Adam Smith

Adam Smith and Mercantilism

Overview

  • Lecture Context: Presentation by Dr. Clare Talwalker, PE 100, includes a PowerPoint accompaniments.

  • Contemporary Misreading of Smith: Neoliberalism is described in 2020 by economists Nils Gilman and Yakov Feyfin as prioritizing capital appreciation over wage growth.

Thematic Areas of Study

  • Context of Smith’s Writing: Mercantilism and Feudal Agriculture

  • Changing Views of Wealth: The Physiocrats

  • Smith’s Perspective on History and Human Nature

  • Critique of Mercantilism by Adam Smith

Historical Context of Adam Smith

  • Life Span: 1723-1790

    • Key Works:

    • The Theory of Moral Sentiments (1759)

    • The Wealth of Nations (1776)

  • Geographical Context:

    • 1700s Britain characterized by enclosures, itinerant poor, mercantilism, the slave trade, and trade in foreign goods.

  • Quote by Robert Heilbroner:

    • “There is nothing which requires more to be illustrated by philosophy than trade does.” Signifies the emergence of economists.

  • Influence of Physiocracy:

    • Francois Quesney, founder of the Physiocracy school, is an important figure influencing Smith.

  • Smith’s Role:

    • Recognized as a theorist of preindustrial capitalism within the mercantile system.

    • Founding member of Select Society; contributed to the formation of a modern public sphere.

Mercantilism and the Atlantic Economy

  • Key Historical Events:

    • Boston Tea Party (1773): Represents colonial resistance to mercantile practices.

    • East India House in London (late 18th century): Highlights the criticism of monopolies.

  • Crucial Excerpt from Smith:

    • “Such exclusive companies, therefore, are nuisances in every respect; always more or less inconvenient to the countries in which they are established, and destructive to those which have the misfortune to fall under their government.” (Smith: 373)

  • Historical Economic Trends:

    • Shift from Bullionism (1500s-1600s) to a broader understanding of value through transactions.

    • Battle of Plassey (1757): East India Company's gain of power in India.

    • Historical Globalization: 1571 marks the beginning, where China sought silver from the New World indicating early globalization.

Changing Views of Wealth

  • Emergence of the Economy:

    • Concept of the economy or homo oeconomicus as a distinct domain.

  • Different Perspectives:

    • Early Mercantilists: Focus on bullion as wealth.

    • Later Mercantilists: Expanded focus on foreign trade, i.e., transactions and goods.

    • French Physiocrats: Emphasized that true wealth derived from the land's surplus produced by cultivators, functioning like blood in a society’s economy. They viewed manufacturers, merchants, and artisan producers as parasitic.

  • Adam Smith's Contribution:

    • Identified labor as the true source of value and wealth. He synthesizes concepts from later mercantilism and Physiocracy.

  • Concept of Wealth Distribution:

    • Wealth manifests as profits of stock, rents, and wages among different sectors: capitalists, landlords, and laborers. This idea underlies the modern understanding of GDP.

Smith on Currency and Goods

  • Circulation and Essentials:

    • Emphasized that fleets and armies are maintained through consumable goods rather than merely gold and silver. (Smith: 285)

  • Argument against hoarding:

    • Quote from Smith:

    • “Were [gold and silver] ever to be accumulated beyond this quantity, their transportation is so easy, and the loss which attends their lying idle and unemployed so great, that no law could prevent their being immediately sent out of the country.” (Smith: 285)

  • Theoretical Foundations of Economic Growth:

    • Land constituted the ultimate wealth.

    • Law of Population: When fertile land is abundant, labor demand increases resulting in rising wages, which subsequently attract more labor, leading to a decline in wages as supply increases.

    • Law of Accumulation: When fertile land is abundant, it causes wealth surplus, evidenced through agricultural production.

Historical Stages According to Smith

  • Ages of History:

    • Classification of Ages:

    1. Hunting

    2. Shepherding

    3. Husbandry (crops and animals)

    4. Commerce

  • Wealth during the Age of Commerce:

    • Accumulated wealth comprises stock, rents, and wages.

  • Concept of 'Natural Laws':

    • These laws govern behavior and economic activities during the Age of Commerce.

  • Home Bias Theory:

    • Smith discusses that capital tends to circulate around home centers: “Home is, in this manner, the center, if I may say so, round which the capitals of the inhabitants of every country are continually circulating… ” (Smith, pg 290).

  • Invisible Hand Theory:

    • Smith posits that self-interest in producing valuable products inadvertently benefits public welfare, contributing to the nation's overall wealth. (Smith, pg 291-292).

Smith’s Critique of Mercantilism

  • Broader Concept of Wealth:

    • Emphasized that wealth is more than mere accumulation of gold and silver.

  • Metaphor for Economic Health:

    • “Great Britain resembles one of those unwholesome bodies in which some of the vital parts are overgrown.” (Smith: 353) This suggests that monopolies can distort national economic structure.

  • Consequences of Merchant Monopolies:

    • These monopolies foster unnatural greed and limit individual investment choices in labor and capital, which likely results in lowered wages, profits, and rent.

  • Impact on Mobility:

    • Emphasizes the constriction of capital and labor mobility due to monopolistic practices.

Historical Context of Adam Smith's Work

  • Life Span: 1723-1790

  • Key Works:

    • The Theory of Moral Sentiments (1759)

    • The Wealth of Nations (1776)

  • Geographical Context: 1700s Britain characterized by enclosures, itinerant poor, mercantilism, the slave trade, and trade in foreign goods.

  • Influence of Physiocracy: Francois Quesney, founder of the Physiocracy school, is an important figure influencing Smith.

  • Smith’s Role: Recognized as a theorist of preindustrial capitalism within the mercantile system; contributed to the formation of a modern public sphere.

  • Context of Smith’s Writing: Mercantilism and Feudal Agriculture.

Views on Human Nature

  • Smith’s work considers human nature in the context of history and economic behavior, particularly self-interest.

The State of Nature

  • Implicit in Smith's stages of history, which model societal development from basic forms (Hunting, Shepherding) to more complex economic systems, suggesting a progression away from a 'natural' state.

The Nature/Role of the State/Sovereignty

  • While not explicitly detailed on the role of the state, Smith critiques state-sanctioned monopolies and exclusive companies, suggesting a preference for less government intervention in trade that stifles competition and individual liberty.

Views of Society/Social Groups

  • Wealth Distribution: Society is seen as divided into sectors receiving profits of stock (capitalists), rents (landlords), and wages (laborers).

  • Critique of Monopolies: Merchant monopolies disadvantage specific groups, fostering unnatural greed and limiting individual investment choices for labor and capital, thus lowering wages, profits, and rent for others.

Interdependency vs. Self-sufficiency

  • Implied through the Invisible Hand Theory, where self-interested economic activity (specialization, trade) inadvertently benefits public welfare and contributes to the nation's overall wealth, suggesting interdependency rather than self-sufficiency.

Pre-Market vs. Market Exchange

  • Ages of History: Smith classifies historical ages, moving from hunting and shepherding through husbandry to commerce, indicating a progression towards market exchange as the primary economic system.

  • Age of Commerce: Characterized by accumulated wealth comprising stock, rents, and wages.

Self-interest vs. the Public Good/the Common Good/Views of Justice

  • Invisible Hand Theory: Smith posits that individuals, pursuing their self-interest in producing valuable products, inadvertently benefit public welfare and contribute to the nation's overall wealth. This mechanism balances self-interest with the public good.

Reason/Rationality

  • Implicit in Smith’s economic theories, particularly in his arguments against hoarding wealth and the predictable outcomes of market forces (

    • “Were [gold and silver] ever to be accumulated beyond this quantity, their transportation is so easy, and the loss which attends their lying idle and unemployed so great, that no law could prevent their being immediately sent out of the country.” (Smith: 285)
      )

Freedom/Liberty

  • Advocated for freedom from restrictive mercantile practices and monopolies, emphasizing that such systems constrict capital and labor mobility and limit individual choices, thereby restricting economic liberty.

Property/Wealth Acquisition

  • Changing Views of Wealth: Smith identified labor as the true source of value and wealth, moving beyond earlier mercantilist views of bullion or physiocratic views of land as the sole source. Wealth manifests as profits, rents, and wages.

  • Law of Accumulation: When fertile land is abundant, it causes a wealth surplus, evidenced through agricultural production.

Labor/The Division of Labor

  • Labor as the true source of value and wealth.

  • Law of Population: When fertile land is abundant, labor demand increases, leading to rising wages, which subsequently attract more labor, eventually leading to a decline in wages as supply increases. This mechanism is foundational to understanding labor market dynamics, a precursor to explicit discussions on the division of labor.

Poverty and Wealth, or Equality/Inequality

  • Wealth Distribution: Wealth is distributed as profits of stock, rents, and wages among capitalists, landlords, and laborers. This model inherently describes an unequal distribution based on one's position in the economic structure.

  • Consequences of Merchant Monopolies: These monopolies likely result in lowered wages, profits, and rent, exacerbating inequality and potentially increasing poverty for those outside the monopolistic control.

Redistribution/Taxation/Government Spending

  • This specific note does not contain details on Smith’s views on redistribution, taxation, or government spending.

Markets, Money, Value, and Prices

  • Changing Views of Wealth: Progressed from early mercantilist focus on bullion, to later mercantilist focus on foreign trade, to physiocratic focus on land surplus, to Smith's labor theory of value.

  • Smith's Contribution: Identified labor as the true source of value and wealth.

  • Money and Currency: Emphasized that fleets and armies are maintained through consumable goods rather than merely gold and silver (

    • "Were [gold and silver] ever to be accumulated beyond this quantity, their transportation is so easy, and the loss which attends their lying idle and unemployed so great, that no law could prevent their being immediately sent out of the country." (Smith: 285)
      ).

Monopolies, “Combinations”

  • Critique of Mercantilism: Smith strongly criticized monopolies and exclusive companies.

  • Crucial Excerpt from Smith:

    • “Such exclusive companies, therefore, are nuisances in every respect; always more or less inconvenient to the countries in which they are established, and destructive to those which have the misfortune to fall under their government.” (Smith: 373)

  • Metaphor for Economic Health: He described Great Britain under monopolies as an "unwholesome body in which some of the vital parts are overgrown" (Smith: 353), suggesting market distortion.

  • Consequences: Monopolies foster unnatural greed and limit individual investment choices in labor and capital, resulting in lowered wages, profits, and rent, and the constriction of capital and labor mobility.