“A recent work of text mining of Smith’s works … shows that ‘silver’ is the most relevant word in the Wealth of Nations (followed by expense, tax, profit, rent, corn, colonies).” — Paganelli (draft paper)
As the quote above indicates, another of my favorite talks at this year’s International Adam Smith Society (IASS) meeting was Maria Pia Paganelli’s fascinating presentation on “Adam Smith’s Digression on Silver.” By way of background, the “Digression on Silver” is a long passage that appears at the end of Book I, Chapter 9 of Adam Smith’s magnum opus on The Wealth of Nations (WN). This digression, however, is usually dismissed by scholars as too long, too detailed, or too boring. Professor Paganelli’s contribution is to explain why the Digression on Silver contains Smith’s most powerful argument against mercantilism and should thus be read as the centerpiece of WN!
In summary, mercantilism is a fallacious, zero-sum economic theory that politicians from Joe Biden to Donald Trump continue to espouse in order to justify restrictions on free international trade. According to this now-debunked economic theory, a government should take aggressive steps to ensure that exports (domestic products sold overseas) exceed imports (especially foreign-made finished goods) in order to increase capital inflows and thus accumulate wealth and prosperity. In other words, for mercantilists, the money generated from capital inflows is equated to wealth and prosperity, and mercantilists in Adam Smith’s day believed that when money increased, prices increased, and so did a nation’s wealth.
But according to Professor Paganelli’s careful analysis of Smith’s “Digression on Silver”, Adam Smith attacked the logic of mercantilism in his digression by taking a deeper and critical look at the relationship between the value of silver and the level of wealth. Specifically, Smith asserts, contra the mercantilists, that it was an increase in political stability (i.e. a decline in domestic insurrections and foreign wars) that allowed wealth to grow, which in turn is what caused real prices to decrease and what also simultaneously caused an increase in the quantity of silver that led to an increase in nominal prices.
For Smith, then, the mercantilists’ main error was to focus on nominal prices instead of real prices, leading them to incorrectly attribute a causal relation between the increases in silver and in wealth. Smith, by contrast, showed that the mercantilist correlation between nominal prices and wealth was not causation but just the coincidence of many simultaneous and independent events, or in the eloquent words of Paganelli, “The Digression on Silver leaves mercantilists with nothing: what seems to be is not what is. Money may seem to be wealth, but it is not.”
Note: I will conclude this three-part series in the next day or two with Sarah Skwire’s IASS talk “As If: Clueless about the Invisible Hand.”