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Adam Smith's Wealth of Nations Episode 6--Division of Land

• Michael Munger

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We trace how Adam Smith solves a historical puzzle: why Europe’s path to prosperity inverted the “natural order,” and how commerce quietly dissolved feudal power to make room for liberty. The story follows incentives, from primogeniture and entail to charters, free towns, and the market’s “silent and insensible” revolution.

  • institutions as congealed preferences and elite incentives
  • why Smith’s natural order inverts in Europe
  • the physiocrats’ growth model and Smith’s critique
  • Solow’s technology vs North’s institutions vs McCloskey’s ideas
  • Joel Mokyr's synthesis and improvement (written BEFORE he Nobel'ed!)
  • feudal constraints primogeniture and entail suppressing agriculture
  • towns as islands of order through charters and fixed rents
  • the king–burgher alliance against barons
  • merchants as improvers of land and capital risk-takers
  • commerce introducing liberty and good government
  • Smith’s “most important” passage and its modern relevance



If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !


You can follow Mike Munger on Twitter at @mungowitz


This is Mike Munger, the knower of important things from Duke University. This is episode six of the series on Adam Smith and the Wealth of Nations. This series is produced in cooperation with AdamSmithWorks at Liberty Fund, and I'm pleased to acknowledge the crucial help of Amy Willis. This episode takes up Book Three of The Wealth of Nations, which is entitled “Of The Different Progress of Opulence in Different Nations”. Book three is by far the shortest book in the Wealth of Nations, but there's a lot to talk about, so let's get to it. Straight out of Creedmoor, this is TAITC.

I was lucky enough to take a class from William Riker, the famous Rochester political scientist, in 1983. He often said, institutions are congealed preferences. What he actually said in his 1980 APSR paper about the disequilibrium of majority rule is this:

One can expect that losers on a series of decisions under a particular set of rules will attempt, often successfully, to change institutions and hence the kind of decisions produced under them. In that sense, rules or institutions are just more alternatives in the policy space, and the status quo of one set of rules can be supplanted with another set of rules. Thus the only difference between values and institutions is that the changing of institutional equilibria is probably a longer process. Institutions are probably best seen as congealed tastes. We ought, I think, to be thoroughly aware that the distinction between constitutional questions and policy questions is at most one of degree of longevity. If institutions are congealed tastes, and if tastes lack equilibria, then so also do institutions, except for short run events. 

End of quote. We learn about the right way to do things. And so I thought that metaphor of congealed tastes or preferences is an interesting place to start. Riker's point, though, is that elites are trying constantly to change the rules, to make themselves better off. And Smith's very aware of that. His diagnosis for the problems that are faced by many nations or regions that are trying to grow is to understand the selfish institutional choices that are made by elites. So Smith developed an institutional theory of growth. Importantly, he distinguished what he thought was the natural and effective process of institutional and economic development from the artificial and harmful one that results from laid-on rules, usually based on the errors of mercantilism and the selfishness of governors. Now, Smith's very clear about this in Book 3, quoting, 

Had human institutions never disturbed the natural course of things, the progressive wealth and increase of the towns would in every political society, and now my words, he thinks it would have resulted in greater prosperity or what he calls opulence. 

That tension between what we would now call emergent institutions and humanly devised rules, compared to the rules that people make on their own, that is, is the key to understanding Book III. It is important to note that unlike many racist explanations of the time, Smith believed that humans were more or less all the same. And unlike naive materialist views that later came to dominate Marxism, Smith thought that institutions were objects of human choice and progress, not a fixed process of political evolution. So again, what's interesting is that Smith says, “had human institutions never disturbed the natural course of things”. Well, that's what's interesting about book three. Title again of book three is of the different progress of opulence in different nations. Now, what Smith is suggesting then is what we would now call growth theory, and that's kind of old hat. But at the time it's pretty radical. 

Let's consider a little bit of the context of growth theories. There are four precursors of special note. The first is the Greeks. Aristotle didn't really imagine growth in the modern sense. He thought that economies were essentially static and they were focused on the natural limits of household management. He was worried about chrematistics, the pursuit of money for its own sake, which he thought was unnatural. Now that's different from economicos, which is the obtaining of things needed by the household. And sometimes the distinction may not be that clear, but economics then, obtaining things for the household is a kind of phronesis, the development of and application of practical reason. Crematistics is not phronesis, though. It's not consistent with virtue. It's unnatural and to be avoided. So increasing wealth, even either for the individual or the society, could happen, but it's not a main focus of what the Greeks thought because it was primarily a static view of life where people try to flourish in their household. 

The Romans, first Cicero in On Duties, emphasized that the pursuit of wealth is not inherently wrong, but it's really only acceptable if it serves virtue. That is, it has to be a means, not an end. Wealth is instrumental, not ultimate. And he was suspicious of greed. He warns against avaritia, the Latin word for greed, which corrupts moral character and undermines justice. Accumulation of wealth for its own sake then was dishonorable. Now that's something that many Romans did, but still it was not something to be approved of. Cicero believed in a natural order and hierarchy, so prosperity meant maintaining stability, not incurring too much debt. His ideal society was more about justice and moral duty than rising living standards. Seneca, about four or five BCE through sixty-five in the current era, fifty years after Cicero, had a pretty typical stoic suspicion of material goods. He stresses that true happiness comes from virtue and inner freedom, and in fact, liberty for Seneca was the ability to detach oneself, to control the human appetites for food, sex, and material prosperity. Wealth is indifferent. It's neither good nor bad in itself, but it can become bad. So wealth can provide opportunities for generosity, beneficence, and flourishing. But attachment to the wealth is an enslavement of the soul. A wise person may use wealth, but must be ready to part with it at any time. 

And so it's the attachment to wealth, the seeking wealth for its own sake that the Stoics were skeptical of. Third, and much closer to Smith in time, was Bernard Mandeville. His 1714 book, Fable of the Bees, suggested that private vices, luxury and consumption, could unintentionally promote national prosperity. So he had an idea that growth could happen, that a nation could become wealthier. But this was after the beginning of a move towards markets, international trade, transportation, really before the Industrial Revolution, but it's at the beginning of the time when people started to engage in pretty widespread commerce. So though Mandeville didn't model growth, he shifted the conversation toward how wealth could expand rather than remain fixed. Fourth and the most important precursor was the physiocrats. The physiocrats explicitly had a growth theory. Now the physiocrats were Francois Quesnay and Robert Turgot, and other people in the middle of the 18th century in France. The core ideas of physiocratic growth theory were their productive source of growth, produit net, which comes from agriculture. Land's the unique factor for the physiocrats that yields a surplus over costs of production. That is, you can plant a seed and then get a whole bunch of corn, for example, where you have thousands, millions of seed. That means that you can make something that did not previously exist. So farming is the engine of growth in the economy, and land is the source of that productivity. 

Physiocrats claim there were three classes. The proprietary class, the landowners who receive rent from the surplus, the productive class, the farmers who cultivate the land and generate the surplus, and the sterile classes, the physiocrats saw them basically as clerks, artisans, merchants, and even manufacturers, who are necessary but don't generate any of the produit net, the net product. This classification then tied social structure to economic growth, and importantly, the tableau economique in 1758, by Quesnay, was the first attempt to model the economy as what we would now call a circular flow of income and expenditure. It showed how agricultural surplus moved from farmers to landlords via rent, then to artisans and merchants via consumption, then flowing back to farmers as investment in production. But all of the growth has to take place at the level of agriculture. Everyone else is just moving money around in the physiocrats' view. Growth then required ensuring this circulation was not obstructed by taxes, monopolies, or restrictions. Physiocrats believe that there was a natural order. The laws of economics are set by nature, especially the productivity of land. So to maximize growth, governments need to remove feudal restrictions, internal tariffs, price controls generally. So their slogan was laissez faire, laissez passer, let do, let pass, advocating free trade in grain and other things, and light taxation and regulation. Now the difficulty is that since only land produces a surplus, growth is going to be inherently constrained by agricultural productivity. And nations that have small amounts of arable land can never become rich in this view, although they might accumulate money. This meant that the physiocrats anticipated a kind of agrarian growth ceiling. 

Now both [Thomas] Malthus and [David] Ricardo had that view, and there also was a moral view that farming was just somehow better. Thomas Jefferson, in his view of American yeoman farmers, certainly had the same kind of moral sensibility. So the physiocrats' growth theory was the first systematic model of economic expansion, but it was land-centered and it was static in its assumptions. They thought agriculture was the sole driver of net growth, and the tableau economique pioneered circular flow analysis. Now, Smith admired the physiocrats, but he thought that they failed to recognize division of labor as the source of value, and he's absolutely right about that. Later on in Book 4, chapter 9, Smith says this system, referring to the physiocrats, 

with all its imperfections, is perhaps the nearest approximation to the truth that has yet been published upon the subject of political economy, and is upon that account well worth the consideration of every man who wishes to examine with attention the principles of that very important science. Though in representing the labor which is employed upon land as the only productive labor, the notions which it inculcates are perhaps too narrow and confined. Yet in representing the wealth of nations as consisting not in the unconsumable riches of money, but in the consumable goods annually reproduced by the labor of society, and in representing perfect liberty as the only effectual expedient for rendering this annual reproduction the greatest possible, its doctrine seems to be in every respect as just as it is generous and liberal. 

Smith admired two things about the physiocrats and their growth theory. First, it is the growth of consumable things that matters. And second, the cause of growth is the absence of restrictions that prevent the free movement of resources. And in fact, Smith is very interested in this kind of approach. Back in Book two, chapter nine, Smith says this, and it's worth quoting at length. This is on page one hundred eleven and one hundred twelve. 

China seems to have been long stationary and had probably long ago acquired that full complement of riches which is consistent with the nature of its laws and institutions. But this complement may be much inferior to what, with other laws and institutions, the nature of its soil, climate, and situation might admit of. A country which neglects or despises foreign commerce, and which admits the vessels of foreign nations into one or two of its ports only cannot transact the same quantity of business which it might do with different laws and institutions. In a country too, where though the rich or the owners of large capital enjoy a good deal of security, the poor or owners of small capitals enjoy scarce any, but are liable under the pretense of justice, to be pillaged and plundered at any time by the inferior mandarins. The quantity of stock employed in all the different branches of business transacted within it can never be equal to what the nature and extent of that business might admit. 

Smith is saying agriculture, very important. China has reached the limit of the growth and prosperity that can be achieved not under its land, but under its institutions. So Smith has a theory of institutional constraint, not of resource constraint. Well, let's take just a moment and look at modern growth theory after Smith, because some of what Smith did has made it further on, but I also want to contrast, as I often do, Smith, after all, tended to see investment as a consequence of saving, whereas the Keynesian approach sees growth as a consequence of spending. After Keynes, the growth theory has been quite different. The most important kind of growth theory is from Robert Solow and a few people who have pursued the Solow growth theory. The intuition's fairly simple, the math can be pretty formal, but the main thing is that the economy produces outputs using capital and labor. Output can grow then either by adding more inputs or by making those inputs more productive by combining with them with more labor. However, they both have diminishing returns. Obviously, adding more workers per machine, you're getting lower marginal impact of labor. But even as you add more and more machines, you're getting diminishing marginal returns. Part of the output is saved and invested in new capital, but it also means that you have to make up more depreciation over time. The key factor is what we would now call total factor productivity, which is, to put it simply, the increase in technology. So if all you have is an increasing amount of capital and you're combining it even with an increasing amount of labor, you start to get diminishing returns. What matters is that the quality of the capital, the efficiency with which labor and capital are being combined, if those things improve, and that's what total factor productivity is, then you are increasing the output that you get from whatever amount of capital and labor that you have, which does suggest, of course, that capital is not a homogeneous thing. It's very different to have sophisticated advanced machines than it is to have a shovel. The bottom line for Solow growth theory is that technological progress is the game changer. If technology improves, workers and machines become more productive, then output per worker can keep rising even in the steady state and even if the population is increasing. So that's why the Solow model says that long-run growth depends not on saving or capital accumulation, but on technological progress. 

Well, the reason I wanted to contrast that with Smith's kind of approach is that Smith is an institutionalist, and there has been a response of institutionalists to the more technological Solow growth theory. One of those is Douglass North. And remember, Smith highlighted the importance of human institutions. Douglass North focuses on institutions. North argued that the rules of the game, the formal and informal institutions, are the fundamental determinants of long-run growth. For him, prosperity depends less on geography or culture in isolation and more on the incentive structures that institutions create. North defined institutions by saying institutions are the rules of the game in a society, or more formally, the humanly devised constraints that shape human interactions. And that's from his 1990 book Institutions, Institutional Change and Economic Performance. He goes on, “Institutions form the incentive structure for a society, and the political and economic institutions in consequence are the underlying determinants of economic performance.” So the key factor for North is not resources, it's not technology. It's institutions. Now, technology and growth may be a consequence of institutions, but they're downstream from institutions. North stressed that institutional change is path dependent. Once societies are locked into bad rules, growth is hindered. A central event for North was England's Glorious Revolution of 1688, as a case where institutions shifted to secure property rights and credible commitment by government fostering growth. Now, an alternative approach is another institutionalist, Deirdre McCloskey. Her central idea, though, is that institutions don't matter as much as ideas. So she doesn't deny the importance of institutions, but she says that claims that the real motor of what she has called the Great Enrichment after 1800 is a change in ideas, especially the rhetoric of dignity and liberty for bourgeois activities like trade, invention, and enterprise. In her book, Bourgeois Dignity, she says, “What explains the great enrichment is not capital accumulation or exploitation or imperialism or the slave trade. It was ideas. It was new ideas about liberty and dignity for ordinary people, including innovators.” Close quote, and that's from Bourgeois Dignity, page two. So the factor that made us rich was not capital, not institutions, not exploitation, but a change in ethics and rhetoric. She sees that as a consequence of people being persuaded. Once you're persuaded of something, you're much more likely to change your behavior rather than having some outside exogenous change in institutions. In her book Bourgeois Equality, she said the bourgeoisie was revalued, honored in Holland, admired in England, tolerated in France, noticed in Germany, and eventually emulated everywhere. This sort of extreme binary, was it institutions, was it ideas, may be more important in academics. Some of the distinctions may seem sort of subtle. Joel Mokyr, in his 2016 book, A Culture of Growth, emphasized what he saw as a market for ideas in early modern Europe, where institutions mattered, but without the intellectual shift toward science and progress, growth would have stalled. On the other hand, ideas without the changes in institutions, and in some cases the changes in institutions that allowed the promulgation and distribution of the ideas, also we wouldn't have seen growth. 

So the the hard distinction may matter less than the institutions and ideas more than it is material factors that are the limiting factor for growth. Well, with that introduction, let's now turn to book three. Title of Chapter One is Of The Natural Progress of Opulence. This book is a story of institutions and institutional evolution. Karl Marx later told a story of political conflict and revolutionary change, but Smith's account is a comparative statics story of institutions. As I said, Book III is relatively short, but it's important, and I want to emphasize the debt that I owe to Barry Weingast and the Adam Smith Project at Stanford, because I'm telling the story of Book III from that perspective. However, as always, errors are my sole responsibility, not those who have suggested this approach. 

Smith begins chapter one with one of his most memorable descriptions of economic life. This is on page three hundred seventy six. 

The great commerce of every civilized society is that carried on between the inhabitants of the town and those of the country. It consists in the exchange of rude for manufactured produce, either immediately or by the intervention of money or by some sort of paper which represents money. The country supplies the town with the means of subsistence and the materials of manufacture. The town repays this supply by sending back a part of the manufactured produce to the inhabitants of the country. The town in which there neither is nor can be any reproduction of substances, may be very properly said to gain its whole wealth and subsistence from the country. We must not, however, upon this account, imagine that the gain of the town is the loss of the country. The gains of both are mutual and reciprocal, and the division of labor is in this, as in all other cases, advantageous to all the different persons employed in the various occupations into which it is subdivided. The inhabitants of the country purchase of the town a greater quantity of manufactured goods, with the produce of a much smaller quantity of their own labor than they must have employed had they attempted to prepare them themselves. 

That's the standard story that Smith has about division of labor, and it carries through the entire book. Skipping a bit to page 377, 

As subsistence is, in the nature of things, prior to conveniency and luxury, so the industry which procures the former must necessarily be prior to that which ministers to the latter. The cultivation and improvement of the country, therefore, which affords subsistence, must necessarily be prior to the increase of the town, which furnishes only the means of conveniency and luxury. It is the surplus produce of the country only, or what is over and above the maintenance of the cultivators that constitutes the subsistence of the town. That order of things which necessity imposes in general, though not in every particular country, is, in every particular country, promoted by the natural inclinations of man. If human institutions had never thwarted those natural inclinations, the towns could nowhere have increased beyond what the improvement and cultivation of the territory in which they were situated could support, till such time, at least, as the whole of that territory was completely cultivated and improved. Upon equal or nearly equal profits, most men will choose to employ their capitals, rather in the improvement and cultivation of land than either in manufactures or foreign trade. The man who employs his capital in land has it more under his view and command, and his fortune is much less liable to accidents than that of the trader, who is obliged frequently to commit it not only to the winds and the waves, but to the more uncertain elements of human folly and injustice, by giving great credits in distant countries to men with whose character and situation he can seldom be thoroughly acquainted. The capital of the landlord, on the contrary, which is fixed in the improvement of his land, seems to be as well secured as the nature of human affairs can admit of. 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 everybody. 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. 

Profits are likely to be higher and less risky than investing in faraway ventures. Furthermore, this fits with Smith's broader theme that institutions evolve to support increasing specialization. Agriculture is not glamorous, but it is essential. And his story is that the towns first spring up to provide specialized services to all the agriculture that is around it. But once that happens, we start to generate enough of a surplus that division of labor becomes more and more important, and remember that division of labor is limited by the extent of the market. So when the town starts to become larger, then you get the agricultural area around it being more and more heavily populated. Once agriculture secures a surplus, then domestic manufacturers follow. 

So Smith is linking division of labor with urban growth. Farmers no longer need to spin, weave, make tools themselves. They can buy the cloth, they can buy the tools. They buy from specialists in town, and those specialists in town depend on the farmers' surplus as a source of the profits that they're going to earn. This is not a story of exploitation, but of reciprocal reinforcement. Towns expand only as the countryside can sustain them. That growth of agriculture and the consequent growth of towns, Smith, we heard his argument that foreign trade is not as likely to be as attractive in the normal course of things, quoting from page 380, 

According to the natural course of things, therefore, the greater part of the capital of every growing society is first directed to agriculture, afterwards to local manufacturers, and last of all to foreign commerce. 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. Some of their lands must have been cultivated before any considerable towns could be established, and some sort of coarse industry of the manufacturing kind must have been carried out in those towns before they could well think of employing themselves in foreign commerce. 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 manufacturers, or such as were fit for distant sale, and the manufacturers and foreign commerce together have given birth to the principal improvements of agriculture. The manners and customs, with the nature of their original government introduced, and which remained after that government was greatly altered, necessarily forced them into this unnatural and retrograde order. 

So the story that Smith is telling is that if you look at what's actually happened in societies, it's not what you would expect. And that's a mystery he's going to try to explain. And his explanation for the answer to that mystery is fundamentally institutional. In Book two, Smith carefully distinguished three levels of trade or employment of capital home trade, which is limited by the surplus within the country, foreign trade of consumption, which is limited by the total surplus of the nation, and carrying trade, which is potentially without limit, since it trades between foreign nations. But this is crucial. Those stages are sequential. Carrying trade should come last, not first, in Smith's theory of development. So there's a sharp institutional point that Smith reminds us of. Again, it's back in book two, that individuals don't invest for the public good, but rather for private gain. It's on the last page of book two, page three hundred seventy-four, next to last page. 

The consideration of his own private profit is the sole motive which determines the owner of any capital to employ it either in agriculture or in manufactures, or in some particular branch of the wholesale or carrying trade. The different quantities of productive labor which it may put into motion and the different values which it may add to the annual produce of the land and labor of the society, according as it has been employed in one or other of these different ways, never enter into his thoughts. In countries, therefore, where agriculture is the most profitable of all employment, and farming and improvement the most direct roads to a splendid fortune, the capitals of individuals will naturally be employed in the manner most advantageous to the whole society. The profits of agriculture, however, seem to have no superiority over those of other employments in any part of Europe. Projectors, indeed, in every corner of it, have within these few years amused the public with the most magnificent accounts of the profits to be made by the cultivation and improvement of land. Without entering into any particular discussion of their calculation, a very simple observation may satisfy us that the result of them must be false. We see every day the most splendid fortunes that have been acquired in the course of a single life by trade and manufacturers, frequently from a very small capital, sometimes from no capital. A single instance of such a fortune acquired by agriculture in the same time and from such a capital has not perhaps occurred in Europe during the course of the present century. 

If agriculture were the most profitable employment, society would naturally follow that public good path. But in Europe, Smith observes, agriculture did not yield fortunes. Instead, merchants and manufacturers gained wealth more rapidly. This seems like, given Smith's model, a startling observation. Agriculture could absorb far more capital, but institutional arrangements, insecure tenures, primogeniture, feudal remnants such as entail, all are policy distortions based on narrow self-interest, often a long time ago, preventing investing in agriculture from being profitable. So more fortunes are made in commerce than in agriculture. That's what Smith's going to try to explain in Book three, with his institutional theory of restrictions on property rights. Thus the natural progress of opulence, agriculture, then manufactures, then foreign commerce, was inverted in Europe. Instead, foreign trade and manufacturing came first while agriculture artificially lagged. This inversion, Smith insists, was not natural but institutional. Book three chapter one is short, but foundational. It sets up Smith's critique of European policy by contrasting the natural order with the actual order. Smith's basically saying if left alone, nations, and he means people who make up the nation, would grow agriculture first, then industry, then trade. But in Europe, institutions twisted that order to protect power rather than progress, and that explains why agriculture was left behind, and why much of Europe is poor even in the midst of great potential because of rich farmland and natural resources. 

Well, if you look at Book three, chapter two, the title of it is of the discouragement of agriculture in the ancient state of Europe after the fall of the Roman Empire. Now a bibliographic note. This story of the rise and fall of Greece and Rome and the institutional heritage that comes from them was a big part of Lectures on Jurisprudence. If you're interested in that background, you should consult the Lectures on Jurisprudence. In chapter two, Smith turns away from his general outline of the natural progress of opulence to explain why, in fact, Europe, after the fall of Rome, did not follow that path. Agriculture, which he regards as the natural foundation of national wealth, was stifled by institutions, legal rules, and political arrangements. So I tried to prepare this chapter and I realized I was quoting almost the whole thing, so I'm just going to paraphrase. The chapter does reward study, though, and I recommend it as an ur-text of public choice, as well as the sophisticated and insightful institutional history of political economy. 

Well, when the Roman Empire collapsed, invasions destroyed towns and trade. Land became concentrated in the hands of a few chiefs and nobles because of the needs of defense and the need to control violence that was that dominated production and prosperity. I think I've said before, one of Doug North's favorite observations was about the enormous economies of scale and division of labor resulting in military strength. After all, an army of 2,000 can defeat dozens of armies of 200, and so you need scale. What Smith notes is that after the fall of the Roman Empire, all the land in the country was engrossed by a few great proprietors, and cultivation of it was abandoned to slaves. Feudal law locked this arrangement into place. The law of primogeniture prevented estates from being divided among multiple heirs, and entails made land almost inalienable. Smith notes, it seldom happens that a great proprietor is a great improver. The pride of family, the prejudice of birth, and the insolence of wealth are almost always unfavorable to improvement. So tenants, whether they're serfs, metiers, or insecure lessees, lacked incentives to improve also. They bore the risk of poor harvests, but they saw little return from improvements. So the farmer, though he should be a man of stock if he had something to invest, is in all cases the servant of the landlord. Agriculture therefore attracted little new capital, since, unlike commerce, the land was tied up with social rank. Now there's some exceptions. Smith praises the yeomanry, the small proprietors who worked their own land, and in a few countries, England, Holland, Bern, the rise of considerable farmers who had both stock and security to improve cultivation. But overall those are exceptions, and improvement was very slow. La

w and policy discouraged output. There are restraints upon the exportation of corn, and by corn that all grains, without a license. The absurd regulations of the forestallers, engrossers, and regraters. These suppress prices and incentives, just as Roman laws had once ruined Italian agriculture. Europe's institutions inverted the natural order. Now I do have to read one part out verbatim, because it's terrific. This is the beginning of chapter two. 

When the Germans and Scythian nations overran the western provinces of the Roman Empire, the confusions which followed so great a revolution lasted for several centuries. The rapine and violence which the barbarians exercised against the ancient inhabitants interrupted the commerce between the towns and the country. The towns were deserted and the country was left uncultivated, and the western provinces of Europe, which had enjoyed a considerable degree of opulence under the Roman Empire, sunk into the lowest state of poverty and barbarism. During the continuance of those confusions, the chiefs and principal leaders of those nations acquired or usurped to themselves the greater part of the lands of those countries. A great part of them was uncultivated, but no part of them, whether cultivated or uncultivated, was left without a proprietor. All of them were engrossed, and the greater part by a few great proprietors. This original engrossing of uncultivated lands, though it might have been but a transitory evil. They might soon have been divided again and broke into small parcels, either by succession or by alienation. But the law of primogeniture hindered them from being divided by succession. The introduction of entails prevented their being broke into small parcels by alienation. 

Notice that this is a story that kind of matches Book I and Book Two. Book one was about division of labor. Book two is about division of stock. Book three is about division of land, or the fact that the failure to be able to accomplish the division of land has held back the natural order of things, which is towards prosperity. Well, let me continue, going over on to page three hundred eighty three.

 Laws frequently continue in force long after the circumstances which first gave occasion to them, and which could alone render them reasonable are no more. In the present state of Europe, the proprietor of a single acre of land is in as perfectly secure of his possession as the proprietor of a hundred thousand. The right of primogeniture, however, still continues to be respected, and as of all institutions it is the fittest to support the pride of family distinctions, it is still likely to endure for many centuries. In every other respect, nothing can be more contrary to the real interest of a numerous family, than a right which, in order to enrich one, beggars all the rest of the children. Entails are the natural consequence of the law of primogeniture. They are introduced to preserve a certain lineal succession of which the law of primogeniture first gave the idea, and to hinder any part of the original estate from being carried out of the proposed line either by gift or device or alienation, either by the folly or by the misfortune of any of its successive owners.

 It was necessary to have large enough stocks of land so that the owner could mobilize military forces for violence to be able to protect the people that lived on them in periods of great disorder. And in order to make sure that there was no division of this ability to focus violence, primogeniture, which means that inheritance has to go to a single person, and entail, which means that that single person cannot give or sell any of the land. We're trying to keep the land together, but the reason is security. This during the thirteenth, fourteenth centuries maybe made sense. It no longer makes sense in the eighteenth century, Smith is saying, and yet we still have these rules. We still have primogeniture, we still have entail, and he's worried that they will continue for centuries to come. Skipping ahead a little bit to page three hundred eighty five, 

Great tracts of uncultivated land were in this manner not only engrossed by particular families, but the possibility of their being divided again was as much as possible precluded forever. It seldom happens, however, that a great proprietor is a great improver. In the disorderly times which gave birth to these barbarous institutions, the great proprietor was sufficiently employed in defending his own territories or in extending his jurisdiction and authority over those of his neighbors. He had no leisure to attend to the cultivation and improvement of land. When the establishment of law and order afforded him this leisure, he often wanted the inclination and almost always the requisite abilities. 

That's pretty harsh, but there is no reason for a single great proprietor to be very concerned about the productivity of the land. He's rich as heck, and it's really fun to have all of these retainers and people that depend on you. It came from the fact that you had to provide defense, but it still meant that you were now the boss of a great host of a gigantic number of people. So the problem is restrictions on division of land. And I actually was expecting that Smith would use that phrase, so I did search for it. Division of labor occurs often, division of stock occurs quite a bit. Division of land never does. So it's a little bit surprising, but that clearly is what he's talking about. Primogeniture, entail, and other restrictions on dividing up land are terribly inefficient, but it benefits the power of the state and a few nobles in terms of their positional goods, of prestige and the ability to have many serfs and retainers effectively as slaves. Now, Smith is outraged by this and he's looking for a mechanism to end those legal rules. Now, Smith does think that there are some nations, or really for the most part, colonies, that are doing things in the correct order, but some of the reason for that is they're they're completely absolved of any power or obligation to take care of themselves because they're owned by someone else. So Smith praises the British colonies in America as perhaps the clearest example. They have abundant land, scarce people, and so the settlers are devoted all their capital first to agriculture. Towns and manufacturers followed, but only to supply the conveniences of the local area. They don't make anything to ship abroad. So what Smith says on page 378 is, 

In our North American colonies where uncultivated land is still to be had upon easy terms, no manufacturers for distant sale have ever yet been established in any of their towns. When an artificer has acquired a little more stock than is necessary for carrying on his own business and supplying the neighboring country, he does not, in North America, attempt to establish with it a manufacturer for more distant sale, but employs it in the purchase and improvement of uncultivated land. From artificer he becomes planter, and neither the large wages nor the easy subsistence which that country affords to artificers can bribe him rather to work for other people than for himself. He feels that as an artificer is the servant of his customers from whom he derives his subsistence. But that a planter who cultivates his own land and derives his necessary subsistence from the labor of his own family is really a master, and independent of all the world. 

Smith also mentions the growth of what he calls substantial farmers in Scotland, but once again the reason that the substantial or considerable farmers in Scotland came about was the breaking of the feudal institutions that kept land locked into just a few families, allowing land to be bought and sold meant that investment in land became possible. So the change in the institution, breaking the institutions of feudalism, was what caused the creation of commerce and then city life. In chapter three, the title of the chapter is “Of the Rise and Progress of Cities and Towns.” So when Smith sets out in Book Three to explain the rise and progress of cities and towns after the fall of the Roman Empire, he's not just telling a story about medieval Europe, he's tracing one of the great transformations in human history, how liberty, security, and prosperity began to emerge again after centuries of feudal darkness. So Smith's argument begins with the humble condition of townspeople in the Middle Ages. Unlike in the flourishing republics of antiquity, where urban land was built around free landowners, medieval towns were almost wholly servile, that is, they were owned by someone else. Smith puts it bluntly. 

The inhabitants of cities and towns were, after the fall of the Roman Empire, not more favored than those of the country. They consisted indeed of a very different order of people from the first inhabitants of the ancient republics of Greece and Italy. These last were composed chiefly of the proprietors of land, among whom the public territory was originally divided, and who found it convenient to build their houses in the neighborhood of one another, to surround them with a wall for the sake of common defense. After the fall of the Roman Empire, on the contrary, the proprietors of land seemed generally to have lived in fortified castles on their own estates, and in the midst of their own tenants and dependents. The towns were chiefly inhabited by tradesmen and mechanics, who seem in those days to have been servile, or very nearly servile condition. The privileges which we find granted by ancient charters to the inhabitants of some of the principal towns in Europe sufficiently show what they were before those grants. The people to whom it is granted as a privilege that they might give away their own daughters in marriage without the consent of their lord, that upon their death their own children, and not their lord should succeed to their goods, and that they might dispose of their own effects by will, must, before those grants, have been either altogether or very nearly in the same state of villainage with the occupiers of land in the country. 

End quote. Smith is drawing an inference, but it seems plausible, and that is that since it was a big deal that these rent rights were granted at some point, it must have been true that before that they were basically the same as slaves, that the people who worked in town, the smith, the cooper, baker, they didn't have any independent status. And so the fact that it was a big deal that they could decide who their daughter married or that they had the ability to leave property to their heirs is a bad sign for how things were before. So that's Smith's starting point. In the year 1000 or so, Europe's towns were not centers of liberty or wealth. They're clusters of tradesmen and mechanics, often burdened with obligation to local lords, exposed to arbitrary taxation, and taxed or had fines imposed on them if they even tried to move around. They lacked even the most basic legal rights. So they were not only socially constrained but economically burdened. Smith details how commerce itself was obstructed by a host of petty exactions. Taxes were levied upon persons, on goods, on passage. If they went over a bridge, if they were carrying goods from place to place, they had to give a part of it before they could go to a fair or a place where they could sell it. If they erected a booth or a stall to sell them in. In other words, every journey, every action was charged, and every bridge exacted a fee, every stall required a payment. Trade was choked at every turn by all these exactions. Smith notes that some merchants purchased exemptions, but for most that burden is crushing. To carry cloth from one town to another could mean paying dues a dozen times over, to the point where there was no point going to sell the cloth. But that meant that a mutually beneficial transaction was blocked. The burghers were able to benefit from playing off the power of the king against the powers of the nobility. That was how this ended, because Smith is pointing out the degree of the problem, and then he's saying, But it seems to have changed, and the question is why? How did it change? And Smith's description is on page 400, quoting now, 

At first the farm of the town was probably let to the burghers in the same manner as it had been to other farmers for a term of years only. In process of time, however, it seems to have become the general practice to grant it to them in fee, that is, for a much longer time, reserving a rent certain never afterwards to be augmented. The payment is having thus become perpetual, the exemptions in return for which it was made naturally became perpetual too. 

These exemptions, therefore, ceased to be personal, and could not afterwards be considered as belonging to individuals as individuals, but as burgers of a particular burgh, which upon this account was called a free burg, for the same reason that they had been called free burgers or free traders.

Okay, no, that's not right. I Ididn't say free bird, it's free burgher. So the difference may seem subtle, but what happened was that these individuals were constantly being taxed. Those taxes, exactions, other restrictions were limited, reduced, in some cases eliminated because they were citizens of a town. So as long as they were part of an incorporated town, they had a different set of rights, which suggests that this might start to move in the direction of political self-rule. And that's exactly what happened. So continuing on page 400. 

Along with this grant, the important privileges above mentioned, that they might give away their own daughters in marriage, though their children could succeed to them, and they might dispose of their own effects by will, were generally bestowed upon the burgers of the town to whom it was given. Whether such privileges had before been usually granted along with the freedom of trade to particular burghers as individuals, I know not. I reckon it not improbable that they were, though I cannot produce any direct evidence of it. But however this may have been, the principal attributes of villainage and slavery being thus taken away from them, they now at least became really free in our present sense of the word freedom. Nor was this all. They were generally at the same time erected into commonality or corporation, with the privilege of having magistrates and a town council of their own making, bylaws for their own government, building walls for their own defense, and of reducing all of their inhabitants under a sort of military discipline, by obliging them to watch against all attacks and surprises by night as well as by day. 

Well, skipping ahead a little bit, page four oh one, “In order to understand this, it must be remembered that in those days the sovereign of perhaps no country in Europe was able to protect, to the whole extent of his dominions, the weaker part of his subjects from the oppression of the great lords”. Pause the quote for a moment. That is, the king could not protect his subjects against the great lords. It's not external threat, primarily, it's the local lord, the local nobility. Back to the quote. 

Those whom the law could not protect and who were not strong enough to defend themselves were obliged either to have recourse to the protection of some great lord, and in order to obtain it become either his vassals or slaves, or enter into a league of mutual defense for the common protection of one another. The inhabitants of cities and bergs, considered as single individuals, had no power to defend themselves, but by entering into a league of mutual defense with their neighbors, they were capable of making no contemptible resistance. The lords despised the burghers, whom they considered not only as of a different order, but as a parcel of emancipated slaves, almost of a different species from themselves. The wealth of the burghers never failed to provoke their, that is the lords, envy and indignation, and they plundered them upon every occasion without mercy or remorse. The burgers naturally hated and feared the lords. The king hated and feared the lords too, but though perhaps he might despise, he had no reason either to hate or fear the burghers. 

Mutual interest, therefore, so pause the quote for a minute, the burgers hated the lords, and the king hated the lords. So the king had every reason to give the townspeople the power to resist the lord because that actually made the king more powerful. So taking up the quote again, they, the burgers, 

…were the enemy of his enemies, his the king, and it was his interest to render them as secure and independent of those enemies, the Lord, as he could. By granting them magistrates of their own the privilege of making bylaws for their own government, building walls for their own defense, and reducing all their inhabitants under military discipline, he gave them the means of security and independency of the barons which it was in his power to bestow. Without the establishment of some regular government of this kind, without some authority to compel their inhabitants to act according to some certain plan or system, no voluntary league of mutual defense could either have afforded them any permanent security or have enabled them to give the king any considerable support. 

Again, skipping ahead a little bit, on page four hundred two, 

Philip I of France lost all authority over his barons. Towards the end of his reign, his son Louis, known afterwards by the name of Louis the Fat, consulted, according to Father Daniel, with the bishops of the royal domains, concerning the most proper means of restraining the violence of the great lords. Their advice consisted of two different proposals. One was to erect a new order of jurisdiction by establishing magistrates and a town council in every considerable town of his domains. The other was to form a new militia by making the inhabitants of those towns under the command of their own magistrates, march out under proper occasions to the assistance of the king. It is from this period, according to the French antiquarians, that we are to date the institution of the magistrates and councils of cities in France. It was during the unprosperous reigns of the princes of the House of Swabia that the greater part of the free towns of Germany received their first grants of privileges, and that the famous Hanseatic League first became formidable. 

Well, that's really interesting. The German city of Lubeck, which was chartered in 1226, is a really striking example. Its privileges allowed it to govern itself, to hold markets and to regulate its commerce. So Germany was pretty chaotic, but the city of Lubeck got the ability to govern itself. It became the leading city of the Hanseatic League, which is a commercial federation of northern European towns that dominated Baltic trade for centuries. And Smith's description of towns negotiating fixed rents exactly echoes that pattern. If you will let us defend ourselves, we will pay you enough to make it worth your while, Mr. King, and then we will be able to defend ourselves against the local lords. In England, boroughs like London, York, and Bristol had accumulated charters from successive kings, but these charters were often not enforceable. Still, those charters often included the right to elect magistrates, to hold courts, and to pay taxes as a lump sum rather than individually, because that meant that the king would use discretion to reward friends and punish enemies. So having a fixed known tax was a big advantage. And you can see this in the famous Magna Carta of 1215. There's two clauses of direct interest. Clause 12 says that no scuttage or aid may be levied in the kingdom without general consent. Now, scuttage is a levy for military service. It's a quit rent. It is a way of saying, instead of military service, I will pay this. And a lot of times the king was more interested in the payment of the scuttage than in the military service, but in any case it meant that none of those things could be imposed. The other clause was clause 13. The city of London shall enjoy all its ancient liberties and free customs, both by land and water. We also will and grant that all other cities, towns, and ports shall enjoy all their liberties and free customs. That second one is still in force, that's still part of the law of England, which means that you can't have it's basically a kind of federalism. Other cities cannot tax, and the king cannot tax, and nobles cannot tax the cities. And it is a really important way of encouraging the rise of commerce. Overall, then, the broad consequence of the rise of towns is that they become islands of order, liberty, and security, even if the countryside remains violent and oppressed. The privileges of towns are the principal means by which the kings of Europe were able to reduce the authority of the great lord. Now there's nothing magnanimous about this, there's nothing actually public spirited. The king's own self-interest led them to give power to the towns because that weakened the enemy of the king, which was the lords. On page four hundred five, Smith says, 

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 occupiers of land in the country were exposed to every sort of violence. But men in this defenseless state naturally content themselves with their necessary subsistence, because to acquire more might only tempt the injustice of their oppressors. On the contrary, when they are secure of enjoying the fruits of their industry, they naturally exert it to better their condition and to acquire not only the necessities, but the conveniences and elegancies of life. That industry, therefore, which aims at something more than necessary subsistence, was established in cities long before it was commonly practiced by the occupiers of land in the country. If in the hands of a poor cultivator, oppressed with the servitude of villainage, some little stock should accumulate, he would naturally conceal it with great care from his master, to whom it would otherwise have belonged, and take the first opportunity of running away to a town. The law was at that time so indulgent to the inhabitants of towns and so desirous of diminishing the authority of the lords over those of the country, that if he could conceal himself there from the pursuit of his lord for a year, he was free forever. Whatever stock, therefore, accumulated in the hands of the industrious part of the inhabitants of the country naturally took refuge in cities, as the only sanctuaries in which it could be secure to the person that acquired it. 

And again that's on page four oh five, end of quote. The natural, rational process should have been investment in farms in the country. But the institutions were so dysfunctional that for complicated reasons, liberty started in the cities. And so as a result, much of the progress, economic progress of Europe has been inverted. That meant that towns were the seedbeds of modern freedom. They nurtured habits of regular exchange, respect for contracts, and self government. Over time, these urban liberties spilled over into the countryside, but they started in the cities. Smith concludes that the commerce and manufactures of cities gradually improved the condition of the country, reviving agriculture and spreading prosperity. 

So that's his bridge to chapter four, where he explains how town trade contributed to the improvement of the land. So chapter three is both history and spells out a theory. It shows us how institutions matter, how charters, corporations, and alliances with kings could transform servile peddlers into free citizens, and how those free citizens in turn transformed Europe. Which brings us to chapter four. Adam Smith's chapter four in Book Three gives a sweeping account of how towns, far from being isolated enclaves of wealth, played the transformative role in cultivating the countryside, breaking feudal power, and laying the foundations of modern prosperity. Smith's argument unfolds through three channels- markets, investment, and governance, and he illustrates each of those with concrete examples that he draws from his knowledge of England, France, Scotland, and continental Europe. But it is well to start, I think, with the punchline. One of the punchlines is on page 422, in chapter four of Book III. 

A revolution of the greatest importance to the public happiness was in this manner brought about by two different orders of people, who had not the least intention to serve the public. To gratify the most childish vanity was the sole motive of the great proprietors. The merchants and artificers, much less ridiculous, acted merely from a view to their own interest, and in pursuit of their own peddler principle of turning a penny wherever a penny was to be got. Neither of them had either knowledge or foresight of that great revolution which the folly of the one and the industry of the other was gradually bringing about. It is thus that through the greater part of Europe the commerce and manufacture of cities, instead of being the effect, have been the cause and occasion of the improvement and cultivation of the country. 

What in the world is Smith talking about? Well, as we'll see, the answer is, Smith thought that it was the self-interest of the ridiculous rich people and the self interest of the profit seeking manufacturers that led to the concentration of wealth in the form of baubles and trinkets. That is, the wealthy people became so interested in having cool stuff they stopped insisting on having power over their vassals, and slavery and feudalism died. So the rise of towns, in other words, was not merely a byproduct of economic growth, it was the engine of Europe's revival, and it fits exactly into what we would now call a comparative statics analysis of the problem. Smith begins by stressing the importance of markets. Towns created what he called a great and ready market for the rude produce of the country. Farmers are no longer limited to producing only what their own household and immediate community could consume. Since they can sell their surplus in town, they can then take advantage of division of labor to buy the things that they need. The effect rippled outward beyond local borders. So the benefit was not confined to the countries in which they were situated, but extended more or less to all those with which they had any dealing. Still, because of transportation costs, proximity mattered most. The neighboring countryside gained the highest rewards because transport costs are lower and farmers could get better net prices. But beyond markets, Smith highlights the role of merchants who, enriched by trade, often purchased country estates. Unlike the traditional aristocracy, they brought with them a spirit of enterprise. As Smith puts it, merchants are commonly ambitious of becoming country gentlemen. And when they do, they are generally the best of all improvers. The reason is they actually would like for the country estate to be more productive of profits. They're used to investing in getting profits. So the contrast between merchants and the traditional landlord is stark. Smith points out that a merchant is accustomed to employ his money chiefly in profitable projects, whereas a mere country gentleman is accustomed to employ it chiefly in expense. This mercantile mindset made merchants bolder investors, willing to sink capital into drainage, enclosure, other kinds of long-term improvements, while country gentlemen hesitated to risk more than what could be saved from the annual rents. And the reason is if you have engaged in commerce, you know that it may take more than one year to see the return. But they were willing to do that. 

And so this transformation started to make agriculture more productive. Perhaps the most profound effect of commerce, though, was political. Before the rise of towns, the great landlords had held almost absolute authority. Their tenants and retainers were as dependent as servants or slaves. Even kings struggled to enforce law within their territories. Smith observes that in such conditions, to have enforced payment of a small debt within the lands of a great proprietor would have cost the king, had he attempted it by his own authority, almost the same effort as to extinguish the civil war. So the king could not collect taxes directly. He had to try to collect them from the lords, and there's an obvious problem there. That authority of the great barons was actually older than feudal law itself. On page four hundred fifteen, Smith says, It is a mistake to imagine that those territorial jurisdictions took their origin from the feudal law. Not only the highest jurisdictions, both civil and criminal, but the power of levying troops, coining money, and even that of making bylaws for the government of their own people were all rights possessed by the great proprietors of land several centuries before even the name of the feudal law was known in Europe. The authority and jurisdiction of the Saxon lords in England appeared to have been as great before the conquest as that of any of the Norman lords after it. But the feudal law is not supposed to have become the common law of England until after the conquest. That was the most extensive authority and jurisdictions were possessed by the great lords in France allodially, long before the feudal law was introduced into that country, is a matter of fact that admits of no doubt. That authority and those jurisdictions all necessarily flowed from the state of property and manners just now described. Without remounting to the remote antiquities of either the French or English monarchies, we may find in much later times many proofs that such effects must always flow from such causes. I should note that elodial title means kind of primitive, the than which there was nothing before. So it's not contingent on anything, it's not in there's no grant or charter, it is original ownership. You don't owe it to anyone else for its legitimacy. 

So feudal law, Smith argues, tried to moderate the arbitrary power of the great landlords, but that proved insufficient. This is one of the most interesting observations, and I think it's the important thing about Book Three. We're coming up to Smith's answer to the his the puzzle that he posed at the outset. In effect, labor became too expensive, and feudal lords became futile, rich people who lived in cities and leave division of labor to improve the prosperity of the country. They no longer used the feudal restrictions of primogeniture and entail because they would sell off their land. Why did this happen? Smith answers it on page 418. 

But what all the violence of the feudal institutions could never have effected, the silent and insensible operation of foreign commerce and manufacturers gradually brought about. These gradually furnished the great proprietors with something for which they could exchange the whole surplus produce of their lands, and which they could consume themselves, without sharing it either with tenants or retainers. All for ourselves and nothing for other people seems in every age of the world to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other person. For a pair of diamond buckles, perhaps, or for something as frivolous and useless, they exchanged the maintenance, or what is the same thing, the price of the maintenance, of a thousand men for a year, and with it the whole weight and authority which it could give them. The buckles, however, were to be all their own, and no other human creature was to have any share of them, whereas in the more ancient method of expense they must have shared it with at least a thousand people. With the judges that were to determine the preference, this difference was perfectly decisive, and thus for the gratification of the most childish, the meanest, and the most sordid of all vanities, they gradually bartered their whole power and authority. In other words, trade offered nobles goods they could enjoy personally, rather than consuming their surplus through armies of dependents. 

As Smith put it, all for ourselves and nothing for other people seems in every age of the world to have been the vile maxim of the masters of mankind. But what that meant was they gave up enslaving people. It was pretty hard to have all these slaves and retainers. Maybe it was cool to have these giant meals where thousands of people were constantly depending on you. I mean it reminds me of King Lear. King Lear had this problem that he had all these retainers, drunk guys, and soldiers that hung around with him, he had this giant retinue. They made him get rid of that, but Lear was forced to get rid of it. The people that Smith is talking about, the wealthy nobles, they did it on their own for a pair of diamond buckles. Commerce also altered the balance of power between towns and kings. The burghers of Europe, who were once despised as a parcel of emancipated slaves almost of a different species, grew wealthy enough to support monarchs against the nobility. Kings then in turn extended privileges to towns, granting magistrates, walls, militias, because they were the enemy of his enemies, and it was his interest to render them as secure and independent of those enemies as he could. 

So Smith gives a number of illustrations. King John of England, Philip I of France, we've already talked about. The conclusion of chapter four is the climax of Book Three. And I first heard this years ago, and I was very impressed by it then, and I'm completely convinced that it is correct now. My Duke Homeboy, Dennis Rasmussen, in his book The Infidel and the Professor, makes a particular claim about this chapter, saying it's the most important argument in all of the Wealth of Nations. Let's take a second and listen to Russ Roberts and Dennis Rasmussen set this up.


Russ Roberts: 

There's one other part of the commercial life that we haven't talked about that you talk about in the book that was really the most startling for me because I just missed it in Smith and it's in Hume as well. I'm going to read a quote from your book. “If asked to nominate the single most important passage in the Wealth of Nations, a reasonable candidate would be the climactic claim of Book Three, and here you quote The Wealth of Nations. ‘Commerce and manufacturers gradually introduced order and good government, and with them the liberty and security of individuals among the inhabitants of the country who had before lived almost in a continual state of war with their neighbors and of servile dependency on their superiors. This, though it has been the least observed, is by far the most important of all their effects’.” That's the end of the quote from Smith and from your book. Now, I would disagree with you. I don't think anyone would name that as the single most important passage in the Wealth of Nations, but that's okay. So you can defend that if you want. But I it was the single most illuminating passage you quote for the Wealth of Nations for me as a as a casual Smith scholar, because I think if you had asked me, or most people to think about Smith liberty and economics, they'd say, well, Smith believed that it's important to have liberty so that you can have a good economy. The government shouldn't intervene too much, let's say fair. Of course, he's not an anarcho-capitalist, he's a classical liberal. He had a role for government, limited, but definitely a role for government. So that's what I would have said. But what you're pointing out is that Smith actually argued something equally interesting and maybe much more profound, which is that the causation runs the other direction, that the increase in commerce and standard of living and commercial life in Europe in particular led to liberty, brought about the liberty that is cherished for its own sake. So give us Smith's argument.


DennisRasmussen:

No, I'll stick to my guns and say it is the single most important. The reason why I say that, I mean, Smith says it quite explicitly there. He says this though that has been the least observed is by far the most important of all of commerce's effects.


Now here is the passage that Rasmussen is referring to:

Commerce and manufactures gradually introduced order and good government, and with them the liberty and security of individuals among the inhabitants of the country, who had before lived almost in a continual state of war with their neighbors and of servile dependency upon their superiors. This, though it has been the least observed, is by far the most important of all their effects. Mr. Hume is the only writer who, so far as I know, has hitherto taken notice of it. In a country which has neither foreign commerce nor any of the finer manufacturers, a great proprietor, having nothing for which he can exchange the greater part of the produce of his land which is over and above the maintenance of the cultivators, consumes the whole in rustic hospitality at home. If this surplus produce is sufficient to maintain a hundred or a thousand men, he can make use of it in no other way than by maintaining a hundred or a thousand men. He is at all times therefore surrounded with a multitude of retainers and dependents, who having no equivalent to give in turn for their maintenance, but being fed entirely by his bounty, must obey him, for the same reason that soldiers must obey the prince who pays them.

 I often listen to EconTalk while walking my dogs, and I also often end up yelling, usually at Russ, when he goes off the rails. I've actually had mothers come outside and rush to take their children inside because there is a crazy man yelling walking by. Well, this was one of those times when Rush challenged the importance of this passage. I think the standard reading is that liberty allowed commerce. That's the story that North wants to tell, or that ideas of liberty allowed commerce. That's the McCloskey story. But the actual story, the story that Smith tells and that Rasmussen highlights, is that commerce allowed, and in fact, forced liberty. It was the change in relative prices combined with two key features of mankind, the desire to be admired, and the propensity to truck, barter, and exchange. If you read that passage on page four hundred twelve, it opens up a whole new way of thinking. 

Well, by the close of the chapter, Smith has painted a vivid picture. Commerce ended feudalism. Markets encouraged agriculture, merchant wealth reinvigorated land, and the rise of burgs undermined the arbitrary power of feudal lords. The changes came not through violence or decree, but by, in Smith's terms, the silent and insensible operation of foreign commerce and manufactures. In short, towns did not drain the countryside, but helped liberate and improve it. Through markets, investment, and governance, they transformed the very structure of European society. The next episode, part seven, will be released on Tuesday, November 25, where we will take up Book 4, where Smith develops his comparative systems view of economics. Talk to you then.