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Book 4, Chapter 8
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
No government has ever actually adopted the agricultural system of political economy, which equates a country’s revenue and wealth to the rude produce generated by its land. But French philosophers have advocated the system because Louis XIV’s government followed the mercantile system, banned grain exports, and devastated French agriculture. The agriculturalists divide people into three groups: landlords, farmers (or the “productive class”), and manufacturers and merchants (or the “unproductive class”). Agriculture requires landlords to invest in improving their land, and farmers in planting and cultivating it, so the cost of these investments—plus the land rent and an ordinary rate of profit—should be exempt from taxation.
Having concluded his critique of the mercantile system, Smith turns to its only significant competitor in 18th-century Europe: the French physiocrats’ agricultural theory. This model was new but would prove short-lived, as Smith’s theory would soon take its place as mercantilism’s primary challenger. The physiocrats would be largely forgotten, but as should be clear here, many of their ideas lived on through Smith’s work. Most importantly, Smith analyzes society in terms of the same basic classes and agrees that agriculture is the foundation of the economy, so mass land improvement is the best kind of investment a government can make.
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The agricultural system treats artisans, manufacturers, and merchants as having zero overall impact on society’s annual revenue. They generate some revenue by manufacturing goods and exporting rude produce, but they withdraw the exact same amount back from the economy in the form of their wages. They only contribute to the national revenue if they earn less in wages than they need for subsistence. Yet they perform an important function by selling rude produce and supplying people with manufactured and imported goods. This indirectly supports landlords and farmers by enabling them to focus their time, energy, and capital on agriculture.
Smith disagrees with the agricultural system on this point. For the agriculturalists, manufacturers and merchants just transform rude produce and move it around, but they don’t add any real value to the economy. But for Smith, artisans, merchants, and manufacturers do add value to the economy. In fact, he sees manufacturing as offering the greatest productivity gains of any economic sector. While the agriculturalists’ perspective might have made sense in agrarian 18th-century France, modern readers will be well aware that non-agricultural sectors of the economy do far more than just save farmers time.
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Since the so-called unproductive classes live off society’s agricultural surplus, it is unwise for them to oppress farmers and landlords. Similarly, unproductive merchant nations like Holland and Hamburgh support but also live off of the productive agricultural nations. Such agricultural nations benefit from free trade, which enables their manufacturers to improve, compete, and ultimately offer better and better goods for lower and lower prices. This grows the surplus of rude produce, manufactured goods, and capital, which eventually enables nations to start exporting goods and competing with one another.
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But agricultural nations that impose import duties and restrictions hurt their own agricultural sectors in two ways. First, by raising the price of foreign goods, they correspondingly raise the real price of their land’s rude produce. Second, they give a monopoly to domestic manufacturers and merchants, whose profit rates rise. This draws capital away from agriculture at a stage when land improvement is still the most productive investment for society. Yet just as the human body can flourish under a range of different diets and circumstances, owing to its natural propensity for self-preservation, human societies can prosper even under oppressive regulations or governments, due to people’s natural desire to improve their condition.
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The agricultural system is wrong to call artisans, manufacturers, and merchants unproductive. Even if they don’t produce a surplus like farmers, they still generate enough revenue to replace their capital investment and living expenses. This distinguishes them from truly unproductive labor, like menial servants and soldiers, whose work doesn’t yield any sellable goods. Indeed, a society can increase its annual revenue by either making labor more productive or increasing the total amount of labor. But machinery and training make it easier to increase productivity in manufacturing than in agriculture, and the agricultural system supposes that merchants and manufacturers are better than farmers at setting aside part of their revenue to pay for more laborers. Lastly, if a country’s revenue is really only measured by the number of mouths it can feed, as the agricultural system claims, then manufacturing and trade contribute to this by funding food imports.
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Despite its errors, the agricultural system is still the most accurate theory of political economy. It wrongly views merchants and manufacturers as unproductive workers, but it rightly defines a society’s wealth as the total product of its labor (rather than its reserves of money) and promotes “perfect liberty” in both domestic markets and international trade. This theory’s backers have helped improve France’s agricultural policies. Notably, while Europe has favored manufacturing and trade over agriculture, China favors agriculture instead, manufactures primarily for the domestic market, and conducts very little foreign trade. More foreign trade would benefit China, but its domestic market is as large, rich, and diverse as all the European markets put together. Ancient Egypt and India also favored agriculture and invested heavily in irrigation, while implementing elaborate divisions of labor through hereditary caste systems and conducting foreign trade (but only via other countries’ ships).
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The sovereigns in China, Egypt, and India invested in agriculture largely because their revenue came from land taxes. Ancient Greece and Rome also preferred agriculture, but only because they discouraged trade and manufacturing (which was reserved for enslaved people, who do best by working as little as possible and keeping out of trouble, rather than working hard and innovating). As a result, fine cloth was incredibly expensive in Rome and Greece.
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The exchange of rude produce from the countryside for manufactured goods from towns is still the foundation of economic growth. As a result, anything that makes manufactured goods more expensive also makes rude produce cheaper, which disincentivizes investment in agriculture and thus slows growth in the whole economy. Thus, it’s foolish to try and promote agriculture by restricting trade and manufacturing. But it’s also foolish to promote trade and manufacturing when a society can still benefit more from investing in agriculture instead.
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Indeed, societies naturally invest their capital in the most productive way available to them, so every well-intentioned system that tries to reallocate capital toward certain kinds of investment will ultimately slow economic growth instead of promoting it. “The obvious and simple system of natural liberty” is the best solution: everyone should be allowed to pursue their private interests, and the government should only be in charge of the national defense, the legal system, and any necessary public institutions that would not be profitable to run privately. To pay for these functions, the government must collect revenue, which is the topic of Book V.
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