter 2 — Adam Smith’s assault against greedy merchants and cunning politicians — is one of Smith’s finest chapters.

[1] After Germany invaded France (10 May 1940), and after the British Expeditionary Force (BEF) was forced to retreat from Dunkirk (26 May to June 4), and after Paris fell to the Nazis (14 June) — in other words, after all hope was lost that Europe would remain free — Winston Churchill delivered a rousing speech to prepare the British people for the trials and tribulations to come: “If the Empire lasts a thousand years men will say, this was their finest hour.”

Adam Smith concludes Book IV, Chapter 1 of The Wealth of Nations by highlighting two major geographical discoveries that “happened much about the same time”: the discovery of America by Columbus and the discovery of a passage to the East Indies through the Cape of Good Hope by Vasco da Gama. (See WN, IV.i.32-33.) According to Smith, both of these discoveries ended up making Europe more wealthy and prosperous than before. How? By creating an economic chain reaction — the creation of new markets and new trade routes as well as an increase in the volume of trade and in “the productive powers of labour” — a positive cascade that culminated in more wealth and prosperity for all:

“The discovery of America, however, certainly made a most essential one. By opening a new and inexhaustible market to all the commodities of Europe, it gave occasion to new divisions of labour and improvements of art, which in the narrow circle of the ancient commerce, could never have taken place for want of a market to take off the greater part of their produce. The productive powers of labour were improved, and its produce increased in all the different countries of Europe, and together with it the real revenue and wealth of the inhabitants. The commodities of Europe were almost all new to America, and many of those of America were new to Europe. A new set of exchanges, therefore, began to take place which had never been thought of before, and which should naturally have proved as advantageous to the new, as it certainly did to the old continent.” (WN, IV.i.32)

Regarding the East Indies, the Scottish political economist observes how the discovery of new trade routes through the Cape of Good Hope along the coasts of southern Africa “opened perhaps a still more extensive range to foreign commerce than even that of America.” (WN, IV.i.33) Although the nations of Europe that traded with the peoples of the East Indies ended up sending large amounts of their gold and silver abroad in exchange for East Indian goods (e.g. spices, silk, and tea), Smith explains why Europe became more wealthy–not less–in spite of this outward flow of precious metals. According to Smith, these new trade routes through the Cape of Good Hope expanded markets and opportunities for mutually-beneficial trade:

“The trade to the East Indies, by opening a market to the commodities of Europe, or, what comes nearly to the same thing, to the gold and silver which is purchased with those commodities must necessarily tend to increase the annual production of European commodities, and consequently the real wealth and revenue of Europe. That it has hitherto increased them so little is probably owing to the restraints which it everywhere labours under.” (WN, IV.i.33)

But Smith is not blind. He denounces the “savage injustice of the Europeans” who discovered and colonized the Americas: “The savage injustice of the Europeans rendered an event, which ought to have been beneficial to all, ruinous and destructive to several of those unfortunate countries.” (WN, IV.i.32; my emphasis) And he will also have some rather nasty things to say about the British East India Company in Book IV, Chapter 7 (“Of Colonies”) and in Book V, Chapter 1 (“Of the Expenses of the Sovereign”) of his magnum opus, but that is getting ahead of my chapter-by-chapter survey of The Wealth of Nations. I will thus turn my attention Book IV, Chapter 2 (“Of Restraints upon the Importation from foreign Countries of such Goods as can be produced at Home”) in my next post. It is in that chapter where Smith’s famous “invisible hand” makes its one and only appearance in 900-plus pages of The Wealth of Nations. (To be continued …)

I concluded my previous post with a question, Doesn’t the government need to maintain a positive balance of trade as well as a large amount of gold and silver reserves for national security reasons, i.e. to finance naval fleets and raise armies in the event of invasion or war? As it happens, Smith devotes most of the second half of Book IV, Ch. 1 of The Wealth of Nations (see especially paragraphs. 20-30) to this very question, and his answer is an unequivocal NO: “It is not always necessary to accumulate gold and silver in order to enable a country to carry on foreign wars, and to maintain fleets and armies in distant countries.” (WN, IV.i.20) Why not? Because it is a country’s purchasing power (i.e. the amount of goods and services it is able to make or buy), and not its reserves in precious metals, that determines its ability to finance a war:

“Fleets and armies are maintained, not with gold and silver, but with consumable goods. The nation which, from the annual produce of its domestic industry, from the annual revenue arising out of its lands, labour, and consumable stock, has wherewithal to purchase those consumable goods in distant countries, can maintain foreign wars there.” (WN, IV.i.20)

According to Smith, gold and silver can be “accumulated or stored up” in one of three different ways — “first, the circulating money; secondly, the plate of private families; and, last of all, the money which may have been collected by many years’ parsimony, and laid up in the treasury of the prince” (WN, IV.i.22) — but none of these methods of piling up precious metals, standing alone, will ever be enough to pay for a war because wars are expensive. Based on his careful review of the available evidence, Smith concludes: “The funds which maintained [Britain’s] foreign wars of the present century, the most expensive perhaps which history records, seem to have had little dependency upon the … the circulating money, or of the plate of private families, or of the treasure of the prince.” (WN, IV.i.26)

But this observation, in turn, poses a puzzle: if Britain’s wars were expensive, and if they were not financed by taking gold and silver coins out of circulation or by melting down private hoards of precious metals or by shipping gold and silver reserves out of the country, then how were these expensive wars paid for? For Smith, the answer is not gold and silver; it is commerce and commodities. Taking the Seven Years’ Was as his prime example, Smith concludes: “The enormous expense of the late war [i.e. the Seven Years’ War] … must have been chiefly defrayed, not by the exportation of gold and silver, but by that of British commodities of some kind or other.” (WN, IV.i.27) More specifically, Smith tells us that it was “the annual produce of the land and labour of the country” that were “the ultimate resources which enabled us to carry on the [Seven Years’] war.” (WN, IV.i.28)

As an aside, Smith also explains why trade in manufactured goods — more than trade in agricultural goods — is the best way to finance a foreign war:

“The commodities most proper for being transported to distant countries, in order to purchase there either the pay and provisions of an army, or some part of the money of the mercantile republic to be employed in purchasing them, seem to be the finer and more improved manufactures; such as contain a great value in a small bulk, and can, therefore, be exported to a great distance at little expense. A country whose industry produces a great annual surplus of such manufactures, which are usually exported to foreign countries, may carry on for many years a very expensive foreign war without either exporting any considerable quantity of gold and silver, or even having any such quantity to export.” (WN, IV.i.29)

“No foreign war of great expense or duration could conveniently be carried on by the exportation of the rude produce of the soil. The expense of sending such a quantity of it to a foreign country as might purchase the pay and provisions of an army would be too great. Few countries produce much more rude produce than what is sufficient for the subsistence of their own inhabitants. To send abroad any great quantity of it, therefore, would be to send abroad a part of the necessary subsistence of the people. It is otherwise with the exportation of manufactures. The maintenance of the people employed in them is kept at home, and only the surplus part of their work is exported.” (WN, IV.i.30)

Furthermore, free trade not only makes it easier for a country to finance its foreign wars; free trade also promotes economic growth and development in the aggregate:

“The importation of gold and silver is not the principal, much less the sole benefit which a nation derives from its foreign trade…. By opening a more extensive market for whatever part of the produce of their labour may exceed the home consumption, it encourages them to improve its productive powers, and to augment its annual produce to the utmost, and thereby to increase the real revenue and wealth of the society…. To import the gold and silver which may be wanted into the countries which have no mines is, no doubt, a part of the business of foreign commerce. It is, however, a most insignificant part of it. A country which carried on foreign trade merely upon this account could scarce have occasion to freight a ship in a century.” (WN, IV.i.31; my emphasis)

To simplify, the best way to make war is to allow people to make money (not just store money), and the best way to make money is to allow free trade. But if free trade is so great, why is it so maligned in politics and so rare in practice? That is, why does almost every country in the world still engage in futile and self-defeating mercantilist and protectionist politics? (To be continued …)

“It would be too ridiculous to go about seriously to prove that wealth does not consist in money, or in gold and silver; but in what money purchases, and is valuable only for purchasing.” (WN, IV.i.17)

In a letter Adam Smith wrote four years after the publication of his Wealth of Nations, the Scottish philosopher describes his magnum opus as “the very violent attack I had made upon the whole commercial system of Great Britain.” (Corr. No. 208, letter from Adam Smith to Andreas Holt dated 26 October 1780) This figurative “very violent attack” begins in earnest in Chapter 1 of Book IV of of The Wealth of Nations (available here), where Smith explodes the most dominant economic theory and policy of his time (and, alas, ours): mercantilism/protectionism (M/P). In summary, M/P is a nationalist economic policy that aims to maximize a nation’s wealth and power through the accumulation of bullion (gold and silver) and a positive balance of trade, i.e. by promoting exports and restricting imports. But as Smith shows, M/P is based on a ridiculous, fruitless, and absurd theory: that money and wealth are the same things.

In a word, Smith calls bullshit! Among other things, he draws a simple analogy, comparing the total amount of gold and silver in circulation at any given moment in time to the total amount of pots and pans and other utensils in kitchen cupboards: “Gold and silver, whether in the shape of coin or of plate, are utensils, it must be remembered, as much as the furniture of the kitchen.” (WN, IV.i.19) As a result, any government policy that would try to artificially increase the total amount of kitchen utensils in a country would be patently absurd (“ridiculous”) as well as counterproductive because the number of pots and pans in a country is a function of the demand for kitchen utensils:

“But it readily occurs that the number of such [kitchen] utensils is in every country necessarily limited by the use which there is for them; that it would be absurd to have more pots and pans than were necessary for cooking the victuals usually consumed there; **** that to attempt to increase the wealth of any country, either by introducing or by detaining in it an unnecessary quantity of gold and silver, is as absurd as it would be to attempt to increase the good cheer of private families by obliging them to keep an unnecessary number of kitchen utensils.” (WN, IV.i.19)

More fundamentally, Smith shows how gold and silver are commodities that are subject to market forces, just like any other article of commerce. Consider what happens, for example, when the demand for gold and silver exceeds the supply of such precious metals. When this happens, there are many ways that a free country — i.e. a country with free markets — is able to overcome this shortfall:

“If … gold and silver should at any time fall short in a country which has wherewithal to purchase them, there are more expedients for supplying their place than that of almost any other commodity. If the materials of manufacture are wanted, industry must stop. If provisions are wanted, the people must starve. But if money is wanted, barter will supply its place, though with a good deal of inconveniency. Buying and selling upon credit, and the different dealers compensating their credits with one another, once a month or once a year, will supply it with less inconveniency. A well-regulated paper money will supply it, not only without any inconveniency, but, in some cases, with some advantages. Upon every account, therefore, the attention of government never was so unnecessarily employed as when directed to watch over the preservation or increase of the quantity of money in any country.”

In other words, barter, credit transactions, and paper money will pick up the slack when the supply of gold and silver is too small relative to demand. Next, consider the more interesting situation when a country has too much gold and silver: “When the quantity of gold and silver imported into any country exceeds the effectual demand, no vigilance of government can prevent their exportation.” (WN, IV.i.13) Why? Because when a country has an excess supply gold and silver relative to demand, the value of these precious metals will drop: it thus makes more sense for people with large amounts of gold and silver to export these precious metals abroad in exchange for consumable goods, and no amount of mercantilist government intervention will be able to stop this outbound flow of precious metals, since gold and silver are easy to smuggle across borders. (WN, IV.i.14)

In short, the total amount of gold and silver in a country is a function of supply and demand. But that said, what about national defense, which Smith describes as the “first duty” of government in Chapter 1 of Book V of The Wealth of Nations? Doesn’t the government need to maintain a positive balance of trade as well as a large amount of gold and silver reserves for national security reasons, i.e. to finance naval fleets and raise armies in the event of invasion or war? I revisit Smith’s original reply to this mercantilist point in my next post. (To be continued …)

My wife Sydjia and I are huge Bad Bunny fans and can’t wait to watch his halftime show at this year’s Super Bowl (Super Bowl LX). In the meantime, check out this preview of Bad Bunny’s halftime show as well as his Tiny Desk Concert from last year (7 April 2025). IMO, Spanish is just as much a part of our North American heritage as the English language is — especially considering that Florida, Texas, and California, along with Cuba and Puerto Rico, were all Spanish-speaking territories before they were acquired by the United States. It’s about time that Puerto Rico be admitted into union as the 51st State! 🇵🇷🇺🇸

In the fourth and final chapter of Book III of The Wealth of Nations (Bk. III, Ch. 4, available here), Adam Smith explains how commerce and trade in urban areas ended up planting the seeds of feudalism’s destruction. According to Smith, the rise of free and prosperous cities and towns in Europe contributed to the demise of feudalism in three ways:

1. New markets. First off, cities and towns provided “a great and ready market” for “the two greatest and most important articles of land produce, bread and butcher’s meat.” (WN, III.iv.2 & 20) In other words, feudal lords now had a powerful economic incentive to manage and improve their lands in a more productive and efficient manner instead of allowing their lands to remain uncultivated.
2. New landlords. Next, as towns and cities became more prosperous, many urban merchants decided to become landowners themselves and put their lands to productive use: “the wealth acquired by the inhabitants of cities was frequently employed in purchasing such lands as were to be sold, of which a great part would frequently be uncultivated. Merchants are commonly ambitious of becoming country gentlemen, and when they do, they are generally the best of all improvers.” (WN, III.iv.3)
3. Liberty and security. Lastly and — for Smith — most importantly, towns and cities were safe spaces that were free:

“Thirdly, commerce and manufactures gradually introduced order and good government, and with them, the liberty and security of individuals, among the inhabitants of the country, who had before lived almost in a continual state of war with their neighbours and of servile dependency upon their superiors. This, though it has been the least observed, is by far the most important of all their effects.” (WN, III.iv.4)

But most ironic of all, Smith tells us, it was the great feudal lords themselves who committed collective suicide, so to speak! According to Smith, these men were so vain, so selfish, and so short-sighted that they readily and cheerfully pissed away their power and privilege in exchange for expensive and exclusive luxury goods. Smith’s stinging analysis is worth quoting in full:

“But what all the violence of the feudal institutions could never have effected, the silent and insensible operation of foreign commerce and manufactures gradually brought about. These gradually furnished the great proprietors with something for which they could exchange the whole surplus produce of their lands, and which they could consume themselves without sharing it either with tenants or retainers. All for ourselves and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other persons. For a pair of diamond buckles, perhaps, or for something as frivolous and useless, they exchanged the maintenance, or what is the same thing, the price of the maintenance of a thousand men for a year, and with it the whole weight and authority which it could give them. The buckles, however, were to be all their own, and no other human creature was to have any share of them; whereas in the more ancient method of expense they must have shared with at least a thousand people. With the judges that were to determine the preference this difference was perfectly decisive; and thus, for the gratification of the most childish, the meanest, and the most sordid of all vanities, they gradually bartered their whole power and authority.” (WN, III.iv.10; my emphasis)

Smith then closes the circle: the vanity of the feudal lords, combined with shrewd self-interest of city merchants and manufacturers, ended up igniting a fortuitous “revolution” — the self-destruction of feudalism and the expansion of order and good government as well as liberty and security — an unexpected but socially beneficial coup du système (if I may be permitted to say) that no one intended or planned on ahead of time:

“A revolution of the greatest importance to the public happiness was in this manner brought about by two different orders of people who had not the least intention to serve the public. To gratify the most childish vanity was the sole motive of the great proprietors. The merchants and artificers, much less ridiculous, acted merely from a view to their own interest, and in pursuit of their own pedlar principle of turning a penny wherever a penny was to be got. Neither of them had either knowledge or foresight of that great revolution which the folly of the one, and the industry of the other, was gradually bringing about.

“It is thus that through the greater part of Europe the commerce and manufactures of cities, instead of being the effect, have been the cause and occasion of the improvement and cultivation of the country.” (WN, III.iv.17-18)

Nota bene: I will proceed to Books IV and V of Smith’s Wealth of Nations on Monday, Feb. 9.

“The [feudal] lords despised the burghers, whom they considered not only as of a different order, but as a parcel of emancipated slaves, almost of a different species from themselves. The wealth of the burghers never failed to provoke their envy and indignation, and they plundered them upon every occasion without mercy or remorse. The burghers naturally hated and feared the lords.” (WN, III.iii.8)

In Chapter 3 of Book III of The Wealth of Nations (available here), Adam Smith surveys the rise of cities and towns in Europe after the collapse of the Roman Empire and explains why so many inhabitants of these urban enclaves, i.e. the burghers, became more and more wealthy over time while the vast majority of their counterparts in the countryside remained impoverished and subservient.

To begin, Smith tells us that, after the fall of Rome, “The towns were chiefly inhabited by tradesmen and mechanics, who seem in those days to have been of servile, or very nearly of servile condition.” (WN, III.iii.1) Nevertheless, despite their servile status — especially when compared with the great lords of the countryside — these humble artisans enjoyed a major advantage: they were outside the legal jurisdiction of the despotic feudal lords. In short, they were free! Or in the immortal words of Adam Smith: “But how servile soever may have been originally the condition of the inhabitants of the towns, it appears evidently that they arrived at liberty and independency much earlier than the occupiers of land in the country.” (WN, III.iii.3; my emphasis)

Among the freedoms (the adult male) inhabitants of towns and cities enjoyed were the right to marry off their daughters without a feudal lord’s permission, the right to dispose of their property by will (again, without a lord’s permission), and the right of appointing their own rulers and of making their own laws. (WN, III.iii.3-7) And furthermore, they were free to trade with whomever they pleased! For Smith, it was these economic and legal freedoms that led to the economic growth and development of the cities and towns of Europe in marked contrast to the despotic and feudal economic stagnation of the European countryside. On this note — the Smithian connection between freedom and economic growth and between the lack of freedom and economic stagnation — the wisdom of the Scottish political economist is worth quoting in full:

“Order and good government, and along with them the liberty and security of individuals, were, in this manner, established in cities at a time when the occupiers of land in the country were exposed to every sort of violence. But men in this defenceless state naturally content themselves with their necessary subsistence, because to acquire more might only tempt the injustice of their oppressors. On the contrary, when they are secure of enjoying the fruits of their industry, they naturally exert it to better their condition, and to acquire not only the necessaries, but the conveniences and elegancies of life. That industry, therefore, which aims at something more than necessary subsistence, was established in cities long before it was commonly practised by the occupiers of land in the country. If in the hands of a poor cultivator, oppressed with the servitude of villanage, some little stock should accumulate, he would naturally conceal it with great care from his master, to whom it would otherwise have belonged, and take the first opportunity of running away to a town. The law was at that time so indulgent to the inhabitants of towns, and so desirous of diminishing the authority of the lords over those of the country, that if he could conceal himself there from the pursuit of his lord for a year, he was free for ever. Whatever stock, therefore, accumulated in the hands of the industrious part of the inhabitants of the country naturally took refuge in cities as the only sanctuaries in which it could be secure to the person that acquired it.

“The inhabitants of a city, it is true, must always ultimately derive their subsistence, and the whole materials and means of their industry, from the country. But those of a city, situated near either the sea coast or the banks of a navigable river, are not necessarily confined to derive them from the country in their neighbourhood. They have a much wider range, and may draw them from the most remote corners of the world, either in exchange for the manufactured produce of their own industry, or by performing the office of carriers between distant countries and exchanging the produce of one for that of another. A city might in this manner grow up to great wealth and splendour, while not only the country in its neighbourhood, but all those to which it traded, were in poverty and wretchedness.” (WN, III.iii.12-13; my emphasis)

If I could therefore sum up the main takeaway of Smith’s Wealth of Nation in a few words, I would say: “Legalize Freedom and Protect Property Rights.” But at the same time, Smith’s formula — his ringing defense of liberty along with his call for good government — poses a political paradox: governments enact and enforce laws, but laws, by definition, limit liberty. (To be continued …)

In Chapter 2 of Book III of The Wealth of Nations (available here), Adam Smith surveys the most dominant social, political, and economic system that arose in Western Europe after the collapse of the Roman Empire: feudalism. But Smith doesn’t waste any time on trivial matters, like knights, jousts, or the feudal code of chivalry. Instead, his focus is on the economics of feudalism, on why this medieval system stunted economic growth and development for centuries. For Smith, feudalism is synonymous with concentrated power and slavery. Indeed, both of these features of the feudal system — large landed estates, most of which is uncultivated, and slave labor — are closely connected, if not intertwined.

According to the Scottish political economist, feudalism is an economically inefficient system for two reasons. One is feudal law: institutions like primogeniture and entails prevent land from being freely sold or divided into smaller plots. As a result, land — the most valuable capital asset of all in Smith’s day — is not only concentrated in the hands of a small cabal of powerful landowners or lords; these rigid legal restrictions also prevent the land from being put to its highest-valued use. (See WN, III.ii.2-7.) Worse yet, the power and wealth of feudal landowners are built on slave labor, and as Smith explains in Paragraphs 9-13 of Chapter 2 of Book III of The Wealth of Nations, slavery is an inefficient and unjust system that impedes economic growth and development. Smith’s economic critique of slavery and coercion is timeless and thus bears repeating in full:

“But if great improvements are seldom to be expected from great proprietors, they are least of all to be expected when they employ slaves for their workmen. The experience of all ages and nations, I believe, demonstrates that the work done by slaves, though it appears to cost only their maintenance, is in the end the dearest of any. A person who can acquire no property, can have no other interest but to eat as much, and to labour as little as possible. Whatever work he does beyond what is sufficient to purchase his own maintenance can be squeezed out of him by violence only, and not by any interest of his own. In ancient Italy, how much the cultivation of corn degenerated, how unprofitable it became to the master when it fell under the management of slaves, is remarked by both Pliny and Columella. In the time of Aristotle it had not been much better in ancient Greece. Speaking of the ideal republic described in the laws of Plato, to maintain five thousand idle men (the number of warriors supposed necessary for its defence) together with their women and servants, would require, he says, a territory of boundless extent and fertility, like the plains of Babylon.” (WN, III.ii.9; my emphasis)

In other words, incentives matter! Enslaved persons are less productive and efficient than freemen and proprietors not because they are morally or genetically inferior but because their labour is coerced — slaves do not get to keep the fruits of their labour — or in the immortal words of Adam Smith: “Avarice and injustice are always short-sighted ….” (WN, III.ii.16) But Smith’s timeless critique of slavery — and of feudalism more generally — begs the question, How did some parts of Europe transition from the feudal system to the Age of Enlightenment? (To be continued …)

Why are some nations stagnant and poor, while others are vibrant and prosperous? We now turn to Book III of Adam Smith’s Wealth of Nations. As it happens, Book III, the third of five “books” or thematic sections in all, is subtitled “Of the different Progress of Opulence in different Nations”, and it is the shortest part of Smith’s magnum opus: it contains four chapters that together span a mere 60 pages of the Glasgow edition of The Wealth of Nations. (By comparison, Smith’s “digression” on the value of silver at the end of Book I is almost twice as long as the entirety of Book III!)

In Chapter 1 of Book III (available here), Smith compares and contrasts the “great commerce of every civilised society … between the inhabitants of the town and those of the country.” (WN, III.i.1) What does this commerce between town and country consist of? The Scottish political economist tells us right off the bat:

“It consists in the exchange of rude for manufactured produce, either immediately, or by the intervention of money, or of some sort of paper which represents money. The country supplies the town with the means of subsistence and the materials of manufacture. The town repays this supply by sending back a part of the manufactured produce to the inhabitants of the country. The town, in which there neither is nor can be any reproduction of substances, may very properly be said to gain its whole wealth and subsistence from the country.” (WN, III.i.1)

Smith then lowers the boom (so to speak) by taking aim at one of the most “absurd speculations” regarding the balance of trade between town and country: “Among all the absurd speculations that have been propagated concerning the balance of trade, it has never been pretended that either the country loses by its commerce with the town, or the town by that with the country which maintains it.” (WN, III.i.1) Why is the Trumpian doctrine of the balance of trade — in this case, domestic or internal trade between town and country — so “absurd” (to borrow Smith’s own term)? Because the world is not a zero-sum place. There are gains from trade:

“We must not, however, upon this account, imagine that the gain of the town is the loss of the country. The gains of both are mutual and reciprocal, and the division of labour is in this, as in all other cases, advantageous to all the different persons employed in the various occupations into which it is subdivided. The inhabitants of the country purchase of the town a greater quantity of manufactured goods, with the produce of a much smaller quantity of their own labour, than they must have employed had they attempted to prepare them themselves. The town affords a market for the surplus produce of the country, or what is over and above the maintenance of the cultivators, and it is there that the inhabitants of the country exchange it for something else which is in demand among them. The greater the number and revenue of the inhabitants of the town, the more extensive is the market which it affords to those of the country; and the more extensive that market, it is always the more advantageous to a great number.” (WN, III.i.1; my emphasis)

Adam Smith thus makes what I would describe as his single-most important contribution to the world of ideas: he presents a positive-sum view of the world. And even more importantly, Smith not only explains why trade is a positive-sum game (not a zero- or negative-sum one); he also begins to lay the intellectual groundwork that will allow us to answer the key question I posed above, Why are some nations poor, while others are wealthy? (To be continued …)