Guidebook to the Wealth of Nations. CH 2: Introduction and Book I.1-3
Chapter 2: Introduction and Book I.1-3
Abstract: the introduction of An Inquiry into the Nature and Causes of The Wealth of Nations is Smith’s summary of his work and explanation of his motivation for writing it: in some poor societies, people are forced to abandon their infants, elderly, and sick “to be devoured by wild beasts”; while in wealthy societies the few people who work are able to support the life all, including all those who do not work. How is this difference possible? As Smith tells us in the first 3 chapters of Book I, it is thanks to the division of labor, which is itself limited by the extent of the market.
Introduction
Adam Smith published his most famous book An Inquiry into the Nature and Causes of The Wealth of Nations in 1776. In his title (and in most of his text as well) Smith avoids mentioning the words of “political economy”. Just a few years earlier, in 1767, the term Political Economy had been used for the first time as part of a title of a book, in James Steuart’s (1707-1780) work: An Inquiry into the Principles of Political Economy. Smith consciously ignored Steuart’s wording and work, with which he did not agree. The Inquiry Smith wants to engage with is about the nature and causes, not the principles, possibly implying his willingness to focus on an open-ended scientific account of wealth.
Smith’s work opens with his own introduction. He summarizes about 1000 pages in a couple of pages, telling us what to expect from his work. We need to pay a lot of attention to this short introduction since Smith is telling us what to focus on.
In the opening sentence Smith declares that labor is “the fund” which supplies the necessities and conveniences of life consumed in a nation. There are at least three key points here: labor, conveniences, and consumption.
The main source of wealth is labor. It is labor that supplies what we need and want. It is labor, it is not gold, it is not land, it is just labor. Smith is already telling us against whom is going to argue, and the alternative he is offering. The so-called mercantilists claimed that wealth came from gold and silver, from money that is, and what mattered for a country was their accumulation. Smith is saying that it is the “fund of labor” that matters instead. And the so-called physiocrats claimed that land was the most important factor in creating wealth. Again, land it is not mentioned, just the fund of labor. Smith is implicitly telling us that he is providing an alternative way to understand wealth and wealth creation, a way based on labor, not on money or on land. Notice also that labor will appear in the first paragraphs of each chapter of the first two books of the Wealth of Nations.
Smith also tells us that the fund of labor supplies us with “necessities and conveniences.” We do not want only what is necessary, we want also what is convenient. And what is convenient and not necessary is usually a luxury. So for Smith we want both necessities and luxuries. We do not want just a copper teapot, we want a silver one, as he tells us in his other book, The Theory of Moral Sentiments. A shirt is necessary, but a fine shirt is better, when possible. Luxury is almost just as important as necessity for us.
And finally, our production is the means to get to consumption. The ability to consume is what makes a country wealthy, not its production, let alone production for its own sake. The accumulation of gold and silver or of domestic products at home and our consumption being limited to them, is not what makes us wealthy. Our ability to consume is what makes us wealthy. This is another indirect criticism of the so-called mercantilists who would promote expensive domestic production and discourage consumption of cheaper foreign imports. If the way to understand wealth is the ability to consume, what reduces consumption for the sake of production is not a way to promote wealth, but a way to diminish it. And this is all encapsulated in the first sentence of the introduction!
But why should consumption be so fundamental in understanding wealth? Because if we cannot consume, we die. In the 4th paragraph, Smith tells us that some societies are “so miserably poor” that the people who cannot produce cannot consume, and therefore they die. The people who cannot produce and therefore cannot consume are the ones who are “too old, or too young, or too infirm.” So, in some societies which are so miserably poor, people are forced, “or think themselves reduced”, to abandon “their infants, their old people, and those afflicted by lingering diseases, to perish of hunger, or to be devoured by wild beasts”! The image of someone being forced to leave their own baby or their own elderly parent to be devoured by wild beasts is chilling today. But if you are so poor that the people who can’t work can’t consume even the necessities required to survive, you will die.
Not all societies are so miserably poor though. Some societies are richer than others. In these societies only a few people work, but they can produce enough to support themselves and all who do not work as well. In fact, Smith tells us, someone who does not work, not only does not die of starvation, but can consume even a hundred times more than someone who works! In a rich country there is so much abundance that even one of the poorest worker can consume more than what the richest people in poor country could ever have. Wealth allows you to consume necessities and conveniences, it allows you to live, and to live well too. Poverty, on the other hand, kills you. This will be a recurrent theme in the book, so much so that Smith will measure economic growth through the ability of a country to support an increasing number of people.
A conspicuous absence in Smith’s introduction may highlight the relevance of labor and consumption even more: markets and prices are not mentioned. There is just labor, consumption per capita, and production per capita.
A country is wealthy depending on the proportion of what it can consume given the number of consumers (paragraph 2). On what does what we can consume depend? Smith’s answer is the skill of the workers, as well as the proportion of people working productively versus the people not working productively, everything else the same (paragraph 3). But what matters the most are the skills of the workers. As we just said, in poor countries everybody works, but little is produced and therefore consumed; while in rich countries only a few people work, but all consume abundantly without much trouble. What matters the most for wealth accumulation is the improvement in the productive power of labor, not the proportion of productive laborers to those who do not labor.
Smith uses Book 1 to analyze the causes of this improvement in the productive powers of labor. He will also look at the distribution of output among different groups of society. Book 2 looks at how it is possible to change the proportion of people who work productively and people who do not. His distinction between ‘productive’ and ‘unproductive’ labor was a reaction against the distinctions that the physiocracts made, and it will become central for all the classical economists including Marx to their analyses of production and accumulation. Here Smith announces that what makes the difference seems to be “capital stock”. So, Book 2 analyzes the nature of capital stock, its accumulation, and its different uses. Book 3 will be about the accidental circumstances which seem to have unintentionally introduced and established different policies, and which gave different encouragement to wealth creation in different nations and at different times. Book 4 will present the different theories of political economy, their effects and their political influence. And finally, the 5th and final Book, will be about the expenses and the revenue of the sovereign. It deals, in particular, with whether some of the necessary expenses should be funded from general revenue or from local revenue; with the different methods of paying for these expenses, including government debt.
An additional thing to notice about the introduction, which is also true for the rest of the book is, as we saw in chapter 1 of this guidebook, that the language Smith uses may not be the most appropriate for our days, but it is what was common in his days. The distinction between savages and civilized people is a technical distinction based mostly on the prevalent means of production of different societies. A society which is based on hunting and gathering, was commonly referred as savage. Pastoral societies were commonly thought of as barbarians. Societies based on agriculture tended to be called civilized and the ones based on commerce were considered refined. Or, in broader terms, what is not based on either agriculture or commerce is considered rude and uncivilized. The contrast between commercial and non-commercial societies will be a regular presence throughout the Wealth of Nations. The Wealth of Nations can be seen as a defense of commercial society, with the recognition of its limits and defects, but it is still a defense of it. The “mercantile interests” in Smith’s words, or what today we would call cronyism, jeopardize the wealth that commerce creates. And theoretical and moral critics, such as Jean Jacques Rousseau, for example, jeopardize the moral foundation of commerce by claiming that wealth and commerce degrade morals. Smith wants to show that both trends are wrong, and that commercial societies offer the best way to secure justice and prosperity.
Book 1, Chapter 1
The first sentence of An Inquiry into the Nature and Causes of The Wealth of Nations is a terse statement: the improvement in the productive power of labor is the effect of the division of labor. It is the effect of the division of labor. This is something Smith will explain in more details in the next chapter.
In the second paragraph we have a first warning: the common eye makes mistakes. How do we correct for those mistakes? He will tell us later (paragraph 5 and 9, as well as in a “juvenile” essay published posthumously titled The Principles Which Lead and Direct Philosophical Enquiries; Illustrated by the History of Astronomy) that the philosopher is the person to let us know about our mistakes and to offer us the correct view. A philosopher is someone who specializes in observing everything. The division of labor applies to knowledge too. And thanks to this specialization, the philosopher is able to combine the most distant things, which a common observer would not be able to do.
The mistake we commonly make is to believe our eyes. But there is more to the world than our eyes can see at any one time. Our eyes can’t see at once the division of labor in a great manufacturer, but they can see it well in a small one. In a big manufacturer, which by the way provides many things for many people, the division of labor is so large and fragmented in so many different places that we cannot see it well. On the other hand, a small manufacturer can have all its production in a single small place. So we can easily see how all the labor is divided, because all is under our sight at once. Consequently, we think there is more division of labor in a small business than in a large one, while in reality it is the opposite.
But because of this incorrect belief, a common way to describe the division of labor is to describe what goes on in a small business, not in a large one. So Smith tells us he will continue using this common example of division of labor, even if it is not ideal, simply because it such a common example. The example is the one of the pin factory, which was used also in the French reference work the Encyclopedie.
If a person tries to make a pin, he could make perhaps one, or at best 20 pins a day. But if the work is divided into, in the case of the pin, 18 separate tasks, even if only 10 people are employed, each man can make around 12 pounds, or four thousand eight hundred, pins a day. How does Smith come up with these numbers? We are not sure, but these numbers are consistent in all his works and with the ones reported in the Encyclopedie. He may actually have visited a pin factory himself since he claims “I have seen”.
When we think in terms of the production of goods that are common among even the poor, say a basic woolen coat, we have to realize that it is the product of the work of thousands of people. It is not just the wool, but also the dies that generally come from distant land, requiring ship building and thus a large network of trade. Leonard Read, with his story “I Pencil” gave new life to Smith’s story of the woolen coat. It is also worth noticing that this simple story is not just descriptive, it is also normative: commerce brings cooperation among thousands since “even the meanest person is in need of the cooperation of thousands”. Trade, even if unintentionally as we will see later on, does not divide people, it brings thousands of people together peacefully.
If the division of labor is the cause of all improvements of the productive power of labor, why do we observe it more in commercial societies? Because commercial societies rely more on manufacturing than on agriculture, and only manufacturing allows for division of labor to be used extensively. In farming it is difficult to divide labor both because of the nature of the tasks and because of their seasonality. In manufacturing it is much easier. So we observe more division of labor, and as a consequence more improvement of the productive power of labor where manufacturers are more common. It follows that the “most opulent nations” are the ones with the greatest division of labor, that is, commercial societies. Actually, commercial societies tend to be better than their poorer neighbors in both agriculture and manufacturing, even if more in their manufacturing, because they are able to dedicate more resources to improve agriculture.
Smith gives us a full theory of productivity. When labor is divided into specific tasks, the worker becomes more productive because he becomes more dexterous in his task, he saves time from not switching from task to task, and he will invent machines to better do his task. This allows for more production, more trade, and more division of labor.
What is interesting to note here (paragraph 7) and to keep in mind as we read through the rest of the book, is a side note in Smith’s description of a country workmen and his justification of it. A country workman is often seen as slothful and lazy, not because he is naturally so, but because day in and day out he is forced to switch work and tools every half an hour or so. This makes him less productive. Which is the reason why Smith brings it up here. But that the nature of employment will shape the character of a worker, as opposed to the character of the worker being the determinant of his employment, will come up again soon enough. What is not present here, but will come up later on, is the analysis of the costs of division of labor. Smith’s usual style is to provide the costs and benefits of what he describes.
The chapter ends picking up the thread Smith laid out in the introduction. Commercial societies make people, all people, better off, including, or better especially, “the lowest ranks of the people”. The division of labor brings opulence to the poor and to the poorest poor in particular. It also brings equality. Smith tells us that the home of a frugal peasant in Europe is not that different from the home of a prince. That same home though is much better than the home of an African king. What is pungent is the comment that Smith makes about the African king. The African King is “the absolute master of the lives and liberties of ten thousand naked savages”. The European prince is not. The frugal peasant not only is clothed but he is also free. Commerce brings wealth for all, as well as life and liberty for all, and this is especially true for the people at the bottom.
Book 1, Chapter 2
We now know what the benefits of division of labor are. But what are the causes? Smith has a very clear answer: the division of labor is the necessary consequence of our propensity to truck, barter, and exchange. The division of labor is not the result of any human wisdom. It is not the result of any action that has intention of creating wealth. It is not the result of a plan that foresees prosperity or such an extensive utility. We may like to think we are responsible for these great results. But we are not. No human reason is capable of this. No human reason is capable of designing and predicting the consequences of such improvement in the productive powers of labor. It is the unintended and unplanned, but “necessary consequence of our propensity to truck, barter, and exchange.” Smith is a very cautious writer. He seldom uses absolutes. But here he does. It is not only a consequence of this propensity. It is a necessary consequence of the propensity to truck, barter, and exchange one thing for another.
If you look in the Oxford English Dictionary, you will see that “to truck”, in Smith’s time, means to bargain, to deal, to exchange something with someone. It may also mean to pay in kind. In this chapter, a substitute Smith uses to indicate to truck is “by treaty” which in Smith’s time means by agreement, by contract, by persuasion. To barter is to exchange one thing for another thing, as distinguished from a monetary transaction.
In each of the 5 paragraphs that compose this chapter Smith refers to these three activities: the propensity to truck, barter, and exchange (1), by treaty, by barter, by purchase (2 and 3), trucking disposition (3), the disposition to truck, barter, and exchange (4 and 5). Humans are naturally trading animals, he repeats in each paragraph. What differentiate us from other animals is not that we are created in the image of god, or that we have an immortal soul, as most theological doctrine of his time would claim, but that we exchange. This propensity to trade is a human characteristic and ours alone. We are the only species of animals capable of trade. Dogs do not trade, they do not have “fair and deliberate exchange”, nor any contract. A dog fawns to get the food he wants from a human. People may fawn too, but we can’t rely on just fawning to get what we want. We do not have time to do it. In our lifetime we only have time to be friends with very few people. And in a civilized society we need the help of many, as the story of the woolen coat from the previous chapter tells us. This propensity to truck, barter and exchange is quite handy since humans, for Smith, are one of the few species of animals incapable of surviving alone.
Here we have possibly one of the most cited sentences of the Wealth of Nations: it is in vain to expect our dinner only from the benevolence of the butcher, the baker, and the brewer. We are different from dogs because we can appeal to the self-love of the butcher, baker, and brewer to persuade them that it is to their advantage to give us dinner: it is not from the benevolence of the butcher, baker, and brewer that we get our dinner, not from their humanity, but from their self-love. Only beggars chose to depend chiefly on the benevolence of others, but even they never do so entirely. They use the money they receive to buy things they like or they exchange things they receive for things they like more.
A couple of things are worth noticing here. Smith tells us we engage other people’s self-love. Is self-love the same as self-interest, or selfishness? Today we use this Smithian sentence to claim the dominance of self-interest in the economic (and occasionally social) world. But the word Smith uses is self-love, a well-understood term in 18th century moral and theological discourse, thanks to Bishop Joseph Butler (and popularizes by Tucker) not self-interest or selfishness.
The other thing to notice is that Smith simply says we do not get our dinner by relying exclusively on other people’ benevolence. Smith does not say we have no benevolence. We are indeed benevolent, but it is in vain to rely entirely on the benevolence of others to get dinner. As a matter of facts, he starts his Theory of Moral Sentiments by observing that however selfish we might think people are, they also care about other people’s happiness.
Now let’s go back to our propensity to truck, barter, and exchange. It is through this propensity that we specialize. And our specialization will allow us to develop those skills which make us better than others at what we do. Smith tells us that we are naturally very similar: there are no noticeable natural differences between individuals. We become different, but we are not born different. Our differences are the effect, not the cause, of the division of labor. We are hunters. Thanks to our trucking disposition I give you arrows and bows in exchange for your venison. Before we know it, we realize that we can have more bows and arrows and more venison if I make only bows and arrows and you go catch the deer. We divide our labor. I start to excel in making arrows, you excel in getting deer. We develop different skills thanks to our specialization. We can both consume more than otherwise could. But we started from equal ground. It is our trucking disposition that drove us to specialize and develop different talents.
Similarly, a street porter and a philosopher are naturally the same. Their differences are the product of customs, habit, and education. Indeed, Smith goes so far as to claim that all children are so much alike until the age of 6-8 that not even their parents can tell them apart: “when they come into the world, and for the first six to eight years of their existence, they were, perhaps, very much alike, and neither their parents nor play-fellows could perceive any remarkable difference.” What makes the difference is that when they are six or eight year old, children start working (Child labor is not an issue yet, but it is the norm). And that work leads them to have different life experiences that will eventually develop into the differences which make the vanity of a philosopher looking down on the porter and acknowledging no resemblance between himself and a street porter. But in reality, if we had no disposition to trade, we would all do more or less the same things, and we would all remain more or less the same even as adults.
By nature, Smith continues, the street porter is much closer to the philosopher that a greyhound is to a shepherd’s dog. But while animals cannot take advantage of their differences, humans can and do. Our differences are useful to each other because we can trade with each other.
Smith’s argument here is quite radical. And it does not go unnoticed. The paladins of the future pro-slavery debate based their arguments on natural inequalities, so that for them some are naturally slaves and others naturally masters. They stand ready to accuse Smith and his followers in the science of economics, of undermining the stability of the social order. For them, it is a horrible thing, a dismal thing in fact, that the economists, followers of Adam Smith, would consider an African black on the same level as a British white. For them, economics is therefore a “dismal science” because our propensity to truck, barter and exchange makes all humans equally human, as opposed to differences in our skin colors or size of our head making some more human than others.
It may be easier to see how strong Smith’s position is when we compare it to an alternative theory of division of labor that was already well established in Smith’s day. Smith was not the first to realize the gains from division of labor. The ancient Greek philosopher Plato already spelled out quite clearly the benefits of divisions of labor and specialization. But in contrast to Smith, Plato believed that the division of labor is a consequence of our natural differences.
Similarly, in today’s principles of economics courses, when we talk about the division of labor we talk about comparative advantage, which is a theory developed by David Ricardo, who wrote after Smith. The idea of comparative advantages is that some people or country should specialize in the production of the things in which they have a comparatively lower cost due to some pre-existing differences. So today our starting point is that people have different talents in production of things. Those people then specialize in the activity in which they have comparative advantage, and then they trade. Smith works the argument in reverse. We are naturally the same. We start trading because of our propensity to truck, barter and exchange, and as a consequence of our trading, we start to divide labor and to specialize. This specialization brings about differences in skills and talents. Our differences are the consequences of trade, not the cause of it!
Book 1, Chapter 3
Why, since we are all naturally the same and we all have the same propensity to truck, barter, and exchange, don’t we experience the same degree of the division of labor everywhere? There are several reasons, as Smith will tell us throughout the book. But for the moment assuming everything else is the same, the extent of the market is what allows us to divide our labor and produce more.
We need to trade to specialize, which means we need to have access to markets, since we can’t eat pins. The larger the markets we can access, the more we can specialize and benefit from it. The smaller the market, the less specialization, the less division of labor.
Can we test this idea? Yes. We can look at the world in Smith’s day and we can look at earlier times to see if we can see the expected behavior. History, as we saw in the previous chapter of this Guidebook, is Smith’s database.
What do we see in Smith’s day? That some industries can be found only in great towns. A street porter would not be able to support himself in a small village in the isolated Highlands of Scotland, or even in general outside London. If a worker specializes in the production of nails and makes something like 300 thousand nails a year, to whom would he sell them in the Highlands where at best there is demand only for one thousand nails a year? So, in the isolation of the Highlands, a villager cannot specialize in the production of nails; he needs to be his own baker, his own butcher, and his own brewer. The division of labor is limited by the limited market.
What do we see in the past? That the first civilized countries developed where there were navigable waters—by the Mediterranean Sea, in Egypt by the Nile, in Bengal, in East India, in East China where there are many rivers and communicating canals. Most of Africa and Tartary (central Asia inhabited mostly by Turko-Mongol people) may have bodies of water but they are few and too far away from each other so communication between them is too difficult. Those countries were not as prosperous as the ones closer to navigable and communicating bodies of waters.
Wherever it is possible to use water to transport goods and people, we see larger markets. Water-carriage is significantly cheaper and faster than land carriage. So it is there that we first see an increase in industry, division of labor, and improvements. Smith saw this also in his time, as mentioned in the previous chapter of this Guidebook: the opening of canals in Scotland opened markets and generated wealth.
How much cheaper is water-carriage compared to land carriage? To carry 200 tons of weight between London and Edinburgh, it takes either 6-8 men and a ship, or 50 broad-wheel wagons, 100 men, and 400 horses… it is much cheaper to transport goods by water! Imagine trade between London and Calcutta only by land. It would be so expensive that only precious goods would travel. But then safety becomes a problem, which would make the cost of those good even more prohibitive. In Smith’s day, thanks to water-carriage, there was a lot of trade between London and Calcutta, and this made both places richer. In our days still, 90 percent of consumable goods worldwide are transported via water.
The extent of the market, that is the extent of the market demand, is the first constraint division of labor faces.
Further readings:
???Diamond, Jared. 1997. Guns, Germs, and Steel: The Fates of Human Societies. New York: W. W. Norton.
Peart, Sandra J. and David M. Levy. 2005. The "Vanity of the Philosopher": From Equality to Hierarchy in Post-Classical Economics. Ann Arbor: Michigan University Press.
Read, Leonard E. 1958. I Pencil: My Family Tree as told to Leonard E. Reed. http://oll.libertyfund.org/titles/112
Young, Allyn. 1928. “Increasing Returns and Economic Progress” The Economic Journal, Vol. 38, No. 152. pp. 527-542.