Adam Smith on consumption as the only end and purpose of production

Adam Smith

Found in An Inquiry Into the Nature and Causes of the Wealth of Nations (Cannan ed.), vol. 2

The Scottish moral philosopher Adam Smith (1723–1790) was the author of two books, The Theory of Moral Sentiments (1759) and An Inquiry into the Nature and Causes of the Wealth of Nations (1776).

In Book IV of Wealth of Nations, Smith explores two different systems of political economy, beginning with the mercantile system. Mercantilism was the reigning political ideology of Smith’s day, and the one against which he argues in this book. (When Smith refers to “the very violent attack I had made upon the whole commercial system of Great Britain” (26 October 1780, Letter from Adam Smith to Andreas Holt), the attack is Wealth of Nations and the commercial system in question is mercantilism.)

In Smith’s conclusion of the Book IV discussion of the mercantile system, he explains why it is so wrongheaded:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer. The maxim is so perfectly self-evident, that it would be absurd to attempt to prove it. But in the mercantile system, the interest of the consumer is almost constantly sacrificed to that of the producer; and it seems to consider production, and not consumption, as the ultimate end and object of all industry and commerce. (IV.viii.49)

Instead, the mercantile system encouraged a pervasive and sprawling set of bounties (subsidies), duties (tariffs), and bans on competition meant to advantage the merchants and manufacturers of domestic industry.

The argument behind these laws was that international trade was carried out in the international “currency” of gold and silver, so when the country’s goods were sold outside of the country (exported), exporters received precious metals for their goods. Purchases of foreign (imported) goods were paid for in precious metals that left the country. Mercantilism held that the country with the largest reserves of gold and silver (exchanged for national currency) was the richest country. This argument is in contrast to Smith’s conception of wealth as the ability of the people within a country to buy the things they want and need—a concept that supports the idea of consumption as the purpose of economic activity.

So, although mercantilism was ostensibly about more than propping up merchants and manufacturers, Smith says that “It cannot be very difficult to determine who have been the contrivers of this whole mercantile system” (IV.viii.54). The system was designed by the producers and merchants whose inputs and exports were subsidized and whose competition was taxed and banned.

The mercantile belief that the wealth of nations consisted in a country’s stores of precious metals had wide-ranging implications, shaping not just global trade but also colonization, foreign alliances, and domestic economic policies.