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Book 4, Chapter 4
Themes
and Colors
Key
LitCharts assigns a color and icon to each theme in The Wealth of Nations, which you can use to track the themes throughout the work.
Labor, Markets, and Growth
Capital Accumulation and Investment
Institutions and Good Governance
Mercantilism and Free Trade
Money and Banking
Summary
Analysis
Another way that manufacturers and wholesale merchants request support from the government is by requesting subsidies, or bounties, for exports. Bounties are only necessary for unprofitable kinds of trade that couldn’t survive otherwise, and subsidizing such trade squanders the nation’s capital. Without bounties, merchants will simply switch to more profitable kinds of trade. Britain’s grain bounty might have increased exports, but it led farmers to waste their capital producing grain instead of other commodities.
Bounties are the fourth kind of mercantilist policy, and Smith opposes them because he thinks that the industries they support simply shouldn't exist. Mercantilists support bounties because they compare how the grain industry looks with those bounties to how it looks without them. But Smith suggests that we should actually be comparing the effects of investing a certain quantity of capital in producing grain for export, versus the greater gains from investing it elsewhere.
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British grain prices did fall after the bounty, but so did French grain prices, even though France banned grain exports. The rising price of silver caused these price drops, not the bounty. Rather, the bounty actually raises prices by encouraging merchants to export all excess grain when the harvest is strong. This prevents the nation from accumulating the reserve it would need to keep prices down in lean years. But many people wrongly think that the bounty reduces grain prices in the long term by encouraging more production. In fact, the bounty is really a tax on everyone in society, as they have to fund it and pay higher grain prices. This hurts the poor most of all. It also encourages people to purchase less grain, which suppresses production levels.
If British grain prices fell while French grain prices rose, then we would have reason to believe that the grain bounty achieved its intended effect. Instead, the much larger effect of rising silver prices caused grain prices to fall in both countries. Bounties may increase the production of certain goods, but they make matters far worse for domestic consumers. Smith has already argued that the best thing a nation can do for its economy is to invest massively in agriculture, so that food (and particularly grain) becomes cheap and abundant. At first glance, grain bounties may appear to help achieve this aim, but in reality, they profoundly undermine it. Indeed, these bounties amount to a huge transfer of wealth from the poor to wealthy grain wholesalers.
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As this bounty doesn’t help farmers maintain more workers with the same amount of grain, it only increases nominal grain prices, not real ones. By increasing nominal grain prices, however, it reduces the real price of silver. Since grain is the basis for subsistence, nominal grain prices also regulate the nominal price of almost everything else, including labor, rude produce, and most manufactured goods. Thus, the grain bounty just makes everything more expensive. It doesn’t improve life for farmers and landlords at all.
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Similarly, a worldwide fall in real silver prices has little effect on the real price of anything else, but if these prices only fall in a single country, they will impoverish it. For instance, nearly all of Europe’s gold and silver enters through Portugal and Spain, so these metals are cheaper there. While this isn’t a problem on its own, Spain hurts its economy by heavily taxing gold and silver, and Portugal by restricting their exportation.
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These policies do not change the basic facts about how much gold and silver can comfortably circulate in these countries’ economies. Rather, they simply burden those countries with precious metals they can never sell. This raises the nominal price of other goods, discourages agriculture and manufacturing, and makes imports more expensive. If Spain and Portugal reversed these policies, their economies may shrink in nominal terms, but they would quickly start growing in real terms because they would trade their “dead stock” (excess gold and silver) for useful goods, thereby transforming it into “active stock” (capital that yields profit).
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Britain’s grain bounty functions just like these policies in Spain and Portugal: it raises nominal prices at home and lowers them abroad, harming other British exports in the process. The only people who benefit are grain merchants, as the bounty increases exports in fertile years and imports in lean ones. Ultimately, rural landlords only supported the grain bounty because they didn’t understand the basic difference between grain and manufactured goods, for which monopolies and bounties do increase real prices (but also waste society’s capital by funneling it into a losing trade).
A better solution is to place bounties on commodity production, rather than exportation. This would reduce real prices for domestic consumers. But due to the mercantile system’s focus on international trade and manufacturers’ desire to keep domestic prices high, the government has rarely offered bounties for production.
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One exception is the bounty for Scotland’s herring fisheries, which helps support British sailing and shipping, but is still a mistake for four reasons. First, the bounty is too high, and herring fisheries would be deeply unprofitable without it. Second, the bounty is based on a ship’s size, not the amount of herring caught, so it promotes waste and fraud. Third, the bounty supports large Dutch-style ships, when ordinary boats are better suited to Scotland’s environment. And finally, as a result of these factors, the bounty has increased herring prices instead of reducing them—all without meaningfully raising fisheries’ profits. (This work’s Appendix includes account books that prove these claims.)
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Production bounties are justified for goods necessary to national defense, as producing them domestically is far safer than importing them. And when a society is prospering, using production bounties to encourage the growth of certain favored industries is not unreasonable. Export incentives for goods that already face export taxes should be considered drawbacks, even though they are often wrongly called bounties. And prizes offered to extraordinary manufacturers and artisans are not bounties: they encourage better production techniques instead of changing “the natural balance of employments” and capital investment.
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“Digression concerning the Corn Trade and Corn Laws.” This long digression will explain why the grain exportation bounty and the laws governing the grain trade don’t deserve the praise they receive. There are four kinds of grain merchants: inland traders, importers, exporters, and re-exporters (who engage in the carrying trade).
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First, inland grain dealers want what is best for society as a whole: for grain prices to keep supply and demand in balance. If prices rise too high, they discourage consumption, leaving some grain unsold. If prices fall too low, they cut into the merchant’s profits and encourage people to buy up all the grain at the beginning of the season, which can lead to famines later on. By keeping prices at the right level, inland merchants ensure that society’s grain supply lasts precisely from one harvest to the next.
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If one company could establish a monopoly over the inland grain trade, it would likely destroy part of the crop and raise prices. But such a monopoly would be impossible to establish, even with the government’s support, because agriculture is such a massive, geographically dispersed industry. Historically, poor growing seasons (and not monopolies) have caused all grain shortages, but failed government policies have caused all true famines. After all, the market distributes grain efficiently, raising prices in years of drought and scarcity so that people buy less and the supply lasts the whole season. But when the government tries to guarantee ordinary grain prices in such years, either dealers never bring it to market because it isn’t profitable, or people buy and consume it all shortly after the harvest. Both contribute to famines. To avoid this, the law should protect the free grain trade.
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The people hate inland grain traders and even attack them during lean years, when they raise prices (and make the profits that allow them to sustain losses in better growing years). As a result, reputable people avoid the grain-trading profession. Historically, European countries banned grain trading, which forced farmers to sell their grain directly to consumers, but also banned manufacturers from selling their goods, which forced them to turn to merchants. But due to the division of labor, people can work more efficiently and produce goods for a lower price if they dedicate their capital and attention to a single activity, rather than splitting it between two.
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Thus, the grain policy had a harmful effect, while the manufacturing policy may have actually accelerated the division of stock and labor. But both policies unjustly violated people’s natural liberty. Specifically, the grain policy discouraged land improvement by forcing farmers to split their capital between agriculture and trade. It thus backfired, making grain scarcer and more expensive over time.
In reality, wholesale merchants support farmers and manufacturers by permitting them to specialize, invest all their capital in efficient production, and sell off their goods and rude produce immediately rather than waiting for customers or even retailers. This helps explain why Britain gradually eased its restrictions on the wholesale grain trade. The current policy permits wholesaling, so long as prices remain below a certain cap and merchants don’t resell the grain in the same market for at least three months. Yet these rules hamper the grain trade when it is most important: during times of scarcity, when prices rise and merchants should buy up grain at harvest time and sell it slowly over the course of the year to avoid famines. Opposition to grain merchants, like witchcraft, is just a form of scapegoating.
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Britain’s inland grain trade is 570 times larger than its grain imports and 30 times larger than its exports. But even though the foreign trade is relatively insignificant, it’s still worth briefly exploring.
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Importers are the second kind of grain merchants. They help reduce nominal grain prices, but not real grain prices, as they don’t change the amount of labor that goes into farming. While Britain imposes high duties on imported grain, it suspends them in times of scarcity. These duties were only necessary to compensate for Britain’s bounty for grain exports. Otherwise, merchants would have just imported and re-exported grain to claim the bounty.
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Exporters are the third kind of grain merchants. They contribute to the nation by ensuring that farmers can produce as much grain as possible, without flooding the domestic market. To this end, Britain removed all restrictions on grain exportation by 1700. Yet unlike inland traders, grain exporters sometimes want the opposite of what is good for the country. For instance, if Britain faced a grain shortage while another country faced a famine, exporters would make more profit by sending British grain to the famine-stricken country.
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It would be best if all countries left the grain trade free, as this would enable “the scarcity of any one country [...] to be relieved by the plenty of some other.” But since most countries place absurd restrictions on the grain trade, it’s often dangerous for small countries to allow free grain exports, which could lead to domestic scarcity. Ultimately, just like laws about religion, these grain laws are just the product of special interest groups pressuring the government.
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Merchant carriers, who import grain and then re-export it, are the fourth and final kind of grain merchant. They often help the domestic market by selling grain locally when exportation is unprofitable. But the combination of import and export limits has, in effect, banned the grain carrying trade in Britain.
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In sum, contrary to popular belief, Britain’s grain laws limit its prosperity rather than promoting it. However, Britain still has some of the freest trade laws of any country, which is why it’s among the most prosperous. For instance, Spain and Portugal are poorer than Britain because their restrictions on gold and silver are easier to enforce than Britain’s grain laws. The most recent updates to Britain’s grain laws are beneficial because they greatly reduce the duties on imports and bounties for exports, as well as eliminating duties on imports for the carrying trade. However, they also create a new bounty for oats and ban grain exports at unreasonably low prices.
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