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Book 4, Chapter 9
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 I. Of the Expence of Defence.” Every nation needs a military force to defend itself against invaders. In hunting and herding societies, everyone can take up arms together if necessary, and they do not need to be paid. Herders’ armies are larger and more formidable than hunters’, and they can even overtake powerful civilizations. In simple settled nations, where most people are farmers and there is little trade, most adult men are physically able to fight in a war. Their families must stay at home to tend their farms, but the soldiers generally do not expect compensation, so long as they are only leaving for a short campaign between planting and harvest time.
Books I–IV focused on Smith’s innovative new theory of political economy, but Book V departs from this focus somewhat in order to offer a comprehensive theory of what the government should do and how it should pay for it. Much like his detailed policy analysis of the mercantile system in Book IV, his observations in Book V are largely an attempt to convince his friends and peers in government to govern Britain differently. This chapter discusses the government’s responsibilities: defense, justice, infrastructure, secular and religious education, and administration. Smith’s analysis of defense in early societies indicates that governments need not go to great lengths to fund armies, so long as most of their people remain farmers.
Themes
Paying soldiers becomes necessary as societies progress in manufacturing and warfighting. Manufacturers and artisans work year-round and stop earning revenue if they go to fight in a war, so the sovereign has to pay them to cover the shortfall. As societies and their military technologies develop, wars become longer and more complex, and a smaller and smaller portion of the workforce can realistically become soldiers. Thus, while all men learned basic military skills and were prepared for battle in ancient Greece and Rome, modern societies require a specialized class of soldiers. The state must pay these soldiers to make military service worth their while.
The division of labor affects the military just like it does any other sector of the economy: soldiers become specialized professionals who earn wages for their work. Instead of everyone performing military service for short periods of time when circumstances demand, a smaller number of people become soldiers, but they serve for longer. Unlike in farming or manufacturing, efficiency gains in fighting aren’t necessarily a good thing—rather, this can make war longer, more widespread, and more destructive than before.
Themes
As society advances and the division of labor progresses, people spend less and less time on military exercise, so the state has two options: form a militia by requiring everyone to perform military service, or form a standing army by permanently hiring a smaller group of professional soldiers. Over time, militias have become more organized. Firearms have made physical training less important, but skill, discipline, and morale more important. Standing armies are better at all three, so they are superior to militias in most cases.
Themes
The Arabs and Turks have the best militias, since they obey the same leaders in peacetime and war. And once a militia spends long enough in the field, it acquires the same level of training as a standing army. The American Revolution started less than a year ago, and the militia leading it may soon reach this point. Otherwise, standing armies historically defeat militias. For instance, Macedon defeated other Greek republics and then the Persian Empire.
Themes
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The history of the Roman army also illustrates this point. Carthage won many victories over Rome, until the Roman militia trained enough to become a standing army. This Roman army then soundly defeated Carthage and went on to dominate the region for centuries. After Rome conquered the whole Mediterranean, it stopped sending its soldiers to war and started stationing them throughout the Empire instead. They turned back into merchants and tradesmen, and so the standing army once again became a disorganized militia. This is how the German and Scythian tribal militias were able to overthrow the Empire. Indeed, militias in shepherding nations are generally stronger than militias in civilized nations. After the Empire fell and peacetime resumed, the militiamen became tradesmen and merchants, then fell out of practice and were replaced by standing armies.
Themes
Civilized countries thus need standing armies to defend themselves because only a standing army remains practiced and brave enough in peacetime to defeat invading militias. In turn, establishing a standing army is the best way to impose discipline and civilization on a country. It’s true that standing armies sometimes overthrow governments instead of supporting them, but this won’t happen if the same people lead both. Put differently, the sovereign should command the army. This also keeps the sovereign’s power secure, which in turn protects people: the sovereign can tolerate dissent, instead of needing to crush it to keep a hold on power.
Themes
In short, defense grows more complex and more expensive as society develops. Firearms accelerated this shift, and the ability to buy and produce them is now the most important factor in warfighting. This gives rich nations a consistent advantage over poor nations for the first time, which civilizes everyone.
Themes
“Part II. Of the Expence of Justice.” In primitive societies, where people own little property, there is no need for a formal justice system. Unlike property crime, violent crime in no way benefits the perpetrator, so most people refrain from it. But once people have property, they start to steal it from each other and need a justice system to govern it. People have to submit to that justice system in order for it to function. People usually subordinate themselves to people who have qualifications, are elders, control money and resources, or belong to a hereditary nobility or monarchy. Hunters don’t have wealth and hereditary distinctions, while herders have them more than any other kind of group. These distinctions lead herders to form governments, as people with property seek to protect it against people without it.
Themes
By forcing lawbreakers to pay, sovereigns turn justice systems into a source of revenue. Indeed, judges in Britain were once little more than traveling tax collectors. They were corrupt, slow, and accountable to no-one. In many herding tribes, the sovereign is simply the wealthiest herdsman, and their revenue comes from gifts people offer them in exchange for protection, so they have no incentive to stop corruption.
Themes
But in societies that collect taxes, judges are paid salaries and not allowed to accept gifts. Judges are not particularly costly to the government, in part because the position is honorable enough that people take it for little pay. But there is nothing wrong with charging court fees to cover this cost, so long as those fees are charged fairly.
Themes
If judges are paid for their diligence in making decisions, as in France, they may act slower but will never be corrupt. In contrast, England’s courts earned more fees the more cases they tried, so they became quicker but took on many more cases. Courts paid per proceeding would simply multiply the proceedings, just as attorneys paid by the page tend to “multiply words beyond all necessity” in their work. Endowing courts with properties or investments is one good solution for covering their costs.
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As societies become more complex, sovereigns appoint deputies to make judicial decisions. In the same way, governments develop specialized executive and judicial branches, which should be separate and independent so that judges can make impartial decisions free from political influence.
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“Part III. Of the Expence of public Works and public Institutions.” The sovereign’s third duty, after defense and justice, is creating the other crucial institutions that would never return a profit to private investors. Specifically, these are the institutions necessary for commerce, the education of the youth, and the religious instruction of all people. The three Articles in this section will cover these three topics.
Themes
“Article I. Of the public Works and Institutions for facilitating the Commerce of Society. And, first, of those which are necessary for facilitating Commerce in general.” The wealthier a country, the better infrastructure and public services it needs to perform large-scale manufacturing and trade. Since these projects are investments that pay for themselves, they shouldn’t be counted as expenses from the government’s general revenue. Instead, they should form a separate fund and be managed in a way that raises revenue for the government while facilitating the transport and exchange of goods.
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For instance, tolls can pay for roads and bridges, seigniorage can more than cover the cost of minting coinage, and post offices usually generate more revenue than they incur in costs. These services make doing business so much cheaper that taxing them to repay their cost of construction will not deter people from using them. Commercial tolls should be proportional to the weight and size of goods transported, and people’s willingness to pay tolls will determine which projects are worth building. In turn, this ensures that projects are built in the right places, where people most need them.
Themes
Canals should be privately owned because governments cannot keep up with the constant maintenance they need to be navigable. Roads should be publicly run because roads do not need constant maintenance to be drivable, so private companies would be incentivized to charge the highest possible tolls but keep roads in the worst possible condition.
Themes
People complain about Britain’s poorly-managed public turnpike system, but it needs time to develop best practices. The government should not raise the tolls as high as possible to raise revenue, as has been proposed. This would discourage commerce, harm the poor, and encourage bad maintenance. In France, roads are managed publicly, and everyone is required to work a few days a year maintaining them. France’s main roads are better than Britain’s, but its country roads are dangerous and impassable. It is said that China’s publicly managed roads and canals are excellent. Local governments should maintain and raise the taxes to pay for local infrastructure. They are sometimes corrupt, but much less so than the central government.
Themes
“Of the Public Works and Institutions which are necessary for facilitating particular Branches of Commerce.” Trade with other parts of the world often requires building forts and hiring ambassadors, and it’s not unreasonable to pay for them by taxing those who participate in this trade. But European countries have wrongly let companies administer those taxes instead of the executive.
Themes
There are two kinds of companies: regulated and joint-stock companies. Regulated companies control a certain branch of trade and allow any merchant to join for a fee. When these companies are powerful, they restrict the trade and create pointless regulations. It’s far better when they’re weak, because that just makes them useless, like the Hamburgh, Russia, and Eastland Companies. The Turkey Company imposes a repressive company monopoly on Britain’s trade with Turkey, which discourages people from joining it. These regulated companies have not generally maintained forts, and they aren’t suited for doing so, since their managers don't have a personal stake in their success or substantial resources to invest. Britain’s other regulated company, the Royal African Company, is supposed to maintain forts, but it instead behaves monopolistically and wastes its budget.
Themes
In joint-stock companies, people pool their resources and become co-owners. These joint-stock companies are not the same as private partnerships: stock owners can sell their shares to anyone and have more limited liability. These conditions attract incompetent investors and boards of directors.
Themes
Some companies have exclusive trade privileges, while others have lost theirs—like the Royal African Company, which failed as a result. The Hudson’s Bay Company has succeeded because it has no real competitors and very few stockowners, who make low but respectable profits. The South Sea Company bankrupted itself enslaving and selling people to Spain, then whaling in Greenland.
Themes
The first East India Company failed due to competition, but Parliament allowed it to continue trading with some of its capital until 1701. Its officials also kept privately trading goods, and their competition made the second East India Company lose money—until it amassed an army and started conquering territory in India, giving it a company monopoly. It keeps demanding higher dividends and financial relief from the government. It is poorly managed because its members and directors care about their immediate profits, and not the company, the Empire, or India.
Joint-stock companies tend to encourage waste and corruption, start unjust wars, and fail unless they have monopolies (which are justifiable when necessary to create a new branch of trade, but foolish when granted in perpetuity). Fifty-five joint-stock companies with exclusive trade privileges have failed, too. Joint-stock companies without these privileges can only succeed in banking, insurance, and canal and aqueduct construction. There are two reasons for this. First, these are methodical, rule-based industries where management quality is unimportant. Second, their work requires massive capital investment but greatly benefits the public. No other industry meets these requirements.
Themes
“Article II. Of the Expence of the Institutions for the Education of Youth.” Schools can be paid for either through fees or an endowment, although endowments reduce the quality of instruction by removing an incentive for good teaching. University members do as little work as they can get away with—and all the university can make them do is give lectures. Students often choose a university for its degrees or scholarships, rather than the quality of its teaching. Reasonable teachers don’t want students to hate their lectures, so do the bare minimum to please them, like by just reading through books in class and making unoriginal, uncontroversial remarks. Since university students are adults, universities would not have to discipline them if classes were really worth attending.
Themes
Private schools are more efficient than public ones because they’re funded by student fees, so their revenue depends on their performance. But universities specialize at subjects that would not be profitable to teach privately. They started as religious institutions, so they required students to learn Latin. They have incorporated more and more Greek for the study of philosophy, which historically has three branches: physics, ethics, and logic. Religious education added two more branches, metaphysics and ontology, which were largely a waste of time. It also corrupted ethics by refocusing it on an afterlife. But this curriculum is still the standard in universities, and most useful philosophical work is happening outside them.
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Wealthy families are foolish to send their sons to universities only fit for the clergy, instead of schools where they can learn to do what their professions will actually demand. More and more young English people go traveling abroad instead of attending university, which is even worse. It wastes their time and makes them undisciplined.
Themes
In ancient Greece, citizens generally received public education in music and gymnastics. They just learned gymnastics in ancient Rome—but music was unnecessary, as it’s an uncivilized art form. While the instructors in these subjects were volunteers, private tutors taught others: reading, writing, and arithmetic. Philosophy was taught in private schools in Greece. Philosophers traveled and lectured for fees, until they made enough money to establish such schools. Their students received neither degrees nor practical expertise. Similarly, many wealthy Romans privately studied law. They were the first to treat law as a systematic science and expect judges to take oaths and issue prudent, defensible, and public decisions.
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Overall, the principle of competition made education better in the ancient world than in Smith’s time, when public university teaching is the worst job for a scholar. Unlike public university teachers, private tutors can only make a living teaching things that are actually useful. Women’s education is better than men’s because it is entirely private and well suited to their role in society.
Themes
The more the division of labor advances, the more the state needs to educate the public. This is because most people with specialized jobs only perform “a few very simple operations,” so the masses in advanced societies quickly learn everything they need to know at work and become “stupid and ignorant” about everything else. In hunting, herding, and simpler farming societies, most people become well-rounded and refined—they develop good judgment because they constantly have to resolve many different kinds of problems.
In advanced societies, the division of labor means that a few people can spend all of their time on contemplation. If they are given the right positions, these people can greatly help society, but if not, their superior knowledge gets wasted. Wealthy and noble families can spend handsomely to give their children an extensive private education, but most people have to work as soon as they are old enough, so they never have time for education. It is inexpensive and very beneficial for the state to teach everybody reading, writing, and arithmetic in public schools at a young age. This system is succeeding in Scotland and England. Offering prizes for high achievers and technical examinations for tradespeople would encourage it to improve.
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The Greeks and Romans encouraged physical excellence through gymnastics training and prizes. By following this example, nations could reduce the size of their standing armies and their expenditures on defense. They could prevent their people from becoming cowardly, which makes them useless and unhappy. So do ignorance and stupidity, which lead the populace to disrespect their leaders and fail to understand policies that oppress them.
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“Article III. Of the Expence of the Institutions for the Instruction of People of all Ages.” Religious teachings serve people of all ages, and private religion teachers are more zealous and hardworking than established clergy paid from endowments, as they earn revenue directly from their followers. This helps explain why new religious movements develop fast. Similarly, low-level Roman Catholic clergy live from parishioners’ charity, so they have strong reasons to serve the people.
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Philosopher David Hume distinguishes between the majority of professions, which people freely join for the rewards and compensation they provide, and a few professions that the state ought to regulate and promote, either to make them attractive or to make them support society’s best interests. The clergy may appear to be the first kind, but it’s actually the second, as a predictable religious establishment is preferable to an industry of zealous, self-interested preachers who distort the truth, inflame passions, and challenge the established social order in order to grow their following.
Themes
But historically, religious establishments actually form because different religious sects align with different political factions, and the winning factions reward their allied sects with power. Religious conflict is most dangerous when two or three large sects are competing for power. In contrast, if religion never got involved in politics, many small sects would compete peacefully for customers (like merchants do).
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There are two approaches to morality, an austere system and a liberal system. Common people generally follow strict ideas about morality and avoid sinful indulgences. But “people of fashion” are looser and more disposed to vice, since they can usually afford to be lazy and irresponsible without wasting their fortunes. Most religious sects start with the austere system of morality and rigorously enforce proper behavior in their followers. To make sure these sects don’t go too far, the state should require all professionals to study science and philosophy, and it should support public festivals and art performances in order to give ordinary people an alternative source of entertainment (and potential zealots an alternative source of income).
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In countries with no established religion, the sovereign does not have to work with religious leaders. But where there is one, kings must work with clergy. The church’s main interest is to maintain its power—which is based on its religious teachings. The state loses popular support if it challenges these teachings or turns against rebellious clergymen. Indeed, people are naturally stubborn, so the state should win them over with persuasion, not violence. This is doubly true for clergymen, who elect their own leaders and answer to the Pope, not the sovereign.
Themes
The clergy used to act like a landed nobility across Europe. It served the Pope like a “spiritual army” and collected rent in the form of tithes, which made it wealthy. It spent its surplus supporting the poor and currying favor with the nobility. Combined with its moral authority, this made the church so powerful that not even kings could defy it. The law didn’t apply to the church in the ancient world, and the Church of Rome governed with an iron fist during the Middle Ages. Even if people could see through its superstitions, “the ties of private interest” kept it in power.
Themes
The clergy’s power declined for the same reasons as the landed nobility’s did. Namely, advances in manufacturing and commerce enabled clergymen to spend their surplus on goods for themselves, instead of generosity to others. To increase this surplus, the clergy started renting its land to farmers—who started making incomes of their own, became independent, and turned against the increasingly vain, wasteful clergy. Sovereigns took the opportunity to restrict the church’s power, especially in England and France. Zealous new religious leaders launched the Protestant Reformation: they gained a following by turning against the church establishment, and some leaders and city-states throughout Europe even aligned with them (although many did not).
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The reformers had no central authority, so they fought endlessly about the church’s proper structure and role in society. On one side, the Lutherans and the Church of England maintained church hierarchies and worked closely with the state. In this way, they promoted stability but fell out of touch with ordinary people.
Themes
On the other side, the Calvinists (or Presbyterians) believed that people should choose their own pastors and all clergy should have equal power and income. The election of pastors led to conflict and disorder, as clergymen tried to stand out and win support by growing more radical. Public officials started appointing them instead. Yet due to their equal status and humble pay, Calvinist clergymen are “learned, decent, independent, and respectable.” The common people actually trust and follow them. In Calvinist countries, the best scholars take university teaching jobs, but in countries where churches are more powerful than universities, they tend to become clergymen. It is better for them to teach, because this refines their knowledge and helps educate the public.
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The church’s revenues are really part of the state’s, since it depends on tithes (which are really land taxes). But the more of this tax goes to the church, the less goes to the government, including the national defense. This means that, wherever the church is richer, the sovereign is poorer, and the people are less protected. In Switzerland, these tithes cover the full cost of running both the church and the government, and in Scotland, the church covers its expenses and serves the public on a very meager budget. Indeed, if they are overpaid, clergymen waste their time “in festivity, in vanity, and in dissipation” instead of performing their duties for the common people.
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“Part IV. Of the Expence of Supporting the Dignity of the Sovereign.” Political leaders need homes, furniture, food, and clothing, just like everyone else. They must keep up with the upper classes in their nation, lest they lose respect, so their expenses increase the wealthier their nation gets. This effect is stronger in monarchies, whose leaders live luxuriously in order to justify the greater distance between them and ordinary citizens.
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“Conclusion.” Expenses for defense and supporting the sovereign’s dignity should come from a nation’s general revenue, because they benefit everyone. But separate court fees should pay for the justice system, and local revenue should pay for public works that primarily benefit a certain area. The general revenue can pay for roads (but tolls are preferable), just as it can pay for schools and religious education (but fees and donations are preferable). And the general revenue should pay for the institutions and public works that benefit all of society.
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