Anda di halaman 1dari 18

ECONOMICS AND HISTORY:

BOOKS II AND III OF THE WEALTH OF NATIONS


Edward J. Harpham*†

Abstract: This essay explores how economic theory and historical inquiry were
brought together for one of the first times in modern political thought in Books II and
III of Adam Smith’s Wealth of Nations. It shows how the theory of capital found in Book
II provides a perspective for thinking about historical development and political insti-
tutions that is in sharp contrast with the historical record traced out in Book III. Smith’s
solution to the problem of reconciling economic theory and history lies in a complex
understanding of the nature of rational economic behaviour and how it has been affected
by uncertainty and institutional development in human history. Embedded in Smith’s
political economy is not only a new theory of economic life, but a new political
understanding of the importance of history to contemporary political life.

The relationship between economic theory and historical inquiry in early mod-
ern British political thought is difficult to understand.1 Writers who helped to
shape one perspective generally did not contribute to the other. When they did,
as in the case of Hume, who penned a number of important economic essays,
the arguments from one perspective were not neatly woven together into a

* School of Social Sciences, The University of Texas at Dallas, Box 830688,


Richardson, TX 75083–0688, USA. Email: harpham@utdallas.edu

I would like to thank Nicholas Phillipson for his helpful comments.
1
Modern British economic reasoning originated in the pamphlet literature of the
seventeenth century that sought to escape the moralistic assumptions of scholastic
thought. See William Letwin, The Origins of Scientific Economics (Cambridge, 1964);
Joyce Appleby, Economic Thought and Ideology in Seventeenth Century England
(Princeton, 1978); Edward J. Harpham, ‘Class, Commerce, and the State: Economic
Discourse and Lockean Liberalism in the Seventeenth Century’, Western Political
Quarterly, 38 (December 1985), pp. 565–82; Istvan Hont, ‘The “ Rich Country–Poor
Country Debate” in Scottish Political Economy’, in Wealth and Virtue: the Shaping of
Political Economy in the Scottish Enlightenment, ed. Istvan Hont and Michael Ignatieff
(Cambridge, 1973), pp. 271–316; Istvan Hont, ‘Free Trade and the Economic Limits to
National Politics: Neo-Machiavellian Political Economy Reconsidered’, in The Eco-
nomic Limits to Modern Politics, ed. John Dunn (Cambridge, 1990), pp. 41–120. British
historical inquiry, on the other hand, originated from a variety of sources, including the
thought of such Renaissance thinkers as Machiavelli and Vico, as well as contributors to
the constitutional debates over the ancient constitution and the feudal law. For a
discussion of this literature see J.G.A. Pocock, The Ancient Constitution and the Feudal
Law: A Study of English Historical Thought in the Seventeenth Century, a reissue with
a retrospect (Cambridge, 1987).

HISTORY OF POLITICAL THOUGHT. Vol. XX. No. 3. Autumn 1999


ECONOMICS & HISTORY IN THE WEALTH OF NATIONS 439

seamless garment.2 For most of the seventeenth and eighteenth centuries,


economics and history remained two new virtually independent ways of view-
ing the political world. Bringing them together became an important project for
the emerging discipline of political economy in the late eighteenth and early
nineteenth centuries.
In this essay, I will provide a reading of Books II and III of Adam Smith’s
Wealth of Nations that explores how economic theory and historical inquiry
were brought together for one of the first times in modern political thought. I
will argue that the theory of capital found in Book II of the Wealth of Nations
provides a perspective for thinking about historical development that is in sharp
conflict with the historical record, a record traced out by Smith in Book III.
Historical inquiry threatens to undermine the conclusions of economic reason-
ing, particularly regarding the role that certain institutions play in the political
life of the nation. One of the major problems facing Smith in Books II and III
of the Wealth of Nations is reconciling the conclusions of economic theory with
those of history. His solution lies in a complex understanding of the nature of
rational economic behaviour and how it has been affected by uncertainty and
institutional development in human history. Embedded in Smith’s political
economy is not only a new theory of economic life, but a new political
understanding of the importance of history to contemporary political life.

The Theory of Capital: Book II


Book II often receives short shrift among political theorists investigating
Smith’s political thought.3 At first glance, it may appear to be concerned with
2
See Constant Stockton, ‘Economics and the Mechanism of Historical Progress in
Hume’s History’, in Hume: A Reevaluation, ed. Donald W. Livingston and James King
(New York, 1976); Nicholas Phillipson, Hume (New York, 1989); Duncan Forbes,
Hume’s Philosophical Politics (Cambridge, 1975).
3
One of the most important reasons for this may be the ongoing attempt to read Smith
as something other than a liberal thinker. Locating Smith’s political thought in a tradition
other than liberalism seems to compel commentators to downplay the more technical
economic side to Smith’s thought. Leading conventional interpretations that view him
as a liberal theorist include: Joseph Cropsey, Polity and Economy: An Interpretation of
the Principles of Adam Smith (The Hague, 1957); J. Cropsey, ‘Adam Smith and Political
Philosophy’, in Essays on Adam Smith, ed. Andrew S. Skinner and Thomas Wilson
(Oxford, 1975), pp. 132–53; Jerry Z. Muller, Adam Smith in His Time and Ours:
Designing the Decent Society (New York, 1993). J.G.A. Pocock and Nicholas Phillipson
locate his political ideas in the civic humanist or republican tradition. See J.G.A. Pocock,
Politics, Language and Time: Essays on Political Thought and History (New York,
1973); J.G.A. Pocock, The Machiavellian Moment: Florentine Political Thought and
the Atlantic Republican Tradition (Princeton, 1975); J.G.A. Pocock, Virtue, Commerce,
and History (Cambridge, 1985); Nicholas Phillipson, ‘Adam Smith as Civic Moralist’,
in Wealth and Virtue, ed. Hont and Ignatieff, pp. 179–202. In Adam Smith’s Politics
(Cambridge, 1978), Donald Winch provided an innovative reading of Smith’s political
ideas in terms of the civic humanist tradition. A criticism of this can be found in Edward
440 E.J. HARPHAM

technical economic issues which are not particularly relevant to either politics
or history. First impressions can be deceiving. Book II also provides a concep-
tual framework for rethinking the historical analysis found in Book III. It does
this by making important qualifications to the arguments regarding economic
growth discussed in Book I.
In Book I, Smith establishes a close linkage among economic growth, in-
creased productivity due to the division of labour, and market size. To the degree
to which the division of labour is intensified through an expanded market, the
nation grows wealthier; to the degree to which it is undercut through contracting
markets, it grows poorer. This argument is qualified at the beginning of Book
II, where Smith notes that markets are not the only limiting factor affecting the
division of labour. The accumulation of stock also plays a role: ‘As the accu-
mulation of stock must, in the nature of things, be previous to the division of
labour, so labour can be more and more subdivided in proportion only as stock
is previously more and more accumulated.’4 Unlocking the secrets of the
creation of wealth demands an understanding of not only the division of labour
but also the accumulation and different employments of stock in the economy.
The key idea underlying Smith’s theory of capital is a highly sophisticated
notion of rational economic action that moves far beyond that introduced in

J. Harpham, ‘Liberalism, Civic Humanism and the Case of Adam Smith’, American
Political Science Review, 78 (December 1984), pp. 764–74; and Jeffrey Isaac, ‘Repub-
licanism vs. Liberalism? A Reconsideration’, History of Political Thought, IX (1988),
pp. 349–77. Winch has rejected this characterization of his interpretation in Donald
Winch, ‘Adam Smith and the Liberal Tradition’, in Traditions of Liberalism: Essays on
John Locke, Adam Smith and John Stuart Mill, ed. Knud Haakonssen (St Leonards,
Australia, 1988), pp. 83–106. In more recent work, Winch also has focused on Smith’s
contribution to the jurisprudential tradition and the science of the legislator. See Donald
Winch, ‘Science and the Legislator: Adam Smith and After’, Economic Journal, 93
(1983), pp. 501–20; and Donald Winch, Riches and Poverty: An Intellectual History of
Political Economy in Britain, 1750–1834 (Cambridge, 1996). Knud Haakonssen, The
Science of a Legislator: The Natural Jurisprudence of David Hume and Adam Smith
(Cambridge, 1981), also reads Smith in terms of the jurisprudential tradition of natural
law. One could argue that the jurisprudential tradition is an important source for
liberalism, and that liberalism itself is an extension of the jurisprudential tradition. The
Smith of the jurisprudential tradition thus may be more liberal in orientation than some
would like to admit. Other important interpretations of Smith’s political thought include:
Albert O. Hirschmann, The Passions and the Interests: Political Arguments for Capital-
ism Before Its Triumph (Princeton, 1977); Richard Teichgraeber, ‘Free Trade’ and Moral
Philosophy: Rethinking the Sources of Adam Smith’s Wealth of Nations (Durham, 1986).
David McNally, Political Economy and the Rise of Capitalism: A Reinterpretation
(Berkeley, 1988), creatively analyses the political implications of Smith’s economic
thought.
4
Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, ed.
R.H. Campbell and A.S. Skinner, textual editor W.B. Todd (Indianapolis, 1981), p. 277.
ECONOMICS & HISTORY IN THE WEALTH OF NATIONS 441

Book I.5 There, in his famous passage referring to the butcher, the baker and
the brewer, Smith argues that it is the appeal to self-interest that lies at the heart
of economic exchange in society.6 Simply put, when we desire something from
our fellows we appeal not to their benevolence but to their self-love. This notion
of self-interest found in this passage says nothing about the conditions under
which exchanges and rational economic action are taking place.
Book II, however, goes into much more detail. Most of Chapter 1 of Book II
is spent defining a number of key terms that will shape the subsequent discus-
sion of capital, such as individual stock, national stock, consumption, circulat-
ing capital, and fixed capital. The chapter concludes with an important factual
observation about economic behaviour in the world:
In all countries where there is tolerable security, every man of common
understanding will endeavour to employ whatever stock he can command in
procuring either present enjoyment or future profit. If it is employed in
procuring present enjoyment, it is stock reserved for immediate consumption.
If it is employed in procuring future profit, it must procure this profit either
by staying with him, or by going from him. In the one case it is a fixed, in
the other it is a circulating capital. A man must be perfectly crazy who, where
there is tolerable security, does not employ all the stock which he commands,
whether it be his own or borrowed of other people, in one or other of those
three ways.7
A number of things are worth noting about this passage. First, Smith is
arguing that typical individuals act rationally in economic affairs in one of two
ways: they use their stock either for present enjoyment or for future profit. This
notion of rationality extends beyond that found in the earlier discussion of the
division of labour. At the beginning of Book I, Smith had argued that the
division of labour is derived from a certain propensity in human nature to ‘truck,
barter, and exchange one thing for another’.8 This propensity, in turn, is based
upon individuals’ perceptions of their own self-interest at the time of the
exchange. This passage in Book II, however, explicitly introduces the problem
of how an individual views his self-interest in time into the discussion of
economic rationality. One’s rational self-interest can be either for present
enjoyment or for bettering one’s condition in the future. A hedonistic pleasure
calculus grounded simply in present enjoyment thus is not what lies at the heart
of Smith’s theory of capital. Rather, the starting point is the recognition that,
along with pleasure in the present, economic action depends upon a ‘uniform,
5
I am limiting my discussion here to an analysis of the theory of rational action found
in the Wealth of Nations. A deeper psychological account of Smith’s theory of acquisitive
economic behaviour can be found in Adam Smith, The Theory of Moral Sentiments,
ed. A.L. Macfie and D.D. Raphael (Indianapolis, 1982), Part IV.
6
Smith, Wealth of Nations, pp. 26–7.
7
Ibid., pp. 284–5.
8
Ibid., p. 25.
442 E.J. HARPHAM

constant, and uninterrupted effort of every man to better his condition’.9 The
passion for present enjoyment, while being a violent one, often difficult for the
individual to control, ‘is in general momentary and occasional’. The desire to
better one’s condition, on the other hand, is ‘generally calm and dispassionate,
comes with us from the womb, and never leaves us till we go into the grave’.10
It is this calm and dispassionate desire that ultimately leads people to seek to
augment their fortunes and engage in frugal economic activity, driving the
engine of economic growth.
A second thing to note in the passage is how the starting assumptions about
economic behaviour are linked to the formal economic concepts Smith intro-
duces at the beginning of Chapter 1 in Book II. Individuals seeking a profit,
that is seeking to better themselves in the future, either use the stock themselves,
thus turning it into fixed capital, or loan it to someone else, thus making it
circulating capital. While being beyond the scope of this discussion, much of
the technical analysis of the employment of capital in a society involves tracing
out the various ways it can be employed and the various economic problems
that are encountered in such employment.
The third point that Smith wishes to make is subtle, yet may be the most
important point that he wishes to present in the chapter. For rational economic
action to occur, there must be ‘tolerable security’. An individual’s life and limbs
must be safeguarded, and his or her property be protected from arbitrary
confiscation, before the logic of rational action can be mapped into a theory of
capital. Where neither life, limb nor property is ‘tolerably secure’, individuals
will be compelled to employ their stock in significantly different ways than
might be expected from economically rational actors. Smith notes that in
countries where individuals are in constant fear of having their wealth expro-
priated by superiors, stock is often buried and concealed, that is hoarded, close
to one’s home so that one has it in times of emergency and trouble.11 Under
conditions of gross insecurity, an individual’s understanding of how to better
one’s condition in the future undergoes significant transformation, even appear-
ing to be irrational from the perspective of one living in a secure situation. The
essential point that Smith wishes to make is clear: lacking a ‘tolerable security’,
individual economic behaviour operates differently than that to be traced out in
the theory of capital in Book II. Smith’s reference throughout Books II and III
to the ‘violence of feudal government’ refers not just to specific actions of
government at a particular point in time, but to an underlying condition of
insecurity that seriously affects the ways people think about themselves in the
present and in the future.12
It is interesting to note that the question of economic action under conditions
of uncertainty becomes a major theme in Book II. In Chapter 2 of Book II, for
example, Smith spends considerable time analysing the economic problem of
9 11
Ibid., p. 343. Ibid., p. 285.
10 12
Ibid., p. 341. See also ibid., p. 256.
ECONOMICS & HISTORY IN THE WEALTH OF NATIONS 443

paper money in terms of uncertainty. Hard currency may be the most secure
and certain way to facilitate economic transactions, but it is also expensive.
Paper currency could perform the same function as hard currency at a much
lower cost. But paper money works only if individuals have the security and
confidence that bankers will redeem their notes. This security and confidence
depends, in turn, on banks knowing how much paper currency they can produce
given the supply of bullion actually on hand.13 If too much paper currency is
printed, circulation can be overstocked and there can be serious bank runs,
followed by economic dislocation.
What is striking about Smith’s analysis of paper money is that the whole
discussion of security, confidence and uncertainty in the money supply is based
on the assumption that a ‘tolerable security’ exists in society as a whole. His
solution to the problem of paper money — allowing high denomination paper
notes to circulate only among dealers and the existence of a multiplicity of
banking companies — is aimed at reducing the uncertainty that follows from
rational economic behaviour under conditions of ‘tolerable security’ and of
limited knowledge.14 The unintended consequences of such behaviour can be
mapped, and solutions devised, by thoughtful individuals in both the public and
the private sectors. But economic analysis cannot solve all problems. When
‘tolerable security’ breaks down, as when a nation is defeated in war and the
treasure supporting the money supply is confiscated, rational economic behav-
iour is fundamentally changed. As in the case of hoarding gold in insecure
times, defeat in war creates so much uncertainty in society that the way people
think about what it means to better themselves in the future is changed funda-
mentally.
Two closely related distinctions stand alongside the idea of rational economic
behaviour under conditions of ‘tolerable security’ to shape Smith’s theory of
capital: productive versus unproductive labour and frugality versus prodigality.
Productive labour, such as that of the farm hand, the artisan, and wholesalers
or retailers, refers to labour that adds to the value of the materials it works upon.
13
Ibid., p. 292.
14
See ibid., pp. 295 and 329. At the end of Chapter 2 of Book II Smith writes: ‘The
late multiplication of banking companies in both parts of the united kingdom, an event
by which many people have been 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 all those malicious runs, which the rivalship of so many competitors is always
ready to bring upon them . . . 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.’ (Smith, Wealth of Nations, p. 329.) There are remarkable parallels
between this argument and that found in Book V relating to Smith’s advocacy of a
multiplicity of religious sects. Both cases involve problems grounded upon ill-founded
opinions that are exacerbated by uncertainty and solutions based upon competition rather
than positive law (see Smith, Wealth of Nations, pp. 792–3).
444 E.J. HARPHAM

Labour that does not add value to a real product, such as the services of police,
ministers or nannies, is considered to be unproductive.15 Frugal behaviour
involves savings that create a fund to maintain productive workers in this or
future years. Prodigal behaviour, in contrast, encroaches on these savings and
diminishes the funds available for maintaining productive labourers. The link-
age between frugality-productivity-economic growth and prodigality-unpro-
ductivity-economic decline is clearly forged by Smith. Frugal behaviour
increases the productive labour in society, and thus promotes economic growth
and the wealth of a nation. Prodigal behaviour, on the other hand, undercuts
both.
By diminishing the funds destined for the employment of productive labour,
he necessarily diminishes, so far as it depends upon him, the quantity of that
labour which adds a value to the subject upon which it is bestowed, and,
consequently, the value of the annual produce of the land and labour of the
whole country, the real wealth and revenue of its inhabitants.16
The two distinctions are developed initially alongside one another in the
analysis of the problem of paper money in Chapter 2 of Book II, but they run
throughout this book as important conceptual themes. Both emerge from
Smith’s discussion of a technical economic issue: the implications that the
introduction of paper currency had for Britain’s economy. Smith’s central
contention in this chapter is that paper currency (backed by an adequate supply
of bullion, of course) would free up significant amounts of capital in the form
of bullion for other uses. But he finds himself having to argue against balance-
of-trade theorists who fear that this liberated capital might simply be used to
buy luxury items overseas for present enjoyment, hardly beneficial to long-term
economic development from any perspective. Such concerns had motivated
many earlier economic theorists to argue for banning the exportation of gold
and silver as well as the importation of luxuries like foreign wines and silks.
Limiting consumption, it was thought, would promote savings and growth.
From Smith’s perspective, however, this conclusion is wrong, based upon a
flawed understanding of how the economy worked.
Smith notes that goods purchased overseas for home consumption can be
used in one of two ways: as revenue for immediate consumption by ‘idle’ and
‘prodigal’ people who produce nothing, or as capital by ‘frugal’ and ‘produc-
tive’ individuals who ‘may purchase an additional stock of materials, tools, and
provisions, in order to maintain and employ an additional number of industrious
people, who re-produce, with a profit, the value of their annual consumption’.17
The fundamental economic issue at stake for Smith is not that of increased
consumption in society per se, as many of his contemporaries thought. Where
people were being economically rational, the availability of new stock inevi-
15
Ibid., p. 330.
16 17
Ibid., p. 339. Ibid., p. 294.
ECONOMICS & HISTORY IN THE WEALTH OF NATIONS 445

tably meant that consumption would increase. The distinctions between frugal-
ity and prodigality, and between productive and non-productive activity, enable
him to explain how the question is ultimately one of how capital is used. Who
is consuming the newly freed-up capital? Why are they consuming? What are
the long-term consequences of their consumption? His answers are clear. To
the degree to which stock goes into capital supporting frugal and productive
individuals, the nation will prosper and grow wealthier. To the degree to which
stock becomes revenue supporting prodigality and unproductive behaviour, the
nation will decline and grow poorer.
The contrasts between prodigality and frugality and between productive and
non-productive activity enable Smith to focus upon three important points about
economic development in eighteenth-century Britain. First, bankers and other
representatives of the so-called ‘monied interest’ who are engaged in the
production of paper money and the exportation of bullion are not part of the
problem but part of the solution. Banking institutions serve the public good by
freeing capital to fuel future economic growth. Moreover, their actions in
pursuit of profit assure that this new capital will be put to good use, for in
Smith’s mind, it ‘seems not only probable but almost unavoidable’ that it will
be used primarily in productive ways. Why? Because the bankers who are
initially in control of the newly freed-up stock of hard money will themselves
not be disposed to support idle, non-productive activity in their loans. As Smith
explains in a pithy comment in Chapter 4 of Book III, ‘Of Stock Lent at
Interest’,
Ask any rich man of common prudence, to which of the two sorts of people
he has lent the greater part of his stock, to those who, he thinks, will employ
it profitably, or to those who will spend it idly, and he will laugh at you for
proposing the question. Even among borrowers, therefore, not the people in
the world most famous for frugality, the number of the frugal and industrious
surpasses considerably that of the prodigal and the idle.18
Second, Smith is able to differentiate the actions of particular individuals
from the overall actions of social groups. Smith does not deny that select
individuals behave in idle and unproductive ways. Some people’s lives are
clearly dominated by a passion for present enjoyment. His claim is that while
the ‘principles of common prudence’ do not govern the conduct of every
individual in society all the time, on average ‘they always influence that of the
majority of every class or order’.19 It seldom happens that a nation is destroyed
by ‘the prodigality and misconduct of individuals; the profusion or imprudence
of some being always more than compensated by the frugality and good conduct

18
Ibid., p. 350. Smith’s positive perspective for viewing the monied interest in
commercial society differs sharply from that found in the civic humanist tradition as
discussed in Pocock, Machiavellian Moment, and Virtue, Commerce, and History.
19
Smith, Wealth of Nations, p. 295.
446 E.J. HARPHAM

of others’.20 Indeed, for Smith the problem facing the nation is not, as it is for
many of his contemporaries, private economic behaviour, but public prodigality
and misconduct. When a large public sector is created in the form of expensive
courts or great fleets and navies, the nation’s stock flows into revenue for
unproductive purposes. Public extravagance, not private prodigality, is the real
danger facing the nation.
Finally, the distinctions direct attention towards a new set of questions
regarding a general theory of capital: What are the different ways in which
capital can be productively employed? Are some employments of capital more
productive than others? Such issues are sorted out in the final chapter of Book
II.
There are, according to Smith, four different ways in which capital can be
invested: in agriculture, in manufacturing, in the wholesale trade, and in the
retail trade.21 While each sector is important in its own right, there are important
differences. All other things being equal, capital employed in agriculture puts
into motion a greater quantity of productive labour than does an equal amount
put into manufacturing. Similarly, capital invested in manufacturing puts into
motion more productive labour than does that going into wholesale trade, while
investment in the latter outdistances that in retail trade. As many commentators
have noted, Smith’s analysis of the differential productivity of capital is shaky,
to say the least.22 His conclusions are nonetheless definitive: countries where
agriculture is the most profitable sector of the economy will prosper because
individuals will be willing to invest their capital in the most advantageous way
for society as a whole, namely, the most productive way. In such situations, the
self-interest that individuals have in bettering their own condition will neatly
dovetail into the public interest for economic growth. In other situations,
however, the link between self-interest and the public interest is clearly more
problematic.
It is here that history raises its head. Even a cursory glance at most eight-
eenth-century societies shows that agriculture was far from being the most
profitable sector in the economy. In fact, as Smith notes at the end of Book II,
in all countries of Europe there is much good land that is either undeveloped
or capable of being developed much more intensely. How could that be if the
economic theory of Book II is correct? It is this question that drives Smith in
20
Ibid., p. 341.
21
At the beginning of Chapter 5, Smith refers to ‘the improvement or cultivation of
lands, mines, or fisheries’ (ibid., p. 360). For the remainder of the chapter and into Books
III and IV, he characterizes this sector as ‘agriculture’. For the purposes of this discussion
I will follow Smith’s lead and refer to it as agriculture as well.
22
See Samuel Hollander, The Economics of Adam Smith (Toronto, 1973), Ch. 10;
and S. Hollander, ‘Some Implications of Adam Smith’s Analysis of Investment Priori-
ties’, in Adam Smith: Critical Assessments, Vol. 3, ed. John Cunningham Wood (London,
1984), pp. 256–74. See also Maurice Brown, Adam Smith’s Economics. Its Place in the
Development of Economic Thought (London, 1988).
ECONOMICS & HISTORY IN THE WEALTH OF NATIONS 447

Book III to reconsider historical development through the lens provided by


economic theory.

The Problem of History: Book III


The brief history of western Europe that weaves its way through Book III of
the Wealth of Nations resembles that found in the works of other eighteenth-
century British historians like David Hume, Adam Ferguson, Lord Kames, John
Millar and William Robertson.23 Themes such as the rise and fall of the feudal
system, the emergence of commerce and its effect on European society, and the
rise of absolutist regimes were standard fare among historians analysing the
history of western Europe from the fall of the Roman Empire to the advent of
modern commercial societies. Smith’s version of this history was first published
in the Wealth of Nations in 1776, long after those of his contemporaries had
appeared in print. We have reason to believe, however, that Smith was not
simply repeating arguments in the Wealth of Nations developed by his contem-
poraries, but was building upon arguments he had developed earlier in his life.
It is likely that Smith initially laid out his historical ideas in a public subscription
course on civil law delivered in Edinburgh in the early 1750s. Smith appears to
have been concerned that his ideas had been taken up by others before he had
the opportunity to publish them.24 It was also at this time that Smith was
introduced to David Hume, who was working on his Enquiry Concerning the
Principles of Morals and collecting material for his monumental historical
work, The History of England.25 Later, many of the ideas developed in Edin-
burgh were used effectively by Smith in lectures delivered on the subject of
jurisprudence to students at the University of Glasgow during the 1750s and
23
See David Hume, The History of England from the Invasion of Julius Caesar to
the Revolution of 1688 (6 vols., Indianapolis, 1983); and David Hume, Essays Moral,
Political and Literary, edited with a forward, notes and glossary by Eugene F. Miller
(Indianapolis, revised edn., 1987); Adam Ferguson, An Essay on the History of Civil
Society, ed. Fania Oz-Salzberger (Cambridge, 1996). John Millar, The Origin of the
Distinction of Ranks: or, An Inquiry into the Circumstances which give rise to Influence
and Authority in the Different Members of Society (Edinburgh and London, 4th edn.,
1806); and John Millar, An Historical View of the English Government from the Saxons
in Britain to the Revolution in 1688 (4 vols., London, 1803); Henry Home, Lord Kames,
Sketches of the History of Man (Edinburgh, 2nd edn., 1778; reprinted Hildesheim, 1968);
William Robertson, The History of the Reign of Emperor Charles the Fifth, with an
account of the Emperor’s Life after his Abdication by William H. Prescott (3 vols.,
Boston, 1857).
24
The question of Adam Ferguson and William Robertson plagiarizing Smith’s ideas
has been raised in the biographical literature on Smith. See Ian Simpson Ross, The Life
of Adam Smith (Oxford, 1995), pp. 105–8; R.H. Campbell and A.S. Skinner, Adam Smith
(New York, 1982), pp. 28–39.
25
See Ross, The Life of Adam Smith, p. 106; David Mossner, The Life of David Hume
(Oxford, 2nd edn., 1980), pp. 242 and 232–3.
448 E.J. HARPHAM

1760s.26 Thus while Smith may not have published his historical perspective
until well after his contemporaries had published theirs, Smith’s historical ideas
may not have been derivative, but truly original. Indeed it is possible, if not
likely, that his contemporaries were more indebted to Smith for inspiration than
he was to them.
We miss an important dimension to Smith’s thought, however, if we simply
focus on the question of whether or not specific historical ideas were his. An
undeniable originality lies in the way Smith integrates them into his overall
argument in the Wealth of Nations. When brought together in Book III, con-
ventional themes are placed in an entirely new context, given new meaning by
the economic theory that preceded them.
A good way to see the originality of Book III is to compare it with the
historical writings of David Hume. Hume and Smith clearly were familiar with
one another’s historical arguments. A letter dated 24 September 1752 from
Hume to Smith notes that the two had some disagreement over when a study
of English history should begin. Should it be the reign of Henry VII when
certain ‘insensible’ long-term changes began to take place, or later during the
reign of James when bitter political conflict had broken out over the issues of
privilege and prerogative?27 Smith, it appears, felt the former; Hume, the latter.
Even more revealing was Smith’s discussion in the Wealth of Nations of the
effects of commerce on feudal relationships, where he identifies Hume as the
one person who recognized the significance of this phenomenon to European
historical development.28
As Nicholas Phillipson points out in his study of Hume’s historical thought,
‘Hume’s primary purpose was to discover the origins of the modern constitution
and the party system and to show exactly on what foundations it had been
built.’29 Hume rejected contemporary Whig and Tory explanations of the
constitutional arrangements that had emerged to define the polity following the
Revolution of 1688. In the place of party principles, Hume offered a highly
nuanced constitutional history that focused on the importance of change. He
analysed the nature of the feudal system, how the spread of commerce gradually
undermined feudalism and enabled it to be replaced by a form of absolutist and
arbitrary rule under the Tudors. It was this system of Tudor government that
was bequeathed to the Stuarts, challenged by Parliamentarians during the Civil
War, and replaced by a mixed system following the Revolution of 1688. His
conclusions were startling, if not scandalous: the origins of Britain’s free
constitutional order were much more recent than was commonly supposed and
26
See Adam Smith, Lectures on Jurisprudence, ed. R.L. Meek, D.D. Raphael and
P.G. Stein (Indianapolis, 1982).
27
Adam Smith, The Correspondence of Adam Smith, ed. Ernest Campbell Mossner
and Ian Simpson Ross (Indianapolis, 1987), p. 8.
28
Smith, Wealth of Nations, p. 412.
29
Phillipson, Hume, p. 11.
ECONOMICS & HISTORY IN THE WEALTH OF NATIONS 449

potentially much more fragile. Care should be taken and opinions moderated
when discussing the constitutional settlement of 1689.30
The title of Book III of the Wealth of Nations, ‘Of the Different Progress of
Opulence in Different Nations’, is one indication of how different Smith’s foray
into history ultimately would be from Hume’s. Hume was concerned with
understanding the development of the English constitution over time and the
role that economic changes such as the rise of commerce played in this devel-
opment. Smith, on the other hand, seeks to understand why some nations
become wealthier than others and the role that economic growth plays in the
life of a commercial society over time. For Smith, economic questions, not
traditional constitutional questions, lie at the heart of his inquiry in the Wealth
of Nations. Why had some nations, such as Britain, progressed further along
the road to opulence than others? What are the comparative advantages of one
country over another in the creation of wealth? What is the best way to promote
future economic development? Smith recognizes that history holds the answer
to such questions. But it is a history that has to be understood in terms of the
proper theoretical perspective, one provided by economic analysis in general
and his theory of capital in particular. The best way to see how economic theory
shapes Smith’s historical analysis is to view it in light of three concerns: first,
his theory of the natural progress of opulence; second, his approach to the study
of the history of western Europe since the fall of Rome; and third, his treatment
of specific issues in this history.
The first chapter of Book III is one of the most fascinating in the Wealth of
Nations. Here Smith explains ‘the natural progress of opulence’, that is the logic
of economic progress that follows from the ‘natural inclinations of men’. This
analysis complements that found earlier in Books I and II, where he uncovers
the patterns of human interaction that follow from human nature in the division
of labour and capital investment. Smith begins by noting that every civilized
society is divided into people who live in the town and those who live in the
country. The division of labour between town and country is a natural one,
benefiting both sides. The country provides agricultural surpluses to the towns.
The towns provide markets with their manufactured goods and luxuries to the
country in return. Through expanding domestic and international markets, the
division of labour is intensified in both town and country. Through increased
savings, capital is created to employ more productive workers in both sectors.
Certain questions follow from this line of discussion. Is there a proper balance
that naturally exists between economic development in the country and that in
the city? How would people naturally invest their capital? Would they invest
in agriculture in the country, in the city’s manufacturing sector, or in foreign
trade? Smith showed in Book II that some forms of investment were more
productive than others. He concluded with the observation that in countries

30
See Hume, History of England, Vol. VI, pp. 530–4.
450 E.J. HARPHAM

where agriculture is the most profitable way to become wealthy, people would
naturally invest their capital in the way that is most advantageous to society as
a whole. In other words, in such countries, the self-interest of people with
capital would serve the public interest in profitable investing practices. In
countries where better profits are to be made elsewhere than agriculture, there
is no guarantee. But what if profits among the different sectors of the economy
are the same? All other things being equal, is there any natural necessity that
drives self-interested activity to serve the public interest?
Smith’s answer in Book III is a resounding ‘yes’. There is a natural balance
to economic development that asserts itself if human nature is allowed to work
unfettered in economic affairs. ‘Upon equal, or nearly equal profits’ most men
choose first to invest their capital in agriculture, rather than in manufacturing
or trade, for two reasons, one economic, the other non-economic. First, capital
invested in agriculture is safer and more secure than capital invested elsewhere.
As Smith explains, it is less subject ‘to the more uncertain elements of human
folly and injustice’.31 A concern over uncertainty and insecurity thus lies at the
heart of Smith’s theory of the natural progress of opulence, as it had his theory
of capital. To the degree to which capital is invested away from one’s sight,
increasing levels of uncertainty enter into an investor’s decision-making calcu-
lus.
Above and beyond the question of the safety and security of one’s investment,
Smith argues that there are also non-economic reasons that lead individuals to
prefer investment in agriculture. There is a beauty to country life than naturally
disposes individuals to prefer investing there than elsewhere.
The beauty of the country besides, the pleasures of a country life, the
tranquility of mind which it promises, and wherever the injustice of human
laws does not disturb it, the independency which it really affords, have charms
that more or less attract every body; and as to cultivate the ground was the
original destination of man, so in every stage of his existence he seems to
retain a predilection for this primitive employment.32
An individual’s natural sense of beauty thus reinforces one’s economic under-
standing of what sort of investments are in his or her best interests.33
A similar economic logic causes people to invest in manufacturing before
foreign trade. Profits being equal or nearly equal, investment in manufacturing
is preferred to that in foreign commerce because it is more secure: ‘being at all
times more within his view and command is more secure than that of the foreign
merchant’.34 There thus is a ‘natural course of things’ that links self-interested

31
Smith, Wealth of Nations, pp. 377–8.
32
Ibid., p. 378.
33
For a further discussion of the relationship between our sense of utility and our
sense of beauty see Smith, Theory of Moral Sentiments, Part IV.
34
Smith, Wealth of Nations, p. 379.
ECONOMICS & HISTORY IN THE WEALTH OF NATIONS 451

investment behaviour to the overall public good. ‘This order of things is so very
natural, that in every society that had any territory, it has always, I believe, been
in some degree observed.’35
Smith points out that two interrelated factors can undercut the logic of the
natural progress of opulence. Towns do not necessarily derive their whole
subsistence from the immediate surrounding countryside. They can also engage
in distant trade with other countries to obtain the supplies that they need to
develop and prosper. Trade thus can cause a terrible imbalance between invest-
ment in the countryside and investment in the towns. In addition, institutional
arrangements can emerge in either the city or the country to transform the
incentive structures that naturally work their way through the economy of town
and country life, all other things being equal. Foreign trade and institutions can
work together to drive a wedge between the natural self-interest individuals
have in investing capital and the public interest in the most productive invest-
ments being made in the economy as a whole. This is precisely what has
happened in western European history. As Smith notes at the conclusion of the
first chapter:
But though this natural order of things must have taken place in some degree
in every such society, it has, in all the modern states of Europe, been, in many
respects, entirely inverted. The foreign commerce of some of their cities has
introduced all their finer manufactures, or such as were fit for distant sale;
and manufactures and foreign commerce together have given birth to the
principal improvements of agriculture. The manners and customs which the
nature of their original government introduced, and which remained after that
government was greatly altered, necessarily forced them into this natural and
retrograde order.36
Smith’s theory of the natural progress of opulence acts as a bridge between
his formal economic theory and his historical analysis. Building on his theory
of capital in Book II, it also provides a framework for thinking about history
which can be clearly seen in Smith’s general treatment of topics in Book III.
He begins his historical inquiry by investigating in Chapter 2 why agriculture
was discouraged in Europe following the fall of the Roman Empire. Chapter 3
explains the significance of the rise and progress of cities and towns across
Europe. Finally, Chapter 4 discusses how the rise and progress of the towns
contributed to the improvement of agriculture in the countryside.
The discussion of the history of western Europe since the fall of the Roman
Empire may resemble that of historians like Hume, but there are important
differences of focus. The bulk of Hume’s history is a detailed retelling of
important events in English history. The grand historical framework within
which these details are understood is found in a few essays written before The
History of England, and in occasional appendices or digressions in the histories

35 36
Ibid., p. 380. Ibid.
452 E.J. HARPHAM

themselves. For Smith, however, the push and pull of everyday political life is
not what is at stake. The key story needing emphasis is the grand history of
western Europe, one that looks at history in terms of economic development in
towns and in the country, and focuses on the institutional factors that cause a
nation to develop in ‘unnatural ways’.
There are three unifying themes to Smith’s grand history of western Europe,
the first being the idea of security. The fall of the Roman Empire led to great
‘confusions’ that lasted for centuries. Towns were deserted, and the countryside
was left uncultivated. Over time, a few great proprietors came to engross the
land, but for political reasons not economic ones. Large landed estates emerged
as reasonable ways to provide security and stability to those living on them.37
A second theme is that of unintended consequences. Feudalism introduced
institutions that addressed one set of problems but created others. From Smith’s
perspective, the large landed estates built up under feudalism would have been
but transitory evils had not primogeniture and entails emerged to permanently
define the conditions under which economic activity would take place in the
countryside. From a political perspective, primogeniture and entails made
perfect sense: they helped secure the feudal system of power that brought order
and stability to society, even protecting the security of thousands from the
‘caprice or extravagance of one man’.38 There were, however, large costs. As
Smith notes, great feudal proprietors seldom were great improvers of the land.
While being secured in their property, they generally lacked the abilities or the
inclination to improve the land. Far from being motivated by a rational desire
to better their own condition, they engaged in a form of conspicuous consump-
tion that might maintain their aura of authority but did little to promote
opulence. An even more disturbing effect of the feudal system of primogeniture
and entails was its impact on the actual people who farmed the land. Having
no property, there was no vehicle by which they could better their condition or
be encouraged to improve society. As Smith explains: ‘A person who can
acquire no property, can have no other interest but to eat as much, and to labour
as little as possible.’39 Significantly, Smith concluded that England’s success
in promoting opulence when compared to other countries may in large part be
attributed to the laws and customs that secured the property of the yeomanry
and encouraged them to engage in productive economic activity. Unlike peas-
ants tied to the land in other European countries, yeomanry enjoyed England’s
relatively free and secure property, enabling them to better themselves as they

37
See ibid., Book III, ch. 2.
38
Ibid., p. 384.
39
Ibid., p. 387.
ECONOMICS & HISTORY IN THE WEALTH OF NATIONS 453

saw fit and, in the process, to promote opulence. They thus were able to better
themselves as they saw fit and, in the process, to promote public opulence.40
The third theme is that a series of events took place in the history of the West
that freed sectors of the economy from the irrational laws, customs and insti-
tutions of the feudal system. By playing off kings against the great landlords
of the country, town dwellers were able to escape the servile condition of those
in the countryside and to arrive at a system of liberty and independence much
earlier.41 As Smith explains: ‘Order and good government, and along with them
the liberty and security of individuals, were, in this manner, established in cities
at a time when the occupiers of land in the country were exposed to every sort
of violence.’42 By securing the liberties and properties of individuals, inde-
pendent town life lays the foundations for an economic prosperity fuelled by
commercial expansion overseas. Over time, it also is responsible for bringing
about what Hume referred to in The History of England as a ‘secret revolution’
in the countryside.43 Commercial prosperity intrudes into the countryside by
stimulating a taste for luxuries among the feudal magnates. The insatiable
vanity of the landlords compels them to dismiss their retainers, the source of
their feudal power, and to grant longer leases to their tenants.
The tenants having in this manner become independent, and the retainers
being dismissed, 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 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 burger or tradesman in
a city. A regular government was established in the country as well as in the
city, nobody having sufficient power to disturb its operations in the one, any
more than in the other.44
The conclusions drawn from Smith’s historical investigation differ signifi-
cantly from those drawn by other late eighteenth-century British historians.
Although order and good government may have triumphed in the modern
commercial era, and liberty and security may have been established in the towns
and countryside of much of Europe for the first time since the fall of Rome, all
is not well. Current economic prosperity is based on foreign commerce and
trade, a base far less secure than agriculture. Outdated institutions and mis-
guided commercial policies, far from promoting future prosperity, threaten to
40
‘Those laws and customs so favourable to the yeomanry, have perhaps contributed
more to the present grandeur of England than all their boasted regulations of commerce
taken together.’ Ibid., p. 392. See also ibid., p. 425.
41
See ibid., pp. 399–402.
42
Ibid., p. 405.
43
See Hume, History of England, Vol. IV, pp. 383–6.
44
Smith, Wealth of Nations, p. 421.
454 E.J. HARPHAM

undercut it by driving a wedge between the self-interest of individuals and the


public good. Such institutions have to be reformed and the nation’s economy
has to be placed on foundations more in line with our economic understanding
of man and society.

Conclusion
There are other aspects to Smith’s historical analysis that lie outside Books II
and III of the Wealth of Nations. Book IV contains lengthy historical discussions
of the mercantile system and Book V develops a version of the four-stage theory
to explain why states provide justice, defence and public works in different
ways at different stages of human history.45 These arguments, however, rest
upon the highly sophisticated perspective developed in Books II and III. By
bringing economic theory and historical analysis together in Books II and III
of the Wealth of Nations Smith forges a perspective for thinking about the
problem of economic prosperity over time and about institutions and policies
in a commercial society. Historical awareness for Smith is a warning about the
threats to prosperity in the future. His historical analysis thus differs signifi-
cantly from that of contemporaries like his close friend, David Hume. Hume
used similar arguments regarding historical development in western Europe
since the fall of the Roman Empire to stimulate thinking about the constitutional
arrangements which had emerged in Britain following the Revolution of 1688.
Historical awareness helped to tone down the party conflict of the day and to
moderate political discussions over the constitution. In contrast, Smith uses
historical awareness to launch a call for the reform of institutions and commer-
cial policies based upon an understanding of the pattern of unintended conse-
quences that follow individual human actions.
One should not overemphasize the differences separating Smith’s political
economy from Hume’s historical analysis, because they also complement one
another in important ways. Like Hume, Smith is interested in using history to
establish the intellectual foundations of a commercial society that is dominated
by a propertied oligarchy. By studying the principles of human nature and their
working out in history, they both seek to show how rational self-interest and
the public interest can be advanced in a free commercial polity. Smith’s goal,
like that of his friend, is not to destroy the existing power structure in society;
it is to place it on more stable and secure intellectual foundations.
Similarly, the institutional reforms that Smith seeks to put into place are
moderately conservative in orientation, and would serve, he believes, the

45
Smith developed a version of the four-stage theory in his lectures delivered at the
University of Glasgow in 1762–3 and 1766. One might speculate that, given the
plagiarism controversy noted above, a version of the four-stage theory also found its way
into his private Edinburgh lectures. See the editor’s introduction to Smith, Lectures, p. 2,
and Ross, Adam Smith, p. 107, for a further discussion of this issue.
ECONOMICS & HISTORY IN THE WEALTH OF NATIONS 455

dominant ruling structure in the society. Institutions such as primogeniture or


entails may have made sense hundreds of years ago, during the heyday of
baronial power, but from Smith’s perspective they make little sense in a modern
commercial order. Far from propping up the power of the landed order in
eighteenth-century Britain, Smith argues that such institutions destabilize long-
term economic prosperity, ultimately endangering the most important economic
resource controlled by the landed class — rents. One of the most important
lessons Smith thus seeks to drive home to the ruling élite of the day is that their
prosperity is integrally connected to that of the nation as a whole, and both are
best served by a proper appreciation of the natural progress of opulence.46
Smith’s understanding of the limits of institutional reform is refined further
by a theory of political action grounded in civility, echoing sentiments found
in Hume’s essays. Simply because reasoned economic analysis leads to certain
conclusions about the need for change does not mean that such changes will
necessarily be put into place. Smith is not in the business of establishing a
perfect society. As he explains in Book IV of the Wealth of Nations: ‘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.’47 There are special interests that have to be taken into account
when advocating reform in any civilized society. The teachings of political
economy have to be balanced with an appreciation that civilized communities
are based upon persuasion, not violence. For Smith, the science of political
economy is, in the end, constrained by the lessons of moral philosophy. An
appreciation of one’s duties and obligations to others in the community neces-
sarily takes precedence over the reasoning of political economy.48

Edward J. Harpham THE UNIVERSITY OF TEXAS AT DALLAS

46
See the conclusion to the final chapter in Book I, where Smith clearly lays out his
understanding of the relationship between the economic interest of the three great orders
in commercial society (the landed order, the merchant-manufacturing order, and the
labouring order) and the public interest in economic growth. This problem is discussed
in much more detail in Harpham, ‘Liberalism, Civic Humanism and the Case of Adam
Smith’, pp. 764–74.
47
Smith, Wealth of Nations, p. 471.
48
Smith discusses the problem of political reform in The Theory of Moral Sentiments,
Part VI. For a further discussion of Smith’s theory of an individual’s duty to the
community see Edward J. Harpham, ‘Smith on Virtue and the Public Passions of Men’,
paper delivered at the 1993 Meeting of the Southwestern Political Science Association,
New Orleans, Louisiana (18 March 1993); and Edward J. Harpham, ‘Smith on Wealth
and Virtue’, paper delivered at the 1993 Meeting of the American Political Science
Association (3 September 1993).