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 …)