Category: The Wealth of Nations

This very short chapter deals with drawbacks.  I’d have had an easier time of it if I knew what drawbacks are.  Next chapter is about bounties, and the same applies.  As near as I can tell, a drawback is a refund of a portion of whatever duty is charged on export.

Page 389: “They tend not to overturn that balance which naturally establishes itself among all the various employments of society.”  My problem here is that it doesn’t make sense to me to speak of some sort of natural balance of employments and then see interference by the State as external to this; the State is an integral, inevitable part of capitalism, and when it interferes in the market, it is (to the extent it does so successfully from the point of view of the capitalists) doing exactly what it is supposed to do.  It is like trying to understand the movement of an orbiting body by examining the centrifugal force, but seeing gravity as an unnatural interference.

In this chapter Smith gets into restrictions on trade in some detail.  In brief, he argues that restricting trade, while not always a mistake, will never be advantageous economically to society as a whole, but at most to certain small sections of it.  He address balance of trade, and makes some interesting points.  In brief, he claims that it is a mistake for nations to worry about the balance of trade, because even if the balance favors country A over country B, both countries are nevertheless gaining by free trade; it is just that country A is gaining more.  Attempts to correct this, will harm the economies of both countries.  I have no idea if this is true, frankly; or if it was true in his time, and no longer true in ours.  But either way, it certainly emphasizes  (if any emphasis were necessary by this time!) the close ties between the market economy, and the nation-state.

He observes on page 372 that there is no certain way to no which of two countries is favored by the balance of trade; I suspect this is out of date.  “National prejudice and animosity, prompted always by the private interest of particular traders, are the principles which generally direct our judgment upon all questions concerning [the balance of trade].”  Maybe.  Certainly the private interests play a role, but I wonder if, today, “national prejudice and animosity” are not the product of economic competition between nations, rather more than the reverse.

Page 373: “The ordinary state of debt and credit between any two places is not always entirely regulated by the ordinary course of their dealings with one another; but it is often influenced by that of the dealings of either with many other places.”  If he had only known!  Far, far more true today!

Page 375: On the value of coinage in different countries:  “In France, the workmanship, as you pay for it, adds to the value, in the same manner as to that of wrought plate.  A sum of French money, therefore, containing a certain weight of pure silver, is more valuable than a sum of English money containing an equal weight of pure silver, and must require more bullion, or other commodities, to purchase it.”

Page 377: “Nothing, however, can be more absurd than this whole doctrine of the balance of trade, upon which, not only these restraints, but almost all the other regulations of commerce are founded.”  Further down: “By advantage or gain, I understand, not the increase of the quantity of gold and silver, but that of the exchangeable value of the annual produce of the land and labour of the country, or the increase of the annual revenue of its inhabitants.”

Page 380:  “A direct foreign trade of consumption is always more advantageous than a round-about one.  But a round-about foreign trade of consumption, which is carried on with gold and silver, does not seem to be less advantageous than any other equally round-about one.”

Page 381: “It deserves to be remarked, too, that, if we consult experience, the cheapness of wine seems to be a cause, not of drunkenness, but of sobriety.  The inhabitants of wine countries are in general the soberest people in Europe; witness the Spaniards, the Italians, and the inhabitants of the southern provinces of France.  People are seldom guilty of excess in what is their daily fare.”  Um.  I don’t know.  This feels a bit like “if all you’ve got’s a hammer.”  I strongly suspect that a tendency toward over-indulgence  in a society has a lot more to do with social conditions leading to despair.

On page 382, on the same subject: “The sneaking arts of underling tradesmen are thus erected into political maxims for the conduct of  a great empire.”  I just like this.

Page 383: ” But the mean rapacity, the monopolizing spirit of merchants and manufactures, who neither are, nor ought to be, the rulers of mankind, though it cannot perhaps be corrected, may very easily be prevented from disturbing the tranquility of any body but themselves.”  Right, except they ARE the rulers of mankind.  For now.  Further down: “The wealth of a neighboring nation, however, though dangerous in war and politics, is certainly advantageous in trade.”

On page 384-5, he talks about how those wishing to acquire wealth move to the towns, because they know that where a lot wealth circulates, there is more wealth to be got, and the same ought to apply to nations, but that modern economic maxims mistakenly aim at impoverishing one’s neighbors.   “It is in consequence of these maxims that the commerce between France and England has in both countries been subjected to so many discouragements and restraints.”  I am not convinced that this desire among capitalist countries to impoverish their neighbor is, in fact, rooted in mistaken “maxims.”

Page 386: “They are both rich and industrious nations; and the merchants and manufacturers of each, dread the competition of the skill and activity of those of the other.”  Well, yes.  That seems only natural.  It is what competition means.

Page 387: “If the exchangeable value of the annual produce, it has already been observed, exceeds that of the annual consumption, the capital of the society must annually increase in proportion to this excess.  The society in this case lives within its revenue, and what is annually saved out of its revenue, is naturally added to its capital, and employed so as to increase still further the annual produce.”  It is important to remember, however, that we are dealing with a closed system–there are not limitless markets, or resources.

Here we begin what seems to be Smith’s major campaign: to prove that anything that restrains trade (with a very few exceptions) is bad for society as a whole.  The difficulty with this proposition appears in the very formulation: society “as a whole” consists of divisions whose interests are opposed to each other; thus to prove that something is bad for society “as a whole” is, to say the least, ambitious.  Let’s see how he does.

This chapter focuses on laws that restrict the importation into a country of goods that can be produced in that country.  He makes the point, on page 349, that “The general industry of the society never can exceed what the capital of the society can employ.”  This is obviously true, though it is worth bearing in mind that this amount of capital is constantly changing–to be precise, it is generally growing–so we ought not to treat it as a fixed sum.  Further down the page, he observes that anyone with capital to invest is always looking for the most profitable way to invest it.  “But the study of his own advantage, naturally, or rather necessarily leads him to prefer that employment which is most advantageous to the society.”  He then goes on state that home-trade is more profitable than foreign trade of consumption, and that the latter is more profitable than the carrying trade (ie, investing in ships, rather than in their cargo).

On page 350 he observes that those in the carrying trade, in order to have greater control over the goods they transport, tend to establish markets in their home ports.  “…and it is in this manner that every country which has any considerable share of the carrying trade, becomes always the emporium, or general market, for the goods of all the different countries whose trade it carries on.”  This makes sense; I wonder to what extent it is still true.

Page 351: “But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value.”  And so each person attempts to maximize the profit of his capital.  “…he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of  his intention.”  And here we find the famous “invisible hand” which, I have no doubt, Mr. Smith would have preferred to amputate if he knew the use to which it would later be put.

How true is it?  I think there is certainly an element of truth here–human beings are forced by their own self-interest to move in certain directions that will have a profound effect on the nature of their society; this is part of what Marx meant when he said, “Men make history, but not just as they please.”  I think Smith’s confusion comes, in part, from failing to understand the nature of the State as the servant of a definite class.  When he objects to government passing laws in the interest of manufacturers at the expense of  “society as a whole” he is not seeing that this government is, in fact, the representative of the manufacturers, and thus the laws in the interest of manufacturers are in fact a very part of that same “invisible hand” that he opposes to them.

Page 353: “The industry of the society can augment only in proportion as its capital augments, and its capital can augment only in proportion to what can be gradually saved out of its revenue.”  Unless I’m missing something, he is observing that the development of capital comes from a portion of the surplus value created by production.  If so, it seems hard to argue with.

My argument above, about Smith failing to understand the nature of the State(which, really, he couldn’t given that he lived in a period where the State was in the process of transition), is bolstered by a comment on 358, comparing the country gentlemen to the manufacturers: “Country gentlemen and farmers, dispersed in different parts of the country, cannot so easily combine as merchants and manufacturers, who being collected into towns, and accustomed to that exclusive corporation spirit which prevails in them, naturally endeavor to obtain against all their countrymen, the same exclusive privilege which they generally possess against the inhabitants of their respective towns.  They accordingly seem to have been the original inventors of those restraints upon the importation of foreign good which secure to them the monopoly of the home-market.”  The point is, after cutting off the head of Charles I and politically emasculating Charles  II (in spite of promises to the contrary), the bourgeoisie had gone a long way toward taking power from the landed aristocracy.  To be sure, not fully: the corn-laws weren’t settled for most of another century, and the House of Lords retained some power even later than that; but the balance had been tipped.

On page 361-62 he contends that taxes on the necessities of life, by raising the cost of labor, raise the cost of all commodities.  He is correct, I think, in objecting to taxes upon necessities of life because they hurt the most those who can least afford them; but they do not raise the cost of labor; at least, not in the direct manner he implies.  The cost of labor is determined socially, in the constant struggle between employer and employee for how much of the surplus value each will get; it doesn’t simply rise (unfortunately!) as the cost of living rises.

I rather enjoyed seeing M. Colbert discussed on page 364, as he’s in important character in The Vicomte de Bragalonne by Dumas.

Also delightful and interesting is this comment on 364-365: “To judge whether such retaliations are likely to produce such an effect, does not, perhaps, belong so much to the science of the legislator, whose deliberations ought to be governed by general principles which are always the same, as to the skill of that insidious and crafty animal, vulgarly called a stateman or politician, whose councils are directed by the momentary fluctuations of affairs.”  Now there is a distinction I’ve never come across before.  I wonder if, at one time, there was truth in it.

On page 367 he compares the habits of the soldier with those of the manufacturer (by which I believe he means laborer in this context), which ties in nicely to some of my own theories about peace-time or professional soldiers, but I don’t think has anything to do with this investigation.

Going back to my earlier criticism of Smith, I have to mitigate it at least somewhat because he, himself, clearly recognizes it to at least some degree.  On page 368: “To expect, indeed, that 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 public, but what is much more unconquerable, the private interests of many individuals, irresistibly oppose it.”  True; and it also goes a long way toward undermining the latter-day beliefs (not Smith’s) about the “invisible hand.”   It leaves open the question of whether that mythical beast, completely free trade, is even something to strive for.  In my opinion, it is silly to even address the question before defining what “completely free trade” even means.  It would seem to mean free from interference–but doesn’t every individual “interfere” with free trade according to his own needs and to the extent of his influence?  If what is being traded is private property, then this implies a State controlled by the property owners (there can be no private property without a State to define and defend it), and how can there by a State controlled by property owners without it exerting it’s influence in their behalf; it is as absurd as to suggest that a fish, in order to preserve it’s body of water, refrain from swimming.

Page 326: “That wealth consists in money, or in gold and silver, is a popular notion which naturally arises from the double function of money, as the instrument of commerce, as well as the measure of value.”  In fact, according to Smith, wealth of the individual consists in what can be purchased for money, and for a nation in the total commodity production of that country.

On page 327 he discusses how the Tartars, wealth consisted of cattle as among the Spaniards it consisted of gold and silver.  “Of the two, the Tartar notion, perhaps, was the nearest to the truth.”

He then spends a fair bit of time on reasons why it is counterproductive for a nation to prohibit the exportation of specie.  He does this, mostly, by dismantling the arguments in favor of such prohibitions.  Then he goes into foreign trade, and how it is obvious that such trade enriches the country, but says this is only true insofar as the country is producing more of a given commodity than it can consume, which again seems reasonable, and once again hammers at the need of capitalism in general and the market of any nation in particular to constantly expand.

Page 332: “The quantity of every commodity which human industry can either purchase or produce, naturally regulates itself in every country according to the effectual demand, or according to the demand of those who are willing to pay the whole rent, labor and profits which must be paid in order to prepare and bring it to market.”  Note that, here, transportation is not included as part of the price, which in my opinion is correct.

Page 334:  “If the materials of manufacture are wanted, industry must stop.  If provisions are wanted, the people must starve.  But if money is wanted, barter will supply its place, though with a good deal of inconveniency…Upon every account, therefore, the attention of government never was unnecessarily employed, as when directed to watch over the preservation or increase of the quantity of money in any country….Money, like wine, must always be scarce with those who have neither wherewithal to buy it, nor credit to borrow it.”

Page 335: “When the profits of trade happen to be greater than ordinary, over-trading becomes a general error both among great and small dealers.”  And, “Money, no doubt, makes always a part of the national capital; but it has already been shown that it generally makes but a small part, and always the most unprofitable part of it.”

Page 336: “And though goods do not always draw money so readily as money draws goods, in the long-run they draw it more necessarily than even it draws them…The man who buys, does not always mean to sell again, but frequently to use or to consume; whereas he who sells, always means to buy again.”  A country needs no more gold and silver than is required to circulate commodities, plus the small amount used for decorative purposes.  “…to attempt to increase the wealth of any country, either by introducing or by detaining it an unnecessary quantity of gold and silver, is as absurd as it would be to attempt to increase the good cheer of private families, but obliging them to keep an unnecessary number of kitchen utensils.”

Page 341: “The transportation of commodities, when properly suited to the market, is always attended with a considerable profit; whereas that of gold and silver is scarce ever attended with any.”

Further down, speaking of international trade, we find the interesting remark: “This bullion, as it circulates among different commercial countries in the same manner as the national coin circulates in every particular country, may be considered as the money of the great mercantile republic.”  True in some sense, but it is worth noting that this bullion is, at all times, privately owned; thus a fundamental contradiction of capitalism, between private ownership and social  use, even applies within the field of trade.

Page 342: “[Foreign trade] carries out that surplus part of the produce of their land and labor for which there is no demand among them, and brings back in return for it something else for which there is a demand.”

Page 343-4: “It is not by importation of gold and silver that the discovery of America has enriched Europe” but by the opening of new markets, and the expansion of the amount of raw produce.  “By opening a new and inexhaustible (!) market to all the commodities of Europe, it gave occasion to new divisions of labor and improvement of art, which, in the narrow circle of the ancient commerce, could never have taken place for want of a market to take off the greater part of their produce.  The productive powers of labor were improved…”

Page 344: Just want to note in passing: “But rich and civilized nations can always exchange to a much greater value with one another, than with savages and barbarians.”

319: “The great commerce of every civilized society, is that carried between the inhabitants of the town and those of the country.”  Even though this has changed in the sense that this commerce is now a tiny fraction of all commerce, it is still the most fundamental, because without it, nothing else can happen.  The country stops growing food, and the cities starve.

320: “The corn which grows within a mile of the town, sells there for the same price with that which comes from twenty miles distance.  But the price of the latter must generally, not only pay the expense of raising and bringing it to market, but afford too the ordinary profits of agriculture to the farmer.”  Smith’s point here is the advantage of those parts of the country that lie physically near the market (ie, the city); which is true, but there is another point that deserves discussion, which is that the above appears to contradict a previous statement.  As I see it, Smith earlier declared that the value of a commodity is the amount of labor necessary TO PRODUCE it.  Later (previous chapter) he indicates that transportation adds value.  Here, he once again denies that transportation adds value.  It would seem clear that labor adds value; the point is that, if the commodity (corn in this case) requires increased transportation cost, then some of that added value must go to the labor of transporting it, thus reducing the amount of added value that can go into the pocket of the farmer as profit.

“As subsistence is, in the nature of things, prior to conveniency and luxry, so the industry which procures the former, must necessarily be prior to that which ministers of the latter.” This is true both historically and theoretically; the development of the country proceeded the development of the town, and it was only when country was able to produce a considerable surplus that the town came to exist (see division of labor, book 1 chapter 1).

Page 321:  “Upon equal, or nearly equal profits, most men will chuse to employ their capitals rather in the imporivement and cultivation of land, than either in manufactures or in foreign trade.  The man who employs his capital in land his more under his view and command, and his fortune is much less liable to accident, then that of the trader…”  Two things.  First, he ignores vagaries of weather, which are a vital and unpredictable element of agriculture, and, two, the profits are not generally liable to be equal or nearly equal.  Today, the greatest profits by far are to be found in the realm of finance, which at the time Smith was writing was barely considered an industry.  (I kept his spelling of “chuse” because I think it’s charming). His thesis is Agriculture > manufacture > transport or foreign commerce; making money directly from finance never enters the equation.