The book was first published on March 9, 1776. Later that same year, a “bunch of farmers” in Britain’s American colonies had their own ideas and fundamentally changed the world. It’s worth asking the simple question: what did Smith actually write?

The full title is An Inquiry into the Nature and Causes of the Wealth of Nations. It’s a mouthful, but the distinction between the full title and the shorthand matters more than people realize.

First, let’s look at the word “Inquiry.” Contrary to what many have claimed, Smith was not declaring in Wealth of Nations that markets and capitalism work. He was asking genuine questions: why are some nations wealthy while others are poor? Why are some nations becoming wealthier while others remain stagnant or are in decline? In fact, all of economics is fundamentally about these questions, even if only indirectly. Nobel Laureate Bob Lucas once said, “once you start thinking about [economic development], it is hard to think about anything else.” This preoccupation is also why Adam Smith is (rightly) referred to as “the father of economics.”

Next, the choice of the word “Nature” in the title is illustrative. Smith is also asking the question, “What is wealth?”

Before Adam Smith, most people and governments assumed that wealth was measured in gold. After all, if having more money makes a household wealthier, then it stands to reason that if the nation has more money, the nation will be wealthier, too. The goal became clear: fill your treasury with gold (read: money), encourage exports so that other countries have to send gold to pay for your exported goods, and restrict imports, so as to avoid having to send your gold to other countries. This was the conventional wisdom of “mercantilism,” but it’s nothing more than the fallacy of composition.

Smith wisely pointed out the problems of the mercantilist understanding of wealth. Wealth is not about how much money you have. Wealth is about access to goods and services that people want or need. It’s about the food we can buy and the coat we can wear. Money is only useful if we can exchange it with other people for the things that we need. Robinson Crusoe would not have had an easier time on his island if he’d washed ashore with a trillion dollar coin in his pocket.

After Smith lays out what wealth is (and is not), we’re ready to understand its “Causes.” If wealth is about access to goods and services, what causes wealth to increase? Smith spells it out in the opening chapters of the book: it’s the division of labor. The pin factory that Smith uses to illustrate this isn’t just a charming example, it demonstrates that wealth is created from ordinary people doing specialized tasks. Disrupting that process destroys value rather than creating it.

But what causes the division of labor? For Smith, that’s easy: exchange. Voluntary, mutually beneficial, free exchanges that happen when people are left to pursue their own interests. And in the right institutional setting, the exchanges that people make are, in his famous phrase, “led by an invisible hand” toward the betterment of society, even if nobody making those exchanges ever intended to pursue that outcome.

An Inquiry into the Nature and Causes of the Wealth of Nations is a research program, not a slogan. Smith never declares that markets work. He investigates the conditions under which they do (and do not). In the process, he provided one of the most consequential arguments in intellectual history: Wealth is not seized, decreed, or stockpiled. Given the right institutional setting, it is produced by ordinary people making ordinary trades with one another, collectively building something that no central planner could design or comprehend.

Two hundred fifty years later, that research program is still going strong. Policymakers—and many others—still confuse money for wealth, mistake the treasury and the stock market for the economy, and believe prosperity can be created by restricting competition and rewarding favored industries. Smith diagnosed the problems with these beliefs in 1776.

Today, the need to read (and reread) Smith has never been greater. We should start with the title.

In this fifth essay, Jacob T. Levy explores one of Smith’s most famous claims in Book V of Wealth of Nations. From the article:

• Yet the argument of Book V of Wealth of Nations is something quite different. Over hundreds of pages, Smith patiently shows why both peace and a tolerable administration of justice are historically rare, and continually fragile. To the extent that some society or other happens to have them, it seems to be neither the natural course of things nor the result of wise and judicious statesmanship but rather barely better than luck.

Yet the argument of Book V of The Wealth of Nations is something quite different. Over hundreds of pages, Smith patiently shows why both peace and a tolerable administration of justice are historically rare, and continually fragile. To the extent that some society or other happens to have them, it seems to be neither the natural course of things nor the result of wise and judicious statesmanship but rather barely better than luck.

Smith was not an esoteric writer, but he was a patient one. He laid out arguments and counterarguments at narrative length and expected readers to follow along with him. Book V requires particularly patient reading, not least because so many different topics are packed into what is officially a section on state budgets. The headline organization of the book into the sovereign’s expenses, revenues, and debts belies subject matter that ranges across the state of English universities, the stadial theory of social organization, church-state relations, the problems of corporate governance, the operation of toll roads, and the organizational consequences of gunpowder. I don’t claim that Smith treats these topics reductively in terms of a single overarching thesis. But, taken together, his sophisticated accounts of all of them point to the tremendous difficulty of attaining and sustaining government that is not “oppressive and tyrannical.”

Peace

Book V begins with an extended account of the political and organizational history of warfare. Its most politically pointed conclusion was the inevitability and superiority of a standing army under modern conditions, and the attendant need for a permanent public fisc to pay for and supply that army. This necessity is not only due to the advantages of specialization and the division of labor, though it is also not a coincidence that the argument appears in a work whose first chapter was about those advantages. Those engaged in commerce and manufacture, unlike herders or yeoman farmers, bear a constant opportunity cost for time spent in military service. Herding peoples like the Mongols bring their animal wealth with them to war. Farmers have seasonal free time, between the planting and the harvest. But those of us in commercial society can’t easily get away without damage to our own livelihood— which is to say, to the wealth of the nation. A commercial society can’t rely on citizens training, marching, and fighting in the off-season; it must pay to staff a full-time professional army. ¹

There are two key things to note for our purposes. One is that the history of government, for Smith, in crucial part just is the history of warfare and military organization. Here, as in Theory of Moral Sentiments (TMS), he gives an account of the moral psychology of obedience that leads us to be willing to be led and governed at all, but the shape of government at any given time is crucially about the shape of the armed forces under the particular economic and technological conditions.

The other is that in modern conditions, the circumstances are particularly ripe for a return to the despotism that Smith associates with the hordes of the herding peoples. The era of the feudal dispersal of military power, we learned in Book III, was dead and gone, undermined by the commercial development of the medieval cities and by the desire of the nobility for luxuries and baubles. The era of the citizen militia celebrated by Machiavelli and the civic republican tradition was always ephemeral. In commercial society, the sovereign will pay a unified army and will supply them with their matériel including expensive, capital-intensive artillery and ships. The sovereign may not own the means of military organization in the same personal way that Genghis Khan did, but the distinction is a fine one.

V.i.a is not the only account of warfare in Book V. The topic returns in V.i.g, the chapter on religion. Smith does not blame religious fervor as such for the wars of religion, but rather the entanglement of church and state. “If politicks had never called in the aid of religion, had the conquering party never adopted the tenets of one sect more than another,” he suggests, denominations and sects could have proliferated and competed freely and peacefully (V.i.g.8, emphasis added). But as Ryan Griffiths has carefully shown, matters are different in societies where politics has already done so, which at the time meant all societies except the United States. Where the entanglement is already an established fact, the risk of cycles of persecution and retribution is an ongoing one, and damage control for the history of persecution is complicated. Moreover, there’s standard, predictable, permanent reason for political actors to call in the aid of religion, and to set their polities on the path to religious conflict. “[E]ach political party has either found it, or imagined it, for its interest, to league itself with some or other of the contending religious sects” (Vi.g.7). The sound policy of liberal religious freedom is one that “positive law has perhaps never yet established, and probably will never establish in any country” (Vi.g.8).

The language here recalls that in Book IV, saying that the establishment of real free trade is a utopian project, and that the sound policy of letting America go peacefully is “such a measure as never was, and never will be adopted, by any nation in the world.” In all these cases, Smith is happy to describe the desired political outcomes, but is far too aware of the mechanisms of politics to think that they are ever attainable.

Tolerable administration of justice

The passage with which I started the essay is one of the most famous of Smith’s commentaries on politics, widely quoted on the right. Perhaps the most widely-known section of Book V is a paragraph on the mentally and politically stunting effects of the division of labor, celebrated on the left. (V.i.f.50) But neither really gets at the core political teaching of Book V, which is better represented by this:

• “When the judicial is united to the executive power, it is scarce possible that justice should not be frequently sacrificed to, what is vulgarly called, politics. The persons entrusted with the great interests of the state may, even without any corrupt views, sometimes imagine it necessary to sacrifice to those interests the rights of a private man. But upon the impartial administration of justice depends the liberty of every individual, the opinion which he has of his own security. In order to make every individual feel himself perfectly secure in the possession of every right which belongs to him, it is not only necessary that the judicial should be separated from the executive power, but that it should be rendered as much as possible independent of that power.” (V.i.b.24)

Without what we would now call a robust separation of powers, we should not expect “a tolerable administration of justice.” But this passage comes at the end of a history of judicial power that argues such a separation is a late, rare, and lucky development. Indeed it seems quite impossible that it can have been in place early enough to lift any society “from the lowest barbarism,” since in the hunting and herding stages of political economy, Smith says that adjudication was standardly joined to the power of command. This remained true into the era of monarchical rule over agricultural peoples. The history of maladministration of justice ran long and deep in part because the ruler passed judgment in private cases as a source of revenue, “which could scarce fail to be productive of several very gross abuses… That such abuses were far from being uncommon, the antient history of every country in Europe bears witness.” (Vi.i.b.14) Since judgment was for sale as the normal fact of legal organization, “the administration of justice appears for a long time to have been extremely corrupt; far from being quite equal and impartial even under the best monarchs, and altogether profligate under the worst” (V.i.b.15).

How did this seemingly intractable condition end? There were two causes, one general and one local to England. The general one was simply that rulers became too busy, or thought themselves too grand, or both, to continue passing judgments personally. Roman consuls and European kings alike eventually delegated the task to subordinates. Once this had been done, a person who thought themselves victim of a gross injustice at least might in principle appeal from the subordinate to the superior. That mitigated some abuses: the king might frown on a judge or bailiff taking bribes, at least if he did not share them upward. But as long as the judges and bailiffs were genuinely dependent on the king, the sacrifice of justice “to what is vulgarly called, politics” continued unabated. The corruption of judgments, moreover, was at best lightly held in check by vague royal oversight.

The local explanation was the highly contingent development of multiple judicial systems whose jurisdictions overlapped enough that they might compete to attract cases, and filing fees. Under the salutary pressure from this competition, courts developed reputations for fairness, impartiality, and incorruptibility. They competed on the quality of the procedures they offered to litigants. Unlike most of the rest of the chapter, the discussion of this development is restricted to England, notably the development of the equity-based court of exchequer. Whether that means Smith thinks this only happened in England isn’t clear. It’s a fortunate example of invisible hand processes: judges seeking only the financial advantage of their courts promoted an end which was no part of their intention, the rule of law. But there doesn’t seem to be anything at all inevitable about it; the development requires the combination of fee-based courts separate from direct royal control, a plurality of judicial systems, and enough concurrency of jurisdiction that they can actually compete for the same cases. Smith does think that post-Glorious Revolution, post-Act of Union Britain has attained a ”tolerable administration of justice.” But, like his friend and mentor David Hume, Smith doubts that the reasonably happy political condition of late 18th-century Britain was inevitable, or is somehow a natural state of affairs that can now be taken for granted.

Taxes

The bulk of Smith’s argument that political actors face constant incentives to increase burdensome tariffs and taxes on commerce happens in Books II and IV. But the discussion of taxes in Book V continues to undermine the happy vision of “peace, easy taxes, and a tolerable administration of justice.” Some of the pressure to keep taxes high will, of course, arise out of warfare itself. But at any given level of overall taxation, it is difficult to make its burden more “easy” by a fair sharing across a broader base. In the context of 1776 this would mean a confederal union spreading taxation and representation across “all the different provinces of the empire inhabited by people of either British or European extraction.” If Ireland, the North American colonies, and the settler plantations of the West Indies were brought into such shared governance, the tax base would broaden, and so the burden would ease. But “the private interest of many powerful individuals, the confirmed prejudices of great bodies of people” provide opposition “as it may be very difficult, perhaps altogether impossible, to surmount.” He continues on with the “speculative” task of offering a vision for such a multinational confederation.” The vision, he drily and darkly jokes, “can at worst be regarded but as a new Utopia, less amusing certainly, but not more useless and chimerical than the old one” (V.iii.68).

Conclusion

Adam Smith did more than any other single thinker to create political economy, and we should take both of the words there seriously. His intellectual contributions to what would later be called political science are of the same serious intellectual caliber as those to what would later be called economics. In my view Smith is the first major social theorist to see the modern state in full. Book V of WN shows a deep understanding, in a way that Locke or even Montesquieu does not, of the political forms then coming into being. That understanding includes a realistic vision of particular political actors— judges, kings, priests, parliamentarians— as well as of organizations like armies, churches, parties, and bureaucracies. The political lessons he draws from that understanding are never simple ones. The vision of a free society he offers might seem like one characterized by inaction: don’t interfere with trade, don’t interfere with religion. But inaction, on his account, will never get us there. Executive domination, corruption of justice, the fusion of military and political power, imperialism and mercantilism motivated by nationalist pride, and religious state persecution of dissidents and nonbelievers: these are what he shows to be the normal course of things. Governments that are “oppressive and tyrannical” are the rule, and he maps out the challenges of finding our way to the occasional exception.

This article has been cross-posted from Liberty Matters, part of the Liberty Fund network. It is part of the series “Compounding Interest: Revisiting the Wealth of Nations at 250“.

Smith did not think that sympathy would lead to masters sympathizing with their slaves, but he seemed to have faith that it could motivate abolitionists to push for change. He did not think politics or religion could end slavery, but had enough faith in economic persuasion that he dedicated time to the problem in his classes. He knew that he was educating the next generation of Scottish leaders and lamented, to them, that he doubted economic motivation would be sufficient for masters to liberate those under their yoke: “It is indeed allmost impossible that it should ever be totally or generally abolished,” even in “a republican government” (LJ(B) 102).

What, then, could the abolitionist hope for? The answer may be only the uneven progress of history. As John W. Danford writes, “It appears, on Smith’s understanding, that historical progress has been a story not only of the spread of general opulence, but also of a gradual transformation in the prevailing moral texture of societies” (Danford 1980, p. 686).

An Inevitable Evil?

Smith was pessimistic about the future of abolition. He argued that slavery was both ubiquitous and inevitable: “Slavery takes place in all societies at their beginning, and proceeds from that tyranic disposition which may almost be said to be natural to mankind…It is indeed all-most impossible that is should ever be totally or generally abolished” (LJ(B) 134, 102). Smith saw the increasing wealth of nations as conducive to more slavery, not less—a rich society can afford to have more slaves than a poor one, and domination is something that he believed people value. In fact, “the greater freedom of the free, the more intollerable is the slavery of the slaves” (LJ(B) iii.111).

Nor did he expect politics or religion to help much. Monarchs will not free slaves—slaves were, after all, present in Scotland. And “we are not to imagine the temper of the Christian religion is necessarily contrary to slavery” (LJ(B) iii.128)—many Christian countries, again including Scotland, allowed slavery. Not even republican governments could be counted on to end slavery because “the persons who make all the laws in that country are persons who have slaves themselves. These will never make any laws mitigating their usage; whatever laws are made with regard to slaves are intended to strengthen the authority of the masters and reduce the slaves to a more absolute subjection” (LJ(b) iii.102).

Smith offered an economic argument against slavery because he did not believe that monarchy (or freedom from it), wealth, or religion can be trusted to convince people to free their slaves. People are too invested in their power and the status quo to give up their slaves. He thought that if he could show them it is in their material interest to abolish slavery, if he could show they will have ever more money and more power without slaves than with them, then there would be more of a chance that he could sway them, at least in the long run.

But of course, being strategic is not the same as being moral, and modern readers will want to know whether Smith was opposed to slavery in and of itself. He was, in no uncertain terms, but he saved his most explicit comments to condemn chattel slavery, not coal and salt work:

Smith observed “what a miserable life the slaves must have led; their life and their property intirely at the mercy of another, and their liberty, if they could be said to have any, at his disposall also” (LJ(B) iii.94). He also observes that “It is evident that the state of slavery must be very unhappy to the slave himself. This I need hardly to prove” (LJ(b) iii.112). However, these are not arguments against slavery, they are just polemic statements (however true they may be). Smith requires something more positive and explanatory as to why slavery is immoral. He offers it in The Theory of Moral Sentiments (TMS).

A Sentimental Path to Abolition?

TMS, Smith’s first book, provides a moral psychology, not a positive ethics. While Smith makes moral claims, they are interwoven with an account of how moral judgments work. The moral what is subservient to the moral how. In TMS, his comments on the immorality of slavery are included within his comments about the general connectedness of all people and the ways each of us enter into individual perspectives. The key concept in TMS is sympathy, the capacity Smith claims we all have for fellow-feeling. It allows us to use our imagination to enter into the perspective of others and to judge the propriety of their moral sentiments.

Smith defines moral sentiments as “moral observations” (Lectures on Rhetoric and Belles Lettres, i.144). They encompass our judgments about and reactions to other people’s judgments and actions. So, for example, if we see someone stub their toe and they start cursing profusely, we make a sympathetic determination whether their reaction is appropriate. If it is, Smith would claim we sympathize with them and thereby approve of their actions. If we think their reaction is too extreme, our lack of sympathy tells them to moderate the pitch of their response.

Similarly, if we learn that someone has slaves and is not working to liberate them, we naturally ask whether this lack of action is appropriate or not. If we would have the same reaction—if we would keep the slaves in bondage—then we can be said to sympathize with the slave owner and approve of their actions, while if we do not share their judgment, we expect them to change.

Smith argued that as we mature morally, we can turn the mirror of sympathy upon ourselves, imagining an impartial spectator who acts as our conscience. We can look to others to judge our action or we can create an impartial spectator who serves in their stead. The impartial spectator is the product of negotiation between our experience, our culture, history, and others’ experience. It can be aligned with the community, but it can also rebel against the status quo. Scottish philosophers saw the slavery in the world and understood that their and other communities approved of it, but their impartial spectator told them it was wrong, and they wrote accordingly.

Smith was explicit that it is easier to sympathize with people whom we are close to, both geographically and culturally. The easier we can imagine others’ contexts and causes, the more likely it is that we can sympathize with them. This means that the more we have in common with others, the more likely we are to approve of their moral judgment, and the less we have in common, the more likely we are to disregard their moral claims. This is the key element in Smith’s moral condemnation of slavery. Historically, slavery has taken different forms. Some masters work side by side in the same conditions as their slaves. In those instances, the masters were generous and kind, and often thought of their slaves as faithful friends. But as society got richer and more prosperous, the divide between the slaves’ day-to-day experiences and their masters’ widened, until there was no way for those in charge to conceive of the tortures of slavery. The masters stopped both sympathizing with the slaves and even conceiving of them as human.

Smith emphasized that when we sympathize with others who experience a wrongdoing, we adopt their resentment against the cause of that wrong. In the case of the slave, the cause is the master. This leads to a problem: for the masters to free their slaves they must first sympathize with them to understand their suffering. In doing so, they must adopt resentment towards the cause of their pain—that is to say, themselves. Thus, accepting that slavery is wrong involves adopting self-resentment or self-hatred. Slave masters must therefore learn to hate themselves at the very moment they mature enough to decide to end slavery and this is precisely what they don’t want to do. If they were to respond with emancipation, they would love themselves again. For Smith, self-acceptance is akin to moral self-approval, but feeling as though one needs to change necessarily involves disapproving of oneself, but

Unfortunately, digging in one’s heels is as much a form of psychological self-protection as economic irrationality, even if it is indefensible in the long run. This helps to explain why the slave culture constructed a worldview that justified slavery, biblical quotations that implied racial inferiority, economic systems that rewarded domination, and literature and art that continually reinforced the status quo. These are the same tools that can be used to undermine slavery—Uncle Tom’s Cabin comes to mind as an example of an abolitionist polemic designed to inspire sympathy rather than interfere with it. As I argue in my book Adam Smith’s Pluralism, in Smith’s moral psychology, the very things that unite us can divide us, and vice-versa (Weinstein 2013). These mixed messages help explain why Smith argued that slavery is most likely inevitable.

This reveals an irony. Despite Smith’s faith in the ability to sympathize with those closer to us, he showed more empathy to the African chattel slaves than the colliers. He had a harder time acknowledging the suffering of his countrymen than he did those whose culture and history were remote to him. In this, his experience foreshadows our own. Contemporary debates about servitude involve garment workers and migrants, none of whom are slaves by name, but many of whom live in conditions similar to the ones the colliers eventually overcame. Whether the servitude of Indian nationals in Saudi Arabia or child laborers in Bangladesh are inheritors of the coal and salt worker legacy is an unsettled matter. It is, however, a debate Smith would recognize[JW7].

Of Colliers and Salters

Today’s readers may be excused for not knowing about the slavery of colliers and salters. Smith is oblique, at best, about Scotland’s role in the slave trade and completely silent about the fact that he might, in any given day, interact with peers who profited by of the servitude of others. He was not alone in this sin of omission—many of the Scottish literati took strong moral positions against slavery without acknowledging their connection to its daily existence. As the historian Duncan Rice puts it, “Scotland was a society whose intellectual and religious leaders had turned against slavery, without developing the slightest conception that anything should be done about it” (Rice 1983).

Many Scots owned or worked in jobs that connected them to the slave trade in the West Indies. Young Scots would travel there to buy, trade, or invest in slaves, or ended up in professional positions for employers who did, and Scotland profited by the tobacco and sugar industries. Their circumstances may have not felt as urgent to Smith as they might have to an abolitionist in the American colonies. There were likely fewer than 100 African slaves in Scotland at any given time in Smith’s life, while slaves made up close to 25 percent of the colonies’ population.

In contrast to the small number of chattel slaves, there were many colliers and salters in Scotland. While some scholars and historians refer to them as serfs, they were not. The Act of 1606 placed already employed coal miners and salters into a state of permanent bondage, making it illegal to offer them new employment without a testimonial from their employer. This meant that as long as their employer refused to offer such a testimonial, the worker was bound to them and a six-day work week. That same employer could bind a worker’s children in exchange for a token gift, indicating lifelong employment. While there was no presumption that colliers and salters were property in the way that Black slaves were, the outcomes were quite similar.

Smith struggled with this awareness. He referred to colliers as “the only vestiges of slavery which remain amongst us,” which both avoids calling them slaves and ignores the other vestige of slavery, the Africans who were still in Scotland. Rather than advocate for them, he picked nits to differentiate between their circumstance and slavery, being generous to their masters. The master, said Smith, could not kill a worker for pleasure or take their property, and the workers must be paid for their labor: “They can be sold, it is true, but then it is only in a certain manner. When the work is sold all the colliers or salters which belong to it are sold allong with it… So that they are no way restricted more than other men, excepting that they are bound to exercise a certain business and in a certain place” (LJ(b) iii.128).Smith’s argument here is ironic in the context of the rest of his work. His point, that the circumstances of the colliers and salters are better off than many previous slaves, is certainly true, but his implication that they are not really slaves because they are only bound to their profession is discordant with much of what he would write later. Smith’s central focus in  An Inquiry into the Nature and Causes of the Wealth of Nations (hereafter Wealth of Nations or WN) is the creation of “perfect liberty” for labourers. He defines it as the state under which someone has the opportunity to “change his trade as often as he pleases” (WN I.vii.6, I.x.a.1). This is the one liberty the colliers and salters are guaranteed not to have. Smith offers no condemnation of the kind of slavery affecting colliers and salters in either of his published books. His only critical comments can be found in his Lectures on Jurisprudence (LJ), which he didn’t publish himself, but come from student notes from Smith’s courses.

Smith is explicit in WN about the requirements of apprenticeships, which were more akin to servitude than school. They were, for Smith, “the epitome of the restrictions of the principles of competition and liberty.” It is unjust, he argues, that “during the continuance of the apprenticeship, the whole labour of the apprentice belongs to his master” (WN I.x.b.8). By prohibiting the apprentice from bringing his skills to market (in Smith’s time, apprentices were always male), the master took away the student’s ability to negotiate for better wages, conditions, or other terms of employment. Readers of the Wealth of Nations can justly anticipate what his objections to the plight of colliers and salters would have been from his comments about apprenticeships, which closely approximated many of the conditions the colliers and salters faced, though they were less extreme.

There is every reason to think that Smith should have condemned the bondage of colliers and salters in Wealth of Nations. He was, after all, penning a “very violent attack… upon the whole commercial system of Great Britain” (Corr. 208). He should also have been less circumspect in his lectures. Scottish culture had become so heavily abolitionist, at least in word, that his students would have understood the moral message implicit in Smith’s associating coal and salt work with slavery. At the same time, Smith was teaching young, well-to-do Scots at Glasgow College; they would have been accustomed to the conditions in the miners. Calling the colliers slaves would have required an argument in and of itself and would probably have been interpreted as an overt political act which would have urged students to sympathize with the workers and therefore resent the coal masters. Smith was famously cautious about political provocation.

And yet, in describing new workers’ reluctance to enter into contracts with the coal masters, Smith ends up referring to colliers as slaves three quarters of the way through the same paragraph in which he called them the last vestiges (LJ(b) iii.130). This is evidence of Smith’s internal conflict regarding how to speak about them. Notice also that Smith made a claim about human nature—not only about market forces. His macroeconomic discussions were not simply concerned with political economy, but were elements of the larger project outlined in TMS, the first edition of which was published three years before the date of the lecture notes. Smith, like all Scottish Enlightenment philosophers, saw himself as contributing to what David Hume referred to as “the science of man,” a project built on the understanding that all sciences are subordinate to human nature because “they lie under the cognizance of men, and are judged of by their powers and faculties” (Hume 1739). Exceptions for specific instances undermine such a project.

An Insufficient Economic Case

Smith probably did not say much about the injustices suffered by colliers and salters in his Lectures on Jurisprudence because the class was on a different topic. He was not making a moral argument against slavery; he was making an economic one. As detailed in the student notes on jurisprudence, Smith outlined how much more expensive bound workers and slaves are than free labor would be. It would be easier to recruit colliers as free laborers, he argued, because potential employees “are now deterred from ever entering into one as it is a rule that one who works a year and day in the coal pit becomes a slave as the rest and may be claimed by the owner” (LJ(b) iii.128—this is where he inadvertently calls them selves). Free laborers were avoiding the original trap that enslaved their predecessors.

Smith made similar observations about the economic irrationality of slavery fourteen years later in Wealth of Nations. First, he argued, slave labor is the most expensive of all labor and even then “can be squeezed out” the slave “by violence only, and not by any interest of his own” (WN III.ii.9). Second, slave labor is more expensive because its cost must be borne solely by the master and not defrayed by the workers: “…tenants, being freemen, are capable of acquiring property…they have a plain interest that the whole produce should be as great as possible… A slave, on the contrary, who can acquire nothing but his maintenance, consults his own ease by making the land produce as little as possible over and above that maintenance” (WN III.ii.12). In addition, the more competition there is for jobs, the lower workers’ salaries will be, a point he does not repeat from his Lectures on Jurisprudence (LJ(b) 111.130), but is implicit in his comment that the only reason why there are sugar slaves is the plantation owners “can afford the expence of slave-cultivation” (WN III.ii.10).

Smith continued, “the wear and tear of a slave…is at the expence of his master, but that of a free servant at his own expense” (WN I.viii.41) and specifies that when it comes to slaves you need more labor “to execute the same quantity of work than in those carried out by freemen” (WN IV.ix). His justification here is the same as in the Lectures on Jurisprudence: “The pride of man makes him love to domineer…wherever the law allows it, and the nature of the work can afford it, therefore, he will generally prefer the service of slaves to that of freemen.” (WN III.ii.10). The bottom line for Smith was that, “avarice and injustice are always short-sighted.” Slave masters’ myopic desire for power does not allow them to “foresee how much this regulation must obstruct improvement, and thereby hurt in the long-run the real interest of the [them and the] landlord” (WN III.ii.16).

For Smith, the central economic problem with slavery is that lack of personal motivation makes the slave lazy, recalcitrant, and uninvested in labor. This is consistent with Smith’s overall conception of human beings. He was not arguing that Africans are inherently inferior, as Hume does in footnote 10 of his essay “Of National Character.” Nor is he commenting negatively on the working class—Smith thinks very highly of their ability to innovate. Instead, he implicitly reinforced his claim that all human beings are endowed with “the uniform, constant, and uninterrupted” motivation to better our own conditions, “a desire which, though generally calm and dispassionate, comes with us from the womb, and never leaves us till we go into the grave” (WN II.iii.31, 28). A person who can accumulate property and savings is motivated to work efficiently and profitably, but a slave, whose only goal is to find rest and disappear into the background, will never contribute productively to someone else’s advancement.

In short, Smith believed that slavery is not as profitable as free labor and that forced servitude takes away economic agents’ motivation to succeed. It takes away their ability to better their own condition. Instead, they are motivated to make life easier for themselves in the short term, which transfers costs that would normally be borne by the worker to the master.

But the desire for higher profits were not enough to move “the masters of coal works” to liberate their bound employees. Smith was arguing for slavery to be seen as a bad economic decision, but he was also illustrating how the natural desire for human domination can make people blind to their other interests. Those with dominion over bound workers or slaves are held firm by a less rational motivation, a natural “love of domination and authority over others” that exploits “the pleasure it gives one to have some persons whom he can order to do his work rather than be obliged to persuade others to bargain with him” (LJ(b) iii.128).

The Slow Road to Abolition

As Smith may have expected, it was the slow, messy progress of history rather than any single, knock-down argument that brought slavery to an end. Scotland’s progression towards abolition of chattel slavery was reasonably quick after Wealth of Nations was published in 1776. The owning of personal slaves was prohibited in Scotland in 1778; their trade became illegal in the British Colonies in 1807, and chattel slavery was abolished in 1822.

As for the colliers and salters, a law declaring them free laborers passed in 1775, while Smith was finishing Wealth of Nations, but complete emancipation didn’t happen until 1799. The practice remained in effect in Northern England until 1872, seven years after the American civil war ended, a much more violent resolution to the scourge of black slavery. There are, of course, still people who argue both that slavery was a positive institution for the black slaves and that the Africans didn’t really suffer. These people however, constitute the vast minority and are generally regarded as crackpots. Adam Smith would not sympathize.

As a trade economist, I tend to focus on Book IV, Of Systems of Political Œconomy, where Smith skillfully dissects and refutes the arguments for mercantilism and protectionism. At the end of Book IV, Smith claims:

Smith was very much a free trader. He staunchly opposed tariffs designed to disrupt the natural flow of trade (revenue tariffs were less objectionable, but still not great). However, Smith’s approach allows for some exceptions. He discusses them on pages 463–471 (much has been written on these exceptions. For example, see my Adam Smith Works piece “Would Adam Smith Have Supported the Jones Act?” or Don Boudreaux’s discussion in his book Globalization). Among those exceptions, there is “a matter of deliberation” as to whether tariffs restricting freedom of trade are beneficial. If tariffs can be used in retaliation to open trade with another country (that is, remove their tariffs), then Smith argues temporary tariffs may be desirable:

However, if no such repeal would be possible, Smith argued that it would be best to just continue with no tariffs (ibid). Negotiating in this manner is difficult. After all, the negotiations are conducted not by principle but rather “as to the skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs” (ibid). World affairs, personal interest, and other factors will influence outcomes of tariff negotiations.

The argument Smith lays out here has come to be known as alternatively the “Crowbar Theory” or “Aggressive Unilateralism.” Under certain conditions, it can work: if Country A is sufficiently large, they can impose tariffs on Country B that will cause A’s terms of trade with B to improve. Since B’s terms of trade with A is reciprocal, A’s terms of trade improvement necessarily means B’s terms of trade deteriorate. B, seeking to avoid this beggar-thy-neighbor outcome, would be incentivized to negotiate with A. Just about every trade economist who has considered the theory dismisses it as a viable alternative, for much the same reason Smith has: political self-interest will often override principles: the tariff may be miscalibrated, B could retaliate purely out of spite, etc. Far better to just keep tariffs low and deal with any problems that might arise at their source rather than rely on trade-distorting tariffs.

Historically, however, aggressive unilateralism has a mixed record of success. In many cases where tariffs were used as a crowbar to pry open markets, they have failed miserably, leading to trade wars or, in some cases, shooting wars. Two examples come readily to mind. Smith cites the war between France and the Dutch in the 1670s as aggressive unilateralism gone wrong. More recently, the Franco-Italian Tariff War of 1887–1898 occurred because Italy tried to use tariffs to force France to open their markets. It ended in economic disaster for Italy.

And yet, Franklin Delano Roosevelt successfully used aggressive unilateralism to wind down the trade war kicked off by the Smoot-Hawley Tariffs. In fact, the actions taken in the late 1930s would lead into the general rise of free trade and free trade agreements that would come to characterize the second half of the 20th Century.

Why was it Roosevelt was successful where so many others failed? The answer, I think, can be found in Adam Smith. In a forthcoming working paper, I argue that Smith is ultimately making an institutional point. The success or failure of aggressive unilateralism depends on the institutions under which the negotiations take place. That is, how do institutions direct the skills of “that insidious and crafty animal” so as to override momentary affairs and follow the principle of liberalism?

Let us consider things from a game theory perspective. We can model trade negotiations as a simple prisoners’ dilemma problem. Two negotiators at a table, each with a choice to cooperate (lower tariffs) or defect (raise tariffs). The figure below is a simplified visualization:

If both countries cooperate, that is the best possible outcome (+,+). Both countries benefit from lower tariffs. If A defects while B cooperates, A is made substantially better off (++) while B is made substantially worse off (–). The reciprocal result will follow if B defects while A cooperates—that is, if B defects while A cooperates, B is made better off and A is made worse off. If both defect, both are made worse off (we have a trade war).

The formal result of the prisoner’s dilemma problem is that, no matter what the other player chooses, a self-interested individual will choose to defect. Consequently, both parties are made worse off, resulting in a stable but sub-optimal equilibrium.

Proponents of aggressive unilateralism use the logic of the prisoner’s dilemma to justify the tariffs: cooperate, cooperate is the best outcome. Therefore, negotiations can come about where both parties agree to cooperate (binding agreements are one way to get out of a prisoner’s dilemma).

However, when we consider the model in play, that argument breaks down. With aggressive unilateralism, the first mover has already indicated he will defect (or has defected). Thus, we are firmly in column 2. Country B has a choice: do I cooperate and hope that Country A keeps their word? If they don’t, I am made worse off than if I just defect. If B cannot count on A to ultimately cooperate, B’s logical action is to retaliate. And thus, aggressive unilateralism breaks down and a trade war begins.

But if B can get a credible commitment to de-escalate from A, then it changes the calculus. B now has an incentive to cooperate as well. The credible commitment to de-escalate comes from the institutional situation of A.

In 1933, representatives of 66 nations met in London to discuss how to wind down the trade war that had engulfed the war. They left with no deals. However, by 1934, FDR was doing deals left and right. Between 1934 and 1939, FDR would conclude 19 trade deals. What changed in that one year? The institutional structure FDR was operating under.

In 1934, Congress passed the Reciprocal Trade Agreements Act (RTAA). Prior to the RTAA, tariffs were generally considered tax policy and set by Congress without foreign policy concerns. If tariffs were used to pry open markets, that made them treaties, which required 2/3rds of the Senate to ratify. Sectional concerns, special interest groups, and other public choice problems could easily derail any tariff reduction a president negotiated. In other words, there could be no credible commitment to de-escalate. But Congress delegated some of its authority to the President. It allowed tariff negotiations to be an executive agreement, subject to a simple majority in Congress. A much lower burden to meet, and much harder for special interests to disrupt. The RTAA changed the institutional framework and created a credible commitment to de-escalate.

Smith, rightfully, was worried about the prospects for free trade. There would be too much political self-interest. But, as we saw in 1934, an institutional framework can change those outcomes.

Further Reading:

• Clashing Over Commerce by Douglas Irwin
• “Trade Wars: A Comparative Study of Angle-Hanse, Franco-Italian, and Hawley-Smoot Conflicts” by John Conybeare. World Politics, 38(1) 1985, pp147–172.
• “The Institutional Roots of American Trade Policy: Politics, Coalitions, and International Trade” by Michael A. Bailey, Judith Goldstein, and Barry R Weingast. World Politics, 49(3) 1997, pp. 309–338.

In this fourth essay, Brianne Wolf explores Book IV of Wealth of Nations, where Smith discusses the mercantile system, against which the whole Wealth of Nations was a “very violent attack.” From the article:

• For Smith, moral philosophy is the study of virtue and the faculty of mind that allows us to determine what is praise- or blameworthy conduct. When we understand the project of the moral sentiments, we can see that Smith adopts the same logic in his analysis of political economy. Political economy provides a lens through which to hone sensibilities about virtue and good conduct.

Book IV of Wealth of Nations is often read for the way it details the key institutions of political economy and how economic theory meets political practice. Smith argues against mercantilism, the dominant economic theory of his time. He presents an alternative vision of trade that proposes to enrich not just the sovereign but to “enable” the people “to provide such a revenue or subsistence for themselves” (IV.Introduction.1). But he also utilizes this economic intervention to articulate a moral theory. He demonstrates the implications of economic policy for both material wealth and human dignity. The dignity of both his fellow subjects as well as distant peoples in the colonies of Britain and other imperial powers is often jeopardized due to the “groundless jealousy of the merchants and manufacturers of the mother country” (WN IV.vii.b.44), “private interest and the spirit of monopoly” (WN V.iii.1) and “national prejudice and animosity” (WN IV.iii.1). Smith seeks to replace policies governed by these passions with better economic institutions that will result in sympathy for others and foster respect for the human dignity of all.

In Book IV, Smith advances a moral project dignifying human beings by prioritizing their autonomy and liberty through identifying good and problematic economic institutions. Most often, we understand Smith’s project in Book IV to be what he called a “very violent attack…upon the whole commercial system of Great Britain” (Correspondence, 250). However, he furthers the moral project first articulated in TMS in 1759 but revised and refined through 1790, by demonstrating the value of human life and the priority of individual judgment via a discussion of collective flourishing. While there are moral arguments about economics throughout the whole of Wealth of Nations, it is especially important to see Smith as using political economy as a practical means to advance a moral philosophy in Book IV, because there he confronts the dangers of political practice for human well-being. Whereas Smith employs character sketches in TMS to help readers understand the implications of his moral arguments, the method of political economy he chooses in Wealth of Nations is to point to empirical examples to ground normative claims. A secondary implication of this essay is to show that for Smith, theory must never be abstracted from human reality because otherwise human freedom and dignity are easily displaced.

First, what is moral philosophy according to Smith? In Book VII of TMS, Smith moves from his own moral project to analyze other answers to the question of moral sentiments offered throughout the history of philosophy. He argues that a theory of moral sentiments should examine:

• “First, wherein does virtue consist? Or what is the tone of temper, and tenor of conduct, which constitutes the excellent and praise-worthy character, the character which is the natural object of esteem, honor, and approbation? And, secondly, by what power or faculty in the mind is it, that this character, whatever it be, is recommended to us? Or in other words, how and by what means does it come to pass, that the mind prefers one tenor of conduct to another, denominates the one right and the other wrong” (TMS VII.i.2).

For Smith, moral philosophy is the study of virtue and the faculty of mind that allows us to determine what is praise- or blameworthy conduct. When we understand the project of the moral sentiments, we can see that Smith adopts the same logic in his analysis of political economy. Political economy provides a lens through which to hone sensibilities about virtue and good conduct. Smith argues here that moral philosophy must include the opportunity for individuals to exercise judgment.

Smith is aware of how counterintuitive articulating the project of a political economy that results in moral conduct is. The “thirst for gold” and power provide perverse incentives (WN IV.vii.a.17). He argues that “Folly and injustice seem to have been the principles which presided over and directed the first project of establishing the colonies; the folly of hunting after gold and silver mines, and the injustice of coveting the possession of a country whose harmless natives, far from having ever injured the people of Europe, had received the first adventurers with every mark of kindness and hospitality” (WN IV.vii.b.59). He also reflects that “it was not the wisdom and policy, but the disorder and injustice of the European governments which peopled and cultivated America” (WN.vii.b.61). Smith notes that “statesman…employ…the blood and treasure of their fellow citizens, to found and to maintain such an empire” (WN IV.vii.c.63). Smith establishes the uphill battle he has before him to show that political economy can be about more than individual greed and can be directed toward justice.

Therefore, Smith first appeals directly to self-interest by demonstrating the wealth to be gained by pursuing the economic system of natural liberty as opposed to the system of government awarding special privileges. For example, he references the expeditions to the new world in search of minerals as “expensive and uncertain” where explorers and rulers “flattered themselves that veins of those metals might in many places be found as large and…abundant” when “the value of those metals has, in all ages and nations, arisen chiefly from their scarcity” (WN IV.vii.a.18–19). He argues that colonization wastes money and often does not turn up the spoils expected. In the first chapter of the book, Smith also critiques mercantilism on its economic merits. For example, Smith considers the price of tobacco in the American colonies. While “by means of the monopoly which England enjoys of it” tobacco “certainly comes cheaper to England than it can do to France,” Smith argues that “had France, and all other European countries been, at all times, allowed a free trade to Maryland and Virginia, the tobacco of those colonies might…have come cheaper than it actually does…to all those other countries, but likewise to England” (WN IV.vii.c.17). In short, tobacco would be cheaper through free trade. He also argues against the inefficiency of allowing national prejudice to direct economic policy. In a frequently revisited example, Smith notes it results in expensive wine. He argues that wine could be grown in Scotland but it would require excessive resources at “thirty times the expense for which at least equally good can be bought in foreign countries” (WN IV.ii.15).

Arguing that Smith’s political economy is moral philosophy does not mean that profit or self-interest cease as motivation. Indeed in Book IV, Smith emphasizes the roles of profit and self-interest in driving industry with claims like: “It is only for the sake of profit that any man employs a capital in the support of industry.” (WN IV.ii.8) Because Smith prioritizes human dignity he foregrounds the individual as the unit of analysis. Throughout TMS he promotes individual interest as tied to virtue. Justice is the ultimate virtue he upholds throughout his work and is defined in TMS as negative virtue, or not harming others (TMS II.ii.1.9). Smith is clear that “mere justice” will not be enough to garner praise from others, but this minimum standard emphasizes the importance of human dignity. Smith also ties this understanding of justice to self-interest in the next section. He argues that “In the race for wealth” individuals can compete with one another, but they cannot harm one another as this is “a violation of fair play” and “the most sacred laws of justice…guard the life and person of our neighbour” (TMS II.ii.2.1–2). Justice allows for pursuing individual interests as long as we do not harm others, thus recognizing their humanity as equal to our own.

Smith offers an alternative system of political economy based on free trade and mutual benefits, called the system of natural liberty. He argues that such a system would: “break down the exclusive privileges of corporations, and repeal the statute of apprenticeship…add to these the repeal of the law of settlements, so that a poor workman, when thrown out of employment either in one trade or in one place, may seek for it in another trade or in another place, without the fear either of a prosecution or of a removal” (WN IV.ii.42–3). Elsewhere he also argues that “unfortunate…regulations” violate this system (WN IV.vii.c.44). Finally, the system of natural liberty involves not only free trade, but also a specific set of duties for the sovereign to protect “the society from violence and invasion”, from “injustice or oppression” of members of society to one another, and finally “establishing an exact administration of justice” (WN IV.ix.51).

Throughout Book IV, Smith presents a normative argument for why free trade is superior to mercantilism. The system of special favors undermines human dignity, fellow-feeling, equality, political representation, and rule of law by prioritizing the needs of some subjects over others.

Smith presents his political economy as moral philosophy in his defense of the dignity and worth of individuals. Smith foregrounds individual freedom throughout his work. Part of his critique of mercantilism lies in its undermining of individual judgment and prosperity in favor of the few and powerful. Smith notes that “the vile…masters of mankind” always seek their advantage (WN III.iv.10). He directly connects the ability to make economic decisions for oneself to individual rights and the duty of the sovereign: “To prohibit a great people, however, from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind” (WN IV.vii.b.44). For institutions to respect human dignity requires allowing individuals to make their own decisions rather than allowing the powerful to make decisions that only favor their interests. Smith defends this point on utilitarian grounds, in that “every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him” (WN IV.ii.10). He also defends the point on normative grounds: “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way” (WN IV.ix.51). Justice is the highest moral law and it requires individual freedom which allows people to pursue their own interests—another key component of Smith’s definition of “the obvious and simple system of natural liberty” (WN IV.ix.51).

Another issue with the system of special favors is that it turns subjects against one another. Since part of the foundation of Smith’s moral philosophy is to build sympathetic relationships between individuals where they experience “fellow-feeling” (TMS I.i.1.4), any set of institutions that intentionally sets individuals against one another threatens to disrupt this moral system. Smith writes “many manufactures have…obtained in Great Britain, either altogether, or very nearly a monopoly against their countrymen” (WN IV.ii.1). Smith argues that manufacturing groups are increasingly recognizing the utility in pursuing the prohibition of foreign goods. Corn, woolen, and silk manufacturers have “obtained the same advantage. The linen manufacture has not yet obtained it, but is making great strides towards it” (WN IV.ii.1). This advantage is gained while harming their fellows because such duties require them to pay more for essential goods.

The system of special favors also turns individuals against those in other nations and undermines rule of law. Putting taxes on goods from other countries has moral consequences: 1) It strains relationship between those countries such that whichever one was taxed retaliates (WN IV.ii.39) and 2) “Those mutual restraints have put an end to almost all fair commerce between the two nations” (WN IV.iii.a.1). While “commerce” should “be, among nations, as among individuals, a bond of union and friendship” instead because of mercantilist theory “nations have been taught that their interest consisted in beggaring all their neighbours” (WN IV.iii.c.9). Smith counters this tendency of mercantilism to vilify those in other nations by promoting the dignity of people of different cultures and ethnicities. Smith has indicated that the liberty of the subject of Great Britain is at risk due to these economic policies, but also condemns slavery (WN IV.vii.b.54) and Columbus’ treatment of the indigenous population (WN IV.vii.a.14–16). Regarding slaves, Smith advances an economic argument to make a moral point. He argues “the profit and success of that which is carried on by slaves, must depend equally upon the good management of those slaves” (WN IV.vii.b.54). Smith elaborates later on what good management means and its moral benefits for the slave in addition to more economic benefits for the master: “Gentle usage renders the slave not only more faithful, but more intelligent, and therefore, upon a double account, more useful. He approaches more to the condition of a free servant, and may possess some degree of integrity and attachment to his masters interest, virtues which frequently belong to free servants” (WN IV.vii.b.54). Smith calls the “law of slavery” “unfortunate” and he argues for the dignity of enslaved persons by asserting that they deserve to be treated well. He positions the slave as capable of virtue and argues that gentle usage will not only make him more economically productive but also give the slave something like freedom and the capacity to grow in virtue and learning. Smith falls short of arguing against slavery as strongly as twenty-first century readers might desire, but while many in his time are promoting slavery as key to imperial economic success, Smith acknowledges the humanity of the enslaved and their capacity for virtue.

Smith also promotes political economy as moral philosophy by asserting the importance of political representation. Justice requires allowing individuals to make their own decisions and pursue their own interests. Therefore, at its best, the political relationship between ruler and ruled should allow citizens “liberty…to manage their own affairs their own way” (WN IV.vii.b.52). Smith argues Great Britain does allow this kind of government in the colonies more than “the absolute governments of Spain, Portugal, and France… in their colonies…the discretionary powers which such governments commonly delegate to all their inferior officers are, on account of the great distance, naturally exercised there with more than ordinary violence” (WN IV.vii.b.52). Smith worries that such governments, when lacking sufficiently strong, centralized power to enforce the law or self-government to serve as a check on their power are “arbitrary and violent” (IV.vii.b.52). In the case of the American colonies’ building rebellion against the crown, Smith argues in a letter to Britain’s solicitor general Alexander Wedderburn known as Thoughts on America, that the ideal resolution between Britain and America would be for “both parts of the empire enjoying the same freedom of trade and sharing in their proper proportion both in the burden of taxation and in the benefit of representation…the principle security of every government arises always from the support of those whose dignity, authority and interest, depend upon its being supported” (Correspondence, Appendix B, 381). The consequences of mercantilism are immoral insofar as those policies undermine rights, the dignity of individuals, and political representation.

Indeed though Smith thinks the American rebellion is mostly about gratifying the ambition of “the leading men of America” he also acknowledges that Britain should consider “the blood which must be shed in forcing” America to remain part of the empire (WN IV.vii.c.74-75). Smith resists both violence and exercises of arbitrary rule because they erode human dignity. Smith is not always sympathetic to the American colonists’ case for representation, such as when he argues that they are not paying their fair share for defense (IV.vii.c.73), but the overarching argument is that all members of a political regime deserve to be represented. He writes, “The assembly which deliberates and decides concerning the affairs of every part of the empire, in order to be properly informed, ought certainly to have representatives from every part of it” (WN IV.vii.c.77). Lack of political representation encourages the powerful to to tread on the rights of others, including the powerful using the populace to enrich themselves and further entrench their power.

Smith explains how political economic policies can even come to undermine the constitution of a state: “Every such regulation introduces some degree of real disorder into the constitution of the state, which it will be difficult afterwards to cure without occasioning another disorder” (WN IV.ii.44). Such economic policies also encourage smuggling which undermines rule of law (WN IV.iii.a.1). For Smith, politics and economics, like politics and morality and economics and morality, are all intertwined. Persistent economic policies favoring some subjects over others reduce the ability of the state to ensure an exact administration of justice.

Finally, Smith presents his political economy as moral philosophy by arguing against system thought. System thought ignores the impact of those systems on real human beings. While Smith asserts a “system” of natural liberty in Book IV, he avoids committing the same sin he accuses other moral philosophies of by also including various caveats to such a system, when necessary, to preserve human dignity. There are too many examples to examine in detail here, but some exceptions he makes include export subsidies or bounties (WN IV.v.a.35), retaliatory tariffs (WN IV.ii.39), tariffs that support national defense (WN IV.ii.23–4; 31), and public education (WN V.i.f.54). To take one example, Smith allows exceptions to free trade to support those who may be harmed in the transition from mercantile policy to the system of natural liberty. Smith argues that though the legislature should try to restore “the importation of foreign goods,” “humanity may in this case require that the freedom of trade should be restored only by slow gradations, and with a good deal of reserve and circumspection” (WN IV.ii.40). Smith takes into account those who have secured jobs under the prevailing economic rules and wants to ensure that these individuals are able to find new jobs as free trade is restored.

Instead of promoting a system that prioritizes the system’s internal perfection and coherence, good political economic policies should create rules and institutions which both prioritize the person’s individual judgment and foster good conduct and economic results.

Book IV is the location of the only reference to the invisible hand in the entirety of the Wealth of Nations. Despite popular parlance, the discussion of the invisible hand does not support the idea that greed is good, but instead, the idea that institutions can channel human beings’ natural self-interest toward the common good. Smith argues that with such institutions, “by 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” (WN IV.ii.9). Political economic institutions that actually support the common good are those that enable individuals to coordinate given their pursuit of their own, diverse ends.

We know Smith remained committed to this portion of his political economy as moral philosophy argument because he articulates it most strongly in Part VI of TMS, which he added in 1790, arguing against the “man of system” who does not consider that each individual “has a principle of motion of its own altogether different from that which the legislature might choose to impose” (TMS VI.ii.2.17). For Smith, political economy is moral philosophy because creating opportunities for individuals to use their judgment, connect with their fellows, be treated equally under fair and impartial rules, and be politically represented dignifies the individual and generates overall economic prosperity.

This article has been cross-posted from Liberty Matters, part of the Liberty Fund network. It is part of the series “Compounding Interest: Revisiting the Wealth of Nations at 250“.

10th. A tie between The Economics of Tariffs and Trade, with Doug Irwin, and Why Christianity Needs to Help Save Democracy, with Jonathan Rauch.
9. How to Walk the World, with Chris Arnade.
8. The Music and Magic of John and Paul, with Ian Leslie.
7. Will Guidara on Unreasonable Hospitality.
6. EconTalk episode #1000. That was a solo episode with me.
5. Number 5: The Magic of Tokyo, with Joe McReynolds.
4. Number 4: The Perfect Tuba, with Sam Quinones.
3. Shampoo, Property Rights, and Civilization, with Anthony Gill.

Your second-most favorite episode was:
2. A Mind-Blowing Way of Looking at Math, with David Bessis.

And, your favorite episode, listed by 33% of listeners in the survey:
1. What Is Capitalism? with Mike Munger.

I want to thank everyone for voting and for your comments, which I love receiving.

This episode also discusses the listeners’ survey votes for their Top 10 EconTalk podcast episodes for 2025.