Adam Smith and
An Inquiry into the Nature and Causes of
the Wealth of Nations
by Adam Smith, 1776
[IV, i, 12, p. 435]
The quantity of every commodity which human industry can either purchase or produce naturally regulates itself in every country according to the effectual demand… No commodities regulate themselves more easily or more exactly according to this effectual demand than gold and silver; because, on account of the small bulk and great value of those metals, no commodities can be more easily transported from one place to another … (p. 436) When the quantity of gold and silver imported into any country exceeds the effectual demand, no vigilance of government can prevent their exportation… (p. 437) No complaint, however, is more common than that of a scarcity of money.
(p. 439) Money, therefore, necessarily runs after goods, but goods do not always or necessarily run after money. The man who buys does not always mean to sell again, but frequently to use or to consume; whereas he who sells always means to buy again. The one may frequently have done the whole, but the other can never have done more than the one-half of his business. It is not for its own sake that men desire money, but for the sake of what they can purchase with it.
Jean-Baptiste Say, A
Treatise on Political Economy
Book I, chapter xv
Of the Demand or Market for Products
It is common to hear adventurers in the different channels of industry assert, that their difficulty lies not in the production, but in the disposal of commodities; that products would always be abundant, if there were but a ready demand, or market for them. When the demand for their commodities is slow, difficult, and productive of little advantage, they pronounce money to be scarce; the grand object of their desire is, a consumption brisk enough to quicken sales and keep up prices. But ask them what peculiar causes and circumstances facilitate the demand for their products, and you will soon perceive that most of them have extremely vague notions of these matters …
For, after all, money is but the agent of the transfer of values. Its whole utility has consisted in conveying to your hands the value of the commodities, which your customer has sold, for the purpose of buying again from you; and the very next purchase you make, it will again convey to a third person the value of the products you may have sold to others…
Thus, to say that sales are dull, owing to the scarcity of money, is to mistake the means for the cause; an error that proceeds from the circumstance, that almost all produce is in the first instance exchanged for money, before it is ultimately converted into other produce: and the commodity, which recurs so repeatedly in use, appears to vulgar apprehensions the most important of commodities, and the end and object of all transactions, whereas it is only the medium. Sales cannot be said to be dull because money is scarce, but because other products are so. There is always money enough to conduct the circulation and mutual interchange of other values, when those values really exist…
It is worthwhile to
remark, that a product is no sooner created, than it, from
that instant, affords a market for other products to the full
extent of its own value. When the producer has put the
finishing hand to his product, he is most anxious to sell it
immediately, lest its value should diminish in his hands. Nor
is he less anxious to dispose of the money he may get for it;
for the value of money is also perishable. But the only way of
getting rid of money is in the purchase of some product or
other. Thus, the mere circumstance of the creation of one
product immediately opens a vent for other products…
But it may be asked, if
this be so, how does it happen, that there is at times so
great a glut of commodities in the market, and so much
difficulty in finding a vent for them? Why cannot one of these
superabundant commodities be exchanged for another? I answer
that the glut of a particular commodity arises from its having
outrun the total demand for it in one or two ways; either
because it has been produced in excessive abundance, or
because the production of other commodities has fallen short.
It is observable, moreover,
that precisely at the same time that one commodity makes a
loss, another commodity is making excessive profit. And,
since such profits must operate as a powerful stimulus to the
cultivation of that particular kind of products, there must
needs be some violent means, or some extraordinary cause, a
political or natural convulsion, or the avarice or ignorance
of authority, to perpetuate this scarcity on the one hand, and
consequent glut on the other. No sooner is the cause of this
political disease removed, than the means of production feel a
natural impulse towards the vacant channels, the replenishment
of which restores activity to all the others. One kind of
production would seldom outstrip every other, and its products
be disproportionately cheapened, were production left entirely
From this important truth
may be deduced the following important conclusions:
1. That, in every community the more numerous are the producers, and the more various their productions, the more prompt, numerous, and extensive are the markets for those productions …
2. That each individual is
interested in the general prosperity of all, and that the
success of one branch of industry promotes that of all the
3. From this fruitful
principle, we may draw this further conclusion, that it is no
injury to the internal or national industry and production to
buy and import commodities from abroad; for nothing can be
bought from strangers, except with native products, which find
a vent in this external traffic…
4. The same principle leads
to the conclusion, that the encouragement of mere consumption
is no benefit to commerce; for the difficulty lies in
supplying the means, not in stimulating the desire of
consumption; and we have seen that production alone, furnishes
those means. Thus, it is the aim of good government to
stimulate production, of bad government to encourage
Back to Wealth of
[IV, ii, 4, p. 454]
Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society.
First, every individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry; provided always that he can thereby obtain the ordinary, or not a great deal less than the ordinary profits of stock.
Thus, upon equal or nearly equal profits, every wholesale
merchant naturally prefers the home trade to the foreign trade
of consumption, and the foreign trade of consumption to the
carrying trade. In the home trade his capital is never so long
out of his sight as it frequently is in the foreign trade of
consumption. He can know better the character and situation of
the persons whom he trusts, and if he should happen to be
deceived, he knows better the laws of the country from which
he must seek redress.
[IV, ii, 6, p. 455]
Upon equal, or only nearly equal profits, therefore, every individual naturally inclines to employ his capital in the manner in which it is likely to afford the greatest support to domestic industry, and to give revenue and employment to the greatest number of people of his own country.
Secondly, every individual who employs his capital in the support of domestic industry, necessarily endeavors so to direct that industry that its produce may be of the greatest possible value.
The produce of industry is what it adds to the subject or materials upon which it is employed. In proportion as the value of this produce is great or small, so will likewise be the profits of the employer. But it is only for the sake of profit that any man employs a capital in the support of industry; and he will always, therefore, endeavour to employ it in the support of that industry of which the produce is likely to be of the greatest value, or to exchange for the greatest quantity either of money or of other goods.
But the annual revenue of every society is always precisely
equal to the exchangeable value of the whole annual produce of
its industry, or rather is precisely the same thing with that
exchangeable value. As every individual, therefore, endeavours
as much as he can both to employ his capital in the support of
domestic industry, and so to direct that industry that its
produce may be of the greatest value; every individual
necessarily labours to render the annual revenue of the
society as great as he can... By directing that industry in
such a manner as its produce may be of the greatest value, he
intends only his own gain, and he is in this, as in many other
cases, led by an invisible hand to promote an end which was no
part of his intention. Nor is it always the worse for the
society that it was no part of it. By pursuing his own
interest he frequently promotes that of the society more
effectually than when he really intends to promote it. I have
never known much good done by those who affected to trade for
the public good. It is an affectation, indeed, not very common
among merchants, and very few words need be employed in
dissuading them from it.
[IV, ii, 23, p. 463]
There seem, however, to be two cases in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry.
The first is, when some particular sort of industry is necessary for the defence of the country. The defence of Great Britain, for example, depends very much upon the number of its sailors and shipping. The Act of Navigation, therefore, very properly endeavours to give the sailors and shipping of Great Britain the monopoly of the trade of their own country in some cases by absolute prohibitions and in others by heavy burdens upon the shipping of foreign countries…
[IV, ii, 30, p. 465]
As defence, however it is of much more importance than opulence, the Act of Navigation is, perhaps, the wisest of all the commercial regulations of England.
The second case, in which it will generally be advantageous to lay some burden upon foreign for the encouragement of domestic industry is, when some tax is imposed at home upon the produce of the latter. In this case, it seems reasonable that an equal tax should be imposed upon the like produce of the former. This would … leave the competition between foreign and domestic industry, after the tax, as nearly as possible upon the same footing as before it.
[IV, ii, 43, p. 471]
expect, indeed, that the freedom of trade should ever be
entirely restored in Great Britain is as absurd as to expect
that an Oceana or Utopia should ever be established in it. Not
only the prejudices of the public, but what is much more
unconquerable, the private interests of many individuals,
irresistibly oppose it...
“Conclusion of the Mercantile System”
[IV, viii, 49, p. 660]
Consumption is the sole end and purpose of all production; and
the interest of the producer ought to be attended to only so
far as it may be necessary for promoting that of the consumer.
The maxim is so perfectly self evident that it would be absurd
to attempt to prove it. But in the mercantile system the
interest of the consumer is almost constantly sacrificed to
that of the producer; and it seems to consider production, and
not consumption, as the ultimate end and object of all
industry and commerce.
[IV, viii, 53, p. 661]
But in the system of laws which has been established for the management of our American and West Indian colonies, the interest of the home consumer has been sacrificed to that of the producer with a more extravagant profusion than in all our other commercial regulations. A great empire has been established for the sole purpose of raising up a nation of customers who should be obliged to buy from the shops of our different producers all the goods with which these could supply them. For the sake of that little enhancement of price which this monopoly might afford our producers, the home consumers have been burdened with the whole expense of maintaining and defending that empire...
It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interest has been so carefully attended to; and among this latter class our merchants and manufacturers have been by far the principal architects. In the mercantile regulations, which have been taken notice of in this chapter, the interest of our manufacturers has been most peculiarly attended to; and the interest, not so much of the consumers, as that of some other sets of producers, has been sacrificed to it.