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Book 4, Chapter 6
Themes
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
“Part First. Of the Motives for establishing new Colonies.” Ancient Greek city-states established independent, self-governing colonies once their populations grew too large to support at home. Rome gave its poor citizens land in the provinces it conquered, although these colonies remained under tight Roman control. In contrast to Greece and Rome, Europe’s modern colonies in the Americas are not necessary, and their usefulness wasn’t clear at first. After all, Columbus came to the Americas by accident, then convinced himself he had found India and started trying to persuade the Spanish crown of his discovery’s importance. Since the New World’s plants and animals were no better than the Old World’s, Columbus focused on its minerals instead.
The sixth, final, and most complex way that mercantilist countries try to expand their wealth is through colonialism. Both the Greek and Roman examples show how colonies can support a surplus population by giving them the land and resources they need to survive—often at the expense of their new lands’ original inhabitants. In both cases, these population surpluses likely would have led to conflicts over resources at home, so colonies also prevented unrest. But Europe’s colonies were, per Smith, instead somewhere between a historical accident and a crime of opportunity. Europeans didn’t need colonies to support their population and grow their economies, but Columbus used the allure of gold and silver to convince them that they did.
Themes
Accepting Columbus’s ploy, Spain agreed to conquer and enslave the native people, using Christian conversion as an excuse. It initially taxed away 50% of the gold that the conquistadors recovered, but it had to reduce this rate once they could no longer just steal it from native people (and had to enslave them in mining operations instead). Notably, the conquistadors focused singlehandedly on gold, while all but ignoring silver.
Most early chroniclers of European colonialism in the New World were animated by a religious mission, sense of adventure, nationalist zeal, or unquestioned thirst for gold. In contrast to all these aesthetically-focused, self-serving narratives, Smith offers a cut-and-dry economic account of the conquest, which emphasizes its deep folly and needless brutality.
Themes
Searching for mines is one of the riskiest, most expensive, and least profitable businesses in the world, but people are greedy and overconfident enough to do it anyway. Some even believe in mythical gold cities, forgetting that gold and silver are valuable because they are scarce, and they are scarce because they are very widely dispersed and very difficult to mine. Indeed, the first Spanish explorers wildly exaggerated the New World’s supply of gold and silver, while later explorers acquired massive gold and silver stores by accident, after conquering Mexico and Peru. But none of Europe’s other nations found any significant gold or silver in their American colonies.
As Smith pointed out in Book I, minerals are one of the kinds of natural produce that human effort sometimes can increase, but sometimes cannot. And as he has emphasized throughout the work so far, gold and silver mainly affect the money supply, so they raise nominal prices without affecting real ones. Together, these two principles explain why colonizing the Americas in search of gold and silver is one of the worst goals a nation could pursue. It just so happened to pay off for a few people, in a few specific cases—but Smith chalks this up to randomness. Needless to say, most of the people who went to America in search of treasure either died trying or returned home empty-handed.
Themes
“Part Second. Causes of the Prosperity of New Colonies.” When they colonize new territories, “civilized” Europeans quickly implement better systems of agriculture and government than the “savage and barbarous” natives. Colonists receive free, plentiful land and get to keep everything they produce, so they are willing to pay relatively high wages for laborers. Thanks to this combination of high wages and cheap land, even poor laborers can afford to buy land, there are strong incentives to have many children, and so the population grows fast.
If Smith’s disdain for Columbus and other early European invaders may not have been typical for his time, his racist language about American peoples certainly was. Like most racist arguments, Smith’s is circular: he claims that Europeans had a right to seize North America from native peoples because of their superior culture, and the proof of that superior culture is that they farmed and governed the land. This has always been the most common justification for the European conquest of the Americas, but it’s both factually wrong and based on prejudices towards certain styles of life. In reality, native people already had established communities, widespread agriculture, and complex systems of government. Europeans learned how to cultivate the land they stole thanks to lessons they learned from the locals, and the Iroquois pioneered many of the ideas now seen as central to American democracy.
Themes
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Ancient Greek colonies also grew fast, sometimes even surpassing the city-states that formed them, but no Roman colony ever surpassed Rome. Europe’s American colonies are more similar to the Greek colonies (and arguably even superior to them), as they are relatively distant and independent, which has enabled them to grow rapidly.
Roman colonies always remained under the Empire’s centralized control, while Ancient Greek and modern European colonies took on lives of their own, developing like independent nations. Indeed, this is an opportune time to remember that Smith published this book in 1776, in the middle of the American Revolution and just a few months before the Declaration of Independence. Understanding this historical moment is key to interpreting the many intriguing thoughts about the soon-to-be United States that he will share in the rest of this chapter.
Themes
Spain has held its colonies longer and controlled them more tightly than any other European nation, which has made them less prosperous, at least relative to their vast size. But they have still grown rapidly in population and technology. Portugal’s colony of Brazil has the Americas’ largest population of Europeans in the Americas, and these colonists even drove out the invading Dutch. After the English defeated the Spanish, Europe’s dominant naval force, other countries began colonizing the Americas too. The Swedes colonized New Jersey, but were conquered by the Dutch from New York, who in turn fell to the English.
Smith’s analysis gives readers an interesting snapshot of the state of world affairs in 1776, at the height of Europe’s colonial ambitions in the Americas, and long before it would dominate Asia and Africa, too. He points out how free military competition was necessary for colonialism: under Spanish military hegemony, nobody else had a fighting chance at establishing colonies. And once Britain overpowered the Spanish, it started conquering any territory it wanted (like New Jersey and New York). Unlike most modern people in North America, Smith clearly understands that colonization was first and foremost about the conquest of land and the ethnic cleansing of native populations.
Themes
The Danish colonies in the Caribbean (the present-day U.S. Virgin Islands) began growing rapidly as soon as the king took control of them from the Danish West India Company. Similarly, company rule hampered growth in the Dutch colonies: Suriname, a few Caribbean islands, and formerly New York and New Jersey. The French colonies of Canada (which the English conquered in 1759) and Saint-Domingue (present-day Haiti) also grew much faster once company rule ended.
The Dutch and French examples show that direct rule by the colonial country produced better outcomes than monopoly rule by a chartered company. Once again, this is because monopolies are the most inefficient kind of market. They have every incentive to profit at everyone else’s expense, by raising prices, restricting supply, and preventing competitors from entering the market. Worse still, they were largely outside the purview of the law in the Americas, so they further cut costs by enslaving and brutalizing workers—although so did the colonies run directly by European monarchs.
Themes
England’s colonies are by far the most prosperous in America. They have less high-quality land than the Spanish or Portuguese, but better political institutions. Specifically, they ban the hoarding of land by making possession conditional on improving it, distribute property more equally among heirs rather than giving everything to the firstborn, and impose relatively low taxes, while spending frugally. In contrast, Spain, Portugal, and France spend lavishly on their colonial officials, while allowing corrupt church officials to live off charity from the poor and amass land.
Smith indicates that the form of a colony’s government shapes its success even more than the quality of its land. Conditioning land ownership on agricultural improvements was the primary way that British colonial governments justified stealing native people’s land, but it also ensured that agriculture grew fast and land ownership was widely-distributed. (After all, nobody could own more land than they could keep up.) Still, the other countries’ systems were even worse, as they focused on redistributing resources from indigenous people and poor settlers to merchants, officials, and the church. Just like the excess gold and silver in Spain and Portugal’s treasuries, this uncultivated land became “dead stock” that should have produced revenue but didn’t, thanks to bad governance. In many cases, the inequalities that he describes emerging in the colonial era still exist today.
Themes
Fourth, the English colonies can trade with England on better terms than other countries’ colonies. When individual companies exclusively control the trade (like in Holland, Denmark, Portugal, and France in the past), they limit supply to increase their profits, which harms the colonial economy. When trade is limited to a single port, as with the Spanish, merchants collude to produce the same effect. But some countries—like England and France—let their merchants trade freely with their colonies. England even lets its American colonies freely export some of the goods they produce best—including grain, timber, cattle, fish, and sugar—to any country, not just Britain. Indeed, if they were limited to the British market, American commodities would have outcompeted local British goods.
Company rule and restrictions on ports are both monopolies, which keep profit rates high but suppress the total volume of production and hamper economic growth. In contrast, the British developed a model that more closely approximates free trade—even if it still included many restrictions. Historically, this was because of the more decentralized nature of British government and colonialism. A large variety of merchants and settlers all independently sought fortunes in North America, making it a competitive market from the beginning and encouraging it to follow a free trade model.
Themes
But Britain still restricts the market for some goods that are only or mainly produced in America. It offers a bounty for American timber in order to boost its navy, and it imports American iron tax-free, which encourages the creation of wood-fired furnaces. Together, these policies have encouraged massive timber harvesting in America, which has cleared land for agriculture. Britain’s American colonies can also freely trade with the British West Indies.
Britain makes exceptions to its colonial trade policies in a few very special cases, when it has a particularly strong rationale for controlling certain goods. Smith seems to view these particular restrictions positively, because they encourage industries that will drive broader economic growth. Its focus on timber and iron demonstrates how access to energy is crucial for economic growth—and foreshadows the coming Industrial Revolution.
Themes
But Britain greatly restrains the trade in manufactured goods, even within its American colonies. This protects its own industry but limits the development of colonial ones. This violates people’s “sacred rights” but has little effect because, with so much spare land, it’s still cheaper for the American colonies to focus on agriculture and import manufactured goods.
Britain’s manufacturing policies are the other side of the Industrial Revolution coin. By giving domestic producers a monopoly on its colonial markets around the world, Britain helped ensure that massive industrial growth would take place primarily at home. Smith points out that this policy is in some ways unnecessary, since Britain would have become a manufacturing center before America regardless. Furthermore, the American Revolution would soon make Britain’s policy irrelevant. However, it would still make a significant difference in Britain’s other colonies—most notably in India, where Britain intentionally dismantled the world’s largest textile industry (and hamstrung the Indian economy) in order to secure unfair advantages for British manufacturers and exporters.
Themes
Britain uses bounties and drawbacks to encourage imports from its American colonies, while permitting drawbacks for goods originating from other European countries if they’re destined for re-exportation (including to the American colonies). This policy enriches merchants, while depriving the state of revenue. Not only are Britain’s trade policies more liberal than other countries’, but it allows its colonies to govern themselves freely, through representative assemblies. Indeed, there is no hereditary nobility in America. In contrast, Spain, Portugal, and (to a lesser extent) France rule their colonies tyrannically.
Smith again sees merchants’ greed and undue political influence as the culprit behind the tax policies he describes here. Nevertheless, these policies bring Britain closer than its peers to a free trade system. The import-oriented policies ensured that Britain could access more than its fair share of raw materials. Drawbacks for the carrying trade ensured that as much global commerce as possible could passed through the hands of British middlemen. And the colonies’ political system ensured that Americans could pursue their own goals, enriching themselves rather than the crown and directing the economy toward their own particular needs. This was especially important because news took months to travel between Europe and the New World, which made it deeply inefficient for European monarchs to control their colonies’ major political decisions.
Themes
France’s Caribbean sugar colonies are more advanced than England’s because they are allowed to refine sugar onsite and they employ better slave management techniques. This is because French magistrates enforce the law arbitrarily, so interfere with planters to protect enslaved people’s rights, which makes enslaved people work better and harder. The same happened in Rome, where magistrates could emancipate enslaved people whose masters mistreated them.
Today, we often forget that Saint-Domingue (present-day Haiti) was once likely the richest place in the world. Yet this not because of its slave system, but despite it. To understand Smith’s argument here, it’s essential to remember his other comments about slavery—which he views as not just immoral and inhumane, but also deeply inefficient. Specifically, he complains that enslaved people have no rights and reap no benefits from economic growth, while planters are generally more interested in power, domination, and abuse than efficient management. As a result, productivity is relatively low and seldom improves. This is just like how serfdom prevented Europe’s economies from growing for centuries. Ironically, Smith concludes that slavery is such a brutal and inefficient system that the rule of law is actually disadvantageous in slave societies, as only corrupt judges can offer enslaved people the rights and protections they deserve (and that encourage them to work harder).
Themes
In sum, Europe’s policies have not helped its American colonies. These were first established through the “folly and injustice” of murdering native people and stealing their land to search for gold and silver that nobody needed. The religious minorities expelled from Europe later established respectable settlements, governments, and agricultural economies in America. In fact, the adventurers and conquistadors who first established the colonies did so at their own risk, with minimal support from Europe—which was more concerned with preserving its trade monopolies than governing America. The only way Europe contributed to the colonies’ formation was by breeding and educating the superior men who established them.
Smith sharply distinguishes between the merchants, mercenaries, and enslavers who invaded the Americas for profit, on the one hand, and the settlers who established communities there in order to escape persecution, on the other. The former acted like vicious monopolists, destroying everything around them in order to seek power, which they saw as their best path to profit. The latter simply established the same kind of settlements they already had in Europe, which enabled relatively free and competitive institutions to form (and spur economic growth). This question remains pertinent today, in debates over extractive versus settler colonialism. Smith’s clearheaded denunciation of the earliest explorers should help us see that pro-conquest and pro-slavery thinkers cannot merely be excused as “products of their time.” Nevertheless, Smith does still recycle racist ideas about Europeans’ inherent superiority—which he views as justification enough for invading and taking native people’s land in North America.
Themes
“Part Third. Of the Advantages which Europe has derived from the Discovery of America, and from that of a Passage to the East Indies by the Cape of Good Hope.” Europe as a whole has benefited from colonizing America because it can import America’s surplus commodities and export its own commodities to America. Even countries that don’t trade directly with America still benefit, as their commerce with other European countries grows due to those countries’ trade with America. But European countries who establish an exclusive trade with their American colonies benefit less, as these colonies would produce more goods for cheaper if trade were free.
Smith argues that, in almost all cases, Europe governed its American colonies badly, which prevented them from reaching their full economic potential. At the same time, the benefits of opening up trade with such a vast, resource-rich market far outweighed the damaging effects of poor governance. Once again, Smith reminds his readers that shifts in trade have ripple effects throughout entire markets. For instance, he pointed out how cheap American lumber helped spur massive iron production in England. The availability of cheap English iron surely benefited Britain’s other trading partners, including countries with no American colonies.
Themes
Still, the particular colonizing countries benefit from their colonies, too. Like all empires, the colonies can provide revenue and soldiers (although, in practice, they actually haven’t). And the exclusive trade helps colonizing countries receive particular commodities that they couldn’t access otherwise (like tobacco and sugar for England). Still, this only gives the mother country a relative advantage over other European countries. Under a system of free trade instead of exclusive trade, such commodities would be even cheaper and more abundant.
As Smith points out here, the colonies don’t actually contribute to defense (but do give European countries far more to defend), and exclusive trade is still worse than free trade. So if colonies’ main benefit is that they enrich the mother country through a suboptimal trade system, then there is actually no need for colonies at all. Instead of conquering, enslaving, and displacing native peoples, Europe could simply recognize their sovereignty and trade with them instead.
Themes
England’s exclusive trade with its colonies led other foreign powers to withdraw their capital from them, which caused more English capital to flow into them. Prices rose, but so did profit margins, so merchants withdrew their capital from other enterprises and forms of foreign trade to invest it in the colonies instead. Indeed, Britain has long been a successful trading nation; rather than greatly expanding that trade, the colonies just reversed its direction, making Britain an importer instead of an exporter. The exclusive trade gives Britain a disadvantage in trading with all other countries, as merchants raise prices to replicate the high profit margins they earn in the colonial trade, and demand for British goods falls in response. While merchants blame these effects on high wages, high profits are the true culprit.
Exclusive trade is just a form of monopoly: it enables merchants to artificially constrain supply, so that they can justify hiking prices (and extracting massive profits). The artificially inflated profit margins drive more capital stock into the Britain–America trade, but only at the expense of economic activities and trade routes that are naturally more productive. In this way, the exclusive trade just shuffles capital around, and its net effects are probably negative. But merchants can always provide a convenient, self-serving explanation to justify why trade policies ought to be even more favorable and workers ought to have even fewer rights.
Themes
Direct trade with nearby countries is best because distances are shorter, so goods can circulate back and forth faster, and the same capital can yield profits more frequently. But Britain’s exclusive trade with its colonies has supported a distant, roundabout trade while harming the direct, nearby trade with nearby countries (especially Mediterranean ones). Since the American colonies need more capital than they have, they try to loan themselves that capital by delaying their return shipments of goods to Europe as much as possible, which hurts Britain. Many American goods, like tobacco, are traded to Britain primarily for re-export, which delays the returns on capital even longer. Without the exclusive trade, Britain would have a balanced variety of “small direct foreign trades” rather than one large, slow, indirect, insecure, mostly carrying trade. Britain should gradually dismantle this exclusive trade system.
Since wealth depends on production and consumption—not the accumulation of treasure—the speed at which capital circulates is key to the level of returns it generates, and thus the amount of economic growth it supports. This makes domestic and short-haul international trade particularly attractive. After all, it’s better to make a 1% profit once a month than a 10% profit once a year. But Britain’s monopoly on trade with America has caused it to shift capital away from a quick form of trade to a much slower, long-distance one. Indeed, Britain’s policy is designed to maximize the proportion of goods that pass through its merchants’ hands, rather than maximizing the overall amount of goods that circulate (or providing them at the best possible price).
Themes
The American Revolution has cut Britain off from trade with its colonies, but this hasn’t severely affected it because the colonies already imported everything they would need before cutting off trade, and new political developments in Spain, Russia, Turkey, and Poland have kept up demand for British goods. And Britain’s trade with its colonies has been beneficial overall, even if the exclusive nature of that trade was harmful. Still, it would be far better in a “natural and free state.” The colonies primarily send rude produce to Europe and serve as a market for European manufactured goods. In Spain and Portugal, unlike in Britain, the colonial trade’s monopoly effects outweighed its benefits: their colonies were so rich and fertile that capital fled their manufacturing sectors, which shut down.
Political uncertainty is another strong reason why nations should prefer to trade freely with as many nations as possible, rather than depending on just one or a few trading partners—especially colonies likely to declare independence. Of course, Smith did not yet know how the Revolution would turn out when he published this book, but his call for “natural and free” commerce between Europe and America suggests that he thinks American independence would be better for economies on both sides of the Atlantic. The collapse of Spanish and Portuguese manufacturing shows how, if taken too far, monopolies can actually lead to economic regression. They artificially inflate profit rates in industries that don’t actually promote economic growth (like gold and silver mining), while destroying industries that do.
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By increasing merchants’ profits, the exclusive trade also reduces wages, discourages land improvement, reduces land rents, and raises interest rates in Europe. In short, it benefits merchants but harms everyone else in society. Further, it encourages people to become merchants and act irresponsibly, rather than doing the honest work that actually makes the economy grow. In this way, merchants’ high profits gradually eat away at society’s capital, impoverishing it, as in Spain and Portugal. In contrast, merchants in places with low profit rates (like Amsterdam) are responsible and honest, but also still wealthier overall, as the volume of their business is much higher.
Mercantilist policies enrich traders by guaranteeing them a much larger slice of the economic pie than they actually deserve. This extra profit has to come from somewhere, so the rest of the economy has to adjust to make up for it. This is a specific instance of the general principle that Smith laid out at the very end of Book I: workers and landlords’ private interests are aligned with the public interest, while capital owners’ are in direct opposition to it. As capital owners gain power over a nation’s political and economic system, they raise profit rates rise but reduce wages, rents, investment, and growth. By losing out on growth, they also hurt their own interests in the long term. This is why the poorest countries tend to have the highest profit rates, while the wealthiest tend to have the lowest.
Themes
Ultimately, shopkeepers contributed nothing to Britain’s efforts to establish colonies, and yet Britain has spent exorbitantly to enrich them by establishing a monopolistic trade system, then paying soldiers and ships to defend it. Britain would be better off if it voluntarily gave up control of the colonies and started trading freely with them. But it will never do this. At present, the colonies don’t yield enough revenue to justify their expense, and the colonial assemblies will neither agree to pay enough nor ever accurately grasp the overall needs of the British Empire as a whole. Alternatively, Parliament could impose higher taxes on the American colonies, which it would not reasonably overtax because it under-taxes other colonies. But it doesn’t have the power to do this: the colonies would simply refuse and revolt. Indeed, that’s exactly what they are doing as Smith writes in 1776.
Britain was about a year into fighting against the American revolutionaries when Smith published this book, so his arguments were bound to be controversial. Accordingly, he is careful to couch his disdain for the British Empire in terms of his love for Britain itself. He presents the American colonies as a waste and burden: they hamper Britain’s economic prospects, waste its energy, and kill its young men. All this only serves to further enrich a small class of greedy merchants. He suggests that, like slavery, colonialism is unsustainable because it’s built on domination and inequality. Subjugated people will always demand their freedom, and their oppressors will actually be happier and wealthier if they grant it.
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If Britain offers the American colonies free trade and representation in Parliament, they might agree to pay their fair share in taxes. Otherwise, the colonies’ new leaders will not surrender, especially because they want to keep the power and status that come with their new roles. In this way, it will resemble the recent revolt in Paris. While Parliament fears that adding American members could alter the balance of power, proportional representation would prevent them from taking over. Instead, it would be in everyone’s best interests to cooperate.
The famous slogan “no taxation without representation” implied the same two solutions that Smith presents here: Britain could either stop taxing the colonies or grant them equal status in Parliament. But Smith warns that there is no middle road between equality and independence for the colonies. Finally, Smith’s emphasis on understanding the revolutionaries’ motives and psychology once again shows how his earlier philosophical work on sentiments and morality underlies much of the analysis in The Wealth of Nations.
Themes
The most important events in human history were the discovery of America and the discovery of the eastern sea route to Asia. In the short term, colonialism has devastated native people around the world, but this is because of the colonizers’ cruelty, not their commercial goals. But over time, it will make the world’s nations equal and mutually interdependent through trade. Colonialism has also spread the mercantile system and turned Europe into the world’s center of manufacturing, so it benefits all the nations of Europe, not just the ones with colonies.
Smith assesses colonization in all its complexity. In short, he sees the accelerating integration of global trade as a kind of economic miracle, but the way Europeans caused it—through slavery, ethnic cleansing, and needless violence—as a tragedy of historic proportions. Still, his vision of shared global peace, wealth, and equality through specialization and trade indicates that he sees the world as naturally moving towards freer markets (and away from the mercantile system). This notion is still popular today, although it’s more often associated with contemporary thinkers like Francis Fukuyama (who thought that the end of the Cold War would bring about a utopian, capitalist “end of history”).
Themes
Yet exclusive trade systems between European countries and their colonies often hurt the mother country’s economy and benefit other European countries even more. Indeed, all of Europe’s American colonies cost more than they yield in revenue. Their dazzling riches lead people to mistakenly put all their capital into it, when it is naturally better to invest capital in activities that are near home and yield fast returns. When too much capital goes into a certain activity, its profit rates fall back to the standard. This is why people naturally distribute their capital in the way that produces the most revenue for society, simply by following their “private interests and passions.”
There’s a wide gap between the way people perceive the colonial economy and the way it actually operates. Behind this disconnect lies the same misunderstanding that makes mercantilism so attractive. Namely, people mistake money for wealth because they don’t understand how the economy really works. This once again shows that economic actors systematically make irrational decisions as individuals, but markets push them toward rational behavior in the aggregate through the pricing mechanism (or the relationship between supply and demand).
Themes
The mercantile system disrupts this natural distribution of capital, and this effect is the strongest in Europe’s trade with America and the East Indies. In America, each European nation monopolizes trade with its colonies, and in the East Indies, each European nation assigns monopoly rights over its trade to a particular company. As explained above, the first kind of monopoly, exclusive trade, causes capital to flood into commerce. The second kind, the company-based monopoly, affects rich and poor European countries differently, but it is always undesirable. Poor countries, like Denmark and Sweden, would not be able to conduct international commerce without a company. But these companies are bad investments: such countries ought to invest at home first. In rich countries like Holland, merchants are already seeking ways to invest their abundant capital, but company-based monopolies shut most of them out, repelling investment that would have been desirable.
The mercantile system doesn’t let markets operate freely because it limits people’s investment opportunities, based on which territories happen to be owned by their country or which companies they happen to join. So far, Smith has focused on exclusive trade monopolies. He stops short of classifying them as good or bad here, because they can sometimes produce benefits—for instance, he noted that the American timber trade has greatly benefited England’s iron industry, which in turn has other positive effects. But these exclusive trade monopolies always damage the economy as a whole. Company monopolies are also consistently harmful—in fact, Smith argues that there is nothing redeeming about them at all. For one, they harm poor countries by reallocating much-needed capital from productive domestic ventures to less productive ones overseas.
Themes
Company monopolies are often justified on the grounds that only companies have enough capital to support the East India trade. But this is wrong: in a country wealthy enough for the East India trade, many different merchants will bring their capital together, invest it in different functions, and start trading spontaneously. Portugal has long traded without an exclusive company, for example. Europe’s Asian and African colonies are smaller and less advanced than its American colonies; the Dutch settlements of present-day Cape Town and Jakarta are the largest and most profitable, despite oppressive company rule.
Additionally, company monopolies harm wealthy countries in the same way that typical monopolies do: by restricting competition, so that prices increase while quality suffers. Readers today will find it obvious that corporations can form without the government chartering them, but in Smith’s time, this was by no means obvious. Most major companies were still chartered by European monarchs, and in Book V Smith will explain why joint-stock companies were still controversial.
Themes
Indeed, the Dutch East India Company has destroyed most of the spice trees and slaughtered the local population to maintain its monopoly on spices, just as the British East India Company has started destroying Bengal’s agricultural land to grow opium on it for export. These policies are actually against the companies’ self-interest. This is because they function as sovereigns in their colonies, so they should want to expand the population and productivity in order to increase the rents they can charge, their share of the annual produce, and demand for their goods. Yet the companies’ officers are short-sighted merchants, so they choose the lower, temporary revenues of a trade monopoly over the higher, consistent revenues of a sovereign.
The predominance of company monopolies was one main difference between the first (American) and second (Asian and African) waves of European colonialism. The East India Companies not only shrunk the overall market in their territories to preserve their trade advantages, but also devastated local economies and killed millions of native people. The Bengal Famines may be the clearest example. Debates about the legacy of colonialism would gain much by taking Smith’s analysis into account, because he explains the economic incentives that made European colonialism so tremendously violent and devastating for Asian and African peoples. Today, many people rightly remember colonialism as a process through which Europe profited at the rest of the world’s expense, but most do not realize that this was in large part because of the monopoly system. Other arrangements, like the pro-market governance system that Smith proposes here, would have produced very different effects.
Themes
As merchants, these company workers will always trade on the side for their own private profit, in addition to their public work for the company. This is impossible to stop, as they work autonomously, far from home. Worse still, they use this private power to establish other monopolies and restrict production, against the interests of the country (and the company). The British East India Company is particularly corrupt, although the organization’s structure is more at fault than its officers’ character. In general, company monopolies “are nuisances in every respect” and should always be avoided.
Just like high tariffs, monopolies encourage the black market trade. Indeed, even the very people who ran the company monopolies sought to subvert them and establish their own, private monopolies. This only underlines how inefficient company monopolies are, and how the incentive to form monopolies never goes away. No matter how concentrated the market is, some people always have the opportunity to pursue private profits at the public expense. This poses a constant threat to human freedom and prosperity, so Smith suggests that good economic governance is first and foremost about counteracting monopoly power and keeping markets competitive.
Themes
