How Cities and Towns Create Wealth and Value According to Adam Smith
In one amazing chapter of An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith applies ancient history and mid-18th Europe to trace potential economic benefits to nations from the movement of craftsmen and merchants out of large estates. He describes how individuals, in towns that were granted certain privileges, were released from the social control and protection of landed proprietors (“How the Commerce of the Towns contributed to the Improvement of the Country,” Volume I, Book III, Chapter IV, Liberty Fund’s reprint, 1981). Smith argues these towns contributed to a nation’s economy in three ways: They provided new markets for advanced manufactured and unprocessed farm goods. Their inhabitants often used newly acquired wealth to invest and improve farm land. Finally, skills acquired through commerce introduced order and good government.
Smith admits to digressing, “[This] does not, perhaps, relate to the present subject, but I cannot help remarking [commenting on] it (III, iv. 16).” Likewise, we cannot resist extending Smith’s observations to current issues. Consider how investment suffers when a large percentage of residents produce less than they consume. Also, note how Smith assesses the role of trade in increasing the quality of goods. Finally, we are amused at how Smith, not without irony, demonstrates how affluent consumption, under certain conditions, can result in improved living standards.
Summarizing Smith’s careful analysis, we conclude that prior to the formation of towns a great proprietor was surrounded by a multitude of often less than fully productive retainers, dependents and tenants. As a leader in war and maintaining order for all who dwelt within their estates, a proprietor’s legal authority usually exceeded that of the sovereign. Any surplus production was shared internally on estates or squandered in forms of hospitality that Smith ridicules. Limited markets denied opportunities for selling home grown products or purchasing quality goods produced elsewhere. As such, there was little incentive to improve the land or increase production.
Extending through ancient times and even feudal law, land was held by great lords in absolute ownership. Thus, even a tenant with a long-term lease “will expose neither his life nor his fortune in the service of the proprietor (14).” Therefore, as the number of dependents increased, farms were enlarged but the actual number necessary to cultivate them reduced. With mass movement into certain towns, officials and tradesmen were free to associate and accumulate personal wealth. In addition to newly acquired independence and wealth, Smith argues, “The habits, besides of order, economy and attention to which mercantile business naturally forms him, render him [a merchant] much fitter [better able] to execute, with profit and success, any project of improvement (3).”
How then would any increase in output brought about by commerce in towns be divided? Here as elsewhere in his writings, Smith presents himself neither as an ideologue nor dismissive of the less desirable aspects of human nature. He says,
Smith admits to digressing, “[This] does not, perhaps, relate to the present subject, but I cannot help remarking [commenting on] it (III, iv. 16).” Likewise, we cannot resist extending Smith’s observations to current issues. Consider how investment suffers when a large percentage of residents produce less than they consume. Also, note how Smith assesses the role of trade in increasing the quality of goods. Finally, we are amused at how Smith, not without irony, demonstrates how affluent consumption, under certain conditions, can result in improved living standards.
Summarizing Smith’s careful analysis, we conclude that prior to the formation of towns a great proprietor was surrounded by a multitude of often less than fully productive retainers, dependents and tenants. As a leader in war and maintaining order for all who dwelt within their estates, a proprietor’s legal authority usually exceeded that of the sovereign. Any surplus production was shared internally on estates or squandered in forms of hospitality that Smith ridicules. Limited markets denied opportunities for selling home grown products or purchasing quality goods produced elsewhere. As such, there was little incentive to improve the land or increase production.
Extending through ancient times and even feudal law, land was held by great lords in absolute ownership. Thus, even a tenant with a long-term lease “will expose neither his life nor his fortune in the service of the proprietor (14).” Therefore, as the number of dependents increased, farms were enlarged but the actual number necessary to cultivate them reduced. With mass movement into certain towns, officials and tradesmen were free to associate and accumulate personal wealth. In addition to newly acquired independence and wealth, Smith argues, “The habits, besides of order, economy and attention to which mercantile business naturally forms him, render him [a merchant] much fitter [better able] to execute, with profit and success, any project of improvement (3).”
How then would any increase in output brought about by commerce in towns be divided? Here as elsewhere in his writings, Smith presents himself neither as an ideologue nor dismissive of the less desirable aspects of human nature. He says,
All for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they [land owners] could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other persons (10).
Freed of the dependency of tenants, serfs, and retainers, the great proprietors lost their power “…in the wantonness of plenty, for trinkets and baubles, fitter [more likely] to be the play-things of children than the serious pursuits of men, they [the land owners] became as insignificant as any substantial burgher or tradesman in a city (15).”
Assuming poor economic policy and no disposition to share, Smith, at least initially, dismisses “trickle-down” theory. He says, “For a pair of diamond buckles perhaps, or for something as frivolous and useless, they [the formerly affluent] gradually bartered [away] their whole power and authority (10).” Therefore, to increase the living standards of a nation, capital that is acquired by commerce must be secured and realized in the cultivation and improvement of the country. The productive bonus for all will not be realized “until it has been spread as it were over the face of the country, either in buildings, or in the lasting improvements of lands (24).” Smith, of course, warns that civil revolutions and war easily dry up any wealth arising from commerce.
Smith, however, emphasizes the potential for overall wellbeing in some developing nations. “In commercial countries, therefore, riches, in spite of the most violent regulations of law to prevent their dissipation, very seldom remain long in the same family (16).” He writes that childish vanity, including diamond buckles, created a demand for finer products, and less ridiculous merchants and artificers received the benefits and developed efficiencies. Quality products justify the costs of long-distant trading. As these products became more widely available, local merchants learned to duplicate them offer them at a lower cost. Also, newly created wealth, unless obstructed by laws such as primogeniture, resulted in better land use and increased agricultural productivity for the nation as a whole.
Smith noted that towns along the coasts obviously had greater market access due to lower transport costs. Thus, Venice and towns in the Hanseatic League are early examples of developing high quality products through international trade. Smith writes, “The capital, however, that is acquired to any country by commerce and manufactures, is all a very precarious and uncertain possession, till some part of it has been secured and realized in the cultivation and improvement of its lands (24). Smith ponders on why the advancements in England’s agriculture took place at a slower rate than that of commerce and manufacturing. He indicates that government’s favoring of the agricultural sector may have backfired. He suggests that indirect encouragement for commerce in general would likely have yielded greater benefits than “altogether illusory” legislation designed with good intentions to benefit a particular sector (20-21).
We will never know how Smith would analyze the decline in our time of once great towns and cities. We know that he discounted, as prime movers in economic development, the power to raise troops, coin money, and make laws (8). He would, however, make four suggestions: reduce dependency by increasing productivity, trade in high valued products, avoid favoring a particular sector, and reduce legal impediments to investment. Smith might possibly make two further observations. First, city government needs to assume certain responsibilities in maintaining liberty and security and, secondly, inhabitants must change those behaviors from which disorder arises (6,9).
More from Maryann Keating
The Soul of Adam Smith's Classical Liberalism
Adam Smith on Infrastructure
Adam Smith on Fostering Civility and Self-Control
Assuming poor economic policy and no disposition to share, Smith, at least initially, dismisses “trickle-down” theory. He says, “For a pair of diamond buckles perhaps, or for something as frivolous and useless, they [the formerly affluent] gradually bartered [away] their whole power and authority (10).” Therefore, to increase the living standards of a nation, capital that is acquired by commerce must be secured and realized in the cultivation and improvement of the country. The productive bonus for all will not be realized “until it has been spread as it were over the face of the country, either in buildings, or in the lasting improvements of lands (24).” Smith, of course, warns that civil revolutions and war easily dry up any wealth arising from commerce.
Smith, however, emphasizes the potential for overall wellbeing in some developing nations. “In commercial countries, therefore, riches, in spite of the most violent regulations of law to prevent their dissipation, very seldom remain long in the same family (16).” He writes that childish vanity, including diamond buckles, created a demand for finer products, and less ridiculous merchants and artificers received the benefits and developed efficiencies. Quality products justify the costs of long-distant trading. As these products became more widely available, local merchants learned to duplicate them offer them at a lower cost. Also, newly created wealth, unless obstructed by laws such as primogeniture, resulted in better land use and increased agricultural productivity for the nation as a whole.
Smith noted that towns along the coasts obviously had greater market access due to lower transport costs. Thus, Venice and towns in the Hanseatic League are early examples of developing high quality products through international trade. Smith writes, “The capital, however, that is acquired to any country by commerce and manufactures, is all a very precarious and uncertain possession, till some part of it has been secured and realized in the cultivation and improvement of its lands (24). Smith ponders on why the advancements in England’s agriculture took place at a slower rate than that of commerce and manufacturing. He indicates that government’s favoring of the agricultural sector may have backfired. He suggests that indirect encouragement for commerce in general would likely have yielded greater benefits than “altogether illusory” legislation designed with good intentions to benefit a particular sector (20-21).
We will never know how Smith would analyze the decline in our time of once great towns and cities. We know that he discounted, as prime movers in economic development, the power to raise troops, coin money, and make laws (8). He would, however, make four suggestions: reduce dependency by increasing productivity, trade in high valued products, avoid favoring a particular sector, and reduce legal impediments to investment. Smith might possibly make two further observations. First, city government needs to assume certain responsibilities in maintaining liberty and security and, secondly, inhabitants must change those behaviors from which disorder arises (6,9).
More from Maryann Keating
The Soul of Adam Smith's Classical Liberalism
Adam Smith on Infrastructure
Adam Smith on Fostering Civility and Self-Control
Chelsea Follett's Cities as Centers of Innovation: Lessons from Edinburgh and Paris
Ryan Muldoon's Freedom is Different People: Cities & Inclusive Freedom
Kyle Swan’s Three Cheers for Adam Smith's Cities
Sarah Skwire's Adam Smith on the Country-City Debate
Andrew Smith's On the Development of Communities
Great Antidotes & Extras
Alain Bertaud on Urban Planning and Cities & Janet Bufton's Great Antidote Extra
Ed Glaeser on the Unseen Beauty of Cities & Janet Bufton's Great Antidote Extra
Rachel Ferguson on Neighborhood Stabilization and Civil Society