Guidebook to the Wealth of Nations: CH 10 Book V.1

Chapter 10: Book 5: Of the revenue of the sovereign or commonwealth

Chapter 1: Of the expenses of the sovereign or commonwealth

Part First: of the expence of defence

Adam Smith is not an anarco-capitalist or a promoter of no government intervention as we already saw. For him the role of the government in society grows with society itself. The more developed a society, the more complex its needs, and the more the government plays a role in it. Only in the first stages of development, in savage societies of hunters, do we see no government. But as soon as societies develop, so does government.

In this Book, Smith describes the three duties he believes a sovereign has (defense, administration of justice, and public works) and the ways to finance them (taxes and debt).

The first function that for Smith the government has is national defense: the duty to protect society against the violence and invasions of neighboring countries. This protection can be offered only with military force, the expenses of which vary from society to society.

Inspired by the tales about North American Indians, Smith believes that in the earliest stages of society, such as among hunters, every man is by necessity both a hunter and a warrior, given the nature of their subsistence. The cost of preparing and maintain an army is therefore minimal. But, what today we call the opportunity cost of fighting a war is quite high. Given the precariousness of their subsistence, if one fights in war, one does not hunt for subsistence. It is thus rare to see an army of hunters larger than a couple of hundred men. Their wars tend to be short. They are no threat to a civilized society.

Armies grow to a couple of hundred thousand soldiers with societies of shepherds, such as Arabs and Tartars. Armies of shepherds also grow to be a formidable threat for civilized societies. Among shepherds, as among hunters, every man has to be a soldier. But because of their nomadic conditions, when they go to war, the whole society goes to war. Nobody is left behind. They all move together, including their flocks, women, and children. Children play games that prepare them for war. Women are often worriers. Flocks move with them, providing subsistence including in times of wars. Shepherds can be worriers at little cost.

Agricultural societies, where farming is the norm, are more complex. People are fixed to the land. This implies that not everybody can go to war. Some people need to stay home to take care of their immobile possessions. But, as for hunters and shepherds, farmers are trained as soldiers by their daily occupation. Working the land exposes farmers to harsh weather and harsh conditions, making them accustomed to the life on a battlefield. The cost of training soldiers is therefore low for agricultural societies too. In addition, farmers can leave home between seeding and harvesting without losing much. So as long as soldiers can go back to their land to harvest, they are not very costly to maintain either.

Things are quite different in advanced societies, though. Shepherds have lots of free time, according to Smith. So they can practice martial exercises at no cost. Farmers have some leisure time. So they can practice military exercises, but not as much as shepherds. Artificers on the other hand, have no free time. Each hour they do not work is an hour without their source of subsistence. With progress in manufacture and in the arts of war, it is therefore impossible for soldiers to support themselves when they are training and when they in battle. The state needs to support the artificer when he goes to war. Thus, in civilized societies, the number of people who can go to war must be smaller than in the rude societies because soldiers need to be supported by non-soldiers.

The implication is that civilized societies are incapable of defending themselves, and yet they are the societies with the strongest need of defense. Civilized societies, thanks to their division of labor, are the wealthiest societies. Their wealth is a temptation for their poor neighbors. The probability of a successful invasion from less wealthy nations is therefore quite high.

So far Smith’s logic is quite similar to David Hume’s and most of his contemporaries. But when he offers his solution to the problem, Smith differs significantly from them. Among his circle of friends, especially the ones revolving around the Poker Club, one of the social clubs meant to offer avenues for discussion of current events, Smith stands out favoring a professional army, a standing army, as opposed to a militia.

His reasoning is as follows.

A militia implies that everybody participates in military exercises. It forces everybody to be a soldier. This is possible when the soldiers make a living through jobs that give them enough free time to be able to exercise regularly.

In ancient Greece, the state could train soldiers at very little cost. Martial exercises were mandatory for all on state provided fields. Campus Martius in Rome is a Roman example of these fields. In feudal times, archery also did the trick. But then military exercises were done less and less. So much less that in a civilized society the only way to perfect the art of war is to make it the sole or principal occupation of some men. In societies where division of labor is dominant, division of labor should include also the military. And since no individual would specialize in a profession that does not feed him, the state must provide for this specialized group.

In addition, before the introduction of firearms, the strength of an army depended on the strength and agility of its soldiers. But with firearms, what matter most is order and prompt obedience to orders. With firearms there is lots of noise and smoke in battle. Death comes in an invisible way. The skills needed in this kind of environment come from troops who train together over and over again.

Members of a militia do not have this kind of discipline since they practice once a week, not daily. They are also less ready to obey orders, for the same reason: they take order only once a week, not every day, all day.

There are exceptions, of course, but these are exceptions that testify to the validity of the rule. Tartar and Arab militias are the best ones, but their members go to war under the same leader they obey in peace time. So they are accustomed to follow his orders. A militia that fights several successive campaigns is also an exception because the duration of its engagement transformed it into a standing army. The exceptions go also in the opposite direction: a standing army can degenerate into an undisciplined militia, becoming incapable of resisting a well-trained militia.

History, for Smith, teaches us that the militia of barbarians, especially shepherds, is irresistibly superior to the militia of a civilized nation, but that a well-regulated standing army is always superior to any militia.

That a standing army goes hand in hand with a civilized nation is testified not only by the fact that only a standing army can defend the opulence of a civilized society, but also that only the opulence of a civilized nation can afford its cost.

An additional benefit of a standing army is that it is possibly the only tool to civilize and bring the law of the sovereign to some barbarous and remote provinces of a nation, such as Peter the Great did in the Russian empire.

The main objection to standing armies, as Smith knows well, is the fear that it could become a threat to liberty. But if the sovereign is the commander in chief and his nobles the chief officers, then the military force is in the hands of who has the greatest interest in preserving the civil authority, having themselves a large share in that authority. As a matter of fact, if the sovereign has the support of the aristocracy and of the standing army, small remonstrations are not a threat to him, so he can safely pardon or ignore them. So a standing army actually allows a degree of liberty that may seem to approach licentiousness.

Smith’s conclusion? Defending society from the violence and injustice of other societies becomes more and more expensive with the development of society. The introduction of firearms also increases the expense of exercise and the discipline in war and peace. Arms and ammunitions, and even cannons and mortars are expensive tools of wars, not just more expensive just to buy and use, but also more expensive to carry to the battle field.

So, in ancient times opulent and civilized nations had difficulties defending themselves against poor barbarous nations. But in modern times the opposite is true: poor and barbarous nations find it difficult to defend themselves against rich and civilized nations.

But here again Smith reminds us not to fall into the hubris of reason: the most important improvement in the art of war —the invention of gun power— was a “mere accident.”

Second Part: Of the expense of justice 

Violence and injustice can come from either outside or inside one’s society. The duty of the sovereign is to protect people against both. National defense is the first duty of the sovereign, the exact administration of justice is the second.

Just like national defense, the exact administration of justice has different costs in different kinds of societies.

Just like with defense, hunters face little or no cost to administer justice. Mostly because there is little or no justice to administer. Hunters generally do not have property, or have very little of it. What they hunt is highly perishable, so it makes sense to share it before it goes bad. The property they might have is generally not worth more than a couple of days’ work. The only injuries they may have are injuries to the person or to the reputation of a person. The injured suffers, no doubt, but the injurer does not gain from it, at least materially. Envy, malice, and resentment are the passions that generally induce these kinds of injuries. For Smith, they are not frequent. There is therefore no need to have magistrates and a regular administration of justice.

Things are different with the introduction of property. When there is property, there is inequality of wealth. And with property, the injurer benefits from the harm done to the injured. Combine the avarice and ambition in the rich, the hatred of labor and love of present ease in the poor, with envy and want and, for Smith, you have frequent and strong motivation to invade other people’s property. The presence of a civil magistrate, thus, becomes indispensable. Without the protection of the civil magistrate, owners of valuable property “can [not] sleep a single night in security”.

This is a striking point that Smith made previously in his lectures on jurisprudence when he taught at the University of Glasgow: without property there is no need for government. The civil government and the civil magistrate emerge from the need of the rich to protect themselves against the poor, for the defense of those who have property against those who do not.

Obedience to the civil magistrate needs to be explained. Using a logic similar to his contemporaries and compatriots such as Adam Ferguson, John Millar, and David Hume for example, Smith explains the causes of subordination to the authority of others, including eventually the civil government. His description of the gradual process of subordination is an alternative to contract theory where individual deliberately submit to a government.

For Smith, the first source of superiority could be personal qualities such as strength, beauty, agility, wisdom, virtue, or moderate mind. These characteristics of an individual can give great authority but cannot be easily defined. We need something more “plain and palpable”. Superiority of age is an example of it. It is more difficult to dispute who is older and who is younger.

Among hunters, there is little or no inequality of fortune. They are too poor for that. Universal poverty means universal equality. Among hunters therefore age or personal qualities are the sole foundation for authority. But usually there is little authority and little subordination.

Another example is superiority of fortune. This is actually very much the criteria of distinction in the rudest ages of society, where there is usually great inequality of wealth. Among shepherds there is possibly the greatest inequality of wealth, and it is where fortune gives the most authority. The authority of an Arabian sheriff is great; and the one of a Tartar khan is almost despotical. Picking up the description of pre-commercial societies of Book III, Smith reminds us that this is the case because men of great fortune can maintain thousands of people in a state of “servile dependency”.

The final sign of superiority comes from birth. This presupposes an ancient superiority of fortune, though, because all families are equally ancient, being the family of a prince or of a beggar. Smith never relaxes his assumption of homogeneity of nature. We are born all the same, as he declared in Book I. Superiority of birth cannot be used by hunters, since its prerequisite is ancient fortune, and hunters do not have much property. But it is very much used among shepherds, since not having luxury to dissipate their wealth on, their wealth stays in the same family for generation to generation.

It is with shepherds therefore that we see the emergence of the civil magistrate. With shepherds, distinctions by fortune and birth are in full force. A great shepherd is also a great military authority. The people who are too weak to defend themselves look up to him for protection. He is thus the best person to compel the injurer to compensate the injured.

For Smith, therefore, distinctions of birth and fortune are the origins of judicial authority.

But this kind of judicial authority is not an expense; rather it is a source of revenue for the sovereign. The person who asks for justice is willing to pay and to give gifts to receive it. And the guilty person needs to pay compensation for having violated the peace of his lord.

The fact that judges were originally itinerant, meaning they would go around the country to hear complaints and bring justice, is a sign that they were sent, yes, to offer justice where the sovereign could not reach himself, but also to collect the revenue of the sovereign.

But when the administration of justice is a source of revenue for the state, Smith tells us, we should expect gross abuses. Indeed, the larger the present one gives to a judge, the more likely it is to receive a favorable judgment. A small present would bring something less than justice. Also, the judge has incentives to wait to deliver his judgment, just in case more presents arrive.

But if this is not bad enough, things can get worst. The sovereign could hold in his own person the judicial power. Since there is nobody above the sovereign, corruption reigns as it did in all governments of Europe founded after the fall of Rome.

And yet, there is light at the end of the tunnel. Even if not by design.

As the expenses for national defense increase, the sovereign needs to find ways to get money. The rents from his private estates are no longer enough. Why not have people pay taxes for their own security? So we have taxes, offering “free” justice. Of course justice does not become free. One still needs to pay for the court and lawyers. But at least giving presents is forbidden.

Be it as it may, as commerce increases, as improvements increase, the administration of justice becomes more and more laborious for the executive power. It requires undivided attention. The executive power cannot and did not want to provide that. So it appoints deputies, bailiffs, and judges. The unintended consequence of this is that it breaks the link that united the judicial and the executive power, which always forces justice to sacrifice to politics. And this is a good thing. A very good thing. The liberty of each individual depends fundamentally on the impartial administration of justice. And this is achieved, at least in Britain, again, not by design, not by conscious reason, but by a series of accidental circumstances.

At this point, though, Smith’s narration becomes murky. The distinction between is and ought, between his historical account and his prescriptive account, is not always clear. He gives historical examples for all the parts of the story, but this does not necessarily make it into an accurate historical account, rather, it is a normative mixture of facts and suggestions. I will follow his narrative, without attempting to distinguish the “is” from the “ought”.

As gift giving is abolished, judges need another source of income. But since the office of the judge is very honorable, people do it with little monetary compensation. In Book I we were indeed told that high monetary remuneration is needed only for jobs that give us a bad reputation. Compensation in approbation reduces monetary compensation, as in this case. Anyway, because being a judge is considered honorable, the expense to the sovereign is not going to be much.

As a matter of fact, the expense to the sovereign should be none. Justice could be financed by user fees, rather than by the general revenue of the state. The sovereign does not have to get involved with it, decreasing the opportunity for corruption. Judges must respect regulations. Sovereign may not. In addition, to give the right incentives to the judges, the fee should be paid to a clerk, who gives it to the judge only after he delivers the sentence. Smith indeed declares: public services are never better performed then when the reward comes after the performance and is proportioned to its diligence.

Now, since the court fees are the principal source of revenue for the court, each court has incentive to attract business to itself. How to do it? Show greater impartiality and speedier results. Competition does miracles in the administration of justice too.

Another way to raise revenue for the court, without tapping into the general revenue of society, could be a stamp duty upon law proceedings. This is risky, though. The judge may be tempted to multiply the proceeding to multiply the duties. This is what happened when the clerk of the court were paid by the number of pages written. They multiplied the words used.

Yet another way to finance the courts could be to use the rents of landed estates or the interest on loans.

But what matters the most is that the judiciary is completely separated from the executive power. Actually, it should be as much independent from it as possible. The caprice of the executive power should not be allowed to remove judges from office; and the regular payment of the judges’ salary should not be dependent on the good will or on the finances of the executive power.

Third Part: Of the expence of publick works and publick institutions

The third and final duty of the sovereign is to erect and maintain those works beneficial to societies but unprofitable for individuals. These public works and institutions are meant to facilitate commerce of society and the instruction of the people. Like the other two duties, the expense will vary with different kinds of societies. And like the administration of justice, these public works should be financed by tolls, or something like tolls, rather than by the general revenue of society.

ARTICLE 1: Of publick works and institutions for facilitating the commerce of the society

And first, of those which are necessary for facilitating commerce in general.

Smith brings back his emphasis on good infrastructure, as he explained in Book I, Chapter iii, division of labor is limited by the extent of the market. If we can facilitate the extension of the market with good infrastructure, we are facing a worthy expense. Good roads, bridges, navigable canals, harbors are all examples of public works that facilitate commerce, the construction and maintenance of which should be considered as part of the duties of the sovereign.

Their expenses will vary with the kinds of societies they are in. For example the expense of a bridge will depend on its strength, and its strength will depend on its use. If it is seldom used, because commerce is not very common, it will require a different expense than if heavy carriages use it day in and day out as in societies where commerce is very much developed.

For Smith, these kinds of works, even if they benefit the whole society, do not necessarily have to use the general revenue of society to function. Small tolls can easily finance them. Seignorage for coinage and fees of the post office, for example, finance their activities, and also generate substantial revenue. Times have changed…

Anyway, for highways and bridges, tolls in proportion to weight would make the payment in proportion to their wear and tear. Smith thinks there could be nothing more equitable than this. After all, the expense of the toll will eventually be passed on to consumers, who are the main beneficiary of the use of the highways and bridges. Unfortunately, Smith’s understanding of the effects of tax incidence are not as lucid as one would wish. Yet, he continues, transportation costs will actually decrease thanks to the good highways and bridges, so the price of the goods carried on them will decrease. The combined effect of decreased transportation costs and increased costs due to the toll not only cancel each other out, but will decrease the final price of the goods transported. Again, there are some issues with price elasticity missing, and lack of explanations of why the overall price would decrease rather than increase but we can only take his word for it now.

Back to the toll analysis. Smith suggests that for transport of luxury goods, the toll should be higher than the proportion to its weight. This would be a way to have the “indolence and vanity of the rich to contribute to the relief of the poor” by making the transport of heavy cargos a bit cheaper.

Paying with tolls also allows us to build roads, bridges, and canals only where commerce needs them. A magnificent road through a desert country where there is no commerce but the villa of a great lord, or a great bridge built just to embellish the view from a palace, would not be able to have enough funding for their construction and maintenance. We see these kinds of works only when they are paid for with other sources of revenue.

The tolls for canals, or duty-locks, should belong to the person who cares for the canals. This sets the right incentive. If the canal is not well maintained, people will stop using it. So they will stop paying the toll. It is therefore in the interest of the person who manages it to keep it in good functioning order. If, instead, the tolls go to some commissioners, they will be less dependent on this revenue and therefore less attentive to the maintenance of the canal.

Things are different for tolls for high roads. These should not go to a private person but to commissioners. Why? Incentives again. A poorly maintained road is still usable. So the person in charge may not have incentive to keep it in good shape since he can get the tolls regardless. There is a better chance to have good maintenance if the tolls and the maintenance are in the hands of a commissioner.

“It has been said”, Smith warns us, that the army should maintain the roads and the government should collect the tolls. Whatever is “commonly said” or “commonly believed” it is usually wrong according to Smith, as we see throughout his work. Here we do not have an exception. What’s wrong here? If the tolls are used to support the expenses of the state, they will increase with the inevitable increase in those expenses. But if the tolls do increase, they no longer facilitate commerce but become an obstacle instead. In addition, a tax on weight is very much equitable if used for the repair of the roads, but it becomes unequitable if it is used for other purposes. If the tolls are proportioned to weight, assuming again (even if incorrectly) that consumers will eventually face the whole burden of the tax, poor consumers will be taxed much more heavily than rich consumers. Poor people are more likely to consume coarse and bulky things. Rich people are more likely to consume precious but light things. In addition, if the government is in charge of repairs, and does not do them, it becomes difficult to have them fixed.

It is not by accident that in France, where road maintenance is in the hands of local magistrates one sees mostly ostentatious useless works and very few useful small works. A proud minister can show off the splendor of his works to the nobility in court. Small works go unnoticed instead. So why bother with them?

There are accounts that in China the executive powers care for roads and canals, that and they work magnificently. But these account, first, come from “stupid and lying missionaries”, and second, may be partially justified by the land tax that the sovereign collects there. This land tax varies with the produce of the land. So it is in the interest of the sovereign to have good roads to transport that produce and to extend the market as much as possible. But in France there is no land tax. So that incentive does not exist.

Lesson learned? Public works should be done, maintained, and financed locally. Public works are always better maintained by local revenue and managed by local administration. The abuses of local administrations cannot be much, and can more easily be corrected than the abuses of a great empire.

Of the publick works and institutions which are necessary for facilitating particular branches of commerce. 

When we expand from domestic to foreign markets, commerce requires different conditions. In particular, if one trades with “barbarians and uncivilized people”, one needs special protections. In particular, warehouses generally need fortification. This is why both the English and the French East India Companies have forts.

But that was true also in the past. Ambassadors and similar consuls are also a consequence of this protection of trade with less civilized people. They helped decide disputes between natives and fellow countrymen. Embassies emerged from the need of commerce, not of wars. And their timing testifies to it. They started to be created in the 15th and 16th century, when commerce increased.

This protection of a particular branch of trade is different from national defense, and differently from it, it should not be paid by the general revenue of the state. It should be paid with a moderate tax on that particular branch of trade. There could be, for example, a fee to enter into a specific trade or a percentage duty on their imports and exports.

“It is said”, again a warning sign that something is wrong, it is said, Smith tells us, that the duty of custom started as a way to pay for the protection from pirates and freebooters, and since the protection of trade is for the benefit of the commonwealth, the executive power should determine and collect that duty. But, as expected there is a but, but the protection of a particular branch of trade is in the hands of particular companies of merchants, who persuaded the legislature to give them the equivalent of military powers (which they exercised in the most unjust and capricious ways) and monopoly privileges over those trades.

At the beginning these companies may fulfil a useful role, since they try something that the state would not do, at their own expense. It is acceptable to give them a temporary monopoly to compensate them for the risk and expenses faced. The monopoly should be temporary though, like a patent for a new machine or a new book. When the monopoly expires, it expires. The government should buy the forts, and trade should be open to all.

If the monopoly is kept permanently, the people are absurdly taxed twice: for the higher price of goods, and from the exclusion from profitable trade. And why? “To enable the negligence, profusion, and malversation of his own servants” who cannot even generate a profit given how disorderly their conduct is.

There are two kinds of these companies: regulated companies and joint stock companies.

The regulated companies admit anybody in them as long as they pay a fine. Each member trades with his capital at his own risk. They are like some sort of corporation seeking an enlarged monopoly. The Hamburg Company, the Russia Company, the Eastland, Turkey, and African Companies are all examples of regulated companies. They do not have or require forts or garrisons. Why? Members have no interest in the prosperity of the company. They are actually better off if there are fewer competitors. So if the general trade decreases, their own private one increases.

Joint stock companies require each member to share the profit or the loss of the company in proportion to his share in it. They do require and have forts and garrisons. Why? Because the directors have a share in the profit of the company and so it is in their interest that the company does well. The forts protect that profit. In addition, differently from regulated companies, the directors of joint stock companies manage very large capitals. Another difference from the regulated companies is that a member can sell his share at the market price, which may be different from the amount that its owner originally gave to the company. Furthermore, and most importantly shall we add, private co-partnerships have unlimited liability while owners of joint stock companies have limited liability. The difference is that an owner of a co-partnership is liable for the full amount of the debt of the company, not for the share of capital he put in originally. So if the company goes bankrupt, his personal asset is at stake. With limited liability instead, the owner of stock is liable only for the amount he contributed to the company. Add that the court of directors is controlled by the court of proprietors but the proprietors do not understand what goes on with the company, and that the proprietors get dividends without trouble or risk, then you have a dangerous cocktail.

Joint stock companies attract many who would not dare use their fortune in private co-partnerships. So they attract a lot of capital. Just imagine: the trading stock of one of these companies, the South Sea Company, was three times larger than the capital of the Bank of England.

But the directors manage other people’s money, not their own. So they are not as anxious about its correct use. It is not by accident that “negligence and profusion” are typical of joint stock companies. They cannot compete with other companies. They cannot survive without exclusive privileges, and often not even with exclusive privileges! Without exclusive privileges, they would succumb to mismanagement. But even with exclusive privileges, they still succumb to mismanagement and in addition, reduce trade.

For Smith, it is historically impossible to find a successful joint stock company. The incentives are just not there.

Look at the fate of the Royal African Company. It went bankrupt and had to be dissolved by an act of parliament. The South Sea Company does not have forts so it does not have major expenses, but it has such an immense number of proprietors that it is subject to folly, negligence and profusion. Only the Hudson’s Bay Company seems to survive. But that is because it is very small and has no competitors. Its profits are so small that it does not even attract envy.

Look even, or especially, at the English East India Company. It attracts men of all kinds of fortune. They want a share in the company because they dream of the influence they may have with their one vote. They do not even care about the dividend or the value of the stock or the prosperity of the empire, or the fate of the people who live there. They just want to buy a share in the appointment of the plunderers of India. The company at the time of Smith’s writing, in 1784 Smith tells us, is in as great distress as ever. It needed to ask yet again for assistance to prevent bankruptcy.

Joint stock companies may have a chance only with trades that are completely routinized, that is, trades where there is a uniform method that does not allow for variations. Such trades are banking, insurance, making navigable canals and cuts, and bringing water to great cities. All these four trades fit the bill that shows that the kind of trade is of greater utility than common trade and that it requires more capital than can be collected otherwise.

ARTICLE II: Of the expence of the instruction for the education of the youth. 

Along with roads, canals, ports, and temporary monopoly powers to companies dealing with barbarians (the previous “article”), Smith includes the education of the youth (this “article”), and of people of all ages (next “article”).

The institutions for the education of the youth, like the ones that facilitate commerce, generally should and do generate enough revenue to support themselves. If not, like the others, they should be funded by local revenue from landed estates or interests, but not from the general revenue of society.

As Smith explained when he described the incentives wages provide to workers, here he reminds us that the amount of effort offered in a job is proportioned to the amount of effort needed to be paid. With competition, that effort has to be significant, given other competitors. Thus competition gives incentive to excel.

Apply this logic to teaching.

If an endowment pays for scholars and teachers, meaning if the teachers are on a fixed salary, the incentives to put great effort in to what they do are not there. If the compensation of scholars and teachers is exclusively a salary, their remuneration becomes completely disconnected from their success or reputation. Their interest is opposite from their duty. They will neglect their duty and live an easy life. Since one is paid regardless of how he does his job, why bother doing it? And if forced to do it, why bother putting any effort in it?

And if he answers to the college or university of which he is a member, he and all his colleagues will cover each other’s backs and they all will be negligent. Smith gives us an example of it from his personal life. He studied at Oxford, where the pay structure of professors is as he just described. His comment: at Oxford the great portion of professors “have given up even the pretence of teaching.”

In France, professors answer to an external authority, such as a bishop or a governor, but things are not better. They may force professors to give some number of lectures, but they cannot control the quality of these lectures. The quality depends on incentives. Having none, lectures will be horrible.

Other perverse incentives include forcing students to attend universities independent of the merits of their teachers; requiring that the privileges of graduation in arts, law, physics, and divinity are obtained only by residence for a certain number of years in a university; offering scholarships that attach students to specific colleges; and forbidding students from choosing or changing their teachers. They all decrease emulation, effort, and diligence in teachers.

Yet, if the teacher is a man of sense he must feel uncomfortable in seeing that students do not attend his classes or when they do they are doing something else or make fun of him. He may then put a little effort in his work. Or may force students to attend his fake lectures.

The discipline of colleges, Smith declares, is not meant to benefit the students but the professors. If the professors do their duty, the students will do theirs. There is indeed no need to force attendance in a lecture that is worth attending. You may have to force young boys to attend, but after the age of 12 or 13 they can make their own decisions.

For Smith the best way to learn something is to study things for which there is no public instruction. Take dancing and fencing for example. They are taught only privately. You may not become the best dancer or fencer in the country, but you will surely learn how to dance and fence acceptably.

Similarly the three basic parts of education, read, write, and account, are more successfully achieved in private than public schools.

In England, public schools are less corrupted than universities because the reward system is different. School masters are paid with fees and honoraria from students. And to graduate one needs to pass an exam, not to sit in school for some time.

“It is commonly said”, red-flags Smith, that teaching in university may not be very good but at least there is teaching. If not, some subjects may not be taught at all. This is not a good thing for Smith. To the contrary. It is a sign that universities are not serving their purpose anymore, but they are serving some special groups instead.

The universities of Europe, after all, were created to educate the clergy and were under the authority of the Pope. Their members were even under ecclesiastical rather than civil jurisdiction. The universities were meant to teach theology or whatever prepares to study theology.

Now, with the end of the Roman Empire, Latin loses ground to local languages, even if it would still be used in religious ceremonies. So there were two parallel languages in Europe: the language of the priests, and the language of the people. The priests needed to learn Latin to understand the scriptures. Greek and Hebrew were not necessary because the Latin translation of the Bible was considered as much as the word of god as the original texts in Greek and Hebrew. So the university needed to teach Latin.

Note that with the reformation, there were claims that the Latin translation was wrong. People needed to look at the original texts in Greek. So Greek was introduced in the universities of protestant countries.

The Church affected the university curriculum more than with just Latin or Greek. In ancient Greece, philosophy was divided into three: natural philosophy or physics, moral philosophy or ethics, and logic.

Smith here picks up a theme he developed in a “juvenile” essay, on which he worked possibly until his death, one of the few things that he preserves for fire. In this essay, titled for short History of Astronomy, he explains the birth of philosophy. The great natural phenomena, especially the skies, excite fear and wonder. We start developing a system of explanation to try to satisfy our curiosity. So we go from superstitious explanations to science.

Natural philosophy is the first science to form. The beauty of systematic arrangements of our different observations of nature leads us to try to do the same for our observation of human conduct. This is how moral philosophy is born. But different people see things differently and create different systems. To show the inaccuracy in their argument, logic is born: the science of good and bad reasoning. It was generally taught before physics and ethics.

In European universities physics was divided into physics—the study of bodies—and metaphysics—the study of spirits. The comparison of the two disciplines created a third one: ontology. But, since theology was the primary interest of university education, the focus needed to be on how to achieve happiness in the next life, not in this one. So the curriculum required a different order: first, logic, then ontology, then metaphysics. Only then, the now debased moral philosophy, and at last the superficial system of physics. This alteration of the course of studies was meant for the education of the clergy, not for the education of gentlemen and men of the world. Would that be so bad then, if some of the subjects would not be taught any longer?

Note a big difference from our times. Universities were not meant to provide education in the sense of technical knowledge that helps you in your profession. Universities were meant to create gentlemen, men of the world, to teach men fashionable topics for polite conversation. And yes, as it is almost always the case in the Wealth of Nations, the gender bias is present and it is a reflection of the then-current state of the world. Women would not be educated in universities.

Women should and would be educated at home. Their education thus does not include “useless, absurd, and fantastic” topics, just what is considered useful for them.

Universities are also not necessarily the place of innovation and improvement. They are “sanctuaries in which exploded systems and obsolete prejudices found shelter and protection, after they had been hunted out of every corner of the world”. And the richer the university, the more slowly and more adverse in adopting changes and innovation. Poorer universities do it faster, because there teachers’ compensations depend on their reputation so they need to pay attention to the world. Smith does not explicitly say this, but he may have Newtonianism in mind. It took decades for Cambridge to teach Newton, even if it was where Newton originally taught. In Scotland, on the other hand, considered the periphery of civilization, Newtoniansim was taught immediately.

Smith goes so far to say that the universities are so bad that the custom of sending children abroad for a few years, even if they return less disciplined than when they left, is a way for a parent “not to see his own son going to ruin in front of their eyes”.

As to be expected, for Smith, different societies have different institutions for the education of their youth.

In ancient Greece, for example, education in music and gymnastic was mandatory for all. Gymnastics would harden the body and prepare for war. Music would humanize the mind for social and moral duties.

Ancient Rome had similar policies for martial education, but not for music. And yet, Smith claims, the morals of the Romans were superior to the Greeks, if judged by the behavior of factions in the two states. Studying music in Greece may have been a long lasting tradition hard to shed. Music and dancing are indeed typical of savages and barbarians, such as Africans, Smith declares.

Regardless. Both in Greece and Rome, the state did not pay for the teacher of gymnastics (and music). It did not even appoint them. It just required that all would practice military exercises and offered a public place to do it.

Learning to read, write, and account for the rich citizens was done at home with private tutors. For the poor it was done in schools with teachers for hire. In both cases, it was left altogether to the care of the parents.

Even with more refined times, when philosophy and rhetoric became fashionable, parents would send children to the school of the philosopher of choice. The state would not support any of those schools. As a matter of fact, they were barely tolerated, so much so that most teachers had to travel from place to place because the state would not welcome them. As demand increased, the school and teachers became stationary, but the state did not provide them with anything, not even a place to teach. There were no salaries, and no privileges. Just student fees.

In Rome, there were not even schools for studying law, the most important intellectual creature of it. If someone wanted to learn law, he must follow someone who understood it.

In Greece, law was not a science, while in Rome it was, and it gave a great reputation to those who understood it. The difference lies in the different justice systems in the two countries. In Greece the courts of justices counted between 500 and 1500 people. The decisions were essentially random since the blame of a bad decision could not fall on anyone in particular. In Rome, on the other hand, decisions were made by a single judge. The responsibility and the reputational consequences of a bad judgment would fall exclusively on him. In doubtful cases, he would uses examples and precedents. The superiority of characters of the Romans may thus be attributable to their better system of courts of justice.

Note how Smith again and again maintains his assumption. There is nothing naturally different between Romans and Greeks. Only their habits are different, and therefore their characters are different.

Similarly, there is nothing naturally bad about teachers. It is just that the set of incentives they have habituates them to bad behaviors. It is the disconnection of their remuneration from their success and reputation which corrupts their diligence. And since university teachers are paid by the endowment of the university, private teachers of subjects taught in university cannot receive a decent pay as they are competing against people who are subsidized. These poor private teachers are thus considered “the lowest men of letters”. The consequence? One cannot find any good private teacher either.

Smith continues with his analysis. As with all other institutions, the attention the government needs to pay to education changes with times and circumstances.

In barbarian societies or even in agricultural ones, there is little division of labor, so each person has to do a variety of things, and to find solutions for all the problems he constantly faces. His mind therefore does not fall in that “drowsy stupidity of the inferior ranks of people of civilized societies.” Everybody can form tolerable judgments, even if no one can have that deeper understanding that only few have in a civilized society. This means that every person is able to do what everybody else can do, that each person has breadth, even if not depth of knowledge.

This is why the education of the common people does not require the attention of the public.

In a civilized state, on the other hand, a person does not do many things, but specializes in one or very few activities. The diversification of activities in the whole society seems infinite. The few people who can spend their time contemplating society can thus observe and make connections among what seems an almost infinite variety of things. Remember from Book I that in civilized societies there are people who specialize in observing everything—philosophers, or scientists. But they are necessarily few.

The majority of the people are not able to contemplate their surroundings and make connections. They are stuck in their specialized activity which narrows, rather than broadens, their horizon.

With division of labor, the majority of the people do only a few simple things from a very young age. Their work is simple, uniform, and repetitive. They have no time to spend on education. The time they do not spend working is time for which they lose the opportunity to earn what is needed to survive. They therefore have no opportunity to develop what Smith calls “understanding”, the ability to judge, to evaluate, and to find solutions to problems. Smith’s words are strong and unflattering, to say the least. The division of labor causes a poor worker to become “as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him, not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment […] he is equally incapable of defending his country in war”.

The specialized poor may gain dexterity, but he does it at the expense of his intellectual, social, and martial virtues. Since the laboring poor are the majority of the people, the education of the common people requires the attention of the public.

The situation is different for the people of rank or of fortune. They do not need the same attention as the common people do. They do not need any attention at all, actually. People of rank start their professional activities at 18 or 19, as opposed to 6 or 8, as Smith told us also in Book I when he talked about nurture, not nature, causing differences among people.

Parents of children of rank are usually anxious about them getting a good education. If they do not get it, it is because of the negligence of the masters that Smith just described. In addition, the kind of activities high rank people engage in are seldom simple and repetitive. Furthermore, their jobs are generally not strenuous: they have a great deal of leisure time which they can spend on “useful or ornamental knowledge”. People of rank and fortune do not live in conditions that make them grow torpid.

So only the common people in commercial societies need the attention of the government. What kind of attention should it be?

Well, Smith tells us, read, write, and account, can be learned at a very young age. Children can learn to read, write, and count before they can learn how to work. So they can, and should, be educated in that window of time. It does not cost much to do it. And it can easily be done in three ways: facilitation, encouragement, and imposition.

The public can facilitate the education of the common poor, by establishing “little schools in each parish”, like in Scotland. The public could contribute to the pay of the teacher. It should not pay the teacher 100% or he will lose incentives to do his job. Part of his pay should come from the parents of the children. The fee the parents pay could easily be moderate enough that any common worker can afford it. And if geometry and mechanics would substitute for Latin, the literal education of the common people would be complete.

The public can encourage education with small premiums and badges of distinction.

And it can impose upon it a mandatory exam requirement before anybody can enter a corporation or set up a trade.

This is how the Greeks and Romans did it. They facilitated education, which, remember, is gymnastics for martial preparation. They did it by appointing a place to practice, and by letting students pay their masters. They encouraged it with prizes (think of the Olympics games). And they imposed a mandate to serve in the military.

Why should the government care, though? Smith here seems to engage with his contemporaries, making an argument that runs parallel to one with which they would be familiar. Remember that Smith was a lonely voice favoring a professional army, while most of his friends and contemporaries favored a militia? So here he tells his pro-militia audience: you think that without government support we see a decline in military exercises and martial spirit, right? And even if this marital spirit would not be effective to defend a society, the government should still tend to it to prevent the “mental mutilation, deformity, and wretchedness of cowardice”, right? Just like the government should give the most serious attention “to prevent leprosy or any other loathsome offensive diseases”, even if neither causes mortal danger, right? Right. The government needs to give attention even to things that may not have any other benefit but the prevention of a great public evil.

Well, the “gross ignorance and stupidity of the inferior classes of people” is one of those public evils. A man without the proper use of his intellectual faculties is more contemptable than a coward. “He is mutilated and deformed in more essential parts”. So if the deformities and mutilation of cowardice need government attention even if the state does not derive any explicit benefits from it, it is even truer for the mutilations and deformities of the ignorance of the mind of the poor. And actually, in case of the education of the poor, the state derives a considerable advantage: “The more instructed the people are the less liable they are to fall prey of delusion, enthusiasm, and superstitions, which are the roots of the most dreadful disorders of society”.

In fact, instructed and intelligent people are more decent and more orderly than ignorant and stupid people. Because of their instruction, they feel more respectable and more likely to obtain respect from their superiors. And if their superiors respect them, they are more likely to respect their superiors. Because of their education, they are more able to understand the special interests that are at the base of the complaints and the seditions of factions. This means that they are less prone to be misled into unnecessary opposition to the government.

In free countries, the safety of the government depends on the favorable judgment of the people. This is why it is fundamentally important to educate the poor common people.

ARTICLE III: Of the expence of the institutions for the instruction of people of all ages

The institutions for the instruction of people of all ages are religious institutions. They are not meant to prepare good citizens for this world, but to prepare people for the next one. Usually the teachers of these institutions depend on voluntary contributions or they receive a salary coming from something like a land tax. Needless to say, their effort and industry increases with the proportion of their salary that comes from voluntary contributions.

Smith claims that teachers of old religions tend to neglect their duties more than teachers of new religions. Why? Because old religions tend to be well endowed. The clergy of well-endowed religions are men of learning and elegance. They are no different from regular gentlemen. They stopped their instruction of the people. So, they lost their authority and their influence on the lower rank of people. Evidence? They need the civil magistrate to deal with their competitors. They call competitors disturbers of the peace and call for their persecution and destruction.

The Church of Rome survives because of the activities of its inferior clergy. They live on voluntary contributions from their church goers and from donations from confessions. The mendicant orders depend completely on donations, thus on their industry. Monks and poor parochial clergy are thus the ones keeping alive the spirit of devotion in the Church.

What should be the relation between a church and the state?

Here Smith offers a long direct quotation from David Hume’s History of England, where Hume claims that the state should establish a state religion and pay directly the salary of the clergy. Hume here is using exactly the same logic that Smith uses to justify why teachers should not have a fixed salary. A salary independent of merit takes away the incentive to be dutiful. By paying for the clergy, for Hume, the state would bribe priests into inactivity, eliminating the problem of fanatic sects and excessive zeal.

Smith thinks Hume is wrong. He thinks history proves Hume wrong. Usually the times of religious violence are times of political violence too. Political parties seek the support of religious sects, and promise to favor whatever sect supports them. When one party wins, the religious sect associated with it demands its share of the spoils: silence of its adversaries and financial support. If political parties would not have had the opportunity to rely on some religious sects, they would have treated all sects equally and impartially, especially if there were many of them.

If one allows each man to choose their religion and their priests, one would see the multiplication of religions and priests. This implies that nobody would have a great success, and zeal would be avoided. Zeal becomes innocent if divided among 200 or 300 or even thousands of sects, since nobody is powerful enough to disturb public tranquility. Smith, forgetting his own argument on the inactivity induced by the pay structure, claims instead that if zeal is concentrated in the hands of one sect or a couple of great sects, it becomes quite dangerous.

On the other hand, Smith continues, with more adversaries than friends, one needs to learn moderation and to give concessions to reach what is mutually agreeable. So much so that religious doctrines would over time evolve into rational religions. If there are only a few great sects, instead, one sees only the veneration of his followers and admirers, which promotes extremisms.

Note this argument is potentially as unrealistic as it is similar to his description of moral development in The Theory of Moral Sentiments. There, Smith tells us that if we surround ourselves only with family and close friends, they will let us indulge in our biases, slowing down our moral development. To reduce our innate egocentrism, we need to be surrounded by strangers, by people who do not care about us. Only then we can realize we are just one in a multitude, thus constantly adjusting the pitch of our passions to the level that is acceptable and agreeable to the people around us. This constant adjustment of the pitch of our passions is the training ground for our moral development. So, just like in The Theory of Moral Sentiments, here too Smith tells us that the realization of being one in a multitude is what gives moderation.

Smith goes on to analyze the social importance of religion. He claims in that in civilized societies, where there is a notable distinction of ranks, there are also two parallel moral systems: an austere one for the poor, and a loose one for the rich.

The loose or liberal system of luxury for the people of fashion tolerates intemperance and great indulgencies, and even breach of chastity if not followed by “great indecencies”. In fact, the liberty of indulging without disapprobation is seen as a privilege of people of fortune and status. Why? Because they can… People of fortune can engage in years and years of extravagances without major consequences.

A few days of excesses, on the other hand, are fatal for a poor. This is why the austere or strict system of the common people, instead, sees all excesses with “utmost abhorrence and detestation”. Again, this makes sense. Even few excesses and extravagances inevitably ruin a poor person. A few days of dissipation will destroy a poor forever, leading him even to possibly commit great crimes.

This is also why austere systems of morality are typical of religious sects that appeal to common people. The more rigorous the system of morality of the sect, the more common people respect and venerate it.

Small sects are thus more important checks for the morality of common people than established churches.

If a man of low condition lives in a country village, he will be under the eyes of all his fellow villagers, so he will be forced to behave well. But when he moves to a big city, he moves into anonymity. Nobody knows him, nobody cares for him. He will let himself go and fall into vices, which will ruin him. But if he finds a small sect, he will be saved. Now his fellow sect members will always keep an eye on him. If he creates scandals, he will be expelled and excommunicated, which is one of the most severe punishments for him.

The negative side of these super rigorous religious sects is that the rigor of their morals can be excessive. But here is where the state can intervene, and can do it without violence. The state can offer a couple of remedies against this “unsocial and disagreeable” moral rigor: it can impose the study of science and philosophy, and it can offer frequent cheerful public entertainments.

Science is “the great antidote to the poison of superstition”. Requiring a mandatory exam before entering any profession means, in practice, imposing mandatory universal education. And by letting people choose and pay for their teachers, it would assure that some education is actually achieved. Public diversions “dissipate melancholy and gloomy humor” which feeds superstitions. The state should thus give full liberty to anybody to engage in the arts, painting, poetry, music, dancing, or dramatic representations. Note again this is not a call for a subsidy but for freedom of entry.

The other advantage that Smith sees in not having the state favoring any religion is that religion will not depend on the executive power. Which, in a twisted way, means that the executive power will not depend on an established religion. Why does it matter? Because with an established religion, with a state religion, the sovereign will never be safe.

The interests of the clergy and of a state religion are different, are opposite actually, from the interests of the sovereign. The clergy wants to maintain authority with the people. If the sovereign doubts even the most trivial part of the church’s doctrine, or if he protects those who do, he will be blasphemous. And the church will use all of its religious powers to “transfer its alliance to a more orthodox and obedient prince”. If the prince rebels, it is even worse: he will be charged with heresy. And since the authority of religion is superior to all authorities, the only ways for the sovereign to maintain power is either to submit without questions to the church, or to use violence. But, the soldiers may also bow to their spiritual leader more than to their temporal one. Furthermore, persecutions with violence render the sect and its doctrine “10 times more popular”, thus “10 times more dangerous”. The use of violence against a popular church is thus a path to disaster. This is why the sovereign is always in a precarious situation and always unsafe when there is an established church.

Does history confirm this analysis? Yes. In the ancient Christian church, the clergy elected its bishops, who became a “spiritual army” independent from the temporal sovereign, but dependent on a foreigner sovereign: the Pope. Its power was “formidable” because it combined spiritual authority, with the influence that the great wealth of the church had on the common people and on some knights of low fortune, and with the liberality in hospitality and charity, which created respect and veneration among the poor.

The king was not even able to adjudicate disputes involving the clergy. It was too dangerous for the king to punish a clergyman. So he would leave him to the ecclesiastical courts, which very much cared to punish who may endanger the honor of the church.

The Church of Rome created thus “the most formidable power” ever formed “against the authority and security of the civil government, and against the liberty, reason, and happiness of mankind”. Note how Smith builds up the power and authority of the church. It is an impenetrable and unshakable power as it combines the “delusion of superstition” with private interests. If reason could maybe crack superstition, reason remains impotent against private interests. Had it been attacked only by human reason, the temporal power of the Church of Rome would have lasted forever, Smith believes. The more unconquerable and indestructible the power of the church was, the more shocking its collapse became.

And the power of the Church did collapse. But not by armies or reason. Instead, it was by the gradual improvement in the arts and manufactures. The gradual and silent revolution of commerce, not only destroyed the power of the great barons, as shown in Book III, but it also destroyed the otherwise indestructible temporal power of the Church.

The clergy, like the barons, started to spend their revenue on themselves, as soon as they could buy manufactures and luxuries. They also had to grant long term leases to their tenants, who then became independent. In addition, they decreased their charity and hospitality, decreasing their spiritual authority. Their vanity, which made them spend on themselves what was meant for charity for the poor, disgusted the common people.

The reformation filled the vacuum of authority that the Church of Rome left open, offering that austerity that attracts common people.

Since there was no general tribunal to settle internal disputes, there were divisions. The followers of Luther favored peace and order. They were willing to submit to the civil sovereign to avoid conflicts. This split the people of rank and people of lower rank. The clergy wants the influence on the sovereign and neglects the influence on the lower ranks of people.

The followers of Calvin kept both the right to elect their pastors and equality among the clergy. But fanaticism emerged. To maintain the peace, the magistrate took the right to fill vacancies himself. But parishioners managed to get it back by buying it from the magistrate. This means that now they cannot expect any favor from the state. And given that the only way left to distinguish themselves is through exemplary morals, the clergy is kind to the people, and in response the people are kind too. This is why the Presbyterian clergy has the most influence among common people and is able to convert them without violence, according to Smith.

If you think back to what Smith said when he offered an alternative system to the one proposed by Hume, this is what Smith was proposing: a system like the Presbyterian Scottish system.

He sees two additional advantages to a competing system of religions in which the state does not get involved. First, when the church receives state benefits, it attracts men of letters away from the universities, like in catholic counties and England. When on the other hand, the church does not receive and give great benefits, the universities can choose the best men of letters, as in Geneva, Germany, Holland, Hamburg, Sweden, Denmark, and … Scotland.

This means that like the ancient philosophers, men of letters will have to teach. And teaching makes people masters of their subject, additionally increasing the quality of both education and knowledge.

Second, not having an established church frees state revenue, which can now go to defense, making the sovereign and the people both richer and military stronger.

In private correspondence, Smith described The Wealth of Nations as a severe attack against the mercantile system, the universities, and the church. He was correct in his judgment.

PART IV: Of the expense of supporting the dignity of the sovereign

There is a last expense of the sovereign, which is not a duty but a public good needing financing from the general revenue: the dignity of the sovereign.

This is the only other expense, with national defense, for Smith, to call for financing from the general revenue and not from tools/fees or local revenue.

Like all other expenses, the amount of expense will vary with times. The sovereign must follow the fashion of the time, meaning, he cannot be less magnificent than a magistrate. So the expenses for the dignity of the sovereign will increase with the increase of wealth, as he needs to have more splendor than his inferiors.

Conclusion of the chapter 

The only two expenses that should be funded from the general revenue of society are defense and the dignity of the sovereign. They are the only two expenses that truly benefit everyone.

The administration of justice also benefits the whole society, but it benefits more the parties involved. So it should be financed by the parties involved, with fees.

All local benefits should be financed locally. It would be unjust to make all pay for something that only benefits some. So it is true that good infrastructure benefits all, but some benefit more than others, so those are the ones to pay. Similarly the institutions for the education of the youth and for religious education benefit all, but some receive a more direct and immediate benefit, so they are the ones who should pay for that benefit with voluntary contributions.

Is there a general principle to direct us? Yes. If the institutions or the public works benefit the whole societies and if and only if the people who immediately benefit from them cannot maintain them, then and only then, their maintenance may come from the general revenue of the state.

The state does play a fundamental role, thus, in Smith’s system. Yet, that role is constrained by the right set of incentives and by justice.

Further readings:

Richard Sher “Adam Ferguson and Adam Smith and the problem of National Defense” Journal of modern History 1989

Edwin G. West “Adam Smith’s Public Economics”

Gary Anderson “Mr. Smith and the Preachers”

Iannacone “Consequences of religious market structure”