Economic Progress from Adam Smith’s The Wealth of Nations
by
Gary Gagliardi
 Sun
Tzu's system depends on learning the nature of the ground. History's best
guide to economic ground is Adam Smith. Like Sun Tzu, Adam Smith drew his ideas,
not from theory, which he abhorred, but from history, and both come to many of
the same conclusions.
Adam Smith and Sun Tzu agreed on three key ideas. Adam
Smith taught that people are motivated by self-interest. Sun Tzu called this
motivation our mission or path and described it as the core of a strategic
position. Adam Smith taught that wealth is made possible by the division of
labor. Sun Tzu called these divisions "openings" and the key to finding
opportunity is exploring them. Adam Smith taught that the division of
labor works through free trade. In a free trade, both parties always win because
they each judge what they are giving as worth less to than what they are
getting. Sun Tzu described this as how to leverage our differing positions to our mutual advantage.
Most striking is Adam Smith's description of the relationships
between manufacturing towns and the agricultural country. It is a perfect
illustration of Sun Tzu's concept of complementary opposites: two seemingly
opposing forces that create the need for one another. Both Adam Smith and Sun
Tzu believed in the continued progress of mankind and our
ability to continually improve ourselves through the use of our imaginations. What follows is my rewrite of Book 3
of The Wealth of Nations where Adam Smith describes
the operations of these ideas in Western history.
A View of Natural Progress
For all of human history, economic activity has consisted of trades between
the town and the country. The country supplies the town with food and raw
materials. The town sends back manufactured products to the country. All parties
gain from this trade. Its division of labor makes production more efficient. The
country people get manufactured goods by selling agricultural goods. Growing
more food in exchange for those goods requires much less effort than making
those good themselves. As the town grows, it creates a bigger market for
agriculture, since the townspeople cannot feed themselves.
Since food is more necessary than other products, agriculture must come
before manufacturing. The improvement of the agriculture makes possible the
growth of the town. Towns are only possible when the growers produce more food
than they need to survive.
People do not have to buy locally. Both farmers and town people can buy from
distant countries; but then they must also pay the cost of transportation.
However, some transportation is necessary because some needed products, such as
metal ores, are not always found locally. As the means of transportation
improves the cost of transportation falls. This allows different areas to
develop different skills that take advantage of local resources and climate. As
people develop more specialized skills and trade among themselves, society
advances and everyone grows wealthier. This progress requires nothing more than
the division of labor and free trade. People follow their natural self-interest
in trading what they have for what they desire.
Given equal profits, people will choose to cultivate the land
rather than manufacture products or trade them. Crops are always valuable
because everyone needs food. A farmer is not dependent on others except by
choice. Manufacturers must find customers for their products in order to eat.
Developed farmland is an asset that persists over time. Manufactured goods are
not nearly as durable as the land. Trade is the least secure since
transportation is always risky.
However, without the assistance of others, working the land is difficult. The
farmer uses smiths, carpenters, wheelwrights, and plough makers, masons, and
bricklayers, tanners, shoemakers, and tailors to make agriculture easier. These
craftspeople also need each other. Since their residence is not tied down like
that of the farmer, these craftspeople naturally settle near one another. This
is forms a small town or village. The butcher, the brewer, and the baker soon
join them, together with other craft people and retailers.
The inhabitants of the town and those of the country are mutually the
servants of one another. The town is a market for the farmers and a place to buy
products. The quantity of the finished work that they sell to the farmers
necessarily regulates the quantity of the materials and provisions which they
buy. The population and wealth of towns grows in proportion to the demand from
the country. This demand can grow only if improvement in farming creates more
crops. Had human institutions, never disturbed the natural course of things, the
wealth of the towns would be in proportion to the cultivation of the country.
In every society, the surplus of farming and manufacture for which there is
no demand at home, must be sent abroad in order to be exchanged for something
for which there is some demand at home. Manufacturers will invest in more
manufacturing rather than in foreign trade for the same reason that agriculture
is preferred over manufacturing. Manufacturing goods are more secure than the
transportation of goods over great distances. However, more farming and more
manufacturing lead inevitably to more transportation for foreign trade.
According to the natural course of things, the capital of every growing
society is first directed to agriculture, afterwards to manufacturing, and last
to foreign trade. This order of things is so natural that it follows in every
society that has arable land. Some lands must be cultivated before any towns can
be established. Some industry must be developed in towns before trade is
possible.
However, this natural development requires the freedom of people to make
choices driven by their self interest. This history of the world is better
explained by the choices that people make when that freedom is denied.
Throughout history, conquering forces have seized the land from those who worked
it and developed it. The development of Western Europe after the fall of Rome
provides a useful example of what can happen when conquest destroys progress.
The Problems in Agriculture after the Fall of Rome
WHEN the German and Scythian nations overran the Western Roman Empire, the
chaos that followed lasted for centuries. The violence of the barbarians
interrupted the commerce between the towns and the country. The towns were
deserted, and the country was left uncultivated. The western part of Europe that
had enjoyed wealth under the Roman Empire sank into poverty. The chiefs and
leaders of the barbarians took lands. Though a great part of that land was
uncultivated; all of the land was claimed by owners. These lands were grouped
together by their new owners. These great estates were owned by the largest
chieftains.
This original amassing of uncultivated lands though a great evil might have
been a transitory one. The division of these estates among descendants and the
sale of land would have soon returned its cultivation to owners who could
develop it. Natural succession among the Romans made no distinction between
elder and younger, between male and female. They wanted all their children to
have the benefits of the land. In medieval Europe, however, primogeniture
prevented estates from being divided by succession and entails prevented them
being sold in small parcels.
Land was the source of feudal power. Every great landlord was petty prince.
His tenants were his subjects. He was their judge and leader. In chaotic times,
safety depended on the use of force. The land was critical as the food source
for the army that protects it. The size of the army depended upon the size of
the estate. To divide the estate was to ruin it. Division exposed its parts to
be swallowed up by its neighbors.
As a source of power, the land is better left undivided to one heir. This was
too important to be left to doubtful distinctions of personal merit. The feudal
lords needed a general rule that eliminated disputes. This led to laws of
primogeniture. Among the children of the same family, there are only two
indisputable differences: sex and age. Since the object was power, the male sex
was preferred over the female and the elder over the younger. The laws of entail
also prevented any part of the estate from being divided by gift, or contract,
or sale. The great tracts of uncultivated land in Western Europe were not only
owned by few families, but the possibility of that land being divided was
precluded.
The tragedy is that an owner of a great estate seldom invests in improving
the land. In the lawless era which gave birth to these estates, the owner was
busy defending his territories or extending them. He had no time to improve of
land. When the establishment of law and order gave him the time, he lacked the
desire and ability. Improving land, as in every business, requires exact
attention to small savings and small gains. A man born to a great fortune, even
though naturally frugal, is seldom capable of that attention.
If little improvement can be expected from great proprietors, still less was
expected from his tenants. In medieval Europe, the occupiers of land were almost
slaves. Tenants could not own property. Whatever they acquired, their master
could take it from them. Such slaves received nothing but their daily
maintenance. The experience of all ages demonstrates that the work done by
slaves though it appears to cost only their maintenance is the most costly of
all. When people can acquire no property, they eat as much and labor as little
as possible. In ancient Rome, both Pliny and Columella remarked on how much
cultivation degenerated when it fell under the management of slaves.
Over time, these peasant slaves were gradually replaced by sharecroppers. The
proprietors furnished the sharecroppers with the seed, cattle, and the
equipment. The produce is divided equally between the proprietor and the farmer.
Such tenants, being freemen, are capable of acquiring property. Having a share
of the produce of the land, they have an interest in making the land produce as
much as possible. A slave, on the contrary, wants to make his job as easy as
possible by making the land produce as little as possible. Sharecroppers,
however, have no interest in improving the land from their profits because the
owner would get half. A sharecropper wants to make the land produce as much as
it can from what is furnished by the proprietor; but it is not in his interest
to mix any part of his own property with it.
Sharecroppers, in turn, were replaced by farmers. Farmers paid a fixed rent
and used their own resources. When such farmers have a long-term lease they may
invest their capital in the farm because they expect to recover their investment
before the end of the lease. Long-term leases, however, were obstructed by
entails; owners were often limited to leases no longer than one year.
These land owners were the original rulers of Europe. Their laws were
supposed to protect their interests. Avarice, however, is always short-sighted.
They did not foresee how much this regulation would obstruct improvement of the
land, and thereby hurt the real interest of the landlord in the long-run. There
were general prohibitions on exporting grain without special licenses. There
were also restraints upon the internal trade on almost every crop, regulating
who could trade, what they could trade, and where they could trade. Such
restraints discouraged agricultural progress everywhere.
The Rise of Cities after the Fall of the Rome
THE tradesmen and craftsmen in towns were, like the serfs of
the land, servants of these lords. They couldn’t even give away their own
daughters in marriage without the consent of their lord. When they died, their
lords, not their children, inherited their goods. Very poor, unfortunate people
traded goods from town to town. Taxes were levied upon these travelers and their
goods when they passed through estates, crossed over bridges, brought goods to a
fair, and erected a booth to sell in. Sometimes the king or a great lord would
grant particular traders an exemption from such taxes. These traders in return
paid to their protector an annual tax. Such traders, though in other respects
servile, were called free-traders. At first, these exemptions were personal,
affecting only certain individuals.
But the inhabitants of the towns gained liberty much more
quickly than those in the country. While the land was a power base for lords,
the towns became a tax base for kings. At first, the king’s men collected taxes.
Eventually, people bought the rights to “farm” a town, making a fixed payment to
the king in return for the right to collect its taxes for themselves.
Eventually, the leading townspeople or burghers became responsible as a group
for the payment of the town’s taxes. Eventually, the general practice everywhere
was for the town to pay the king an annual tax that didn’t grow over time.
When the payment became perpetual, the exemptions to the taxes
became perpetual too. There were no more free traders but free burghs and towns.
With these changes in taxation, the men in towns gained other freedoms, personal
freedoms, such as giving away their daughters in marriage and making wills to
dispose of their property, and civic freedoms, such as having magistrates and
town council, making laws, building walls and having local militias. These
townspeople became free in our present sense of the word.
It may seem strange that the kings all over Europe voluntarily
accepted a fixed payment that didn’t grow over time and created these
independent republics in the heart of their own kingdoms. To understand why, we
must remember that these kings were unable to protect their subjects from the
oppression of the great land-holding lords. As individuals, townspeople had no
power to defend themselves; but as free towns, they did. The lords despised the
burghers, whom they considered emancipated slaves. The burghers hated and feared
the lords. The king hated and feared the lords too; but he had no reason to fear
the burghers. Mutual interest disposed them to support the king, and the kings
to support them. By granting them their own governments, kings gave them
security and independence from the barons.
The kings who were the weakest were the most liberal in
granting freedom to their burghs. King John of England was a great benefactor to
his towns. Philip the First of France lost all authority over his barons. His
son Lewis consulted his bishops about restraining his lords. Their advice was to
establish magistrates and a town council in every town and to form town
militias. During the weak reigns of the princes of the house of Suabia, the free
towns of Germany received their privileges and the Hanseatic league arose.
Order and good government and the liberty and the security of
individuals were established in cities when people in the country were helpless.
Men in a defenseless state must be content with subsistence because to acquire
more tempts their oppressors. When people are secure to enjoying the fruits of
their labor, they exert themselves to acquire more. If a country person
accumulated anything, he hid it from his lord, to whom it legally belonged, and
took the first opportunity to run away to a town. Legally, if he could conceal
himself there for a year, he was free forever. The most industrious inhabitants
of the country took refuge in cities.
The inhabitants of a city must get their food from the
country, but cities near the coast or a river could draw food from anywhere.
Through trade, a city might become wealthy while the neighboring country
remained in poverty. The cities of Italy were the first in Europe to attain this
wealth while the countryside remained poor. The inhabitants of trading cities
offered products and luxuries that appealed to the vanity of the great lords.
These lords eagerly purchased them with their crops. Thus the wool of England
was exchanged for the wines of France and the fine cloths of Flanders for the
corn in Poland.
Trade introduced a taste for the finer product into countries
where no such manufacturing was being done. As the demand for better products
increased, merchants started manufacturing them in their own country to
eliminate the cost of transportation. These manufacturers first supply their
neighborhoods and, as their work improved, more distant markets. The finer the
products, the more they justified the costs of transportation. For example, a
piece of fine cloth is easy to transport but it was worth the price of several
hundred pounds of corn, which is much more difficult to transport.
Towns Improved the Countryside
THE prosperity of towns contributed directly to the
improvement of the countryside in three different ways. First, the towns offered
a market for agriculture. Secondly, their wealth purchased and improved what
lands could be sold. Thirdly, they introduced order and good government.
Before the development of towns and their products, the great
lords had nothing to exchange for their crops. So they used their surplus to
feed their followers. These retainers became their armies. Westminster Hall was
the dining-room of William Rufus. Food was the power base of the ancient barons.
They became the judges because no one else had any authority. The king in
particular didn’t. He was little more than the largest land owner to whom the
other proprietors paid respects for the sake of common defense. The introduction
of the feudal law was an attempt to moderate the authority of the great lords,
but the king was still incapable of restraining their violence.
Foreign trade and manufacturing gradually furnished these
proprietors with products for which they could exchange their crops. Unlike
food, they could consume these products without sharing them. As soon as they
could consume their wealth themselves, they had no desire to share it. For a
pair of diamond buckles, perhaps, or for items just as frivolous, they exchanged
the ability to maintain a thousand men and all the power and authority that
those men gave them. The buckles, however, were all their own. Thus, for their
personal gratification, they gradually bartered away their power.
When the great lords invested their wealth feeding their
retainers, they maintained their control over them. When they spent their wealth
with tradesmen and craftspeople, they may have financially supported as many
people, but their control was gone. Each individual trader and craftsperson had
a hundred or a thousand different customers. Though he is obliged to them all,
he is not absolutely dependent upon any one of them.
As the expenses of the great proprietors increased, the number
of their retainers diminished until they were dismissed altogether. They also
dismissed their unnecessary tenants. Farms were enlarged, and the number of
farmers reduced. By the removal of the unnecessary mouths and by charging the
farmer larger rents for larger farms, the proprietor made more money. If the
proprietor wanted to raise his rents further, he had to give his tenants longer
leases so that they could have time to profit from improving the land. The
expensive tastes of the landlord made him willing to accept these long leases
and change the laws the prevented them. These leaseholders were independent of
their landlords. Their landlords didn’t expect any services from them beyond
what was stipulated in their leases.
As their tenants became independent and their retainers were
dismissed, the great proprietors lost their political power. Having sold their
birthright, they became no more important politically than any successful
tradesman in a city. Since the lords not longer had any power to prevent it, a
regular government was established in the country as well as in the city.
In this manner, the great revolution in public happiness came
from two different groups of people who had no intention of serving the public.
The sole motive of the great proprietors was to gratify their personal desires.
The merchants and craftspeople pursued their own interests in turning a penny in
whatever they could. Neither group saw the great good that their selfish
interests were serving.
Comparing Progress in Europe and America
This progress in Europe has been both slow and uncertain
because it is contrary to the natural progress where agriculture advances first,
then manufacturing, then trade. Compare the slow progress of Europe with the
rapid advances of our North American colonies where the wealth is founded on
agriculture. The population of Europe has not doubled in five hundred years. In
our North American colonies, population doubles in twenty or five-and-twenty
years.
In Europe, the laws prevent the division of great estates and
hinder the multiplication of small proprietors. A small proprietor knows every
part of his little territory. He takes pleasure not only in cultivating it but
in building it up. He is the most industrious, the most intelligent, and the
most successful of all improvers.
When regulations keep so much land out of the market there is
always more money to buy than there is land to sell. What is sold always sells
at a monopoly price. To purchase land in Europe is an unprofitable investment.
In North America, on the contrary, a small investment is all that is required to
purchase land. The purchase and improvement of uncultivated land is there the
most profitable investment and the most direct road to fortune. If the landed
estates of Europe were divided equally among all the children upon the death of
any proprietor, these estates would often be sold. So much land would come to
market that it could no longer sell at a monopoly price. A small investment
might be employed in purchasing land as profitably as in any other way.
The wealth of a nation that is founded on commerce and
manufacturing is a precarious possession compared with wealth that comes from
the cultivation and improvement of its lands. A merchant is not tied to any
particular place. It is unimportant where he carries out on his trade. A minor
disgust can make him remove his business from one place to another. No part of
it can be said to belong to any particular place until it has been put either in
buildings or the lasting improvement of lands.
The ordinary revolutions of war and government can easily dry up the sources
of that wealth which arises from commerce only. Wealth that arises from
agriculture is much more durable. However, it too can be destroyed as it was
during the chaos that followed the fall of the Rome.
As a postscript, let me add one further observation. Adam Smith's
preference for agriculture over manufacturing or trade was, without his knowing
it, a preference for controlled areas over competitive ones. The land is more
secure because it is more controlled. As such, it allows for more productive
planning. Manufacturing and especially trading markets are less controlled and
more competitive. This means that they require more strategy. GG
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