The Answer Is Transaction Costs

Adam Smith Episode 8: A Nation of Shopkeepers

• Michael Munger • Season 3 • Episode 19

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Smith closes Book IV by dismantling mercantilism through the lens of colonial policy, monopoly, and rent seeking, then weighs physiocracy against the system of natural liberty. We trace why colonies grew despite Europe, not because of it, and how “wealth as money” broke policy and fueled war.

• mercantilism’s definition of wealth and the balance of trade myth
• monopoly and bounties as tools for concentrated gains
• chapter 7 on colonies as a case study in institutional design
• free ports versus exclusive companies and growth outcomes
• enumeration, navigation acts, and distorted incentives
• defense costs and the arithmetic of empire
• the “nation of shopkeepers” argument and public choice
• draconian wool laws, smuggling, and consumer losses
• physiocracy’s insights and errors, sector favoritism
• the system of natural liberty as Smith’s alternative


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 8 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 partnership of Amy Willis.  

This episode takes up the second part of Book 4 of The Wealth of Nations, which is entitled Of Systems of Political Economy. That is, this episode will finish Book 4, looking at chapters 7, 8, and 9. Now, chapter 7 and 8 are two of my favorite chapters in all of Wealth of Nations, so I'm excited. Straight out of Creedmoor, this is TTAITC.

 Having explained how an economy can and ought to work, if allowed sufficient freedom, Smith devoted much of Book 4 to a sharp critique of the entrenched views of his life. His overall project, as Dan Klein has noted, is to argue for a rebuttable presumption of liberty. Most of the time, in most situations, the system of natural liberty will result in the greatest happiness and opulence. Good society is not what happens when the state plans everything, but neither is it what happens when there is no state. The state is charged with doing three general things: establish and maintain justice, which is abstain from what is another's, provide defense, and generate a very short list of what we would now call public goods. That's Smith's system of natural liberty. Having spelled out his idea of good government in Books one through three, Book four is Smith's great indictment of the two alternative systems, mercantilism and physiocracy. There was no socialism, at least as a formal system at the time, though there were precursors all the way back to Plato. But Smith is focusing on mercantilism and physiocracy as viable existing alternatives. Now, Smith prefers physiocracy, but he finds flaws even there with a narrow focus on agriculture as the only source of wealth and growth. But his greatest scorn, including a surprising level of sarcasm and mockery, is for mercantilism. 


In the November episode, we covered chapters one through six in Book Four. Today we'll be looking at chapters seven through nine. That may not sound like much, but chapter seven alone is nearly ninety pages in the Liberty Fund edition. Now the longest chapters in Wealth of Nations are Book 1, Chapter 2, and Book Five, Chapter 1. Each of those is more than a hundred pages all by itself. But chapter seven on colonies is almost ninety pages. The three chapters that we'll look at today, seven, which is Of Colonies, read Mercantilism, a belief that the economy existed to strengthen the government, eight, his conclusion on mercantilism, and nine, on agriculture or physiocracy, by far the greatest amount of time we'll spend today is on chapter seven. 


Mercantilists define national wealth as the amount of gold and silver held in reserves within the nation's borders and often by the state. This was necessary, in the view of the mercantilist, first and foremost, to fight wars, many of which resulted in the expansion of territory, which could produce more gold and silver. The need to retain and expand this stockpile led to an obsession with the balance of trade, the need to reduce imports, which saw gold leaving the country, and to promote exports, which saw more gold coming in. In Smith's view, this led to distortions of the free market, including high import tariffs, protectionism, and the creation of monopolies, all of which served the interest of a select few to the great cost of the many. So I'll paraphrase what we talked about last time a little bit to save time. To attempt to increase the wealth of any country, either by introducing or by detaining in it an unnecessary quantity of gold and silver is as absurd as it would be to attempt to increase the good cheer of private families by obliging them to keep an unnecessary number of kitchen utensils. As the expense of purchasing those unnecessary utensils would diminish instead of increasing either the quantity or goodness of the family provisions, so the expense of purchasing an unnecessary quantity of gold and silver must in every country as necessarily diminish the wealth which feeds, clothes, and lodges, and which maintains and employs the people. 


The operation of mercantilism had two principles. Wealth consisted of gold and silver, and that those metals could be brought into a country which had no mines only by balance of trade, or by exporting to greater value than it imported. It necessarily became a great object of political economy to diminish as much as possible the importation of foreign goods for home consumption, and to increase as much as possible the produce of the domestic industry. Its two great engines for “enriching,” and that's in quotes, enriching the country, were restraints upon importation and encouragement to exportation. Mercantilists want to spend all of our useful goods to buy more money. So we send away all our stuff to buy money. Why? Because we might need money to buy stuff. That's ridiculous. Better to realize in the first place that wealth was stuff, not money all along. Smith talks about this on page 496 and 497 in Book 4, chapter 3, Part C. That's on page 496. 


But the very same circumstances which would have rendered an open and free commerce between two countries so advantageous would have occasioned the principal obstruction to that commerce. Being neighbors, they are necessarily enemies. The wealth and power of each becomes, upon that account, more formidable to the other. What would increase the advantage of national friendship serves only to inflame the violence of national animosity. They are both rich and industrious nations, and the merchants and manufacturers of each dread the competition of the skill and activity of those of the other. Mercantile jealousy is excited and both inflames and is itself inflamed by the violence of national animosity, and the traders of both countries have announced with all the passionate confidence of interested falsehood the certain ruin of each, in consequence of that unfavorable balance of trade, which they pretend would be the infallible effect of an unrestrained commerce with the other. 


So pause the quote for a second. That phrase, all the passionate confidence of interested falsehood, is a proto public choice perspective. These are rent seekers. And they're lying, and in fact they even convince themselves, so it isn't quite a lie, but it is a falsehood, that their self-interest is actually the same as that of the country. And the country will be ruined if we allow these other people to send us the stuff that we would like to buy. Continuing the quote now, 

There is no commercial country in Europe of which the approaching ruin has not frequently been foretold by the pretended doctors of this system from an unfavorable balance of trade. After all the anxiety, however, which they have excited about this, after all the vain attempts of almost all trading nations to turn that balance in their own favor and against their neighbors, it does not appear that any one nation in Europe has been in any respect impoverished by this cause. Every town and country, on the contrary, in proportion as they have opened their ports to all nations, instead of being ruined by this free trade, as the principles of the commercial system would lead us to expect, have been enriched by it. Though there are in Europe indeed a few towns, which in some respects deserve the name of free ports. There is no country which does so. Holland, perhaps, approaches the nearest to this character of any, though still very remote from it. And Holland, it is acknowledged, not only derives its whole wealth, but a great part of its necessary subsistence from foreign trade. 


End of quote. Well, that's ripped from the headlines. That's exactly the debate that we're having today. And it is interesting that people are decrying this old-fashioned view that Adam Smith had. And what they're arguing for is an even more old-fashioned and thoroughly discredited view, which is mercantilism, which is the argument that Adam Smith tried to, and to my mind, did, lay to rest. But it is having a new zombie life. The balance of trade is the main concern of the U.S. to the impoverishment of most American citizens. One of the main underlying concerns that Smith has in his discussion of colonies, as we'll see in chapter 7, was monopoly. Smith was particularly critical of how the mercantilist system operated towards Britain's growing colonial empire. Restrictive trading arrangements designed to inflate Britain's exports hindered the development of both the colonies and those parts of the home economy excluded from these monopolies. When this trade was disrupted, for example, by further war, the economy was disproportionately affected more than it had to be. 


So this is an interesting anticipation of the Marxist-Leninist view of imperialism. [Karl] Marx had made the absurd prediction that wages would fall anywhere capitalism reigned. Now that turned out to be ridiculously false, completely false. Lenin recognized he needed a patch to some way to save the exploitation theory. He hit on colonialism and imperialism, and we're still paying the costs of that today. The Marxist Leninism that's taught in American universities, in economics classes that are taught by literature professors, he said, his voice rising with outrage, these so-called economics classes see colonialism and imperialism as the main source of historical change and inequality in the world. Now, notice what this does for the Marxist-Leninist. The wages of workers in developed nations might rise, but only because workers in colonies were being exploited. Now there was a recent EconTalk with William Easterly that explored that perspective. And in fact, to the credit of Marxist-Leninists, a lot of empire builders tried to use exactly that argument to justify it. We will grow rich by exploiting the colonies. As Smith shows, though, it was never true. It was never true that colonies were profitable. And so the core claim that the source of wealth in capitalist nations was from their colonies is just nonsense. 


Well, as I said, Smith notes that there is something to this argument in the sense that that's what the mercantilists are claiming, but it is not true that it worked. There is an economic argument, it has two parts. First, mercantilism slows growth. Second, monopoly is extractive and harmful, but powerful interests benefit, concentrated political interests benefit, and they can often win the favor of corrupt government officials. Again, Marx was pretty close, as I've argued in some of my work earlier, claiming that Marx was the first public choice theorist. If Marx had abandoned his dumb theory of labor exploitation in voluntary transactions, and instead had focused even more on rent seeking, he could have invented public choice a full century before it was actually created. Adam Smith had a bunch of intuitions that I think would lead one in the direction of public choice. Smith really did foresee much of what later came to be the Baptists and Bootleggers model of statutes and regulation. He notes that there are two groups in favor of mercantilism. One is the business people who want monopolies and recognize that they will benefit, and the other is those that are fooled, befuddled, misled by the apparently plausible doctrine of the balance of trade. But the costs of this are substantial. On page 604, which is in Book 4, chapter 7, Part C, Smith says, 


The monopoly of the colony trade, besides, by forcing toward it a much greater proportion of the capital of Great Britain than it would naturally have received, seems to have broken altogether that natural balance that otherwise would have taken place among all the different branches of British industry. The industry of Great Britain, instead of being accommodated to a great number of small markets, has been principally suited to one great market. Her commerce, instead of running in a great number of small channels, has been taught to run principally in one great channel. But the whole system of her industry and commerce has thereby been rendered less secure, the whole state of her body politic less healthful than it otherwise would have been. 


At this point, Smith borrows a medical analogy from his friend, the French physiocrat, philosopher, and doctor, Francois Quesnay. Still on page six oh four:


In her present condition, Great Britain resembles one of those unwholesome bodies in which some of the vital parts are overgrown, and which upon that account are liable to many dangerous disorders scarce incident to those in which all the parts are more properly proportioned. A small stop in that great blood vessel which has been artificially swelled beyond its natural dimensions, and through which an unnatural proportion of the industry and commerce of the country has been forced to circulate, is very likely to bring on the most dangerous disorders upon the whole body politic. The expectation of a rupture with the colonies, accordingly, has struck the people of Great Britain with more terror than they ever felt for a Spanish armada or a French invasion. It was this terror, whether well or ill grounded, which rendered the repeal of the Stamp Act, among the merchants at least, a popular measure. 


Pause quote for a moment. Well, he's talking about the Stamp Act that was removed from the American colonies. The British had tried to get the Americans to pay for some part of their very expensive defense. It was costing England a lot to defend the colonies, and they imposed the Stamp Act. The Americans, of course, went nuts. There were protests, including the Boston Tea Party. And interestingly, the merchants of England were the ones who were most in favor, in England at least, of the removal of the Stamp Act. And the reason was that they wanted to preserve this big channel of money that was coming from the colonies through trade. And it's a bizarre way of thinking about the world. We have to spend all this money from the public treasury in order to make sure that these rich monopolists don't have any threat to the boodle that they get from having manipulated public policy to their benefit. Back to the quote on page 605. 


In the total exclusion from the colony market, was it to last for only a few years? The greater part of our merchant used to fancy they foresaw an entire stop to their trade. The greater part of our master manufacturers, the entire ruin of their business, and the greater part of our workmen, an end of their employment, a rupture with any of our neighbors upon the continent, though likely too to occasion some stop or interruption in the employments of some of all these different orders of people is foreseen without any general emotion. The blood of which the circulation is stopped in some of the smaller vessels easily disgorges itself into the greater without occasioning any dangerous disorder. When it is stopped in any of the greater vessels, and again what he means is from the colonies, convulsions, apoplexy, or death are the immediate and unavoidable consequences. If but one of these overgrown manufacturers, which by means either of bounties or the monopoly of the home and colony markets, have been artificially raised up to an unnatural height, if it finds some small stop or interruption in its employment, this frequently occasions a mutiny and disorder alarming to government and embarrassing even to the deliberations of the legislature. How great, therefore, would be the disorder and confusion, it was thought, which must necessarily be occasioned by a sudden and entire stop in the employment of so great a proportion of our principal manufacturers. 


So Smith is mocking the idea that England depends on the colonies. And in fact, he thinks that the dependence on the colonies is one of the chief problems that England has to try to solve. Smith has before talked about the absurdity of mercantilist ideas on controlling the import of goods, and Smith uses an example back in Book 4, chapter 2, of the problem of absolute advantage in producing an item of the highest quality at the best price in the home country. So this is on page 458. 


The natural advantages which one country has over another in producing particular commodities are sometimes so great it is acknowledged by all the world to be in vain to struggle with them. By means of glasses, hotbeds, and hot walls, very good grapes can be raised in Scotland, and very good wine too can be made with them at about thirty times the expansion, which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines merely to encourage the making of claret and burgundy in Scotland? 


Well, no, no, it wouldn't. And so why is it that we are trying to make sure that the colonies are forced to buy only our products and then paying them with bounties to make those products cheaper? It would be better not to pay the bounties to allow the colonies to buy from whom they want, but to be able to buy things more cheaply from the colonies themselves. Instead, Smith saw this elaborate Rube Goldberg structure that had emerged, and well, in chapter seven, as we're going to turn to now off Book Four, Smith pretty much takes it apart and demolishes it. So let's move now directly to chapter seven. It's a long chapter, as I already said. It comes near the close of Wealth of Nations Book IV, and it's both an analytical history of European colonization and a sustained indictment of the mercantilist system as it operated overseas. It is a three-part structure, A, B, and C. A on the motives for establishing colonies,B on the causes of their prosperity and the advantages that Europe derived from the discovery of America and the route to the East Indies is part C. So that is the canvas on which Smith is painting. The chapter is effectively an applied case study of the very themes that he had spent the earlier part of Book 4 criticizing as domestic policy. Bounties, exclusive companies, restraints on trade, jealousy of merchants, and the delusions of empire. It's also an extension and culmination of arguments he had begun more than twenty years earlier in his Lectures on Jurisprudence. Smith begins, in part A, with the origins. The movement of peoples is not new. Greeks and Romans had founded colonies deliberately to relieve population pressure, to secure and conquer territories, or to create outposts of commerce and agriculture. Modern European stories were different. The first motives for the Spanish and Portuguese ventures were the pursuit of gold and silver, and the attempt to monopolize precious East Indian spices. Later, other European powers established colonies for reasons that range from religious freedom to the chance to secure land and better one's condition. In this discussion, Smith follows the thread of mercantilist illusion. European governments believe colonies were valuable chiefly as sources of treasure or exclusive markets for the home country. That's the reason colonies existed. So the earliest practices, such as Spanish exploitation of mines, Portugal's search for eastern routes for trade, and later Dutch and English trade companies, were all shaped by the belief that monopolizing colonial commerce would enrich the mother country. 


Also in Part A, Smith talks about, he advances his most famous empirical claim, about colonial development. The extraordinary prosperity of new settlements owes almost nothing to Europe's regulation or to the superiority of European civilization. Instead, it owes almost all of its growth to three conditions. First, the abundance of good land, land that's available to nearly anyone who wished to cultivate it. Second, high wages and high returns to labor. Because land was plentiful, people were relatively scarce, that meant that wages were going to be high. Third, the character of institutions brought by the colonists themselves, that is, not the government institutions that come from England, Portugal, or Spain, but by education, industriousness, habits, capacity for self-government, what we might now call human capital. This is often helped by distance from the center, giving freedom to the colonists, though of course it could be harmed by the autonomy of local autocrats. Overall, though, European policy had discouraged rather than encouraged colonial development after settlement. The only real contribution Europe made was forming the men, or magna viramater, for the people who founded the colonies. So what that magna virimata means is the mighty mother of heroes. So European policy, if there was anything, was to have produced people who were entrepreneurial, hardworking, and willing to take chances. Colonies where that was not true just failed. Smith famously argues that new colonies prosper because of their economic conditions, certainly not because of mercantilist regulation. And in fact, Mancur Olson later takes up this theme in The Rise and Decline of Nations. One of the things that kept the colonies from being as wealthy as they might have been was this growing institutional sclerosis where the empires felt they had to protect the monopolies that were entirely dependent on the existing conditions in the colonies. 


Smith illustrates his argument with case studies that are drawn from different colonial systems. Spanish and Portuguese colonies had vast natural resources, but their growth was impeded and in some cases entirely stopped by monopolies and the impressive oppressive governance of exclusive trading companies. The Dutch East and West India companies throttled the natural progress of their settlements, though some, like Curacao and Saint Eustatius, prospered because the Dutch declared them free ports. And Smith is here, as he often does, he's exercising a kind of comparative statics. So we have a bunch of colonies that are basically the same culturally. However, there are different institutions in some. Some of them were declared free ports. Those became really wealthy. Huh, I wonder why. The English colonies, by contrast, enjoyed institutions that limited the engrossing of land, restrained feudal patterns of landholding, and permitted freer local government. As a result, they grew far more rapidly. The most rapid, Smith notes, despite lacking the mineral wealth of the Spanish territories. 


In the third part, Part C of chapter seven, Smith talks about what Europe gained from America and the new Eastern Passage. Smith divides the benefits into two types, general benefits to Europe taken as a whole, and the particular benefits to the countries who established and ran the colonies. Now the general benefits include an increase in enjoyments, new goods, tastes, conveniences of sugar, tobacco, chocolate, new commodities and spices, and an augmentation of industry, not only among countries trading directly with America, such as England, France, Spain, and Portugal, but also among inland European countries that supplied goods to the exporters. Smith warns that these general benefits are offset, in many cases more than offset, by the exclusive system of colonial trade. The monopoly, he writes, reduced the enjoyments and industry of all Europe and America, especially that of the colonists. For particular colonizing powers, the supposed benefits were mostly illusory. The monopoly enriched certain merchants and plantation interests, but it did so at enormous cost to the mother country's consumers and to its taxpayers, to its treasury, and to its industrial workers. So, overall, this chapter, chapter seven, is the culmination of Smith's long intellectual attack on the mercantilist system throughout Book 4. So he had looked at the errors of regulation toward money, trade, bounties, navigation acts. Chapter 7 applies those errors to the single most consequential case, and that is Europe's overseas empires, which are made up, of course, of colonies. Smith had been developing these ideas since the 1750s. In his Lectures on Jurisprudence between 1762 and 63, he'd already treated colonies and empires as examples of policy driven by commercial avarice and the mean rapacity of merchants. He rehearsed many of the themes that we now see in chapter 7: how colonies prosper through land availability and liberty, how exclusive companies cripple growth, and how wars for colonies squander national wealth, both to acquire colonies and to defend them. By the time he wrote Wealth of Nations, the American Crisis, the Stamp Act, the Township Act, the Boston Tea Party, had convinced him that the mercantile colonial system was not only economically misguided, but politically unsustainable. The entire part of Chapter 7 should be read as opposed to the Stamp Act reflection on the madness that led Britain to risk and ultimately lose its American empire. And the madness I'm referring to is the insistence on monopoly trade. Now, it's interesting, one of my friend Pete Boettke's rules, and I'm sure others, but I hear it mostly from Pete, is in order to understand what someone is saying, you need to think about who they're talking to, who are they arguing with. And Smith is talking to a number of writers in the mercantilist tradition. He engages with both literature and with particular intellectual opponents. Above all, he's talking to the authors of the mercantile system, British pamphleteers, commercial projectors, and the theorists who believe that national wealth consisted of treasure and favorable balance of trade. Those would include mostly Thomas Mun, who wrote England's Treasure by Foreign Trade, authors of many different commercial company charters, the colonial improvers who demanded exclusive markets, and the British writers who at the time were defending the Navigation Act. Now, Smith rarely names these people. He also doesn't name the people he supports, to be fair. He treats and he seems accurately to conceive of the system as a constellation of widespread errors rather than the work of some single great evil genius. So he doesn't think anyone is acting badly. In fact, that makes it much harder to argue against. People are actually mistaken. And so he is trying to explain what we talked about long ago, the fourth source of moral sentiment, and that is trying to get people to understand the workings of a well-contrived machine. And as it stands, they don't understand that. In Smith's crosshairs, most often, polemically, are the great exclusive companies, the Dutch, East and West India Companies, the French companies controlling Canada and the Mississippi, the English Royal African Company, the Hudson's Bay Company. These companies are perhaps the worst of all governments for any country, quoting, unquoting now, because they possess both the power and the temptation to oppress the colonists. The worst of all governments for any country. And it's because they have the ability and the constant temptation to oppress the colonists. The colonists have no response. So I'm going to spend quite a bit of time on the first part, it's actually in part B of chapter seven. Starting on page 570, that's 570. 


The small islands of St. Thomas and Santa Cruz are the only countries in the New World that have ever been possessed by the Danes. These little settlements, too, were under the government of an exclusive company, which had the sole right both of purchasing the surplus produce of the colonists and of supplying them with such goods of other countries as they wanted, and which therefore, both in its purchases and sales, had not only the power of oppressing them, but the greatest temptation to do so. The government of an exclusive company of merchants is perhaps the worst of all governments for any country whatever. It was not, however, able to stop altogether the progress of these colonies, though it rendered it more slow and languid. The late King of Denmark dissolved this company, and since that time, the prosperity of these colonies has been very great. The Dutch settlements in the West, as well as those in the East Indies, were originally put under the government of an exclusive company. The progress of some of them, therefore, though it has been considerable in comparison with that of almost any country which had long been peopled and established, has been languid and slow in comparison with that of the greater part of new colonies. The colony of Suriname, though very considerable, is still inferior to the greater part of the sugar colonies of the other European nations. Colony of Nova Belgia, now divided into the two provinces of New York and New Jersey, would probably have soon become considerable too, even though it had remained under the government of the Dutch. The plenty and cheapness of good land are such powerful causes of prosperity that the very worst government is scarce capable of checking altogether the efficacy of their operation. The great distance too from the mother country would enable the colonists to evade, more or less, by smuggling, the monopoly which the company enjoyed against them. [Skipping a bit now and going to page 571.] The French colony of Canada was, during the greater part of the last century, and under some part of the present, under the government of an exclusive company. Under so unfavorable an administration, its progress was necessarily very slow in comparison with that of other new colonies. But it became much more rapid when this company was dissolved after the fall of what is called the Mississippi Scheme. When the English got possession of this country, they found in it near double the number of inhabitants which Father Charlevoy had assigned to it between twenty and thirty years before. That Jesuit had traveled over the whole country and had no inclination to represent it as less considerable than it really was. The French colony of San Domingo was established by pirates and freebooters who for a long time neither required the protection nor acknowledged the authority of France, and when that race of banditi became so far citizens as to acknowledge this authority, it was for a long time necessary to exercise it with very great gentleness. During this period the population and improvement of this colony was increased very fast. Even the oppression of the exclusive company to which it was for some time subjected, with all the other colonies of France, though it no doubt retarded, had not been able to stop its progress altogether. The course of its prosperity returned as soon as it was relieved from that oppression. It is now the most important of the sugar colonies of the West Indies, and its produce is said to be greater than that of all the English sugar colonies put together. The other sugar colonies of France are in general all very thriving, but there are no colonies of which the progress has been more rapid than that of the English in North America. Plenty of good land and liberty to manage their own affairs their own way seem to be the two great causes of the prosperity of all new colonies. In the plenty of good land the English colonies of North America, though, no doubt very abundantly provided, are, however, inferior to those of the Spaniards and Portuguese and not superior to the sum of those possessed by the French before the late war. But the political institutions of the English colonies have been more favorable to the improvement and cultivation of this land than those of any of the other three nations. 


Over the next few pages, Smith lists what he sees as the differences in the English colonies and why it has been more favorable to the improvement and cultivation of the land. One thing he mentions is the engrossing of uncultivated land is almost unknown, not quite, but almost unknown in the English colonies, which means that there is a market, they can be bought and sold. Second, there's no obligation of primogeniture in most of the colonies, which again means that it can be bought and sold. Third, the labor of the English colonists is more productive, and in consequences of moderate taxes, a greater proportion of that goes to themselves, which means that if they work for a while, they go and buy their own land and work for themselves, which is just a more productive system. But that requires the great availability of almost free land. But still, since labor is able to move, labor mobility and uh the first two were about land mobility. There's no primogeniture and there's no engrossment, so we have both division of land and division of labor, and those are his consistent explanations. On page 574, quoting now, 


All the different civil establishments in North America, in short, exclusive of those of Maryland and North Carolina, which no exact account has been got, did not, before the commencement of the present disturbances, which the American Revolution cost the inhabitants more than sixty four thousand seven hundred pounds a year. An ever memorable example of how small an expense three millions of people may not only be governed, but well governed. The most important part of the expense of government, indeed that of defense and protection, has constantly fallen upon the mother country. The ceremonial too of the civil government in the colonies upon the reception of a new governor, upon the opening of a new assembly, though sufficiently decent, is not accompanied with any expensive pomp or parade. Their ecclesiastical government is conducted upon a plan equally frugal. Tithes are unknown among them, and their clergy, who are far from being numerous, are maintained either by moderate stipends or by the voluntary contributions of the people. This is he compares this then with Spain and Portugal, where it they derive some support from taxes levied upon their colonies. France has never drawn any considerable revenue from its colonies, but this is a big difference, quoting now, still on page 574, the sums spent upon the reception of a new viceroy of Peru, for example, have frequently been enormous. Such ceremonials are not only real taxes paid by the rich colonists upon those particular occasions, but they serve to introduce among them the habit of vanity and expense upon all other occasions. They are not only very grievous occasional taxes, but they contribute to establish perpetual taxes of the same kind still more grievous. The ruinous taxes of private luxury and extravagance. In the colonies of all these three nations too, the ecclesiastical government is extremely oppressive. Tithes take place in all of them and are levied with the utmost rigor in those of Spain and Portugal. All of them, besides, are oppressed with a numerous race of mendicant friars, whose beggary being not only licensed but consecrated by religion, is a most grievous tax upon the poor people who are most carefully taught that it is a duty to give, and a very great sin to refuse them their charity. Over and above all this, the clergy are, in all of them, the greatest engrossers of land. End quote. Every European nation has endeavored more or less to monopolize to itself the commerce of its colonies, and upon that account has prohibited the ships of foreign nations from trading to them, and has prohibited them from importing European goods with any foreign nation. But the manner in which this monopoly has been exercised in different nations have been very different. 


Then on 575, goes through the different ways that countries have tried to monopolize this exchange, and the result is that the colonies don't produce very much. And since, over and over again, the military defense of the colony is left to the mother country, you get no benefit except to the few craven monopolists that have established enough political power to get the government to take care of them. Taxpayers pay for military defense, and the colonists are poorer than they should be, so it seems like an all-around lose. Well, the final thing I wanted to talk about in this part of chapter seven in B is about what Smith calls enumeration. On page five seventy seven, 


In the exportation of their own surplus produce too, it is only with regard to certain commodities that the colonies of Great Britain are confined to the market of the mother country. These commodities have been enumerated in the act of navigation, and in some other subsequent acts have upon that account been called enumerated commodities. The rest are called non enumerated and may be exported directly to other countries provided it is in British or plantation ships, of which the owners and three fourths of the mariners are British subjects. Among the non-enumerated commodities are some of the most important productions of America and the West Indies. Grain of all sorts, lumber, salt, provisions, fush, fish, sugar, and rum. Grain is naturally the first and principal object of the culture of all new colonies. By allowing them a very extensive market for it, the law encourages them to extend this culture much beyond the consumption of a thinly inhabited country, and thus to provide beforehand an ample subsistence for a continually increasing population. In a country quite covered with wood, where timber consequently is of little or no value, the expense of clearing the ground is the principal obstacle to improvement. By allowing the colonies a very extensive market for their lumber, the law endeavors to facilitate improvement by raising the price of a commodity which would otherwise be of little value, and thereby enabling them to make some profit of what would otherwise be mere expense. In a country neither half peopled nor half cultivated, cattle naturally multiply beyond the consumption of the inhabitants and are often upon that account of little or no value. But it's necessary, it's already been shown, that the price of cattle should bear a certain proportion to that of corn before the greater part of the lands of any country can be improved. By allowing to American cattle in all shapes, dead and alive, a very extensive market, the law endeavors to raise the value of a commodity of which the high price is so very essential to improvement. The good effects of the liberty, however, must be somewhat diminished by the fourth of George III, C 15, which puts hides and skins among the enumerated commodities and thereby tends to reduce the value of American cattle. 


Let me pause the quote for a second there. When he says the fourth of George III, he's talking about the fourth parliament of George III. And notice that what Smith is saying here has to do with complements and substitutes. If you are going to develop land and you are in a heavily wooded area, it's very expensive to get rid of at least part of the wood to make it land that you can then cultivate. The price of the grain which you will get if you get rid of the trees and plant the land is not sufficient. If there's no market in timber, there's not enough reason to cut down the trees and get rid of the stumps in the first place. But what has happened in the United States is since there's such a big market in timber and it's not one of the enumerated goods, that means that the colonists had more of an incentive to improve the land. And the same was true of cattle. If cattle are a substitute for grains, instead of having grain on the cleared land, you can have cattle on the cleared land. Again, that's a reason to clear off the trees. But that's only true so long as you are able to exchange those things. And so Smith is lamenting the fact that hide and skins of cattle, not the meat, but the hides and skins of the cattle were included among the enumerated commodities by George III. That reduces the value of American cattle, and it means that there will just be far less economic activity, not that there will be more money collected from the tariffs on hides and skins. Going back to the quote on page 577, 


To increase the shipping and naval power of Great Britain by the extension of the fisheries of our colonies is an object which the legislature seems to have had almost constantly in view. Those fisheries, upon this account, have had all the encouragement which freedom can give them, and they have flourished accordingly. The New England fishery in particular was, before the late disturbances, one of the most important perhaps in the world. The whale fishery, which, notwithstanding an extravagant bounty, is in Great Britain carried on to so little purpose that in the opinion of many people, which I do not, however, pretend to warrant, the whole produce does not much exceed the value of the bounties which are annually paid for it. It is in New England carried on without any bounty, to a very great extent. Fish is one of the principal articles with which the North Americans trade to Spain, Portugal, and the Mediterranean. 


Again, let's pause the quote for a second. People who fish for Wales and fish in Great Britain say that they wouldn't be able to do this unless they had the bounty, the payment which they get for not importing it, for producing it domestically. And there's no bounty like that for the fishermen of New England, and yet they make a fortune by doing it. So it raises questions about whether the bounty is truly necessary. And we now would say that it's possible that it is necessary because the fishing industry of England had become so inefficient it depended on the bounty. But it was clearly true that in the New World, fishing could stand on its own bottom and could make profits without any subsidies from the government, which meant to Smith that the problem was the bounty itself. Going back to the quote on page 578, 


Sugar was originally an enumerated commodity which could be exported only to Great Britain. But in 1731, upon a representation of the sugar planters, its exportation was permitted to all parts of the world. The restrictions, however, with which this liberty has been granted, joined to the high price of sugar in Great Britain, have rendered it in a great measure ineffectual. Great Britain and her colonies still continue to be almost the sole market for all the sugar produced in the British plantations. Their consumption increases so fast that, though in consequence of the increasing improvement of Jamaica, as well as other islands, the importation of sugar has increased very greatly within these twenty years, the exportation to foreign countries is said to be not much greater than before. Rum is a very important article in the trade which the Americans carry on the coast of Africa, from which they bring back negro slaves in return. If the whole surplus produce of American in grain of all sorts, in salt provisions and in fish had been put into the enumeration, and thereby forced into the market of Great Britain, it would have interfered too much with the produce of the industry of our own people. It was probably not so much from any regard to the interest of America, as from a jealousy of this interference, that those important commodities have not only been kept out of the enumeration, but that the importation into Great Britain of all grain, except rice and of salt provisions, has in the ordinary state of the law been prohibited. The non enumerated commodities could originally be exported to all parts of the world. Lumber and rice having been once put into the enumeration when they were afterwards taken out of it were confined as to the European market to the countries that lie south of Cape Finistere, which is that's a peninsula on the Atlantic coast of Spain. By the sixth parliament of George III, all non enumerated commodities were subjected to the like restriction. The parts of Europe which lie south of Cape Finistere were not manufacturing countries, and we were less jealous of the colony ships carrying home from them any manufacturers which could interfere with our own. The enumerated commodities are of two sorts. First, such as are either the peculiar produce of America or as cannot be produced, or at least are not produced in the mother country, of this kind are molasses, coffee, cacao nuts, tobacco, pimento, ginger, whale fins, raw silk, cotton, wool, beaver, and other peltry of America, indigo, fustic, and other dying woods. Secondly, such as are not the peculiar produce of America, but which are and may be produced in the mother country, though not in such quantities as to supply the greater part of her demand, which is principally supplied from foreign countries. Of this kind are all naval stores, masts, yards, bowsprits, tar, pitch, and turpentine, pig and bar iron, copper ore, hides and skins, pot and pearl ashes. 


End of quote. So I wanted to give you a flavor of the depth, the level of understanding and detail that Smith had. The reason it took him so long to write this book was he was trying to record at least a snapshot of the way these things worked at a time when there were a lot of questions about how these countries could get more economic development. And his answer is consistent and clear, and that is remove the restrictions, get rid of this idea of enumeration entirely. Well, there are imperial apologists of the policy of colonies, and in particular, Smith is addressing his book to those in Britain, the pamphleteers, members of parliament who defended the colonial monopoly and the Navigation Act as being beneficial to the nation. Smith's view is the opposite. The monopoly benefited only narrow mercantile interest at the expense of consumers and taxpayers. Let's go to page 584. 


In everything except their foreign trade, the liberty of the English colonists to manage their own affairs in their own way is complete. It is in every respect equal to that of their fellow citizens at home in England, and is secured in the same manner by an assembly of the representation of the people who claim the sole right of imposing taxes for the support of the colony government. The authority of this assembly overaws the executive power, and neither the meanest nor the most obnoxious colonist, as long as he obeys the law, has anything to fear from their resentment, either of the governor or of any other civil or military officer in the province. The colony assemblies, though, like the House of Commons in England, they are not always a very equal representation of the people. Yet they approach more nearly to that character, and as to the executive power which has not the means to corrupt them, or on account of the support which it receives from the mother country is not under the necessity of doing so, they are perhaps in general more influenced by the inclinations of their constituents. The councils which in the colony legislatures correspond to the House of Lords in Great Britain are not composed of a hereditary nobility. In some of the colonies, as in three of the governments of New England, those councils are not appointed by the king but chosen by the representatives of the people. In none of the English colonies is there any hereditary nobility. In all of them, indeed, as in all the other free countries, the descendant of an old colony family is more respected than an upstart of equal merit and fortune, but he's only more respected. He has no privileges by which he can be troublesome to his neighbors. Well implicitly and almost explicitly, 


Smith is saying that in England people who do have hereditary privileges are troublesome to their neighbors, so he's he's coming pretty close there to saying something dangerous. Continuing on page five hundred eighty five. 


There is more equality therefore among the English colonists than among the inhabitants of the mother country, that is, of England. Their manners are more republican, and their governments, those of three of the provinces of New England in particular, have hitherto been more republican too. The absolute governments of Spain, Portugal, and France, on the contrary, take place in their colonies, and the discretionary powers of such government commonly delegate to all their inferior officers, who are on account of the great distance, naturally exercised there with more than ordinary violence. Under all absolute governments there is more liberty in the capital than in any other part of the country. The sovereign himself can never have either interest or inclination to pervert the order of justice or to oppress the great body of the people. In the capital, his presence overaws more or less all his inferior officers, who in their remoter provinces, from whence the complaints of the people are less likely to reach him, can exercise their tyranny with much more safety. 


So what Smith is noticing there is that there's quite a bit more freedom in the English colonies in America because they are self-governing. Where the Spain, Portugal, and French colonies are delegates who get their power not from the consent of the people, but from the power of the king. And since it's so far away, it takes months, maybe even a year, to get a message back and forth, they literally have to make decisions that are arbitrary and local. The result is that the form of government of the colony, even though it's not absolute power, makes an enormous difference. And Smith also notes that the fact that the American colonies have elected officials also means they have very little tax money that they can use to play favorites among people, and that means that they have much less power to do harm. That's not true for royal representatives. Smith sums up his assessment of what he calls the policy of Europe on page five eighty eight and following. 


Quoting Policy of Europe, therefore, has very little to boast of, either in the original establishment or so far as concerns their internal government in the subsequent prosperity of the colonies of America. Folly and injustice seem to have been the principles which have presided over and directed the first project of establishing those colonies, the folly of hunting after gold and silver mines, and the injustice of coveting the possession of a country whose harmless natives, far from having ever injured the people of Europe, had received first adventurers with every mark of kindness and hospitality. The adventurers indeed who formed some of the later establishment joined to the chimerical project of finding gold and silver mines, other motives more reasonable and more laudable. But even these motives do very little honor to the policy of Europe. The English Puritans, restrained at home, fled for freedom to America and established there the four governments of New England. The English Catholics, treated with much greater injustice, established that of Maryland, the Quakers, that of Pennsylvania. Portuguese Jews, persecuted by the Inquisition and stripped of their fortunes and banished to Brazil, introduced by their example some sort of order and industry among the transported felons and strumpets, funny way to describe Brazil, the transported felons and strumpets, by whom that colony was originally peopled, and taught them the culture of the sugar cane. Upon all these different occasions, it was not the wisdom and policy, but the disorder and injustice of European governments which peopled and cultivated America. Well, that's that's pretty remarkable. Smith is saying that it wasn't any part of the genius of Europe, and in fact the folly of we want gold and silver, we're going to kill these harmless, innocent natives that have done nothing to us. And many of the people who went to the New World in the first place were those who had been mistreated by their home governments in Europe. 


So that's pretty much three strikes. Those are those are three really bad things that had caused the existence of the colonies in the New World. Europe has very little to boast of, as Smith said. Well, to conclude chapter seven of Book Four, it's one of the most sweeping condemnations of European imperial policy ever written, certainly more than anything else that was written in the 18th century. Its core insights were that colonies prosper by freedom, land, and good institutions, not by the design of and maintenance of commercial monopolies. The modern European colonies are fouled by mercantile folly, a system that enriches a few and impoverishes the many. The East India Company is the worst example, corrupt, monopolistic, inefficient steward of both trade and governance, and a terrible ruler of India. The British North American colonies succeeded only because they escaped both the mercantilist abuses that dominated other empires and the system of government that otherwise, if they had been controlled by the British, they would have been under. So they managed to govern themselves and they escaped the exclusive companies. The only reason that the North American colonies of Britain succeeded then was that they managed to insulate themselves from these causes that otherwise had been so catastrophic. Let's spend a moment in part C on page 607. Smith distinguishes the colony trade and monopoly of the colony trade. And it's easy to get those two things confused. Having colonies with whom to trade might be beneficial. Monopolizing that means that you're losing more than whatever benefit you might have gained from establishing a colony. At the bottom of page 607, 


We must carefully distinguish between the effects of the colony trade and those of the monopoly of that trade. The former are always and necessarily beneficial, the latter always and necessarily hurtful. But the former are so beneficial that the colony trade, though subject to a monopoly and notwithstanding the hurtful effects of that monopoly, is still on the whole beneficial, and greatly beneficial, though a good deal less so than it would otherwise be. 


The problem is that once you add in defense of the colony on top of monopoly, it means that it's a net loss for the colonizing mother country. On pages six nine and six ten, Smith goes through a discussion of the problems of monopoly and defense of colonies, and notes that almost all of the colonies that he was able to get information about had been a large net loser, which means that Lenin was wrong. Colonies can't possibly be a source of profit because they were mostly a source of loss. Now, that doesn't mean that that's good for the colonies, not zero sum. Colonizing was catastrophic for the places that were being colonized. It's just that they were not a benefit to the country doing the colonizing, and so Lenin's attempt to save the idea of exploitation by moving it to colonies can't possibly be successful because it was a source of loss, not a benefit. On page 613 through 615, Smith gives a very famous discussion of why some people said focusing on colonies for their economic benefit was a mistake. So on page six hundred thirteen it's worth quoting: 


To found a great empire for the sole purpose of raising up a people of customers may at first sight appear a project fit only for a nation of shopkeepers. It is, however, a project altogether unfit for a nation of shopkeepers, but extremely fit for a nation whose government is influenced by shopkeepers. Such statesmen and such statesmen only are capable of fancying they will find some advantage in employing the blood and treasure of their fellow citizens to found and to maintain such an empire. Say to a shopkeeper, buy me a good estate, and I will always buy my clothes at your shop, even though I should pay somewhat dearer than I can have them at other shops, and you will not find him very forward to embrace your proposal. But should any other person buy you such an estate, the shopkeeper would be much obliged to your benefactor if he would enjoin you to buy all your clothes at his shop. England purchased for some of her subjects, who found themselves uneasy at home, a great estate in a distant country. The price indeed was very small, and instead of thirty years purchase, the ordinary price of land in present times it amounted to little more than the expense of the different equipment which made the first discovery, reconnoitred the coast, and took a fictitious possession of the country. The land was good and of great extent, and the cultivators having plenty of good ground to work upon, and being for some time at liberty to sell their products where they pleased, became in the course of little more than thirty or forty years, between sixteen twenty and sixteen sixty, so numerous and thriving a people that the shopkeepers and other traders of England wished to secure themselves the monopoly of their custom. Without pretending, therefore, that they had paid any part either of the original purchase money or the subsequent expense of improvement, they petitioned the parliament that the cultivators of America might for the future be confined to their shop, first for buying all the goods which they had wanted from Europe, and secondly for selling all of such parts of their own produce as these traders might find it convenient to buy. 


End quote, and that's on page 614. Well, Smith is making fun of the idea there that a nation of shopkeepers came up with the idea to have colonies, but once there were colonies, they did come up with the idea of having monopolies. And it's unsurprising because they're constantly looking to their own short-term benefit. It's also in part C that Smith makes the, I think, not serious proposal, but he does talk about the idea that Great Britain would be better off if they simply ceded independence of the North American colonies. That means that they would have to pay a slightly greater price for some of the inputs that now they had monopsony power over, but they wouldn't have to pay the defense of the empire, and getting rid of that expense is more than worth the increased cost. That is, if the colonies are independent, they'd have to pay higher prices, but much lower defense costs, and none of the upfront costs of setting up monopolies. On page 634, Smith follows up on a point he has already made. Remember, he had said that it was immoral, it was completely wrong, it was evil for the welcoming generosity of the natives of North America to have been treated by being killed and being enslaved. On page 634, he talks about what are in effect much less civilized people. Sometimes he uses the word savages, but what he means is a civilization in the stadial theory that we talked about in episodes one and two. There's nothing inherent about the natives of America that makes them savages. It's just that as hunters or even just primitive agriculturalists, they are by definition, they're not as civilized a level as the people of Europe who are in the commerce stage. But there's nothing that would prevent them from being able to make the claim that they are human beings who are entitled and in fact we're obliged to offer the normal dignity of humanity. So being a savage is not a disqualification for the dignity of being a human being. 


Well, I took a long time to talk about Book 4, Chapter 7, but it's important. It's more than a historical survey, it's Smith's final demonstration that the mercantile system is a structure of error. Colonies thrived in spite of European regulation, not because of it. Europe gained from America's discovery only insofar as there was a free flow of commerce, as human ingenuity was allowed to operate without restraint. The supposed advantages of empire were all built on illusions. They were costly. Monopolies distorted markets, wars drained treasuries, and political tensions ultimately broke the empire apart. So this is a chapter that anticipates not only the fall of the British Empire, but the emergence of a more liberal commercial order, one that Smith hoped would be grounded in reciprocity, open markets, and the obvious and simple system of natural liberty. Well, let's turn now to chapter eight. The general purpose of the chapter is to gather together the main themes that Smith had developed in the earlier parts of Book 4, so this is the conclusion of mercantilism. He evaluates the system of political economy, that is mercantilism, and contrasts it with the system of natural liberty. Tries to highlight the political and social reasons for the mercantile system's endurance despite its economic weaknesses, because that does seem like a puzzle. If it's so bad, why is it so popular and so persistent? And a big part of the answer he's given several times now, it's Baptist and Bootleggers. It is plausible on its face, and it does create very large benefits for a concentrated few, and once those people have power, they complain, rightly in a way, that if the system is changed, it will cost them a lot of wealth. But it should never have been done in the first place. He reiterates the foundational argument that wealth does not consist of gold and silver, but in the annual produce of land and labor that is actually consumed by people. He criticizes mercantilists for confusing money, which is a means of exchange, with wealth, which is the object of exchange, goods and services. That error led to policies that are designed to accumulate bullion and specie rather than to try to expand productive capacity. He gives an exhaustive list of artificial restrictions and monopolies. He talks about how the mercantile system is supported by a network of monopolies, protective tariffs, and restraints on trade. And it would be surprising if those things, which are a restriction on creation of wealth, could somehow create wealth. And of course, it's not true. He emphasizes the distributional consequences. Mercantile policies raise the profits of merchants, but it lowers the real income of consumers, especially the poor. It's just very hard to measure the cost of transactions that never take place. Now, in the first version of my looking at this chapter, I'd recorded an extra 45 minutes and it well, I basically was reading aloud the whole chapter, so I had to cut back and start over with a less complete treatment of the chapter. So I'm gonna do it this way. I'm gonna confine myself to just one illustrative quote from pages 648 through 650, and well, that's already quite a bit. So actually I'm gonna start back on page 647. 


The same commodities which we gave bounties when imported from America were subjected to considerable duties when imported from any other country. The interest of our American colonies was regarded as the same as that of the mother country. Their wealth was considered as our wealth. Whatever money was sent out to them, it was said, came all back to us by the balance of trade, and we could never become a farther the poorer by any expense which we could lay out upon them. They were our own in every respect, and as it was an expense laid out upon the improvement of our own property and for the profitable employment of our own people. It is unnecessary, I apprehend, at present, to say anything further in order to expose the folly of such a system, which fatal experience has now sufficiently exposed. Had our American colonies really been a part of Great Britain, those bounties might have been considered as bounties upon production, and would still have been liable to all the objections which such bounties are liable, but to no other. 


I'm going to stop the quote there. Of course, when he says that it has now been sufficiently exposed, this is coming out in 1776, by which time it was clear that there was going to be a revolution, that the colonies were not Great Britain's own, and that any money that they spent was not the same as spending it domestically. So let's be clear about what's happening. Agricultural products are being shipped from America and bounties are being paid for that. So tobacco, cotton, wheat, corn, skins, all sorts of products are being sent to England and a bounty is being paid for that, so it's being subsidized. The goal is to have cheaper prices for inputs for British producers. And it had that effect. The problem is that this made these things more expensive for British consumers. And the benefit that went to the colonies was being paid out of taxes that were being paid by British consumers. So the only people that were benefiting were the ones who had subsidized cheap inputs, and that was the British manufacturers. It's catastrophic. On page 648, Smith gives one of the most astonishing descriptions, a sarcastic, really surprisingly sarcastic and contemptuous description of British policy. This is the top of page 648. 


The cruelest of our revenue laws, I shall venture to affirm, are mild and gentle in comparison of some of those which the clamor of our merchants and manufacturers has extorted from the legislature. For the support of their own absurd and oppressive monopolies, like the laws of Draco, these laws may be said to be all written in blood. 


Now you may not immediately recognize the reference to Draco, but it's more likely you will remember it as Draconian. Draco was a legislator in the seventh century BCE in Greece. Ostensibly, I mean some of this may be legend rather than actual history, but ostensibly Draco had put together the first laws, and this was a code to be enforced by a court, not popularly in the way that laws had been created and carried out in Athens. So to call them Draconian, what that meant was that a lot of the laws had been extremely severe and penalty or extreme physical punishments were administered for even minor offenses. So Smith says, like the laws of Draco, these laws may be all written in blood. And what he means is laws about the export of goods from England, and the reason that you were not allowed to export things from England that were primary products was that the English manufacturers wanted all of the cheap primary goods for themselves. So going back to the quote. 


To prevent the breed of our sheep from being propagated in foreign countries seems to have been the object of this law. By the thirteenth and fourteenth of Charles II, the exportation of wool was made felony, and the exporter subject to the same penalties and forfeitures as a felon. For the honor of the national humanity is to be hoped, it is to be hoped that neither of these statutes were ever executed. 


First of them, however, so far as I know, has never been directly repealed. Sergeant Hawkins considers it still to be in force, that is, conferring whether the statute was still on the books, Smith had confirmed that it was. It may, however, be considered as virtually repealed by the twelfth of Charles II, which without expressly taking away the penalties imposed by former statutes, imposed a new penalty, twenty shillings for every sheep exported or attempted to be exported, together with the forfeiture of the sheep and of the owner's share of the ship. Smith cites pages and pages, you'll just have to take my word for it, of incredibly aggressive regulations that are designed to make the smuggling of wool not just unlikely but impossible because the draconian threat of being losing all of your goods, being killed, basically having your children kidnapped, losing all your property. And yet, Smith notes that smuggling happened all the time. It wasn't very well enforced. These were attempts by woolen thread manufacturers in England to secure for themselves a monopoly of the English wool production. And they didn't want they wanted to have as cheap possible inputs, and then they wanted to have bounties on their exports. And their argument was that this would improve the balance of trade. So all of this bad acting was being hidden behind a fig leaf of being concerned about the balance of trade. If you lived within 10 miles of the coast, you basically couldn't even ship wool. You couldn't move wool around. It couldn't be in a bag. It had to be in a leather case that was marked wool, and it had to be open for inspection at all times. It dramatically actually increased the expense of the wool, and the quality was dramatically lower. He notes on page 650 that the law had a particular indulgence. 


The law is so very indulgent as to declare this shall not hinder any person from carrying his wool home from the place of shearing, though it be within five miles of the sea, provided that in ten days after shearing and before he remove the wool, he do under his hand certify to the next officer of the customs the true number of fleeces where it is housed, and do not remove the same without certifying to such officer under his hand his intention to do three days before. So he has to tell the officer three days before he is going to ship it. Bond must be given that the wool to be carried coastways is to be landed at the particular port for which is entered outward. If any part of it is landed without the presence of an officer, not only the forfeiture of the wool is incurred, as in other goods, but the usual additional penalty of three shillings for every pound weight is likewise incurred. 


So the wool manufacturers were just piling up all of these penalties on the producers of wool, and hoping that they could get cheaper wool as a result. And their story was, he tells this on page 651, that this meant that English wool was of a peculiar quality, superior to that of any other country, that the wool of other countries could not, without some mixture of it, be brought up into any tolerable manufacturer. Smith said, 


This is so perfectly false that English wool is in any respect necessary for the making of fine cloth that it's altogether unfit for it. Fine cloth is made of Spanish wool. English wool cannot be even so mixed with Spanish wool as to enter into the composition without spoiling and degrading in some degree the fabric of the cloth. 


Well, I'm going to leave it at that rather than the forty-five minutes that I had before. This is detailed, it is sarcastic, and it's actually contemptuous. I had not realized until I read this chapter how much of an insult this book was to many of England's most important manufacturers. I had sometimes wondered about Smith's reaction to the controversy over his letter to Strahan, where he had submitted, after David Hume's death, a letter to his publisher Strayan, saying that overall he thought that Hume was both wise and moral, as any as much as anyone he had ever met. And there was this terrible reaction against calling Hume an atheist moral. And Smith said in response to that that the letter to Strahan had brought on me ten times more abuse than the very violent attack I've made on the whole commercial system of Britain. Well, it's true. It was a very violent attack on the if you read chapter eight of Book Four, this is savage. And to read something like this in a book by an academic where he's basically pointing at you, you manufacturers, and saying, You're evil, you're hurting the country, you're stealing money from other people, it is surprising that there was not more of a response. But Smith was not lynched, he was not thrown out of the country, and in fact, in many ways he became much more respected for having given reasons why this mercantilist system was so damaging. 


Well let us turn finally to chapter nine of the agricultural systems, or of those systems of political economy which represent the produce of land as either the sole or the principal source of revenue and wealth of every country. So what he means by agricultural systems, there's the pure system, one which represents the produce of land as the sole source of revenue and wealth. Most nations had not really adopted that seriously. It was mostly the French physiocrats, Quesnay, DuPont de Nemours, and a few others, but they had not really persuaded anyone, and Smith in particular was not persuaded. The physiocratic doctrine, at least as Smith summarizes it, holds that only agriculture produces a net product. Surplus of food after feeding the cultivators is the only true addition to a nation's wealth. All manufacture is sterile. Manufacturing and trade are ultimately paid for by this agricultural surplus. So every non-agricultural class indirectly lives upon the produce of the land. Political economy should therefore privilege agriculture. Smith, he thought that was an interesting argument and not entirely wrong because he too thought that producing from the land was the source of the greatest surplus. So he doesn't attack them with anything like the same ferocity he uses against the mercantilists. He treats them as serious interlocutors, whose errors probably matter most academically. That system never has done and probably never will do any harm in any part of the world, and that's from the lectures on jurisprudence. The key analytical point is straightforward. Any system that prefers one sector, whether agriculture, manufacturing, whatever, distorts the natural and most productive distribution of capital because capital will find its own level. Agricultural systems, like mercantile ones in this case, try to reshape economic activity by restraints and encouragement rather than allowing the system of natural liberty to allow the division of stock to take place. So when an agricultural system imposes restraints on manufacturers or on foreign trade to promote agriculture, it actually reduces agricultural prosperity. Because manufacturers and land, the produce of the land, are mutually dependent. The trade between them is an exchange. Land produces food, manufacturers produce goods. If manufacturers are made artificially expensive or for whatever reason difficult to acquire, then rude produce, the produce of the land, becomes cheap in relation to them, and the landlord and the farmer lose the incentive to improve the land. Restraints on manufacturing shrink the domestic market, which is the most important of all markets for the rude produce of the land, Smith agrees about that. Agricultural systems, physiocrats, discourage their own favorite species of industry. So even if you agree with them, they're not achieving their objective, and he thinks that their objective is incorrect anyway. Mercantilism at least helps the sector that it favors, the manufacturing sector, even if it does so inefficiently in a way that's very expensive. Agricultural systems harm even the agriculture that they attempt to assist. Overall, Smith treats physiocracy as a noble but misguided attempt to build a comprehensive system of political economy. It's noble because it values agriculture, views society holistically, and seeks natural law foundations, but it's misguided because it rests on a false premise that only land is productive, and its policy proposals end up undermining the very thing that they say they're intended to help. So in short, physiocracy is what Smith calls a beautiful system, ingenious, but highly impractical. Mercantilism, by contrast, is the ugly system, pernicious and widely adopted. His arguments against physiocracy are therefore philosophical. His arguments against mercantilism are political, more moral, more urgent, and as we saw, much more sarcastic. 


So Smith concludes the agricultural system, while flawed in its exclusivity, is much nearer to truth than the mercantile system. The agricultural system, the physiocrats, do not imagine wealth merely as money or treasure. They think of it as food, which at least that is valuable. They recognize the role of production rather than accumulation, and they promote liberty of commerce, especially in agricultural production. Well, let's take a little bit of stock of book four as a whole, because this has been two long episodes just on book four. Smith closes Book four by restating his larger argument. Systems that favor one sector, commerce, agriculture, or manufacturing, above others distort the natural flow of industry and wealth. The proper role of government is not to privilege one class or activity, but to maintain liberty, security, and justice, allowing industry and capital to find their natural employment to the greatest advantage of society. Smith systematically dismantles the two main alternative systems of political economy. The mercantile system, which is claims that wealth is equal to money, trade is managed for exports, colonial monopolies and restrictions are the goal of empire. Smith condemns it as narrow, self-interested, and harmful, and gives a lot of examples. The other is the agricultural system. Physiocracy's claim is that wealth is equal to the produce of land. It's closer to the truth because at least it's about production rather than the accumulation of specie. But it is still mistaken. Smith's alternative is pretty simple. The system of natural liberty, free trade, open markets, minimal, not zero, but minimal political interference. Promotes real wealth, the produce of land and labor, shared prosperity, and peace. Well, next time, we're going in January, I'm going to take up Book Five. And the amazing thing about Book Five, it is the it is the first textbook on public finance, because it is explicitly designed to be a handbook for legislators, administrators, people who are actually trying to run a polity. What are the sources of revenue? How should revenue be spent? What public activities are worthwhile? What activities should not be performed by the public? I look forward to talking to you again in January.