Liberty Matters

Compounding Interest: Revisiting The Wealth of Nations at 250

By: Eric Schliesser, Maria Pia Paganelli, Dennis C. Rasmussen, Brianne Wolf, Jacob T. Levy, and Craig Smith March 9, 2026

Arriving in 1776, as the Declaration of Independence gave birth to a new nation and Gibbon’s Decline and Fall gave birth to a new approach to history, Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations gave birth to a new discipline--modern economics.

Liberty Fund has been interested in Wealth of Nations since our own founding, and we have published it since 1981, so in this edition of Liberty Matters we have asked five authors to help us celebrate the semiquincentennial of this groundbreaking work. Each essay will explore one book of Wealth of Nations, drawing out the moments these authors find particularly intriguing and allowing readers to proceed through the essays as they progress through Smith’s text. The series will close with a capstone reflection on the work as a whole.

Perspective Essay Innovation and Governance in Book 1 of Wealth of Nations

Eric Schliesser March 9, 2026

A standard criticism of Adam Smith, going back to John Rae in 1834, is that in “Wealth of Nations economic growth is caused by capital accumulation, which is in turn the result of saving. Increases in productivity through increased division of labor are a more or less automatic result of accumulation, not an independent cause of growth.”[1] This criticism has been indirectly reinforced by the tendency of more recent commentators to identify “the prudent man of" The Theory of Moral Sentiments (hereafter: TMS) with “the frugal man of" Wealth of Nations (hereafter: WN) and, thereby, find a unity in Smith’s corpus.[2] The unity is real, and Smith indeed defends the moral salience of prudence, including frugality, but the standard interpretation of Smith’s political economy also overlooks a more dynamic account in Smith centered on governance, institutions, and bottom up innovation.

This more dynamic account is introduced in the first chapter of Book 1 of Wealth of Nations, which starts with the claim that the “greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour.” (WN 1.1.1, p.13) This immediately clarifies two features of Smith’s analysis: first, the fact that per capita output grows is itself the effect of the division of labor.[3]

Second, within the division of labor there is room for agency by those who apply skill, dexterity, and judgment to take advantage of it. So, initially, it seems that Smith is offering a narrative that valorizes the entrepreneur and what we would call the manager of (say) a factory where the division of labor is perfected. (In wider context, Smith clearly states that the division of labor can be pursued at greater length in manufacturing than, say, agriculture.)

However, Smith also suggests that within the division of labor there is, in addition to much saving of time, an “increase of dexterity in every particular workman.” Note that he does not claim the skill or judgment of each worker is increased. In fact, Smith recognizes that the shift from artisanal labor to machine-aided manufacture may well involve de-skilling and undermining judgment. Of course, the division of labor is both shaped by and generates, “the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many.” (WN 1.1.5, p. 17)

In fact, in order to explain how the division of labor generates further inventiveness, Smith appeals to his theory of human nature for the first time in Wealth of Nations: “Men are much more likely to discover easier and readier methods of attaining any object, when the whole attention of their minds is directed towards that single object, than when it is dissipated among a great variety of things.”[4] (WN 1.1.8, p. 20) Smith then continues:

But in consequence of the division of labour, the whole of every man's attention comes naturally to be directed towards some one very simple object. It is naturally to be expected, therefore, that some one or other of those who are employed in each particular branch of labour should soon find out easier and readier methods of performing their own particular work, wherever the nature of it admits of such improvement: A great part of the machines made use of in those manufactures in which labour is most subdivided, were originally the inventions of common workmen, who, being each of them employed in some very simple operation, naturally turned their thoughts towards finding out easier and readier methods of performing it…One of those boys, who loved to play with his companions, observed that, by tying a string from the handle of the valve which opened this communication to another part of the machine, the valve would open and shut without his assistance, and leave him at liberty to divert himself with his playfellows. One of the greatest improvements that has been made upon this machine, since it was first invented, was in this manner the discovery of a boy who wanted to save his own labour. (WN 1.1.8, 20)

In Book V of Wealth of Nations, Smith recognizes that this narrowing generates a kind of alienation that is both harmful to workers and has dangerous political implications.[5] So, the quoted passage is not without a politically and humanly troubling under-current, not the least the existence of child-labor.

However, the otherwise bad narrowing of attention has a salutary effect among a subset of workers subject to it.This subset finds ways to improve their own productivity either (i) by organizing their own work more efficiently (“easier and readier methods”) or (ii) by designing and developing labor-saving machines. I offer four further observations on the quoted passage.

First, Smith anticipates here an insight by Thomas Kuhn that a certain kind of constrained activity, a puzzle, promotes and even helps constitute ingenuity. As we learn from Smith’s posthumously published “History of Astronomy,” Smith understood scientific theories as machines that undergo a process of development/refinement, and then can undergo a revolutionary change.

Second, as Smith’s example of the playful boy suggests, Smith clearly valorizes bottom-up, workplace initiative. I am not the first to note this. Even early socialists like Thomas Hodgskin often draw explicitly on Smith to argue for the importance of work-place driven technological innovation.[6]

Third, as David M. Levy and Sandra J. Peart emphasize, Smith’s underlying point is a kind of intellectual egalitarianism.[7] Smith repeats that it is ordinary working laborers who are the ingenious designers of much beautiful machinery. Ingenuity is a common disposition that is, if not a context-sensitive property, at least triggered by constraints in our social environment.

Fourth, Smith’s narrative, thus, pushes back against the idea that what’s really needed in a modern political economy is to turn workers into machine-like, thoughtless, and seamless parts of an assembly-line guided by scientific Taylorism or ruled by a managerial elite, which ensures a sufficient rate of savings. Rather, what’s needed is to let ingenuity bubble up from the work floor. For Smith, ingenious workers deliver a stream of productivity gains. When much later in Wealth of Nations, Smith criticizes the physiocrats, Smith makes this very point again, “The improvement in the productive powers of useful labour depend, first, upon the improvement in the ability of the workman; and, secondly, upon that of the machinery with which he works.” (WN 4.9.35, 676)

The bottom-up mechanism of technological improvement that Smith showcases in the very first pages of Wealth of Nations shapes the division of labor. These technological improvements contribute to growing production (and to growing markets with more room for subdivision), capital’s profit, and cheaper goods and so raising living standards. Capital accumulation is an effect, not the cause, of technological innovation, and not just the result of the prudential habit to save.

In another context I have emphasized that the boy’s play involves the first mention of liberty in Wealth of Nations.[8] But here I just note that the boy who wants to play is himself working among machines designed by common laborers; he performs relatively simple operations. So, the point of the passage is very much that even laboring boys can contribute their ingenuity to improving the productivity of the mechanized factory floor.

In the first chapter of WN, Smith argues also that the activities of the sciences and philosophy, including his own, are part of the division of labor. He strongly implies that as the division of labor is extended within the sciences the growth of knowledge and productivity-enhancing discoveries will accelerate. [9]

Book 1 of WN is a lengthy affair. Smith summarizes it twice almost identically, first in the “general introduction” and then in the title of Book 1 as follows: “Of the Causes of Improvement in the productive Powers of Labour, and of the Order according to which its Produce is naturally distributed among the different Ranks of the People.”[10] This summary contains an implied contrast between the ‘artificial’ or social means of improving the productivity of the workforce, and the “natural” means of the distribution among the rest of the population of what this workforce produces. If we paraphrase Smith’s summary of his work into modern English, we can say that according to Smith the first book of Wealth of Nations is about the social causes of how workers are made to be more productive, and how what they produce is distributed among the rest of the population if that distribution is left undisturbed by government. So, the main two subjects of Book 1 are what we may call ‘productivity’ and ‘distribution.’

Smith’s main focus is to provide an analysis of a society familiar to his readers, and how to improve it for the better. We can illustrate the former by attending to how even in Smith’s summary and title the population he refers to is neither a homogeneous mass nor a small anarchic band of equals; it is a socially differentiated and hierarchical society like the one Smith’s readers lived in. That’s the meaning of Smith’s use of ‘ranks’ (and ‘society’/‘people’). Crucially, then, Smith endeavors to explain the world that he lives in.

Smith also explains the wider significance of the topic of Book 1 in the general introduction. While bracketing the significance of “soil, climate, or extent of territory of any particular nation,” Smith identifies two central factors to worker output per capita: “first…the skill, dexterity, and judgment with which its labour is generally applied; and, secondly, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed.” (WN Intro.3, p. 10; Smith uses the phrase “skill, dexterity, and judgment” three times in the General Introduction, and then again, for emphasis, in WN 1.1.1.) Smith then quickly explains that the development of the first of these causes is the more important one. Where the workforce lacks skill, dexterity, and judgment everyone will be impoverished and famine frequent. This means that where worker output per capita is high, hunger and dearth can be eliminated. This is the moral core of Smith’s political economy.[11]

Smith treats worker output per capita as a proportion like he does with nearly all major quantities in Wealth of Nations.[12] Policy can influence both sides of the proportion. So, in principle, population size ought to be rather important to Smith’s analysis. Yet, as Friedrich Engels noted in one of his first ‘Marxist’ bits of writing, Smith shows negligible interest in the significance of demography in his argument. Population size is only first emphasized by Malthus, who was a careful reader of Smith.[13]

It’s likely that this downplaying of the significance of the size of a population was deliberate on Smith’s part. Throughout Wealth of Nations, but, especially in Book IV, Smith is critical of Mercantile political economy of which he treats John Locke as the most significant representative. For Locke, “numbers of men” are central to the art of “government.” (Second Treatise, chapter V, section 42.) By treating population size as a minor factor, Smith invites focus on the mechanisms and mores that shape workers’ “skill, dexterity, and judgment.” This includes what modern economists would call their ‘human capital,’ but Smith’s view is more expansive than that because he also emphasizes workers’ judgment. So, lurking here is an account of how prudence and taste are developed in a population.[14] Smith completes that argument only in Book V of Wealth of Nations.

Let’s return to the two main stated themes of Book 1. In a commercial society, for Smith, the natural distribution of our production follows three main factors of production: labour, capital, and land, which have a counterpart in three distinct kinds of revenue streams that generate purchasing power:

The whole of what is annually either collected or produced by the labour of every society, or what comes to the same thing, the whole price of it, is in the manner originally distributed among some of its different members. Wages, profit, and rent, are the three original sources of all revenue as well as of all exchangeable value. (WN 1.6.17, p. 69)

These distinct revenue streams, in turn, map onto three great social orders or ranks (or as the Marxists would say, classes): workers; owner-entrepreneurs, whom Smith calls the merchant class; and land-holders. Of course, these categories can be sub-divided, say, between manufacturing laborers and agricultural ones or between entrepreneurs and bankers, and so on. Smith does often distinguish these when he discusses the details. Importantly, for Smith the interests of labourers, who are paid wages, and the owner-entrepreneurs who expect profits are generally opposed to each other. He thinks the landowners and the labourers can have shared interests.

Through these distinctions, Smith is creating an abstract model to be used in analysis and causal discovery. For, as Smith shows, in reality this natural distribution is always perverted and corrupted through the use of force, government connections, and government regulations. Books III–IV cover how feudalism, physiocracy, and mercantilism are, in part, systems of governance that undermine the natural distribution through the use of force.[15]

With this in place, let me return to the significance of population to Smith’s argument. After having explained the division of labor and its underlying mechanisms in the first two chapters, Smith adds an important dimension at the start of chapter 3: “As it is the power of exchanging that gives occasion to the division of labour, so the extent of this division must always be limited by the extent of that power, or, in other words, by the extent of the market.” (WN 1.3.1, p. 31) Crucially the extent or size of the market is at least partially constituted by the density and number of people involved. As he writes, for example, “There are some sorts of industry, even of the lowest kind, which can be carried on no where but in a great town.” (WN 1.3.2., p. 31) Undoubtedly, here Smith means a rich town, too, but part of what makes a “great town” great is its population size and density.

The upshot of Smith’s account of the division of labor is worth quoting:

It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people….Observe the accommodation of the most common artificer or day-labourer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation. (WN 1.1.11, p. 22)

Both of these sentences are significant. The second one is rightly extolled by friends of the market who emphasize that it can coordinate the economic activity of incomparably many people even if we cannot compute it in real time. The first sentence has two important features: first, that the division of labour is supposed to benefit (to use Rawls’ language) the least-advantaged. Second, this universal opulence that is the natural effect of the division of labor is a by-product of proper governance. As Smith shows in Book III of Wealth of Nations, the actual history of mankind is mostly a history of disordered and violent government.

Part of the point of Smith’s science of the legislator in Wealth of Nations, then, is to teach the art of government of managing a great people that facilitates “good government or happiness of their society.” (WN 5.1.f.51, p. 783) One of the first examples Smith offers of good governance is the state’s role in regulating and securing coins, weights, and measures (WN 1.4.7, pp. 40-1). When the state debases any of these Smith calls the effect ‘disordered.’ (WN 1.5.41, p. 63)

Importantly, Smith also inscribes governance and citizenship within the division of labor. This is eloquently expressed in a passage that he added to the sixth and final, 1790 edition of TMS that is worth quoting in conclusion:

The prudent man is not willing to subject himself to any responsibility which his duty does not impose upon him. He is not a bustler in business where he has no concern; is not a meddler in other people’s affairs; is not a professed counsellor or adviser, who obtrudes his advice where nobody is asking it. He confines himself, as much as his duty will permit, to his own affairs, and has no taste for that foolish importance which many people wish to derive from appearing to have some influence in the management of those of other people. He is averse to enter into any party disputes, hates faction, and is not always very forward to listen to the voice even of noble and great ambition. When distinctly called upon, he will not decline the service of his country, but he will not cabal in order to force himself into it, and would be much better pleased that the public business were well managed by some other person, than that he himself should have the trouble, and incur the responsibility, of managing it. In the bottom of his heart he would prefer the undisturbed enjoyment of secure tranquillity, not only to all the vain splendour of successful ambition, but to the real and solid glory of performing the greatest and most magnanimous actions. (TMS 6.1.13, pp. 215-216, emphasis added)

While drawing on the republican language that rejects faction and the spirit of party, Smith simultaneously rejects here the republican-democratic ideal of permanent, collective governance. Rather, Smith invents here liberal citizenship. The division of labor permits citizens to pursue activities other than ruling. For, as Smith discerns, many of us lack a taste for politics. As the last quoted sentence suggests, Smith is not wholly admiring of this preference. He thinks there is real and solid glory in public service, and heeding the call of public duty.

Smith is a friend of competitive markets and the division of labor and the institutions that secure these. But within the division of labor and the governance of these institutions, the population needs to be not just prudent, but also to become educated in skill, dexterity, and good judgment, as Smith shows in Book V.

Endnotes

[1] Brewer, Anthony. "Economic growth and technical change: John Rae's critique of Adam Smith," History of Political Economy 23.1 (1991): 1. Brewer cites Rae’s Statement of Some New Principles on the Subject of Political Economy.

[2] See the editors introduction of the Glasgow edition of TMS, p. 18

[3] That Smith is interested in analyzing per capita output is clear by the way Smith defines annual national purchasing power, which he treats as a ratio between the annual total worker output and the number of people who consume that output (subtracting net imports from abroad). Or to put this anachronistically, worker output per capita is fundamental to a nation’s wealth according to Smith

[4] This is consistent with and further articulated in Smith’s account of scientific discovery in his posthumously published “The History of Astronomy” in Essays on Philosophical Subjects.

[5] See Levy, David M. "Marxism and alienation." New Individualist Review 5 (1968): 34-41.

[6] Popular Political Economy. Four lectures delivered at the London Mechanics Institution (London: Charles and William Tait, 1827). https://oll.libertyfund.org/titles/hodgskin-popular-political-economy-four-lectures-delivered-at-the-london-me chanics-institution

[7] Peart, Sandra, and David M. Levy. The street porter and the philosopher: conversations on analytical egalitarianism. University of Michigan Press, 2009.

[8] Schliesser, Eric Adam Smith: Systematic Philosopher and Public Thinker (OUP 2017), chapter 8.

[9] Rosenberg, Nathan. "Adam Smith on the division of labour: two views or one?." Economica 32.126 (1965): 127-139.

[10] Why ‘almost’? In the introduction the last word of this summary is not ‘people’ but ‘society.’ In other places Smith does not use these interchangeably. However, both are politically constituted and have an implied social hierarchy (‘ranks’).

[11] Williams, Callum. "Famine: Adam Smith and Foucauldian Political Economy." Scottish Journal of Political Economy 62.2 (2015): 171-190.

[12] Schliesser, Eric, 'Smith and Anti-Mathematicism', Adam Smith: Systematic Philosopher and Public Thinker (OUP 2017), Chapter 13.; 13

[13] Friedrich Engels’ (1843/44) “Outlines of a Critique of Political Economy.” https://www.marxists.org/archive/marx/works/1844/df-jahrbucher/outlines.htm

[14] Fleischacker, Samuel. On Adam Smith's Wealth of Nations: A Philosophical Companion. Princeton University Press, 2009.

[15] Pack, Spencer J., and Eric Schliesser. "Adam Smith, natural movement and physics." Cambridge Journal of Economics 42.2 (2018): 505-521.

Perspective Essay Wealth of Nations, Book Two: Prudence, Competition, and Party Walls

Maria Pia Paganelli March 16, 2026

What is wealth? How do we increase it? These are some of the questions Adam Smith asks in his Wealth of Nations ([1776] 1981) and in particular in Book II. Smith opens the Wealth of Nations explaining that wealth is a product of the improvement of the productive power of labor, which is to say of division of labor. He then continues explaining that division of labor is possible when there is enough capital to support it. So how do we have enough capital to develop, support, and promote a productive division of labor and thus economic growth? This is the topic of Book II.

Smith attributes the remarkable economic growth that Scotland experienced in the 18th century to the development of a vigorous banking system, made prudent through competition.

In the 18th century, banks are a bit controversial. Some believe that banks, by introducing paper money, increase the quantity of money in a country, thus making it richer. Others claim that banks make a country poorer instead, because paper money substitutes for gold and silver as a means of domestic payment, thus decreasing the quantity of gold and silver, thereby decreasing the country’s wealth. Smith differs. For Smith, banks do help an economy to grow richer (not poorer) by decreasing (not increasing) the quantity of gold and silver in the country!

Smith’s logic relies on economic forces and government regulations to generate the prudent financial conduct needed for stable growth.

Money in Smith’s time is commodity money, a medium of exchange that has an alternative use, such as gold and silver. Banks can issue paper notes that circulate as money because they can be redeemed for gold and silver on demand. These paper notes are not receipts for deposits but sort of an “IOU.” Banks issue credit to merchants who promise to repay it with interest. And those notes circulate as means of payment. Smith explains that paper notes are a cheaper medium of exchange than gold and silver coins. Alvaro Perpere (2024) may help in understanding Smith’s logic.

Perpere (2024) explains that Smith adopts the medieval distinction that money can be both pecunia (medium of exchange) or capitale (capital). Gold and silver can be used as mediums of exchange (pecunia), but they can also be used as investment capital (capitale). If gold and silver are used as money, they cannot be used as capital. Smith compares the introduction of bank money to a highway in the sky. If a road is on the ground, that ground cannot be used to produce anything. But if that road is suspended in the sky, the ground below is now freed and can be used for agricultural purposes. Using a different medium of exchange, like paper, frees gold and silver from that function and allows them to be used for investment purposes.

The key assumption in Smith’s logic is that the demand for money is fixed at any given level of industry in a country, not on banks issuing notes. When banks introduce paper money, they free gold and silver from their function as a medium of exchange. That gold and silver can now go abroad in search of investment opportunities. Now that the gold and silver can go abroad they can generate returns that previously they could not.

It is harder, if not impossible, for paper money to go abroad because foreigners are unlikely to accept it, not knowing the issuer and not knowing if that paper would actually be converted into gold and silver on demand. For foreigners, a bank note may just be a piece of paper, not a claim on precious metals. Paper money is after all fiduciary money, money based on trust. Banks in the 18th century usually are local, their reputation (and thus the circulation of their notes) limited to a small area, because the trust customers give to the bankers is based on local knowledge. Gold and silver, on the other hand, are accepted everywhere since it is relatively easy to attest their veracity regardless of where one is. And so, contrary to mercantilists who fear the outflow of gold and silver, Smith is telling readers that when gold and silver leave the country, they generate more economic growth and wealth than when gold and silver are present in the country!

An objection to Smith’s logic is that the introduction of bank money would increase the quantity of money in the country, and thus raise prices. But for Smith this is not something to worry about. Smith explains that the demand for money is like a channel. If we pour too much water in it, the water will overflow. If we pour in more money than the economy wants, gold and silver will go abroad, thus leaving prices unchanged. Indeed, paper money, if in excess of its demand, will go back to its issuer. Merchants would redeem it for their gold and silver and would not keep that gold and silver idle at home. They would invest abroad. Domestic prices are not affected; the returns allow for higher consumption, which is to say, for more wealth. For this reason, Smith argues that an excess supply of money will not take place.

This objection to introducing bank money is based on the possibility of over issuing, that is, of imprudent behavior on the side of bankers. Banks, after all, have incentives to be imprudent and overissue notes, because the more paper money they have in circulation, the more they will earn in interest. But Smith does not believe overissuing would systematically take place. If it did happen in the past, Smith believes, it may have been out of ignorance, when banking was a new phenomenon. But with experience bankers learn it is in their interest to be prudent and not over-issue notes.

It is true that there have been some hiccups in the history of Scottish banking, but that was mostly due to inexperience. Thanks to competition, bankers learn that prudence is the best way to do banking. If a banker is tempted to overissue, the notes of the bank will come back because they are in excess of their demand. This means that the bank needs to have enough gold and silver to pay the notes that are coming back for redemption. But if the bank has over issued, it means that it issued more than its reserves of gold and silver. So the bank needs to find the gold and silver needed for redemption, often by sending agents to London. This means that the costs of getting the precious metals will be more than the returns they would get from the issued notes. This is not a good strategy, especially for the long run. It is a sure way to bankruptcy. If notes are convertible on demand, and if there are multiple banks to choose from, if bankers are not prudent on their own, competition will make them prudent. This is a lesson that, according to Smith, can quickly be learned.

That said, Smith does worry about a couple of imprudent practices which he fears competition will not correct. For those, Smith calls for government regulations. He is very much aware that all the parties involved want some specific agreements, so that the regulations are an infringement of natural liberty. But he deems them necessary, just like requiring “party walls” (the partition walls between houses meant to prevent the spreading of fire) is an infringement of natural liberty but necessary for preventing fire from spreading from house to house. That the house must have a partition is a violation of natural liberty, but it is necessary for the wellbeing of society.

One “party wall” Smith calls for is banning the option clause. The option clause is a cause that the bank puts on a note, and the receiver of the note willingly accepts. The clause says that the bank may not redeem the note on demand, but may postpone redemption for a specified time and pay interest for that suspension period. The clause is used by solvent but illiquid banks so that they can get liquidity without fearing a bank run and bankruptcy. But Smith fears that this instrument would be misused and would incentivize overissuing and thus cause unneeded crises. Banning it is a necessary party wall to impose prudence.

The second “party wall” Smith favors is a ban on small denomination notes. The working poor are paid with small denomination notes because of a chronic lack of small denomination coins. This is a solution to the problem of small coins that both parties welcome.

People pay attention to the solvency of the issuer of large denomination notes. If the issuers of large denomination notes should go bankrupt, the personal asset of the bankers is used to cover all the bank’s liability due to the unlimited liability that governed Scottish banks. So, if the issuer is not trustworthy, there is a lot to lose. And even in the worst case, should the banker not have enough to cover their liabilities, dealers of large denomination notes are usually relatively wealthy merchants, so they would be able to find ways to survive.

The situation is different for small denomination notes. People do not pay the same attention to issuers of small denomination notes, because the notes are of small denomination. They may not always have the assets to cover their liabilities. The problem is that small denomination notes circulate among the working poor. If “beggarly bankers” go bankrupt, as they often do, Smith says, the holders of the notes are left with nothing. This is a catastrophic situation for the working poor because they have very little to begin with. Thus, Smith concludes that small denomination notes should be avoided. Prudence should be imposed if the conditions are such that it would not emerge by itself. Smith thus fears that “beggarly bankers” who issue small denomination notes do not have the incentives to be as prudent or honest as one may hope for, and this is why this “party wall” is called for.

There is a situation for which Smith sees no solution, though, because prudence cannot emerge or be imposed. This may happen more with government notes than with bank notes proper.

Banks in Scotland are forbidden from lending to the government. But in the North American colonies, it is different. Governments themselves issue notes, or give monopolies to banks in exchange for lending to them. The colonial governments eliminate competition, imposing legal tender, forcing the colonists to accept the notes as payment, and the notes do not pay interest. Now there is no reason for not overissuing. In Scotland, a note redeemed six months in the future will earn interest. In the colonies, a note redeemed six years in the future will earn no interest. Notes lose value over time but colonists are forced to accept them anyway. Smith’s words are categorical: this is “an act of such violent injustice, [that] has scarce, perhaps, been attempted by the government of any other country which pretended to be free. It bears the evident marks of having originally been […] a scheme of fraudulent debtors to cheat their creditors” (WN II.ii.100).

His account of colonial banking indicates that what Smith really fears are monopoly and legal tender, especially if combined with inconvertibility. The colonial system is imprudent. On the other hand, his account of the banking system in Scotland explains to the readers of his time and ours that competition is the way to prudence and growth.

This is how Smith closes WN II.ii:

“The late multiplication of banking companies in both parts of the United Kingdom, an event by which many people have been much alarmed, instead of diminishing, increases the security of the publick. It obliges all of them to be more circumspect in their conduct, and, by not extending their currency beyond its due proportion to their cash, to guard themselves against those malicious runs, which the rivalship of so many competitors is always ready to bring upon them. It restrains the circulation of each particular company within a narrower circle, and reduces their circulating notes to a smaller number. By dividing the whole circulation into a greater number of parts, the failure of any one company, an accident which, in the course of things, must sometimes happen, becomes of less consequence to the publick. This free competition too obliges all bankers to be more liberal in their dealings with their customers, lest their rivals should carry them away. In general, if any branch of trade, or any division of labour, be advantageous to the publick, the freer and more general the competition, it will always be the more so” (WN II.ii. 106).

The lesson is thus clear: Welcome multiple banks of issue and make sure there is always full convertibility, and bankers will be prudent and the economy will be stable and prosperous. Today we do not have banks of issue and notes cannot be converted into gold and silver, yet Smith’s lesson still applies: competition is the most effective instrument to generate and guarantee prudence in banking.

References

Perpere, A. (2024). "Capital, interes y usura: tensiones y continuidades entre la escolastica franciscana y Adam Smith." Estudios Publicos 2(Adam Smith 300 anos): 291–310.

Smith, A. ([1776] 1981). An inquiry into the nature and causes of the wealth of nations. Indianapolis, Liberty Classics.

Perspective Essay Why Adam Smith Embraced Commercial Society: The Wealth of Nations, Book 3

Dennis C. Rasmussen March 23, 2026

If I were asked to name the single most important passage in Adam Smith’s corpus, my nominee would be the climactic claim of Book 3 of The Wealth of Nations: “commerce and manufactures gradually introduced order and good government, and with them, the liberty and security of individuals, among the inhabitants of the country, who had before lived almost in a continual state of war with their neighbours, and of servile dependency on their superiors. This, though it has been the least observed, is by far the most important of all their effects” (WN III.iv.4).[1]* Smith is, of course, best known as a defender and promoter of commercial society, and this is his most explicit and emphatic statement about what he saw as so beneficial about this kind of society: the promotion of liberty and security is by far the most important of all of commerce’s effects. In order to understand how exactly commerce helps to promote liberty and security, and why it is so critical that it do so, in Smith’s view, it will be helpful to step back and look at the broader narrative of Book 3.

Much of Book 3 is dedicated to a historical account of how and why the feudal order that prevailed throughout Europe for many centuries eventually gave way to a liberal, commercial order—that is, how a world dominated by hierarchy, dependence, and intrastate conflict was superseded by one in which the rule of law reigned and people enjoyed comparative freedom and safety. Smith’s account of how the feudal lords squandered their immense power for the sake of frivolous luxuries has become a famous one.

After the fall of the Roman empire, Smith recounts, the great landowners throughout Europe possessed huge estates over which they exercised almost complete control, because the kings’ authority was rarely strong enough to challenge them on a local level. Given the relative absence of luxuries and manufactured goods in these societies, the lords had little use for their wealth other than to “maintain” thousands of serfs, who in turn became utterly dependent on their patrons for sustenance, accommodation, and protection: “Every great landlord was a sort of petty prince. His tenants were his subjects. He was their judge, and in some respects their legislator in peace, and their leader in war. He made war at his own discretion, frequently against his neighbours, and sometimes against his sovereign” (WN III.ii.3; see also III.iv.7). Smith forcefully draws the reader’s attention to the serfs’ almost total lack of personal freedom: they could have no private property that was free from encroachment by their lord, they were bought and sold with the land and so were unable to move freely, they typically could not choose their own occupations, and they often had to obtain their lord’s consent to get married. In all, they were little better than slaves (see WN III.ii.8).

The kings struggled for centuries to limit the power of the lords without success, Smith writes, “but what all the violence of the feudal institutions could never have effected, the silent and insensible operation of foreign commerce and manufactures gradually brought about.” Once commerce expanded and luxuries were introduced, the lords finally had something on which to spend their wealth other than maintaining their serfs. These goods gave them a way to spend their money on themselves alone, one that they immediately adopted out of greed and vanity. Thus, “for a pair of diamond buckles perhaps, or for something as frivolous and useless, they exchanged the maintenance, or what is the same thing, the price of the maintenance of a thousand men for a year, and with it the whole weight and authority which it could give them” (WN III.iv.10).

After the lords began to spend the bulk of their wealth on luxuries, in other words, they could no longer afford to keep their dependents. And after the serfs were dismissed, Smith writes, “the great proprietors were no longer capable of interrupting the regular execution of justice, or of disturbing the peace of the country. Having sold their birth-right, not like Esau for a mess of pottage in a time of hunger and necessity, but in the wantonness of plenty, for trinkets and baubles, fitter to be the play-things of children than the serious pursuits of men, they became as insignificant as any substantial burgher or tradesman in a city” (WN III.iv.15). The fall of the lords resulted in an enormous increase in the power of the kings—as happened in Britain under the Tudors—who were then able to establish what Smith calls a “regular government,” meaning one that was strong enough to effectively enforce order and administer justice throughout the country (WN III.iv.15).

Once the people were no longer dependent on the lords, they not only enjoyed greater security—because the rule of law was enforced by the king—but also greater freedom or discretion, such as the choice of where to live and what occupation to practice. It was only after people gained this kind of freedom of choice, Smith says, that they “became really free in our present sense of the word Freedom” (WN III.iii.5). Hence the upshot of Smith’s story is, to repeat, that commerce helped to introduce “order and good government, and with them, the liberty and security of individuals … who had before lived almost in a continual state of war with their neighbours, and of servile dependency on their superiors” (WN III.iv.4).

Later in The Wealth of Nations, Smith reveals that the social orders that are the focus of Book 3—feudal Europe and the western Europe of his own time—constitute the latter stages of a four-stage process or schema (see WN V.i-ii). He suggests that societies generally progress through hunting, shepherding, agricultural, and commercial stages, and that feudal Europe corresponded to the third, agricultural stage, while western Europe in the eighteenth century corresponded to the final, commercial stage.

Smith’s four-stages schema helps to extend and reinforce the lesson that he derives from the narrative about the fall of the feudal lords in Book 3. The basics can be summarized in the following table:

Let’s unpack this a bit. Smith suggests that in the first stage of society, such as that found among many Native American tribes, there is no domestication of animals or raising of crops; people subsist by hunting, fishing, and gathering. Within these societies, there is very little in the way of private property—nothing that “exceeds the value of two or three days labour” (WN V.i.b.2). As a result, there is also little need for “any established government or any regular administration of justice” (WN V.i.b.2).

Given the absence of much economic inequality or government in the hunting stage, Smith notes, individuals generally enjoy a great deal of personal freedom or independence. The cost of this seemingly easy lifestyle, however, is what he describes as “universal poverty” (WN V.i.b.7). On the very first page of the book, he notes that such societies are often “so miserably poor, that, from mere want, they are frequently reduced … to the necessity sometimes of directly destroying, and sometimes of abandoning their infants, their old people, and those afflicted with lingering diseases, to perish with hunger, or to be devoured by wild beasts” (WN intro.4).

Smith’s chief examples of the second, shepherding stage of society are the “Tartars” (meaning the inhabitants of central Asia), Arabs, and Scottish Highlanders. In these societies, subsistence is not quite as precarious as in the hunting stage. Because people own and raise animals, meat and milk are usually readily available. The ownership of herds introduces real economic inequality for the first time, as well as the need for “some degree of … civil government” to protect the property of the better-off (WN V.i.b.12).

Perhaps the key feature of the shepherding stage, however, is the rise of personal dependence. Smith suggests that, given the absence of luxuries and manufactured goods in this stage, the only way for wealthy individuals to use their wealth is to “maintain” or provide for others—sometimes thousands of others—which in turn renders those others utterly dependent on them, much the way that the serfs were dependent on the lords during the feudal era. In fact, Smith writes of the shepherding stage that there is “no period … in which authority and subordination are more perfectly established” (WN V.i.b.7). If the keynote of life in the hunting stage is dire poverty, then the central fact of shepherding life is the rise of subservience among all but the few wealthiest individuals.

The third, agricultural stage commences when people begin owning and cultivating the land. Smith’s chief example here is the feudal period in Europe that he describes so painstakingly—and harshly—in Book 3. The ownership of land and the greater economic inequality of this stage result in the need for an even more extensive and complicated government than had been found in the shepherding stage. The problem of dependence from the previous stage, however, very much remains. Property is still a source of great power—although land comes to be more important than herds—and the wealthy still have little on which to spend their wealth other than the maintenance of a large number of dependents (see WN III.iv.5).

We have already seen that Smith regarded the prevalence of “servile dependency” in feudal Europe—dependence that ran so deep that it resembled slavery—as the key obstacle to liberty and security during this era (WN III.iv.4). This is, again, why he saw the rise of commerce and the concomitant fall of the feudal lords as so important.

The fourth and final stage of Smith’s schema, commercial society, emerged in the western Europe of his time as international trade grew more extensive and occupations grew more specialized. These developments led to even greater economic inequality than had existed in the agricultural stage, at least in strictly numerical terms, but the enormous productivity that they unleashed also made possible what Smith describes as “that universal opulence which extends itself to the lowest ranks of the people” (WN I.i.10). As John Locke had famously argued, even the poor in commercial society are materially better off than even the rich in precommercial societies (see WN I.i.11).

Even more importantly, for Smith, in commercial society the problem of personal dependence—the problem that had dominated the shepherding and agricultural stages of society—is greatly mitigated. In commercial society, he maintains, the wealthy may enjoy a great deal of purchasing power, but their wealth does not lead to direct authority over others since everyone stands in a market relationship with everyone else and there are generally a multitude of potential buyers, sellers, and employers (see WN I.v.3; III.iv.11–12; and V.i.b.7).

Of course, the wealthy may support many others indirectly by employing them or by buying goods that they produce, but Smith argues that this indirect support is not enough to place these people at their command. Even if employees are likely to try to please their employers in order to keep their jobs, for example, it is highly unlikely that they would surrender their rights to them or accompany them into battle, the way that the serfs were compelled to do for their lords.

Notice also that, according to Smith, people enjoy greater personal independence in commercial society not despite the fact that the government is even stronger than it had been in earlier stages, but precisely because it is stronger. As the narrative of Book 3 shows, the rise of liberty and security was made possible by the establishment of a “regular government” that was able to effectively enforce order and administer justice throughout the country (WN III.iv.15). So much for the caricature of Smith as a dogmatic opponent of all government.

This is, in my view, the key takeaway from Smith’s four-stages schema: in the society with the most property, the most inequality, and the most government, the independence that had characterized the society with the least property, the least inequality, and the least government reemerges. It is a different kind of independence, and indeed a preferable kind of independence, because it results not from a dearth of property that makes government unnecessary but rather from the effective rule of law and the interdependence of the market. (Hence the final box in the table above, emphasized in italics.) Instead of liberty and security amid “universal poverty,” as in the hunting stage, people enjoy liberty and security along with “universal opulence.” As Smith indicates in the passage whose importance I stressed at the outset, this is the key reason why he defended and promoted commercial society, whatever flaws it may have.

Endnotes

[1] I have also called attention to the importance of this passage in Dennis C. Rasmussen, The Problems and Promise of Commercial Society: Adam Smith’s Response to Rousseau (Pennsylvania State University Press, 2008), especially 136-37, but also chapter 4 more generally; and Dennis C. Rasmussen, The Infidel and the Professor: David Hume, Adam Smith, and the Friendship That Shaped Modern Thought (Princeton University Press, 2017), especially 162-65. The next five paragraphs of this essay draw on these earlier discussions, and I am grateful to the publishers for permission to reuse this material.

Perspective Essay Book IV of Wealth of Nations: Political Economy as Moral Philosophy

Brianne Wolf March 30, 2026

While Adam Smith has often been thought of as only the father of economics, most scholars now agree that the projects undertaken in the two books published during his lifetime, Theory of Moral Sentiments (TMS) and Wealth of Nations (WN) are not separate endeavors of moral philosophy and political economy, respectively, but two ways of approaching one, unified project about realizing human flourishing. Though it is recognized that Smith’s moral philosophy informs, supplements, and supports his economic project, what has not been explored as much is that Smith’s political economy also has moral implications.

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” (CAS, 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.

Perspective Essay “Very difficult, perhaps altogether impossible”: Smith’s political science

Jacob T. Levy April 6, 2026

“Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things. All governments which thwart this natural course, which force things into another channel, or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”

The passage, attributed to Adam Smith posthumously by Dugald Stewart, is a popular one in some circles and not only (though certainly in part) for its appeal to low taxes. It seems to offer a comforting assurance about politics. The “natural course of things” will mean that politics will tend to work out reasonably well. Governing well is not difficult, as it mostly consists of not doing things: not going to war, not raising taxes. To the modern economists who think that they are the true intellectual heirs of WN, the implication that political science isn’t that difficult might be an added bonus.

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 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.

Endnotes

[1] Smith presciently noted that the American militias of 1775-76 would have to develop into such an army if the war that had recently broken out lasted for a few years, which of course they did, under Washington’s leadership and Lafayette’s training.

Perspective Essay Of Course We’re Still Reading Wealth of Nations

Craig Smith April 13, 2026

The anniversary of the publication of the Wealth of Nations gives us cause to pause and consider what Adam Smith achieved in writing that book. He is, as the commonplace goes, the founding father of economics, and the fact that we are marking the publication of his great book, and in doing so acknowledging its impact on the development of that discipline, is a concrete symbol of his lasting achievement.

In our times it seems that there are two common responses to the anniversary of a ‘great’ book. The first of these is found in those commentators who seek a revisionist account of the significance of the individual and their work, aiming to de-bunk or de-throne the great book. We find an example of this predictable, yet tired, response in an article in The Economist at the end of 2025 that sought to undermine the significance and originality of Smith’s ideas.

One might be forgiven for taking such a click-driven attempt at revising the reputation of a historical figure as a symbol of the decline of seriousness in our culture. But Smith himself would have been well familiar with such reviews in the scurrilous pamphlets and newspapers of his own day, and he would doubtless have treated them with the bemused disdain expected of the Enlightenment literati. In his correspondence we see Smith acknowledge the changes that he made in response to the views of his critics, distinguishing those he saw as substantive and ignoring those he saw as misinterpretations. As he did so he noted that ‘Authors are not much disposed to alter the opinions they have once published.’ (Smith Corr: 250). That he was willing to do this when he thought necessary suggests that he was not doctrinaire in his views and that he was open-minded to persuasion.

Moreover, as Glory Liu demonstrates in her book Adam Smith’s America: How a Scottish Philosopher Became an Icon of American Capitalism, whatever we may think of Smith and the Wealth of Nations they did become symbolic of the new discipline of economics through the centuries and it hardly befits us to question the judgments of past generations’s assessments of the value of a work they read for themselves for their own purposes. It is a matter of historical fact that the book became a ‘classic’.

The fact that the Wealth of Nations was well-received by his contemporaries and became a must-read for the educated public shows that Smith’s book met with favour and was influential. Though his prose and style of presentation may seem dated to us today, they were well-regarded at the time and demonstrated a system of ideas backed by examples and empirical data. All of this was brought to bear to make a point, a point that was both academic – that commercial society was something new and as a result we had to think anew about its economic structure – and political, that the arguments presented by interested parties in favour of particular economic and political policies were in dire need of reconfiguration. But why should a 250 year old book which Smith himself billed in a letter to his friend Andreas Holt as a ‘very violent attack’ on ‘the whole commercial system of Great Britain’ (Smith Corr: 251) be thought helpful to us today?

This leads us to the second common response to an anniversary, the urge to ask what we can learn from the book. What does the Wealth of Nations say to us, and what would Adam Smith make of the economics of our times? In December 2025 the German newspaper Die Zeit did just that. They resurrected Adam Smith through AI and interviewed him about recent events. As anachronistic, and perhaps narcissistic, as it might seem to ask a 250 year old book and its author to speak to our problems, the AI ‘Smith’ acquitted himself well, appearing suitably baffled that trade wars and tariffs remain a part of our own economic life. Smith might have hoped that his book and 250 years of subsequent effort could persuade politicians of the folly of seeking to manipulate economic activity in such a way, but that is to misunderstand Smith’s pragmatic sense of the likelihood of success for his book. He noted ‘To expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it. Not only the prejudices of the publick, but what is more unconquerable, the private interest of many individuals, irresistibly oppose it.’ (WN IV.i.43: 471).

So, Smith was modest in his expectations for the influence of his book upon those whose self-interest is best served by restricting competition and securing a livelihood through the power of the state. In some areas he obviously succeeded in shaping the course of both the discipline and the public discourse. We no longer think that wealth consists in gold and silver, and we understand that our world is characterised by specialisation and interdependence. But in his attacks on empire and on colonialism we find him much less successful – as the history of the British Empire in the Nineteenth Century attests.

Smith has been more fortunate than his dear friend David Hume in that his opposition to empire and slavery have not seen his reputation suffer among those who consider it a worthwhile use of their time to judge the past by present mores. His understanding that the interests of some would likely prevent the attainment of the system of natural liberty in its full form, suggests that he had a different hope in view for his book. The point was not to create a school of ideologues seeking to impose his system. Instead, it was to influence the public debate by providing so clear a system of ideas that it became much more difficult to advance policies based on false systems and personal enrichment. That free trade became synonymous with nineteenth century British liberalism is largely down to Smith’s success in kick-starting the discipline of political economy while using it to make political points about British economic policy.

As someone who initiated a discipline we cannot hope for him to be an all-seeing sage and expect the truth to lie somewhere in the Wealth of Nations if we only look hard enough. Karl Marx had the misfortune to encourage such a cult-like status among the followers who scratched over his writings to seek meaning that they might apply in their own lives. Adam Smith, ‘founding father’ that he may be, was fortunate not to inspire that level of devotion.

In expecting Adam Smith to speak directly to our current economic situation, we also face the danger of a lack of charity if we point out the things that we now know that he got wrong and which have been ‘corrected’ by the work of subsequent thinkers. Plainly no easy balance sheet can be constructed if we take a 250 year old book that established a discipline and try to apply it today. We might, however, take a moment to think about what Smith got wrong, and where he may not be a reliable guide.

One big example pointed to in writings that explore Smith’s place in the history of economic thought is his attempt to create an objective theory of value from labour. This attempt flows naturally enough from the guiding ideas of trade and the division of labour that Smith places at the heart of his analysis. Viewed from a contemporary setting on the other side of the ‘marginal revolution’ this looks like a major misstep. This, in addition to being uncharitable, is also a mistake. It is a mistake because Smith saw that the theoretical search for a measure of value in labour was doomed to fail in practice and instead suggested that we rely on prices derived from market exchanges as a more practicable guide (WN I.v). A century of economic thinkers followed him in trying and failing to solve the puzzle of the basis of a labour theory, but this in itself would not been seen as a waste by Smith. As we see in his essay on the History of Astronomy, he well knew knowledge advances slowly and systems of ideas are eventually replaced by better systems that more accurately explain the matter. We have to go up a dead end to discover that it is such.

But more than that, he understood that economic interaction was more complex than the simplified exchange examples he uses to illustrate his theory. Smith understood the value of generalising from evidence to create models of types of situations that might then illustrate the point under discussion, but here again we see some of those thinkers who were influenced by him taking up his ideas in a less than helpful fashion. Smith’s identification of types of society characterised by the dominant mode of subsistence, the ‘four stage’ theory of hunter, shepherd, farmer, and commercial societies, encouraged thinkers like Hegel and Marx to develop scientific theories of historical development of a sort absent from Smith’s work and in direct contradiction to the spirit of his inquiry. Smith has no notion of historical inevitability, and so he would not have dreamt that his writings could foresee what our own societies have become. Indeed Smith more often than not describes the ‘natural’ track of economic development only to then explain that human institutions have redirected that course. The analysis of the rise and fall of feudalism in Europe that we find in Book III of the Wealth of Nations is a masterpiece of such analysis that demonstrated the difference between how we can explain economic change on a theoretical level and yet realise that the reality of historical change is quite different for those living through it.

Perhaps, then, that is the lesson that we ought to take in reflecting on what Adam Smith can say to us today. When Smith defended what he called ‘the obvious and simple system of natural liberty’ where ‘The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient: the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society.’ (WN IV.ix.51: 687). He was not making a doctrinaire point about self-interest or claiming that there was no role for the government; the whole of Book V is about what that role ought best to be. Instead he was drawing a conclusion from the evidence as he saw it. His aim was to puncture the pretensions of those, whether merchants or ‘pretended doctors’ (WN IV.iii.c.14: 496) advancing false systems of understanding the economy, who sought to direct opinion on economic matters. In doing so he understood that he was unlikely to be completely successful, but he could at least make advancing such views as difficult and intellectually embarrassing as possible for those whose ideas he opposed.

That the Wealth of Nations is a classic, that it has had a profound impact on the discipline of economics and the way that the educated public think about political economy is undeniable. We’re still talking about it after 250 years. That its author had a more modest sense of the likely impact of his system given the nature of human life, the prejudices of the public, and their tendency to make interested arguments where wealth is to be made, perhaps explain why we do not live in the system of natural liberty. If someone were to check in again on the 500th anniversary of the Wealth of Nations, in all probability Adam Smith would expect the same mixed report card. Even a text as great as the Wealth of Nations can’t fully inoculate against human folly, but perhaps we can still learn a few lessons from Smith’s faith in clear argument and empirical evidence in countering the more damaging economic follies of our own times.

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Compounding Interest: Revisiting The Wealth of Nations at 250

Sections

Perspective Essay Innovation and Governance in Book 1 of Wealth of Nations

Perspective Essay Wealth of Nations, Book Two: Prudence, Competition, and Party Walls

Perspective Essay Why Adam Smith Embraced Commercial Society: The Wealth of Nations, Book 3

Perspective Essay Book IV of Wealth of Nations: Political Economy as Moral Philosophy

Perspective Essay “Very difficult, perhaps altogether impossible”: Smith’s political science

Perspective Essay Of Course We’re Still Reading Wealth of Nations

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