Adam Smith and the Uniform Quest for Betterment
Found in An Inquiry Into the Nature and Causes of the Wealth of Nations (Cannan ed.), vol. 1
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 his discussion of “unproductive” labour in Book II, chapter 3 of An Inquiry into the Nature and Causes of the Wealth of Nations, Smith writes:
In his discussion of “unproductive” labour in Book II, chapter 3 of An Inquiry into the Nature and Causes of the Wealth of Nations, Smith writes:
This frugality and good conduct, however, is upon most occasions, it appears from experience, sufficient to compensate, not only the private prodigality and misconduct of individuals, but the public extravagance of government. The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things towards improvement, in spite both of the extravagance of government and of the greatest errors of administration. Like the unknown principle of animal life, it frequently restores health and vigour to the constitution, in spite, not only of the disease, but of the absurd prescriptions of the doctor. (WN II.iii.31)
In this chapter, Adam Smith discusses “productive labour”, which contributes to economic growth through investment, and “unproductive labour”, which meets consumption needs or provides important services but doesn’t contribute to investment. Unproductive labour provides things like arts and music, household service, government administration, the administration of justice, and military defence.
“Productive” labour is important because humans are always consuming resources. Without economic growth, consuming resources means consuming the capital that contributes to the maintenance of the population and (eventually) the opulence of the nation.
Although Smith wants to convince his reader that productive labour is important and ought to be supported, Smith realizes this isn’t and won’t be widely understood. Because successful investments generate profits, owners of capital are rewarded for putting their money to work rather than using it for consumption. In other words, they are rewarded for their “frugality”.
In a free market, investment makes a profit because it is producing wanted goods or services—profit signals that the money is helping to better the condition of others. The profit is then used by the owner of capital who receives it in return for their investment to better their own condition, both by reinvesting a portion and by meeting their own wants and needs.
The motivation that profits provide are so great, says Smith, that they’ve caused economic growth that greatly exceeds the consumption of resources for “unproductive” labour and through the resources destroyed by wars (almost constant in Europe), natural disasters (plague, fire), and errors in investment and administration.