Ignazio Musu

History of Economic Thought

Lecture 2

Adam Smith.

1
Adam Smith: the life.

• The most important and well known figure in the history of

economic thought is Adam Smith.

• Smith is unanimously considered as the founder father of

the discipline of economics.

• He opened an alternative way of approaching the economic

reality opposed to mercantilism, taking inspiration also
from the work of the physiocrats.

• Smith is also the first and the most prestigious figure of a

st ea of e o o i thi ke s k o as lassi al
e o o ists .
2
• Adam Smith was born in Scotland, in 1723.

• In 1737 he moved to Glasgow in order to attend the local

university.

• Among his teachers he had the moral philosopher Francis

Hut hiso , hose i flue e o the “ ith’s thi ki g as
crucial.

• In 1740 he received a scholarship as a preparation to an

ecclesiastic career that allowed him to go to the Balliol
College in Oxford, where he learned classical languages,
literature and philosophy.

3
• Oxford was a very conservative university: Smith was
pu ished he aught eadi g the T eatise o Hu a
Natu e of Da id Hu e.

• In 1746 he decided to abandon the idea of becoming a

priest and decided to return to Scotland

• From 1748 to 1751 he gave public lectures in Edinburgh on

rhetoric and English literature; in 1751 he was appointed as
professor, first of logic and then of moral philosophy, at the
University of Glasgow.

• In the following years Smith worked to his first book, The

Theo of Mo al “e ti e ts whose first edition was
published in 1759.
4
• In 1764 Smith resigned from the University and became a
private tutor of the young Duke of Buccleuch; this allowed
him to travel to France where he met Voltaire, Quesnay
and Turgot.

• Du i g his pe iod i F a e “ ith ega o ki g at An

Inquiry into the Nature and Causes of the Wealth of
Natio s to e published in 1776.

• In 1778 Smith was appointed commissioner of customs for

“ otla d’s a d he o ed to Edi u gh.

• He died in 1790. Sixteen volumes of manuscripts were

destroyed immediately before his death following his will.

5
The Theory of Moral Sentiments: sympathy and the impartial
spectator.

• Many saw a contradiction between the positions of Smith

i the Theo of Mo al “e ti e ts , st essi g the
i po ta e of s path , a d i The Wealth of Natio s
in which self-interest is considered as the driving force
behind human action.

• This is k o as the “ ith pa ado , ut it is ot eall a

paradox.

• Both sympathy and self-interest are dealt with in the

Theory of Moral Sentiments, and the way in which this
relation is dealt with should be taken into account when
reading The Wealth of Nations.
6
• The first edition of the Theory of Moral Sentiments
appeared in 1759. A second edition, with some substantial
revisions, was published in 1761; it was followed by three
further editions in 1767, 1774 and 1781, with minor
revisions.

• A sixth edition was published in 1790, with drastic

revisions and an entirely new part. This was 14 years after
the publication of the Wealth of Nations (1776).

• There no signs that the changes in the last edition of the

Theory of Moral Sentiments were affected by a supposed
dominating role of self-interest over benevolence in the
Wealth of Nations.

7
• Let us consider how the relation between sympathy and
self-interest is dealt with in the Theory of Moral
Sentiments.

• The beginning sentence of The Theory of Moral

“e ti e ts eads: ho selfish a a e supposed,
there are evidently some principles in his nature that
interest him in the fortune of others and render their
happiness necessary to him though he derives nothing
from it except the pleasure of seeing it.

• Of this kind is pity or compassion, the emotion which we

feel for the misery of others, when we either see it, or are
ade to o ei e it i a e li el a e . I,I,

8
• This se se of s path to a ds the othe s does ot
depend on an abstract moral duty, but derives from the
hu a e pe ie e hi h leads us to i agi e the
situation and the sentiments of the others.

• B the i agi atio e pla e ou sel es i his of the othe

pe so situatio ,…a d e o e i so e easu e the sa e
pe so ith hi . I,I,

• Smith defines the person who, with her imagination, places

he self i the situatio of a othe pe so as a spe tato .

• Sympathy towards the others is the result of our emotions

as spe tato s .

• Natu e tea hes the spe tato s to assu e the

i u sta es of the pe so p i ipall o e ed I.I. ). 9
• Sympathy towards the other is not necessarily the result to
be a spectator.

• “ path e ui es app o al of hat “ ith alls p op iet

(appropriateness) of sentiments and actions of the others.

• But this e ui es the spe tato to e fai a d i pa tial .

• To achieve this fairness and impartiality we must first

e a i e ou sel es: We e dea o to e a i e ou o
conduct as we imagine any other fair and impartial
spe tato ould e a i e it III,I, .

10
• It is impossible that a person discover the voice of the
impartial spectator concerning herself, without a relation
with the other people.

• But this is not enough, as we may be deceived by only

looki g at othe s’ app o al o disapp o al.

• We ust look at the t i u al of ou o s ie e .

• Though a has… ee e de ed atu e the

immediate judge of mankind, he has been rendered so only
in the first instance; … a appeal lies … to a much higher
tribunal, to the tribunal of their own consciences, to that of
the supposed impartial and well informed spectator, to that
of the man within the breast, the great judge and arbiter of
thei o du t III.I. .
11
The Theory of Moral Sentiments: self-interest.

• In the Theory of Moral Sentiments, Smith recognize the

existence and importance of self-i te est: The pleasures of
wealth and greatness strike the imagination as something
grand and beautiful and noble, of which the attainment is
well worth all the toll and anxiety which we are so apt to
esto o it (IV.I.9).

• A d it is ell that atu e i poses upo us i this a e . It

is this deception which rouses and keeps in continual
motion the industry of mankind. It is this which first
prompted them to cultivate the ground, to build houses, to
found cities and commonwealths, and to invent and
improve all the sciences and arts, which ennoble and
embellish human life; which have entirely changed the
hole fa e of the glo e IV.I. . 12
• The ha its of e o o , i dust , dis etio , atte tio , a d
application of thought, are generally supposed to be
cultivated from self-interested motives, and at the same
time are apprehended to be very praise-worthy qualities,
which deserve the esteem and approbation of e e od
(VII.II.87).

• “ ith e og izes that a selfish oti e … see s ofte to

sully the beauty of those actions which ought to arise from
a benevolent affection VII.II. ).

• But he lai s that the cause of this … is not that self-love

can never be a motive of a virtuous action, but that the
benevolent principle appears in this particular case to want
its due degree of strength, and to be altogether unsuitable
to its o je t VII.II. ).
13
• The vision of Smith in the Theory of Moral Sentiments is the
same as in the Wealth of Nations: self-love can be a motive
of virtuous action, but it must not be in opposition to
benevolence, because benevolence has the priority as a
moral sentiment.

• It is the impartial spectator who is in us who must decide

about the most appropriate relation between self-love and
benevolence, as the following passage in book II confirms:

• E e a is, o dou t, atu e, fi st a d p i ipall

recommended to his own care; and as he is fitter to take
care of himself than of any other person, it is fit and right
that it should be so.

14
• E e a , the efo e, is u h o e deepl i te ested i
whatever immediately concerns himself, than in what
o e s a othe a .

• If he ould a t so as that the i pa tial spe tato a e te

i to the p i iples of his o du t, … he ust hu le the
arrogance of his self-love, and bring it down to something
hi h othe e a go alo g ith II.II. .

• This passage confirms that self-love may be in some cases a

useful motivation for appropriate actions, but it can never
be in contrast to the more important ethical principle of
benevolence.

15
• It is interesting to observe that it is precisely in the Theory of
Moral Sentiments that we find for the first time the
etapho of the i isi le ha d .

• Smith believes that it is nature that acts to balance self-

i te est a d e e ole e th ough a i isi le ha d .

• The i h o su e little o e tha the poo , a d …though

the ea o l thei o o e ie es, …the di ide ith
the poor the produce of all their improvements.

• They are led by an invisible hand to make nearly the same

distribution of the necessaries of life which would have been
made, had the earth been divided into equal portions among
all its inhabitants, and thus, without intending it, without
k o i g it, ad a e the i te est of the so iet IV.I. .
16
• But in achieving the balance between self-interest and
sympathy the nature acts through the impartial spectator.

• Whe e a e … so u h o e deepl affe ted

whatever concerns ourselves than by whatever concerns
othe e , hat is it hi h p o pts the ge e ous … to
sacrifice their own interests to the greater interests of
others?

• It is reason, principle, conscience, the inhabitant of the

breast, the man within, the great judge and arbiter of our
conduct.

• The natural misrepresentations of self-love can be corrected

o l the e e of this i pa tial spe tato III.I.
17
• It is Nature that has implanted in the human breast the
sense of justice to limit self-love:

• Me , though atu all s patheti , feel so little fo

another, with whom they have no particular connection,
in comparison of what they feel for themselves.

• They have it so much in their power to hurt him, and may

have so many temptations to do so, that if this principle
the p i iple of justi e did ot sta d up ithi the , …
they would, like wild beasts, be at all times ready to fly
upon him; and a man would enter an assembly of men as
he e te s a de of lio s II.II. .

18
• The position of Smith is different from that of Hobbes.

• According to Hobbes only the sovereign with his authority

could calm the persistent conflicts among the members of
a society.

• “ ith is lea l o e li e al tha Ho es a d ea e to

Hume.

• Nature, through the fair and impartial spectator, teaches

men the principle of justice that lead them to avoid
permanent civil conflicts without requiring the action of
the Leviathan.

19
The Wealth of Nations: division of labor and exchange.

• In the Wealth of Nations Smith deals mainly with economic

issues, in particular with the drivers of what we now call
e o o i g o th .

• According to the Wealth of Nations, the main source of

economic growth is the increase in the productivity of
labor; and the increase in the productivity of labor is the
effect of the division of labor.

• The greatest improvements in the productive powers of

la o …see to ha e ee the effe t of the di isio of
la o . …The di isio of la o …o asio s… a proportionable
increase of the productive powers of labor. (I,1

20
• In determining how the division of labor increases national
wealth a fundamental role is played by the exchange
process.

• The certainty of being able to exchange all that surplus

part of the produce of his own labor, which is over and
above his own consumption, for such parts of the produce
of othe e ’s la o as he a ha e o asio fo ,
encourages every man to apply himself to a particular
occupation, and to cultivate and bring to perfection
whatever talent of genius he may possess for that
pa ti ula spe ies of usi ess I. ).

21
• The implication is that the market, where the exchanges
take place, limits the possibilities of the division of labor:

• As it is the po e of e ha gi g that gi es o asio to the

division of labor, so the extent of this division must always
e li ited … the e te t of the a ket I. .

• On the other hand the exchange process is itself the

outcome of division of labor: it is because people are
specialized that they cannot produce all the goods that they
require, and need to specialize and engage in the exchange.

22
• It is within the exchange process that self-interest can play
a role with better practical results than those achieved
through benevolence.

• “ ith e pli itl lai s that a has al ost o sta t

o asio fo the help of his eth e , ut he also spe ifies
that it is ai fo hi to e pe t it f o thei e e ole e
o l .

• He will be more likely to prevail if he can interest their self-

love in his favor and show them that it is for their own
ad a tage to do fo hi hat he e ui es of the I. .

23
• Noti e the spe ifi atio f o thei e e ole e o l :
benevolence is the most important attitude, but there are
cases in which the recourse to benevolence is not enough;
a typical example is in the case of exchange.

• A well-k o se te e follo s: It is not from the

benevolence of the butcher, the brewer or the baker that
we expect our dinner but from their regard to their own
interest.

• We address ourselves not to their humanity but to their

self-love, and never talk to them of our own necessities,
ut of thei ad a tages I. .

24
• Co e ti g “ ith’s positio , the Nobel laureate in
economics Amartya Sen pointed out: The exchange
benefits us all, and we do not have to be raving altruists to
seek such exchange.

• This is a fine point about motivation for trade, but it is not

a claim about the adequacy of self-seeking for economic
su ess i ge e al Erasmus Journal for Philosophy and
Economics, Vol.3, n.1,2010).

• Moreover Sen points out that in the Wealth of Nations

self-interest is not considered as the only motivation even
in exchange; confidence and trust among traders are also
crucial.

25
• As an example, Sen cites a significant sentence which appears
later in the Wealth of nations:

• When the people of any particular country has such

confidence in the fortune, probity, and prudence of a
particular banker, as to believe he is always ready to pay upon
de a d su h of his p o isso otes, …those otes o e to
have the same currency as gold and silver money, from the
confidence that such money can at any time be had for
them.

• Thus, confidence and trust are necessary pre-requisites in

order for the exercise of self-interest in economic life to
produce positive social outcomes.

26
The Wealth of Nations: labor commanded and labor embodied.

• In chapter 4 of book I Smith analyzes what determines the

e ha ge alue of a o je t: the po e of pu hasi g othe
goods hi h the possessio of that o je t o e s I. .

• To explain the exchange value Smith observes that every man

de i es the g eate pa t of the e essa ies, o e ie es
a d a use e ts of his life f o the la o of othe people…
which he can command, or which he can afford to purchase
(I.5).

• This la o o a ded a good is not necessarily equal to

the la o used e odied i the p odu tio of that good.

27
• The a e o l e ual i that ea l a d ude state of so iet
which precedes both the accumulation of stock and the
app op iatio of la d I. .

• If a o g a atio of hu te s… it usuall osts t i e the la o

to kill a beaver which it does to kill a dear, one beaver should
atu all e ha ge fo o e o th t o dee I. .

• I this state of thi gs, the hole p odu e of la o elo gs to

the laborer; and the quantity of labor commonly employed in
acquiring or producing any commodity, is the only
circumstance which can regulate the quantity of labor which it
ought o o l to pu hase, o a d o e ha ge fo
(I.6).

• Hence when the whole produce of labor belongs to the

la o e , la o o a ded oi ides ith la o e odied28.
• But, as soo as the sto k has a u ulated i the ha ds of
particular persons, some of them will naturally employ it in
setting to work industrious people, whom they will supply
ith ate ials a d su siste e, i o de to ake a p ofit I. ).

• I this state of the thi gs, the hole p odu e of la o does

not always belong to the laborer. He must in most cases share
it with the owner of the stock which employs him.

• An additional quantity (with respect to the labor embodied in

p odu tio … ust e due fo the p ofits of the sto k hi h
ad a ed the ages a d fu ished the ate ials of that la o
(I.6).

29
• When the land of a country has become private property, the
rent of land must added to wages and profits as a third
component part of the exchange value of a good.

• As i a i ilized ou t the e a e ut fe o odities of

which the exchangeable value arises from labor only, (and)
rent and profit (are) contributing largely to that of the far
g eate pa t of the , … the a ual p odu e of its la o ill
always be sufficient to purchase or command a much greater
quantity of labor than what was employed in rising, preparing
a d i gi g that p odu e to a ket I. .

30
The Wealth of Nations: natural and market prices.

• In chapter 7 of Book I Smith introduces the important

disti tio et ee atu al a d a ket p i e of goods.

• I e e so iet the e a e o di a o a e age ates of

ages, p ofit a d e t that “ ith alls atu al .

• When the price of any commodity is the sum of the

atu al ages, p ofits a d e t, the o odit is sold fo
what may be called its natural price.

31
• The a tual p i e at hi h a o odit is o o l
sold, is called its market price.

• It may either be above, or below, or exactly the same with

its natural price.

• The market price of every particular commodity is

regulated by the proportion between the quantity which is
actually brought to market, and the demand of those who
a e illi g to pa the atu al p i e of the o odit ,…the
effe tual de a d….

32
• When the quantity of any commodity which is brought to
the a ket falls sho t of the effe tual de a d…the a ket
p i e ill ise … a o e the atu al p i e. …

• When the quantity brought to market exceeds the

effe tual de a d,…the a ket p i e ill si k… elo the
natural price. …

• When the quantity brought to the market is just sufficient

to supply the effectual demand, and no more, the market
p i e atu all o es to e … the sa e ith the atu al
price. (I.7)

33
• Ho e e , the a ket p i e g a itates to a ds the atu al
price through the adjustment of labor, stock and land.

• If the market price of a commodity is below the natural

p i e, this ea s that so e of the o po e t pa ts of its
price must be paid below their natural rate.

• If it is e t, the i te est of the la dlo ds ill… p o pt the

to withdraw part of their land;

• and if it is wages or profit, the interest of the laborers in the

one case, and of their employers in the other, will prompt
them to with draw a part of their labor or stock, from this
e plo e t I. .

34
• The fall in the quantities of labor, land and stock brought to
the market will increase their price rise to their natural rate,
and the whole price will rise to its natural level.

• The opposite process will take place when the quantity

brought to market falls short of the effectual demand, so
that the market price is above the natural price.

• Landlords will use more land so that the rent will fall;
workers will supply more labor so that wages will fall;
manufacturers will add more stock so that profits will fall.

• The market price will fall towards the natural price.

• The atu al p i e is … the e t al p i e, to hi h the p i es

of all o odities a e o ti uall g a itati g I. ).
35
The Wealth of Nations: the importance of competition.

• According to Smith, competition is the force leading the

market price towards the natural price.

• “ ith lai s that: o opolists, keepi g the a ket

constantly understocked by never fully supplying the
effectual demand, sell their commodities much above the
natural price.

• The p i e of o opol is upo e e o asio the highest

which can be got. The natural price, or the price of free
o petitio , o the o t a , is the lo est hi h … the
sellers can commonly afford to take, and at the same time
o ti ue thei usi ess I. .

36
• The e lusi e p i ileges of o po atio s… a d all those la s
hi h est ai … the o petitio … a e a so t of e la ged
o opolies, a d a f e ue tl , fo ages togethe , … keep
up the a ket p i e … a o e the atu al p i e… Such
enhancements of the market price may last as long as the
egulatio s of poli hi h gi e o asio to the I. .

• O the othe ha d, the … i ease i o petitio ould

reduce the profits of the masters, as well as the wages of
o k e . … But the pu li ould e a gai e , the o k of all
artificers coming in this way much cheaper to the market.

• It is to prevent this reduction of price, and consequently of

wages and profit, by restraining that free competition which
would most certainly occasion it, that all corporations, and
the g eate pa t of o po atio la s ha e ee esta lished
(I.10). 37
Here are two other interesting passages:

• People of the sa e t ade seldo eet togethe , e e fo

merriment and diversion, but the conversation ends in a
conspiracy against the public, or in some contrivance to
aise p i es. … Though the la a ot hi de people of the
same trade from sometimes assembling together, it ought
to do othi g to fa ilitate su h asse lies I. .

• The p oposal of a e la o egulatio of o e e…

ought never to be adopted till after having been long and
a efull e a i ed. …. It come from an order of men whose
interest is never exactly the same with that of the public,
who have generally an interest to deceive and even to
oppress the public, and who, accordingly have, upon many
o asio s, oth de ei ed a d opp essed it I. ).
38
The Wealth of Nations: wages and profits.

• In the last part of Book I Smith deals with the determinants

of wages and profits.

• There are some interesting passages on the relation

et ee aste s a d o k e .

• What a e the o o ages of la o depe ds

everywhere upon the contract usually made between those
two parties, whose interests are by no means the same.
The workmen desire to get as much, the masters to give as
little as possible. The former are disposed to combine in
order to raise, the latter in order to lower, the wages of
la o I. .
39
• The aste s, ei g fe e i u e , a o i e u h
more easily: and the law, besides, authorizes, or at least does
not prohibit, their combination, while it prohibits those of
the o k e . … The aste s a hold out u h lo ge . I.

• Maste s a e al a s a d e e he e i a so t of ta it …
o i atio ot to aise the ages . But e seldo hea of
this o i atio hile o i atio s of o k e to esist
age uts o to aise ages a e al a s a u da tl hea d of
particularly when they recur to violence (I.8).

• I this last ase o k e a t ith the foll a d e t a aga e

of desperate men, who must either starve or frighten their
aste s i to a i ediate o plia e ith thei de a ds
(I.8).
40
• The aste s, upo these o asio s, a e just as la o ous
upon the other side, and never cease to call aloud for the
assistance of the civil magistrate, and the rigorous execution
of those laws which have been enacted with so much severity
against the combination of servants, laborers and
journeymen.

• The workmen, accordingly, very seldom derive any advantage

from the violence of these tumultuous combinations which,
partly from the interposition of the civil magistrate, partly
from the superior steadiness of the masters, partly from the
necessity which the greater part of the workmen are under of
submitting for the sake of greater subsistence, generally end
up i othi g ut the pu ish e t o ui of the i gleade s
(I.8).
41
• The e is ho e e a e tai ate elo hi h it see s
i possi le to edu e … the o di a ages e e of the
lowest species of labor.

• A man must always live by his work and his wages must at
least e suffi ie t to ai tai hi . The ust e e … e
something more, otherwise it would be impossible for him
to i g up a fa il I. .

• Hence there is a tendency of wages to be settled at their

subsistence level.

• However, Smith notices that, when the demand for labor in

a country is growing (which can only happen if the revenue
and the stock of capital increase) , this will lead to wage
increases even without any combination and request by the
workmen. 42
• It is ot the a tual g eat ess of atio al ealth, ut its
continual increase, which occasions a rise in the wages of
labor.

• It is not, accordingly, in the richest countries, but in the

most thriving, or in those which are growing rich the
fastest, that the ages of la o a e highest .

• Smith gives the example of China which has been long one
the richest countries in the world but it remained
stationary for a long period: travelers at the time of Smith
described it almost in the same terms as Marco Polo who
visited it more than five centuries before.

43
• It is i the p og essi e state, hile the so iet is ad a i g
to the further acquisition, rather than when it has acquired
its full complement of riches, that the condition of the
laboring poor, of the great body of the people, seems to be
the happiest and the most comfortable.

• It is hard in the stationary, and miserable in the declining

state. The progressive state is, in reality, the cheerful and
the hearty state to all the different orders of the society; the
statio a is dull, the de li i g, ela hol I. .

• I a g o i g e o o , the li e al e a d of la o leads to
highe ages also e ause it i eases the i dust of
o o people. … Whe e ages a e high… e shall al a s
find the workmen more active, diligent, and expeditious,
tha he e the a e lo I. .
44
• While the increase in the stock of capital leads to higher
wages, it tends to lower profits because of the competition
among those who are investing in the stock of capital.

• The esta lish e t of a e a ufa tu e … is al a s a

speculation from which the projector promises himself
extraordinary profits.

• If the project succeeds they are commonly at first very high.

When the trade or practice becomes thoroughly established
and well known, the competition reduces them to the level
of othe t ades I. .

• Hence economic growth and competition tend to reduce

the profit at its minimum level.
45
The Wealth of Nations: capital.

• Smith deals with accumulation of capital in Book II. He

defines capital as a stock that can be used to derive some
revenue from it.

• Smith considers two types of capital.

• First, there is i ulati g apital which includes raw

materials required for the production, goods to be
anticipated as real wages to workers, or finished good
waiting to be sold (inventories).

• The part of circulating capital used to pay the workers is the

age fu d : it is a fo of apital e ause it is a ti ipated
by the capitalist to carry on production.
46
• “e o d, the e is fi ed apital hi h o sists i the
improvement of land, in the purchase of useful machines
a d i st u e ts of t ade… to ield a e e ue o p ofit
ithout … i ulati g a fu the . (II,1).

• Fixed capital also includes profitable buildings such as

warehouses, work-houses, farm-houses.

• Moreover, it i ludes hat e o all hu a apital :

the a ui ed a d useful a ilities of all the i ha ita ts a d
members of the society.

• The acquisition of such talents, by the maintenance of the

acquirer during his education, study and apprenticeship,
always costs a real expense, which is a capital fixed and
ealized, as it e e, i his pe so II, ).
47
• Capital accumulation increases the number of productive
workers and their productive powers.

• Smith makes a distinction between productive and

unproductive labor.

• Productive labor is the labor employed in producing goods;

• Unproductive labor is the labor employed in supplying

personal services or in similar activities (people employed as
the domestic staff of capitalists and landlords) (II,3).

• Only productive labor is essential to sustain economic

growth.

• Hence the percentage of workers employed in unproductive

labor should be reduced to a minimum. 48
• Capital a u ulatio is i eased pa si o , a d
di i ished p odigalit a d is o du t II, .

• Pa si o , a d ot i dust , is the i ediate ause of

the increase of capital.

• Industry, indeed, provides the subject which parsimony

accumulates; but whatever industry might acquire, if
parsimony did not save and store up, the capital would
e e e the g eate II, .

• B hat a f ugal a a uall sa es, he ot o l affo ds

maintenance to an additional number of productive hands
fo that of the e sui g ea , ut … he esta lishes … a
perpetual fund for the maintenance of an equal number in
all ti es to o e II, ).
49
• A o di g to “ ith he a p odigal a o su es to pa
the wages of unproductive workers, he diminishes the
employment of productive labor and hence the national
product.

• He e e e p odigal appea s to e a pu li e e ,a d
e e f ugal a a pu li e efa to II, .

• What promotes prodigality (or profusion) and discourages

sa i g is the passio fo p ese t e jo e t that leads
people to fo get that the ost likel a of aug e ti g
their fortune is to save and accumulate some part of what
they acquire, either regularly and annually, or upon some
e t ao di a o asio II, ).

50
• Prodigality is often encouraged by the behavior of the
governments that employ to many unproductive workers:

• Ki gs a d i iste s…a e the sel es al a s, a d ithout

a e eptio , the g eatest spe dth ifts i the so iet .

• Governments should on the contrary give the good

example:

• Let the look ell afte thei o e pe ses a d the a

safely trust private people with theirs.

• If their own extravagance does not ruin the state, that of

the su je t e e ill II, .
51
The Wealth of Nations: critique to mercantilism and support
to physiocracy.

• Smith devotes book IV, to the critique of mercantilism

ased o the popula otio that ealth o sists i
o e , o gold a d sil e IV, .

• A o di g to “ ith ealth does ot o sist i o e ,o i

gold a d sil e , ut i hat o e pu hases IV, .

• He is i fa o of fo eig t ade ot e ause it i eases the

quantity of gold and silver, but … the exchangeable value of
the annual produce of the land and labor of the country, or
the i ease of the a ual e e ue of its i ha ita ts IV,3).

52
• In explaining why the expansion of the domestic product
can better by obtained by free markets and free trade
“ ith efe s to the ole of the i isi le ha d .

• E e i di idual e essa il la o s to e de the a ual

revenue of society as great as he can. He generally, indeed,
neither intends to promote the public interest, nor knows
how much he is promoting it IV, .

• B p efe i g the suppo t the do esti to that of fo eig

industry, he intends only his own security, and by directing
that industry in such a manner as its produce may be of
the greatest value, he intends only his own gain; and he is
in this, as in many other cases, led by an invisible hand to
p o ote a e d hi h as o pa t of his i te tio . IV, )
53
• B pursuing his own interest he frequently promotes that of
the society more effectually than when he really intends to
promote it. I have never known much good done by those
who affected to trade for the public good IV, .

• Smith supported the physiocratics, but he criticized Quesnay

for having considered the manufacturers as an unproductive
class.

• He ites: I ha e lassified a tifi e s, a ufa tu e s a d

e ha ts a o g the p odu ti e la o e s. … If merchants,
a tifi e s a d a ufa tu e s a e … atu all o e i li ed
to parsimony and saving than proprietors and cultivators,
the a e … o e likel to aug e t the ua tit of useful
labor employed within their society , and consequently to
i ease its eal e e ue IV, .
54
The Wealth of Nations: the role of the State in economic life.

• Smith deals with the role of the State in the economic life
in Book V.

• He believes that this role should be limited to those

a ti ities that p o ote the ge e al e efit of all so iet
and for which the market does not provide the incentive to
individuals to carry on them in an appropriate way (V,1).

• The fi st dut of the “tate the so e eig , as “ ith alls

it is that of p ote ti g the so iet f o the iole e a d
i asio of othe i depe de t so ieties V, . This dut
g o s g aduall o e a d o e e pe si e as the so iet
ad a es i i ilizatio V, .
55
• The se o d dut of the “tate is that of p ote ti g, as fa
as possible, every member of the society from the injustice
or oppression of every other member of it, or the duty of
esta lishi g a e a t ad i ist atio of justi e V, .

• To Smith the administration of justice is fundamentally

related to the defense of property.

• It is only under the shelter of the civil magistrate, that the

owner of that valuable property which is acquired by the
labor of many years, or perhaps of many successful
ge e atio s, a sleep a si gle ight i se u it . …

• The a uisitio of alua le a d e te si e p ope t …

necessarily requires the establishment of a civil
go e e t V, ).
56
• Smith agrees that public expenditure should be financed by
the ge e al o t i utio of the so iet , that is taxation,
in two areas: defense and justice.

• Smith establishes four important principles of taxation.

• Fi st, the su je ts of e e state ought to o t i ute to a ds

the support of the government, as nearly as possible, in
p opo tio to thei espe ti e a ilities V,

• “e o d, the ta hi h ea h i di idual is ou d to pa ought

to e e tai a d ot a it a V, )

• Thi d, e e ta ought to e le ied at the ti e, a d i the

manner, in which it is most likely to be convenient for the
o t i uto to pa it V, .
57
• Fou th, e e ta ought to e so o t i ed, as oth to take
out and to keep out of the pockets of the people as little as
possible, over and above what it brings into the public
t easu of the state V,

• Smith claims that there are other institutions, from defense

and justice, which a e i the highest deg ee ad a tageous
to a g eat so iet … hi h a ot e e pe ted that a
individual or small number of individuals, should erect or
maintain .

• But they should be financed not with general taxation, but

ith e ual p ope t , a d e e ith so e ad a tage …
those ho e ei e the i ediate e efit V, ).

58
• For example, public works which facilitate the commerce
(roads, bridges, navigable canals, harbors, etc.) should be
financed by tolls and tariffs, which are expected to increase
with the commerce that they are aimed at developing.

• Education is o dou t e efi ial to the hole so iet a d

may, therefore, without injustice, be defrayed by the general
o t i utio of the hole so iet V, ).

• Smith also recognizes that, although wealthy people can

afford to pay directly the costs of educating their children,
that is not the case for the majority of the persons in the
society and particularly for the poor people.

59
• However Smith is skeptical about an education system
directly supported and managed by the State.

• He elie es that this e pe se should, ho e e , ith e ual

property and even with some advantage, be defrayed
altogether by those who receive the immediate benefit of
such education and instruction, or by the voluntary
contribution of those who think they have occasion for
eithe the o e o the othe V,

• He observes that where the teachers are paid by

contribution by public institutions, their quality is reduced by
a lower competition; hence he prefers that the salaries of
teachers come form fees by the pupils let free to choose the
school, and possibly the teacher within a school.
60