I concluded my discussion of Adam Smith’s theory of economic development in Chapter 1 of Book II of The Wealth of Nations (see my previous post) with this observation: “a poor or developing nation does not make progress by accumulating or hoarding money and other assets; a nation becomes wealthy when her capital assets are put to productive use.” But this conclusion, in turn, begs the $64 question, how does a nation actually go about putting her capital assets to productive use? As I see it, this question is what this part (Book II) of Smith’s Wealth of Nations is all about!

To the point, for Smith two ingredients are essential for economic growth and development: law and liberty. In summary, if people are free to make their own choices and if property rights are more or less secure and the legal environment is stable (what Smith refers to as “tolerable security”; see the passage quoted below), capital assets will not only be put to good use; they will gravitate to their best or most productive uses! I have already commented on Smith’s resounding and timeless defense of liberty (see here, for example) [1], today I will focus on the “law” side of Smith’s economic equation, for the Scottish philosopher himself compares and contrasts two different types of legal environment in the last two paragraphs of Chapter 1 of Book II of The Wealth of Nations:

“In all countries where there is tolerable security, every man of common understanding will endeavour to employ whatever stock he can command in procuring either present enjoyment or future profit. If it is employed in procuring present enjoyment, it is a stock reserved for immediate consumption. If it is employed in procuring future profit, it must procure this profit either staying with him, or by going from him. In the one case it is fixed, in the other it is a circulating capital. A man must be perfectly crazy who, where there is tolerable security, does not employ all the stock which he commands, whether be his own or borrowed of other people, in some one or other of those three ways.

“In those unfortunate countries, indeed, where men are continually afraid of the violence of their superiors, they frequently bury and conceal a great part of their stock, in order to have it always at hand to carry with them to some place of safety, in case of their being threatened with any of those disasters to which they consider themselves as at all times exposed.” (WN, II.i.30-31; my emphasis)

Nota bene: I will resume my survey of Book II of The Wealth of Nations on Monday, 26 January, and then push into Book III by the end of next week!

[1] Cf. WN, I.x.1, where Smith extols the advantages of “a society where things were left to follow their natural course, where there was perfect liberty, and where every man was perfectly free both to choose what occupation he thought proper, and to change it as often as he thought proper.”