Guidebook to the Wealth of Nations: CH 9 Book IV, chapter 7-9

Chapter 9: IV.7-9

WN IV.7: Of Colonies

Part First: of the motives for establishing new colonies

Here Smith describes the last and possibly most dangerous tool merchants and manufacturers use to increase their own profits: building an empire though colonization.

The 18th century is not unique in having countries with colonial ambition. Ancient societies had colonies too. But they were different. And created for different purposes.

In Ancient Greece, when the population of a city state expanded too much, the city state would look for new territories to relocate the extra people, forming a colony. The colonies were the child of their motherland, but they were more like emancipated children, according to Smith. The motherland did not have any claim of direct jurisdiction over the new colonies.

Ancient Rome also had colonies. There, colonization policies started as a way to reduce potential tensions that wealth inequality caused. In Rome, only the wealthy had land. Slaves would do most jobs. So the poor freemen had nothing to live on and would often protest, demanding some land. The rich and powerful thought that sending the poor away to form new colonies in new dominions would be a good way to satisfy the people, with an additional side benefit: the new colonies would form garrisons in the newly conquered land. The Roman colonies were different from Greek colonies. Even the origins of the names differed: for the Romans, colony derives from planation, while for the Greek from separate dwelling. Yet, in both cases, colonies originated from necessity and clear and evident utility.

Necessity and utility do not explain the European colonies in America and the West Indies. Avidity is the explanation. Here is how.

Venice in the 14th -15th century had almost a monopoly trade with the East Indies. That monopoly, like all monopolies, gave Venice great profits. Those great profits, like all great profits, attracted the avid interest of others. Rather than going East by land, why not try to go by sea? The Portuguese thought they could circumnavigate Africa. And indeed in 1497 Vasco de Gama arrived in Indostan via the Cape of Good Hope.

But in the meantime, Christopher Columbus convinced Spain to get to the East via the West. And in 1492 he arrived in some uncultivated lands, covered in woods, and inhabited by some “naked and miserable savages”. The place looked nothing like Marco Polo’s descriptions. But Columbus refused to believe that he was not in Indostan.

He did not care what these lands were; Columbus wanted to show them off as important. The problem was that there were no animals or vegetation to show off. Just iguanas and cotton. Since he could not find any impressive animals or vegetables, Columbus started to look for minerals. He did not find much of them either, just some bits of gold on some indigenous clothing.

Yet, he returned to Spain in triumphant honors, claiming he found inexhaustible sources of wealth. In what seems a sarcastic tone, Smith describes how Columbus showed off in solemn processions some small gold bracelets stolen from the native people, a few bales of cotton, some colorful birds, some curiosities, and some “natives of singular color.” His inflated descriptions made Spain want to conquer these lands. As an added bonus, the indigenous people were obviously unable to defend themselves. So, with the excuse to convert the indigenous people to Christianity, they hid the real motive of this “unjust project:” looking for gold.

To convince the crown of the greatness of his discovery, Columbus offered the crown half of the gold he found. Plundering defenseless people makes it easy to pay for this high tax. But after the natives were stripped from all they had (in 6-8 years), the Spaniards had to dig for gold, so they were no longer able to pay for the tax. And the tax on gold had to be reduced to 1/20, and the one on silver to 1/10.

Smith’s description of the Spaniards is not flattering. They found little gold. They exaggerated their reports. Their avidity became so inflamed that they went off in search for gold, even if there is nothing more ruinous than searching for new mines. They expected to find Eldorado even if mining is the most disadvantageous lottery. Mining does not replace capital, it absorbs both it and the profit. It is just the absurd confidence which almost all men have in their own good fortune that drives them to think that they can find veins of gold and silver as abundant as the veins of iron or lead. This is not something that sober reasoning would conclude. But it is an absurd idea dictated by human avidity. Sober reasoning would also have made them realize that gold and silver are valuable because they are scarce. Finding Eldorado would mean a decrease in the value of gold and silver. Avidity of immense riches of gold and silver is neither sober nor rational.

Note how here again Smith differentiates between the sober and prudent desire to make a living and earn well-deserved profits or wages, with this avid ambition of immense riches caused by dreams of gold. We all desire to better our conditions, but we ought to be wary of what shines too much and feeds our delusions. It is ruinous.

Note also how negative is the description of Columbus. He is not a hero, but a villain, greedy and overly ambitious, willing to lie and to commit the vilest injustices to bring glory to himself.

Eventually, abundant gold was found in Mexico and Peru. But that was 30-40 years after Columbus. It took over 100 years to find gold and diamonds in Brazil. In the English, French, Dutch, and Danish colonies no gold had been found yet, during Smith’s life.

Smith concludes this part in a lapidary way: this part of history is an accident. By accident, the discovery of the West happened unforeseeably trying to go East. Against all odds and all reasonable expectations, a project of gold and silver, a course of accidents, which no human wisdom could foresee, was more successful than expected. Like in Book III, history is not made by human designs or by kings. A series of accidents and of deluded people in search for vain distinctions is what brings about historical changes.

Second Part: Causes of the prosperity of the new colonies

So, European countries now have colonies in America, Africa, and in both the East and West Indies. Are these colonized places better off or worse off? This is not an easy question to answer. Smith is a British subject after all, a subject of one of the countries whose colonies he describes. Smith’s perspective needs to be kept in mind. Yet, he is well aware of the irreparable damage done to the colonized population. Being either an accusation against the brutal injustices per se, or against the mercantile policies that caused those injustices, Smith’s analysis reflects the mixed blessing of markets extended in brutally unjust ways.

If a land is empty, or if it is scarcely inhabited, Smith claims, it is easy to colonize it because there are no opposing forces. The colony will grow faster than any other land because the colonists carry with them their agricultural and institutional knowledge (which Smith correctly or not deems superior to the one of the indigenous savages), and also their habits of subordination, regular government, the system of laws, and regular administration of justice. This speeds up the otherwise slow process of development.

Because of the low original population, there will be more land than one can use. The farmer needs to pay no rent and little taxes. Superiors have to treat inferiors with more humanity and generosity, if there is no slavery, because of the disproportion between the abundance of land and the scarcity of people. They need to hire and pay labor well. The laborer will earn enough to leave and become himself a landowner. And the liberal reward of labor will encourage marriage, and children, so population grows fast. This was the case for Greece.

Rome was different. Its provinces were fully inhabited before colonization. There was little land for the colonists, and, differently from Greece, there was dependency on the motherland.

The European colonies are in between. They had scarcely populated land, like Greece, and dependency, like Rome, but were way far away, which made them more independent from their motherland, again like Greece. This combination of abundant land and independence explains their progress.

Spain kept closed ties to its colonies because of their gold and silver. For Smith, Mexico and Peru, in spite of the cruel destruction of the natives, are now more populous than they have ever been before. Portugal did not pay too much attention to Brazil because it seemed it had no gold. Brazil prospered. It is the colony with the most Europeans in it. The Danish St Thomas and Santa Cruz were under the government of an exclusive company with the sole right to buy and sell there. The company could and did oppress. The government of an exclusive company of merchants is the worst of all governments. Yet, it was not able to stop progress; it just significantly slowed it down.

Of all colonies, the North American British colonies experienced the most rapid progress. There was plenty of good land and there was liberty for colonists to manage their own affairs. Both are important factors. But Smith tells us that free institutions are the most important. The land is not necessarily better than the land of the colonies of France and Spain, but the political institutions of the English colonies are more favorable to improvement and cultivation of land.

First of all, colonists can own only as much land as they can improve, there is no primogeniture, and taxes are moderate, so that people can save and invest in improvements. Their taxes are moderate because they have few expenses. Their government is modest and, a key factor, they do not have to pay for their own defense: England does. This is quite different from Spain and Portugal, which derive their power from taxing their colonies and have a habit of vanity and expense.

The British North American colonies also enjoy a larger market than other countries, since, even if monopolized, it is less monopolized than other countries.

So, Smith says there are three different ways to deal with colonial trade.

One is to give the whole commerce of the colonies to an exclusive company. Its interest is to sell dear and to buy cheap. It will buy no more than what it can sell at a high price. Holland, Denmark, France, and Portugal adopted this kind of monopoly.

Another is to give the whole commerce of the colonies to an exclusive port of the mother country. The port is open to all domestic merchants who pay a very costly license to operate there. The profits remain “exorbitant and oppressive”, as in Spain and Portugal.

The final way is to let trade be free to all. Competition prevents exorbitant profits. So in France and England there are still high profits but they are not exorbitant. In the case of Britain, only a list of some commodities is confined to the home market: the so-called “enumerated commodities”. The non-enumerated commodities can be exported anywhere, even if only on British ships or in ships with a majority of British sailors. But this is limited to raw materials, not to manufactures.

The colonies are lucky, in a sense, because their land is so cheap and their labor is so expensive that they can still be better off importing manufactures rather than trying to produce them themselves. But… But the advisors for regulations of the colony trade are the merchants themselves. Not surprising, for Smith, their interest is considered more important than that of the colonists and of the mother country. British merchants and manufacturers convinced the legislature to impose high duties to prevent refined manufactures in the colonies.

Here again Smith does not hold punches against the mercantile interests: to prohibit from making all they can from their own produce or from using their capital the way they think most advantageous is a manifest violation of the most sacred right of mankind! The interest of the colonies is sacrificed to the interest of the merchants. It is unjust and it is inefficient.

Despite this monopoly, Great Britain is the least illiberal with colonies compared to other countries. With the exception of foreign trade, the colonies manage their own affairs, secured like at home by an assembly of representatives, which also keeps in check the executive power. So the meanest and most obnoxious colonist, as long as he obeys the law, has nothing to fear from the resentment of the government or of the civil and military officer. In addition, the colonies do not have hereditary nobility. There are old colonial families which are more respected, of course, but they do not have more privileges than others. In a sense, there is more equality among colonists than among the inhabitants of the mother country. They are more republican.

England is thus the only country to give perfect security to its distant provinces. Spain, Portugal, and France have a more absolute government. There may be more freedom in the capital city because the sovereign keeps the inferior officers in check. But in the distant provinces, away from the sovereign’s sight, the inferior officers can become tyrant. With a possible exception: slavery.

Here Smith launches a counterintuitive argument: an arbitrary government is better for slaves than the government in a free country. With an arbitrary government, a magistrate can interfere with the private property of a master, defending the slaves. In a free country, the master is often a member of the colony assembly, so the magistrate does not dare go against him to protect the slave. Another acute Public Choice analysis and criticism of British slavery. Furthermore, when the magistrate protects a slave, the slave gains some respect in the eyes of his master. The master will treat the slave more gently. In his turn, the slave will be more faithful and useful. This is why among the sugar colonies, where the sugar production is entirely in the hands of slaves, the French ones are the most prosperous. It is because of their good management of slaves. The British sugar colonies prosper too, but that is because of the great riches of England, not because of the good conduct of its colonists toward their slaves.

Here again, Smith ends the section with lapidary statements and accusations: it was folly and injustice that motivated the establishment of the European colonies. The hunt for gold caused injustices for the harmless natives of the colonized lands, who, rather than injuring Europeans, welcomed them with kindness and hospitality. “It was not the wisdom and policy but the disorder and injustice of the European government which peopled and cultivated America.”

Europe contributed with one thing, and one thing only, to the current prosperity of the colonies: “it bread and formed the men capable of achieving such great action. The education and great views of their founders owe their greatness to scarce anything else.”

Part Third: Of the advantages which Europe has derived from the discovery of America and from the passage to the East Indies by the Cape of Good Hope

Having established that the only benefits the colonies get from Europe is the education of their leaders, what are the benefits that Europe receives from the colonies, if any?

There are benefits of two kinds, according to Smith: general benefits and benefits specific to each country.

The general benefits, those that all countries share, are the increased enjoyment from having a larger variety of goods to consume, and the increase in industry due to a larger market for their products.

One country does not need to directly trade with the colonies to enjoy these benefits. Poland and Hungary do not send anything to America. Yet, they consume sugar, chocolate, and tobacco. They send their products to countries that will then send colonial products to them. Actually, a country does not need to even ever consume a colonial product to benefit from colony trade. As other countries do trade, directly or indirectly with the colonies, they become wealthier and consume more of everything, including the products of countries that do not consume colonial products.

Yet, monopoly trade, with its higher prices, will reduce both industry and enjoyment. Monopoly is a dead weight.

It is therefore important to distinguish between colony trade and monopoly trade. Colony trade is always beneficial. Monopoly trade is always hurtful. In the case of the American colonies, it just happened that the benefits are much larger than the damages done by its monopolization. Again Smith tells us to be careful between correlation and causation: colony trade is beneficial not because of its monopoly, but despite its monopoly.

As a matter of fact, we cannot take for granted that the benefits of the colony trade will always overcome the damages its monopoly causes. This is true for England. But that is because England has comparatively more liberty of trade, and most importantly, it has an equal and impartial administration of justice, where the rights of the meanest subject are as respected as the rights of the greatest. And where every man can safely have the fruits of his labor, which is the greatest and most effective way to increase industry. Things are different in Spain and Portugal. Their irregular and partial administration of justice protects the rich and powerful debtors from the injured creditors, decreasing, if not eliminating, the incentives to produce: why produce if I am forced to sell to people who cannot pay? There, the damages of monopoly are more than the benefits of trade.

Smith continues with his taxonomy. The benefits specific to each country are divided into benefits that every empire receives, such as military force and revenue, and into benefits specific to the American empires, such as exclusive trade.

An empire should benefit from its colonies because the colonies should increase its military force and its revenue. But it does not work this way. Not for the American colonies, at least. Only the colonies of Spain and Portugal contribute to the revenue of the mother countries. No colony contributes to the military force of the mother country. None of the colonies contribute even to cover the expenses of their own defense! It is always the mother country that has to face the defense bill. The American colonies therefore turned out to be a weakness, not a strength, for the countries in Europe. So much so that Smith claims that the unjust oppression of industry of other countries falls back on the head of the oppressor crushing their own move.

The exclusive trade mother countries have with their colonies could be seen as the only benefit European countries may receive. But it is a peculiar benefit because it is achieved by depressing others, rather than rising above others. It is actually not a benefit at all. For example, tobacco is received exclusively in England, so it has a high monopoly price. England then sells it to France at an even higher price. Free trade would allow lower prices for everybody. Not surprisingly, the higher monopoly prices of domestic products induces foreign merchants to undersell domestic merchants in all other markets. Not surprisingly, merchants complain. But they complain about high labor costs, not about their higher profits! They complain about the gains of others, not their own gains.

Another problem is that the monopoly of the colony trade, with the great profits it generates, attracts capital in the colony trade away from other activities. At first sight, this seems great, to the undiscerning eye blinded with ambition. But every time Smith tells us “at first sight”, we know to expect a problem. Indeed, this means that eventually profits in the colony trade will decrease (more capital poured in), but that profits elsewhere will increase (less capital available). Eventually they will equalize, but at a level higher than otherwise.

It is not an accident that since the establishment of the Navigation Act, trade with the colonies increased while trade with Europe decreased. One could object that after the introduction of the Navigation Act, profits actually decreased. True, Smith says, but they would have decreased even more without this monopoly.

We know from earlier, and Smith reminds us, that the mercantile capital naturally prefers to stay close to home, rather than going far, everything else equal. But if distant employments have high enough profits, capital will go there. Without laws, private interests and passions will naturally distribute capital in line with the interest of society. Regulation will derange that natural and most beneficial distribution of capital, Smith repeats.

The high profits of colonial trade thus force capital into channels in which it would not otherwise go. Overall trade did not increase. It just changed direction. New colonies always have less capital than needed. Ergo the great profits. Borrowing from the motherland satisfies in part this high demand for capital. But this is not a good thing. The colonies are far away. It takes a long time to receive payments. Slow payments mean less investment.

For Smith, the monopoly of colonial trade broke the natural balance between all branches of industry. Now a big single channel replaces many smaller channels. This big channel decreases security. It is like putting all the eggs in one basket. A bad idea. The economy looks like “a sick body with some overgrown vital parts”, Smith depicts. A small blockage in a great vein which is artificially swollen is very dangerous. If a small vein busts, not much happens. But, Smith says, if a big vein breaks, we can have “convulsions, apoplexy, and even death”! So people now look at a possible break of this great vein of colonial trade with more terror than they would look at the Spanish Armada.

The artificially higher profits have an additional fatal problem. They destroy the natural parsimony of merchants. Since the lower ranked people look up and imitate the rich, they also will become less parsimonious. Capital will gradually decrease, and with it, productive labor will decrease too. Smith asks rhetorically: have the exorbitant profits of Lisbon or Cadiz increased the capital of Portugal or Spain? Look at Amsterdam instead to see the difference.

So Smith accuses the monopoly of colony trade to be “mean and malicious”, as it decreases everybody’s industry. It benefits only a group of men at the expense of the general interest of the country. What today we call state capture is the problem: special interests capture the government. The Empire is the “mean and malicious” product of special interests. “To found a great empire for the sole purpose of raising up a people of consumers is not a project fit for a nation of shopkeepers, it is the project fit for a nation whose government is influenced by shopkeepers. Such statesmen only would employ the blood and treasure of fellow citizens to maintain such empire”. And Smith is not just saying “blood and treasure” for emphasis. All the recent wars have been fought to protect these monopolies. Even the very large naval force of Britain was built to guard against smuggling.

“The maintenance of monopoly is the sole and end of purpose” of the empire. The provinces have not contributed to either the revenue or the defense of it. They are a net loss for Britain. So much so that Britain would be better off without them and should voluntarily give them up. Yes, giving up the colonies is the best thing for Britain to do. It would immediately decrease its expenses. It would create a good friend with whom to have good terms in commerce and good alliances in wars. Unfortunately, Smith is well aware that this is unrealistic. It is contrary to the private interests of too many. It mortifies the pride of the nation and it eliminates a place from which wealth and distinction is derived. Too bad.

Ok then, if it is not politically feasible to voluntarily give independence to the colonies, how about taxing them? Taxes could be imposed by their own assembly or by the British parliament. It is unrealistic to expect that their own assembly will vote to increase taxes for the Empire. They cannot even raise enough to pay for their own civil and military establishment. Even in England it was difficult to increase taxes. It was only possible by distributing offices. But the colonies are too far to manage. It would not work. And their distance is also an impediment to the knowledge of the needs of the Empire.

They could be taxed by requisition then, meaning the British parliament tells them how much it wants, and they can come up with the amount in the way they see fit. This also is not going to work, because if Britain taxes its provinces without their consent, the province’s assembly loses importance.

The incentives structure of Smith’s analysis is based on psychological just as much as material motivations. Pride plays a fundamental role in human actions, even if, as we would consider today, irrationally so. For Smith, men want to manage their own affairs because it makes them feel important. The key to a stable government is to preserve their feeling of importance. Smith is convinced that the colonists are so ambitious that they would draw their swords to defend their own importance. Not the most flattering description, but probably accurate.

No voluntary giving up; no taxation by requisition; is there another possible way to alleviate the burden the colonies cause Britain? Yes, Smith suggests. Give them representation in the English parliament. By allowing representation, you can tax them. And, most importantly, you give them a new way to feel important. The presumptuous hope in their good fortune, which as we know every man in relatively good health has, and these colonists seem to have even more, will delude them into thinking that they can win great prizes in the lottery of British politics. They will feel so very important, much more than any subject of Europe. Even now all of them, from shopkeepers to tradesmen and attorneys, think of themselves as statesmen and legislators, flattering themselves that they will become the greatest and most formidable country ever. If you do not give them something to be more ambitious with, they will die to defend their status.

Britain flatters itself thinking it can sedate them by force, but their feeling of importance is too big to tame. Unless there is a Union (like the one between England and Scotland), they will fight against the best of the mother countries.

A complete Union with the colonies is thus Smith’s most plausible solution. For this solution he does not think there are impossible problems, like the other two options. There are just some (insurmountable?) prejudices. Smith’s Union proposal is radical. And it gets even more radical.

The American colonies grow so much and so fast that within a century or so they will produce more than Britain. Which means that their tax revenue will be more than Britain’s. And since the seat of the empire tends to move to the part of the empire which contributes the most to it, the seat of the empire may very well move to America within a century or so after this Union. How is that as a selling point to the English people?

Before describing the consequences of the presence of exclusive companies, such as the East Indies Company, Smith offers yet another condemnation of the modern colonization process: the natives got the short end of the stick: “all benefits got lost in their dreadful misfortunes”. The Europeans were able to create such empires, not because of anything intrinsic in their policies, but because of accidental circumstances. They happened to find natives who were militarily much weaker than them, which enabled the Europeans “to commit with impunity every sort of injustice.” This may sound either like an apology for European powers, or as a condemnation of their arrogance in claiming greatness.

Now attention turns toward the East. The East Indies trade is cursed with exclusive companies. The typical features of the exclusive companies are their extraordinary waste, frauds, and abuses. Combine them with the extraordinary profits they manage to extract, and you have prices much higher than otherwise. This is one of the reasons why exclusive companies are always harmful.

The other reason why they are harmful is that they derail capital from its proper course. Large parts of a country’s capital could have been used in ways more suitable to the county’s own circumstances rather than in long distance trade. Instead, poor countries use more capital than they otherwise would and rich countries use less. Poor countries, like Sweden and Denmark would not have sent as many ships to the East Indies, or any at all. Rich counties like Holland would have sent more, had there been freer trade.

The exclusive companies in the East Indies, combined with the fact that the indigenous population was not as defenseless as the one in America, are the explanation for the little progress we see in the East Indies. Africa is a bit better because it had more defenseless people and more trade with ships stopping by.

The exclusive companies are dreadful to both the home country and the colonies. Want proof? Look at the production of spices in the Dutch islands and of opium in Bengal. If production exceeds what keeps Europe’s high price, it is burnt. By destroying the extra, they make sure it will not be smuggled to Europe. The same happens with population. Wages are kept so low as to maintain only the number of people needed to supply the garrisons. Remember Smith’s description of the hundreds of thousands of yearly deaths by starvation in Bengal in Book I, Chapter viii?

The government of an exclusive company is a government subservient to the interest of monopoly. It is not by chance that the council of merchants can only command obedience with military force; it is a despotical government. Vain are the requests of moderation coming from the home country. “Nothing is more foolish than to expect the clerks at ten thousand miles distance and out of sight to follow orders not to make a fortune”.

Look at it in this way, Smith tells us. The interest of the sovereign is in line with the interest of country, while the interest of the merchants is the opposite. If a sovereign wants to increase his revenue, he needs to increase the revenue of his people, which means to increase their produce, which in its turn means to decrease monopolies. An exclusive company acts as a sovereign but cannot think as a sovereign. It only thinks: buy cheap, sell high to increase profits; keep competitors out; decrease production to raise prices high enough to have exorbitant high profits. An exclusive company prefers temporary profits to permanent revenue.

Why? Because masters of countries are different from servants. A country belongs to its master, so a master has interest in it. If he oppresses it, it is out of ignorance: he does not understand his interest well enough. But the country does not belong to the servants. Their interest is therefore different. Even with perfect knowledge, they would have no incentives to stop its oppression. Think of the exclusive company as a government in which each member of the administration will leave, and will leave carrying his fortune away with him. When they leave, they are therefore completely indifferent to the circumstance of the country, as if the whole country would be swallowed by an earthquake.

This image is powerful enough to describe the blunt indifference of the East Indies Company members. It becomes even more devastating when compared to what Smith writes about the possibility of a country being completely destroyed by an earthquake in his Theory of Moral Sentiments. In that book, he tells us that we care more about our little finger than about the destruction of a faraway country like China. If we know that we are going to lose our little finger tomorrow we would not be able to sleep at night. But if we know that the entire population of China would be swallowed by an earthquake, we would snore placidly though the night. Yet, if asked to let the whole population of China die to save our little finger, we would not do it. We would not let China be swallowed by an earthquake. Nobody would. “Human nature startles with horror at the thought, and the world, in its greatest depravity and corruption, never produced such a villain as could be capable of entertaining it.” (TMS III.3.4). With the exceptions of the people working in the exclusive companies! They would save their finger, and impassibly let China be swallowed by an earthquake.

Yet, Smith cautions, as later on Public Choice scholars would also do, that we need to differentiate between people and incentives. People are all the same. A sovereign is as good or as bad as a clerk working in the East India Company. The destructive results of exclusive companies are not the results of bad people working in them. It is not that replacing bad people with good people would make a difference. All people are equally good or bad. Those clerks are just like you and I. That destruction comes from the perverse incentives that that institution generates. If you or I would work for the East India Company we would also walk away from our post, with our enormous fortune, without looking back to the devastating destruction we left behind. Human homogeneity remains. Institutional incentives are what matters.

CHAP 8: Conclusion of the mercantile system

This relatively short chapter summarizes Smith’s concerns and accusations against the mercantile system. It lists several of the actual trade restrictions and their ferocious penalties, without holding back that they all come from the avidity of the private interests of merchants and manufacturers who are able “to extort” protection from the legislature.

These prohibitions and enormous duties not only are ineffective to prevent exports, they are a violation of justice. The great price difference between the domestic and foreign markets is just too strong to resist temptation for smugglers. With their exception, as well as the exception of the protected merchants and manufacturers, everybody would be better off with just a modest tax. It would give revenue to the sovereign and would save more burdensome taxes.

Note that the prohibitions include also the one of movement of labor. Artificers are forbidden from leaving the country for fear that they would spread their knowledge to competitors abroad. This is a direct violation of their liberty. Their liberty is sacrificed to the futile interests of the merchants and manufacturers.

It is the merchants and manufacturers that can easily combine to gain monopolies because they are concentrated in urban centers. Most other professions have people dispersed in the territory making it impossible to collude. The consequences are unjust, Smith tells us over and over again: “To hurt in any degree the interest of any other order of citizens, for no other purpose but to promote that of some other, is evidently contrary to justice and equality of treatment which the sovereign owes to all his subjects.”

This is even more absurd if we think that consumption is the sole end and purpose of production. The interest of producers should be supported only insofar as it supports the interests of consumers. But the mercantile system, with its perverse avidity, reverses it. The interest of consumers is always sacrificed to the interest of producers, as if production was the sole end and purpose of industry and commerce. Which it is not.

Look: Smith summarizes the conclusions of his previous chapters of this book, import restrictions benefit producers at the expense of consumers who have to pay higher prices. Bounties on exports benefit producers and hurt consumers who not only have to pay taxes for the bounty, but also have to pay a higher price because of the decrease in domestic supply due to the increased export. Treaties of commerce benefit producers who can sell with better terms in distant places at the expense of consumers who are forced to buy more expensive and lower quality goods from those distant places rather than cheaper and better quality ones from closer places. Colonial management is the worst of all. “A great empire was established for the sole purpose of raising up a nation of consumers” obliged to buy from the mother country’s producers. “For the sake of that little enhancement of price which this monopoly might afford our producers, the home-consumers have been burdened with the whole expence of maintaining and defending the empire.”

Smith tells us again that “the cruelest of our revenue laws, I will adventure to affirm, are mild and gentle in comparison of some of those which the clamour of our merchants and manufacturers has extorted from the legislature, for the support of their absurd and oppressive monopolies. Like the laws of Draco, these laws may be said to be written in blood”. He is not just offering a vivid image here. He explicitly accuses merchants and manufacturers to be solely responsible for the past two wars England fought. The wars cost was human blood, and costs were much greater than the whole value of the colony trade.

The blame for the wastes and injustices of the mercantile system are unequivocally determined: “our merchants and manufacturers have been by far the principal architects”.

CHAPTER 9: Of the agricultural Systems, or of those Systems of political Oeconomy, which represent the Produce of Land as either the sole or the principal Source of the revenue and Wealth of every Country.

This last chapter of Book IV describes a theoretical system, which has never been put into practice, and therefore has never done any harm. This system is a reaction to the system that Colbert put into place in France when he was a minister of Luis 14th. Colbert fell into the trap of the mercantile system and designed policies that gave extraordinary privileges to some industries and extraordinary restraints to others. In particular, in his attempts to promote the industries of the towns, he discouraged the one of the countries. He wanted to offer cheap corn to the towns. He forbade the exports of grains, which, in conjunction with other restrictive regulations, ended up discouraging agriculture.

To counterbalance Colbert’s actions, a group of French philosophers, led by Mr. Quesnai, articulated a system that ended up undervaluing the industries of towns.

They thought that a society is divided into three classes. One: proprietors of land; two: farmers; and three: artificers, manufacturers, and merchants.

Whatever landlords spend to improve their land contributes to the annual produce of a country. Landlords are therefore a productive class. And to avoid giving incentives not to improve, their land should not be taxed until all of its expenses are covered.

Farmers are also productive. They contribute to the produce of society by paying for the tools they use, including their seeds and cattle, and their annual expenses for the maintenance of their family, servants, cattle, and for the replacement of the wear and tear of their instruments of cultivation. Unless these two expenses are not regularly covered and profits are guaranteed, farmers cannot carry on their activities. So the rent they pay to their landlords is what remains after paying all the expenses. Farmers are productive because they are able to replace the original and annual expenses and to create a neat produce.

Artificers, manufacturers, and merchants, on the other hand, are unproductive and barren because they do not create new value. These French philosophers are called Physiocrats (physio is nature and crat means ruling), for their desire to let nature rule. The labor of artificers, manufacturers, and merchants does not add any value to the whole annual amount of rude produce of the land, or so they claim.

The only way in which artificers, manufacturers, and merchants may increase the revenue and wealth of a nation is with parsimony, by depriving themselves of funds meant for their consumption. So, agricultural countries such as France and England can grow rich with enjoyment, while merchant countries such as Holland and Hamburg can grow rich only with privation.

The unproductive class, despite being completely maintained and employed by the productive classes, is very useful. It produces and buys domestic and foreign goods, for the enjoyment of the productive classes, and it allows the productive classes to concentrate themselves on agriculture, rather than trying to produce manufactures themselves, which would be a waste of productive resources. The unproductive classes therefore indirectly increase the productive power of labor by letting farmers be farmers.

It follows that it is not in the interest of the productive classes to restrict or discourage the activities of merchants and manufacturers. The greater their liberty, the more their competition, the lower will be the prices of their goods that farmers and landlords buy.

High duties would decrease the value of the surplus of the land by increasing the price of manufacture. They would give incentives to have more manufacture and less agriculture, decreasing productive labor and increasing unproductive labor. Quesnai’s economic tables represent how a violation of the natural distribution, which the most perfect liberty creates, would decrease the value and the annual produce and the wealth of a society. Instead, to rival mercantile nations, a landed nation should continuously increase the surplus produce of land, which eventually will support artificers and manufacturers, and eventually even foreign trade.

The best way for a landed nation to raise its own artificers, manufacturers, and merchants is therefore a perfect freedom of trade with all nations. Perfect justice, perfect liberty, and perfect equality is the recipe for the prosperity of all members of society.

Perfect, perfect, perfect. This system requires a lot of perfection. It implies, to use a physician image, since Quesnai was a physician after all, that unless we follow a perfectly healthy diet, we will get sick. But we know from experience, as Smith reminds us, that somehow we remain mostly healthy even if our diet is not perfectly healthy. The political body, like the human body, does not necessarily prosper only under a perfect and perfectly followed regimen. Perfect liberty is nice, but Quesnai does not take into consideration the driving engine of human betterment for Smith: our natural desire to better our condition. Our effort to better our conditions is a remedy against many of the bad effects of bad and oppressive policies. After all, Smith notices, if a nation could not prosper unless it had perfect liberty and perfect justice, no nation could ever have prospered. The “wisdom of nature” offers remedies to the bad effects of the “folly and injustice of man”.

The Oeconomists, the name with which the French philosophers were known, did make another serious mistake. They considered artificers, manufactures, and merchants as unproductive. Here are five reasons why they are wrong. First, artificers, manufactures, and merchants reproduce annually the value of their own consumption. They are like a couple who makes two children. They will maintain constant population. True, population will not grow, but that does not mean that they are barren. Second, artificers, manufactures, and merchants are not like menial servants, the work of whom does not repay its expense, meaning that the service they produce perishes the moment of its performance. The labor of artificers, manufactures, and merchants instead fixes itself in the vendible good they produce. Then, it is wrong to say that the labor of artificers, manufactures, and merchants does not increase the revenue of society. The value of what each of them produces may be equal to the value of what he consumes, but the whole value of the goods in the market increases with his production. Furthermore, farmers also need to be parsimonious to increase the real revenue of society. Revenue increases only with improvements in the productive power of labor or with the increase in the quantity of labor. Manufacturing allows for more division of labor, therefore for more improvement. So farmers, even more than artificers, manufactures, and merchants, need to save to improve. And finally, the revenue of a trading and manufacturing country is always more than the one who is not trading and producing manufactures. It is only with manufacturing and trade that one country can get more subsistence than what its land produces.

Also, recall Smith’s defense of merchants in his Digression on the Corn Laws. That kind of defense would not be possible in the hands of a physiocrat.

Now, this system is not perfect, Smith tells us, but it is the one that gets closer to the truth. It understands that wealth does not consist of the “unconsumable riches of money” but of consumable goods. It also understands that if agriculture is to be preferred, restraining manufacturing and foreign trade is actually counterproductive, so it promotes liberty, even if perfect liberty.

Quesnai and his followers did influence France’s policies, which helped French agriculture recover a bit from its previous oppressions. Yet, Europe, generally, has had policies more favorable to manufacture and trade than to agriculture. Examples of nations that favored agriculture over manufacture and trade are: China, Egypt, Indostan, ancient Greece and Rome.

China has little respect for foreign trade and has little of it. But since it has a very large territory, with a lot of people, different climates and productions, and an easy internal navigation system, it was able to develop its own manufacture and division of labor without the need for foreign trade. But its closure to other nations, with the possible exception of Japan, prevented its improvement.

Egypt and Indostan also favored agriculture and disliked sea travel, so they discouraged manufacture. Their developed agriculture tells us that, in a closed market, it is easier to support agriculture than manufacture.

Ancient Greece and Rome discouraged manufacture more than encouraged agriculture. We can see this in the price of their clothes, which was extremely high. When manufacture is little, clothes are very expensive and their variety is limited. With the improvement in manufacture, the price of clothes decreases, depriving the rich of a way of distinguishing themselves. The way they manage to keep their distinction is through the variety of clothing rather than through the expense of one dress.

The chapter ends linking the criticisms of the systems of political economy described in this Book to the following Book. Smith reminds us indeed that when a system of natural liberty is in place, every man, as long as he does not violate the rules of justice, is left free to pursue his interest in the way he sees best. If the sovereign does not have to be bothered with the impossible task of allocating labor and capital, a task for which “no human wisdom or knowledge could ever be sufficient”, he can more easily concentrate on his three duties: defense against foreign violence and invasions, protection of his subjects from the injustice and oppression of some other of his subjects, and erecting and maintaining public works and institutions, which society needs but private interests would not create because deemed unprofitable. These, and the way to finance them, are the topics of the three chapters of the next and final book.

FURTHER READINGS????

?????

?????

?????