DaDaDa! DaDaDa! This is Smith Center! Part 3 of Chapter 7 of Book IV of The Wealth of Nations — available here; scroll down to “Part Third” — is yet another must-read, for the great Adam Smith concludes his chapter on colonialism with a number of significant and still-relevant observations. To get us started, below is my personal highlight reel of Adam Smith’s “top ten plays” (so to speak), the ten most timeless Smithian insights of this lengthy chapter:

#10. The formal title of Part 3 of Chapter 7 is “Of the Advantages which Europe has derived from the Discovery of America, and from that of a Passage to the East Indies by the Cape of Good Hope” (WN, IV.vii.c), but Smith doesn’t get around to these major discoveries until almost the very end of this lengthy chapter (Paragraph 80). But it’s what Smith has to say in the first 79 paragraphs that will really take your breath away!

#9. Smith begins Part 3 on a promising note: after recapping the previous part of this chapter — “Such are the advantages which the colonies of America have derived from the policy of Europe” (WN, IV.vii.c.1) — Smith then asks, “What are those which Europe has derived from the discovery and colonization of America?” (WN, IV.vii.c.2)

#8. In answering the above question, Smith uses the phrase “dead weight” for the first time. Indeed, his full answer is so direct and brutal that it deserves to be quoted in full:

“The exclusive trade of the mother countries tends to diminish, or, at least, to keep down below what they would otherwise rise to, both the enjoyments and industry of all those nations in general, and of the American colonies in particular. It is a dead weight upon the action of one of the great springs which puts into motion a great part of the business of man-kind. By rendering the colony produce dearer in all other countries, it lessens its consumption, and thereby cramps the industry of the colonies, and both the enjoyments and the industry of all other countries, which both enjoy less when they pay more for what they enjoy, and produce less when they get less for what they produce. By rendering the produce of all other countries dearer in the colonies, it cramps, in the same manner the industry of all other countries, and both the enjoyments and the industry of the colonies. It is a clog which, for the supposed benefit of some particular countries, embarrasses the pleasures and encumbers the industry of all other countries; but of the colonies more than of any other. It not only excludes, as much as possible, all other countries from one particular market; but it confines, as much as Possible, the colonies to one particular market; and the difference is very great between being excluded from one particular market, when all others are open, and being confined to one particular market, when all others are shut up. The surplus produce of the colonies, however, is the original source of all that increase of enjoyments and industry which Europe derives from the discovery and colonization of America; and the exclusive trade of the mother countries tends to render this source much less abundant than it otherwise would be.” (WN, IV.vii.c.9; my emphasis)

#7. Colonies generate negative returns: “Such colonies [those of Spain, Portugal, and England], therefore, have been a source of expense and not of revenue to their respective mother countries.” (WN, IV.vii.c.13)

#6. In developing his timeless critique of exclusive trade monopolies (WN, IV.vii.c.14-44), which Smith denounces as an “invidious and malignant project” (WN, IV.vii.c.18), Smith uses the term “absolute advantage” for the first time. (See WN, IV.vii.c.16 & IV.vii.c.18.)

#5. Smith draws a connection between trade monopolies and the legal environment of business. More specifically, Smith compares and contrasts the “irregular and partial administration of justice” in Spain and Portugal, “which often protects the rich and powerful debtor from the pursuit of his injured creditor, and which makes the industrious part of the nation afraid to prepare goods for the consumption of those haughty and great men to whom they dare not refuse to sell upon credit, and from they are altogether uncertain of repayment” (WN, IV.vii.c.53), with the “equal and impartial administration of justice” in Britain, “which renders the rights of the meanest British subject respectable to the greatest, and which, by securing to every man the fruits of his own industry, gives the greatest and most effectual encouragement to every sort of industry.” (WN, IV.vii.c.54)

#4. Smith explains why “the monopoly of the colony trade” is “like all the other mean and malignant expedients of the mercantile system ….” (WN, IV.vii.c.56) Simply put, trade monopolies benefit small groups of merchants at the expense of everyone else: “It is thus that the single advantage which the monopoly procures to a single order of men is in many different ways hurtful to the general interest of the country.”

#3. Smith hurls the memorable insult “a nation of shopkeepers” to describe this particular brand of crony capitalism, to take British merchants to task for using their money and influence to procure counter-productive trade monopolies:

“To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers; but extremely fit for a nation whose government is influenced by shopkeepers.” (WN, IV.vii.c.63)

#2. So, what is to be done? Smith, ever the pragmatist, has no idea:

“To open the colony trade all at once to all nations might not only occasion some transitory inconveniency, but a great permanent loss to the greater part of those whose industry or capital is at present engaged in it. The sudden loss of the employment even of the ships which import the eighty-two thousand hogsheads of tobacco, which are over and above the consumption of Great Britain, might alone be felt very sensibly. Such are the unfortunate effects of all the regulations of the mercantile system! They not only introduce very dangerous disorders into the state of the body politic, but disorders which it is often difficult to remedy, without occasioning for a time at least, still greater disorders. In what manner, therefore, the colony trade ought gradually to be opened; what are the restraints which ought first, and what are those which ought last to be taken away; or in what manner the natural system of perfect liberty and justice ought gradually to be restored, we must leave to the wisdom of future statesmen and legislators to determine.” (WN, IV.vii.c.44; my emphasis)

#1. So, what is Number One? I will reveal what I consider to be the Top Play or Smithian highlight from Chapter 7 in my next post!