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Book 3, Chapter 1
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 fall of the Roman Empire disrupted Europe’s economy, reducing it from “a considerable degree of opulence” to “the lowest state of poverty and barbarism” and concentrating all land ownership in the hands of a few political leaders. These landlords preferred to use their land for security and power, rather than agricultural production, so rather than dividing it among various heirs, they started passing it all on to a single heir—usually their eldest son. This system is called primogeniture, and even though it is no longer necessary, it continues into the late 18th century. So do entails, or restrictions that prevent anyone outside the landlord’s bloodline from ever owning a piece of land, even several generations later.
Smith’s analysis of the European economy focuses on the feudal system that developed during the Middle Ages and started slowly declining from the 15th century onwards. While feudalism disappeared at different rates in different places, the French Revolution would all but end it in Western Europe about a decade after The Wealth of Nations was published. As Smith points out here, the feudal system’s key feature was a rigid, hereditary system of land ownership. This stopped people from buying, selling, and improving land—which, in turn, enables them to trade agricultural surpluses for profit and generate economic growth. Indeed, one of the most common critiques of Smith (and modern economic theory more generally) is that he views land specifically as something to be cultivated for profit. In contrast, the feudalists viewed land as a symbol of wealth and power (much like money is today). And today, many environmental and Indigenous thinkers conceive of land primarily in terms of humans’ fundamental connection with nature.
Themes
These wealthy families generally don’t improve their land, for several reasons: they care more about defense than profit, they lack the necessary patience and frugality, and they prefer to spend on status symbols. These landowners’ tenants were enslaved people who belonged to the estate and could not own property, so they had no incentive to improve the land, either. In fact, slavery is the costliest labor system for society: since enslaved people don’t stand to benefit from their own labor, it’s in their best interests to “eat as much, and to labour as little as possible.” But landlords still prefer to use enslaved labor because people love to dominate others. In North America, while tobacco and sugar are profitable enough to support a slave economy, grain is not.
Feudal lords were already on top of the social pyramid, so even if they amassed a little more land or wealth, their status would not truly change. Similarly, their enslaved workers—or serfs—could not get ahead, no matter how they tried. Smith offers a powerful moral and economic case against slavery. He argues that there is no silver lining to it: slavery is inhuman, inefficient, and unsustainable. It only persisted in Smith's day and age because people preferred power to wealth. In this analysis, Smith again makes an implicit distinction between collective and individual economic behavior. Namely, collective economic behavior can look rational in the aggregate because the market rewards the people who make the most profitable decisions. But individual economic behavior is often irrational because it’s driven by desire for things like status, power, attention, and adventure.
Themes
After the slave labor system ended in Europe, it was replaced by metayers, or free workers who split their produce with the landlord. This system was more appealing to both these workers and the state, which saw big landowners as rivals. Metayers had an incentive to produce as much as possible, but not to improve the land, because this would mean investing their own capital for the landlord’s benefit. Eventually, a new farming system took hold, with farmers using their own capital stock to cultivate land and simply paying rent to the landlord.
Smith continues to show how different systems of economic regulation shape people’s incentives. In turn, these incentives determine whether they make the individual decisions that are best for the economy collectively. The shift from serfdom to the metayer system gave peasants much more freedom, as well as an incentive to work harder. In Book II, Smith explained why agriculture is the foundation of the economy and land improvement is the single best step a nation can take to enrich itself. But the metayer system still didn’t clear this bar, because metayers still didn’t stand to gain from land improvement.
Themes
Long-term leases give farmers an incentive to improve the land, but they often don’t because landlords can too easily evict them. Yet farmers who lease land for more than 40 shillings a year can vote for Parliament, which has given them power. England is thus the only country where such farmers tend to improve their land, and this is a crucial reason for England’s wealth. But different rules apply in Scotland, and in the rest of Europe, leases are still too short to encourage land improvements. Farmers have also had other obligations that have prevented them from investing in the land, like building roads and supplying their landlord’s troops, or paying steep taxes to the government. These policies make farming an undesirable profession and dissuade manufacturers and wholesalers from shifting their capital into agriculture. So do rules against grain exportation and limits on domestic trade.
Farmers need secure long-term property rights in order for land improvement to be worth their while. England achieved this by giving them some political power. Of course, this was something of a historical accident. In fact, many contemporary economists and historians trace England’s success in the Industrial Revolution, global trade, and colonization to the fact that Parliament distributed power based on wealth (as well as nobility). This was not democratic in any real sense of the word, but it was certainly more democratic than political arrangements elsewhere in Europe (and especially in France, which is Smith’s favorite point of comparison). Put differently, the key link in England’s shift from feudalism to a commercial society was its political system. This once again shows that, while economists today often contrast “free markets” with ones regulated by the government, this distinction made no sense for Smith. Rather, he sought to show how markets could only be free if a favorable political system regulated them into existence.
Themes
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