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Book 2, Chapter 5
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
The most important commerce in society is the mutually-beneficial trade between the countryside, which provides rude produce, and the town, which manufactures goods out of that rude produce and sends some of them back to the country. This requires an agricultural surplus in the countryside, which derives the most benefit if it is near the town but can also be distant from it. This surplus forms because, when offered equal profits, people generally prefer to invest in their land over trade and manufacturing. They do this because land is close to home, seldom fails, and affords its owners an idyllic country lifestyle. But cultivators need to hire artisans—like smiths, bricklayers, tailors, and so on—who tend to settle in villages together.
The last three books in The Wealth of Nations are decidedly more historical and less theoretical in outlook than the first two. In Book III, by far the shortest of all, Smith analyzes European history through the lens of the theory he has developed thus far. In the process, he shows how different places can enrich themselves in parallel through trade. This analysis lays the foundation for his critique of mercantilism and defense of free trade in Book IV. The point that he makes here about the city and countryside is a useful window into his theory of free trade. It will be intuitive to most readers, and it’s conceptually quite simple: the countryside is obviously better at agriculture because that’s where cheap, abundant, fertile land is, while the city is obviously better at trade and manufacturing because people and economic activity cluster there. In the rest of The Wealth of Nations, Smith will expand this principle to an international scale. He will show that, when every country specializes in making whatever it produces best—and is able to trade with every other country—everyone benefits. Contemporary economists call this principle absolute advantage, and David Ricardo would famously build on it to develop the theory of comparative advantage a few decades after Smith’s death. Lastly, careful readers will note that, at the end of Book II, Smith argued that investors tend to prefer manufacturing and trade to agriculture, but here he is arguing that they prefer buying land instead. This is no contradiction. In Book II, he was pointing out that investors expect higher returns from manufacturing and trade. But here, he’s saying that they prefer investing in land if the returns are the same.
Themes
In North America, there is still so much fertile, uncultivated land that successful artisans actually prefer to become farmers. In other countries, where fertile land is less available, artisans instead expand their businesses by producing goods for more distant markets. Since manufacturing is still a safer use of capital than foreign commerce, a country’s agriculture sector tends to grow first, then manufacturing, and then trade. But many European countries have inverted this sequence due to their policies and customs.
Smith’s analysis of agriculture, manufacturing, and trade in Book II is the key to understanding North America’s economic success since the 17th century. Namely, North America is one of the few places where the profit motive actually pushes people to invest in agriculture—which is the best kind of investment for the economy overall—instead of trade or manufacturing. Contemporary readers might be surprised to see Smith describe Europe’s growth as stunted, but they should remember that most of Asia was still far wealthier than Europe until the Industrial Revolution helped Europe surpass it in the mid-1800s.
Themes
