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Book 3, Chapter 2
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
After the Roman Empire fell, landlords went from living comfortable lives in houses in town to living on their estates in walled castles. In towns, this left only artisans and tradespeople, who were poor and heavily-taxed. But kings gave these townspeople various freedoms—including the freedom to organize their own taxation, pass on their property, and even form town councils to govern themselves. This helped them counterbalance the power of landlords, who used their private armies to raid towns and challenge monarchical rule. Cities built their own militias, sometimes even overpowering landlords and creating their own independent republics (like in Switzerland). Elsewhere, they became powerful enough that monarchs came to depend on them, stopped taxing them, and even gave them representation at the royal court.
The Roman Empire enabled European cities to reach a relatively high level of economic complexity. The Empire’s collapse left the existing division of labor in place, but without the corresponding division of political power that had always enabled it to function. Artisans and merchants leveraged their economic and social position to achieve significant political power. Again, Smith’s underlying principle is clear: the more political power a group of people has, the more likely they are to protect their economic rights, and so the more likely they are to invest and grow their capital over the long term. This implies that the countries with the most balanced political systems are likely to have the most successful economies.
Themes
As a result of these political shifts, cities became safe and prosperous, while the countryside remained poor and violent. City people started accumulating a stock of resources and strategically directing it towards economically productive activities. Hardworking farmers moved from the country to the city in search of safety, bringing their capital with them. Coastal and river cities grew rich by trading with the rest of the world, starting with Venice and Genoa.
The relatively egalitarian power structure that enabled European cities to flourish simply had no parallel in the countryside. In fact, the cities’ gain became the country’s loss, as capital fled agriculture instead of pouring into land improvement (which Smith considers the best way to grow the economy). Ironically, then, the same political forces that made Europe the center of global trade and commerce in the later medieval period actually restrained its overall economic growth.
Themes
At first, such cities traded the rude produce from their surrounding countryside for fine manufactured goods from the rest of the world. Then, demand grew high enough that these cities started manufacturing goods at home, too. All countries manufacture some goods for domestic use, but manufacturing for export began in one of two ways: either through the imitation of foreign manufacture (as with Europe’s silk production) or through the improvement of local household industries into finer goods, which generally occurs in fertile farming areas where an agricultural surplus comes to support a vibrant local manufacturing sector.
As Smith noted in Book II, the fastest and most natural development path for a society is to invest in agriculture, then manufacture, then trade. Large agricultural surpluses enable people to take up different kinds of trade and manufacturing; a surplus of manufactured goods encourages people to invest in international trade. Of course, all three sectors exist at all times in every society—agricultural surpluses could never reach consumers without traders, for example. But Smith’s ideal model reflects where gains from investment are highest. Still, Europe’s unique political situation led investment in trade to predominate there, with agriculture and manufacturing to follow. This may have been less efficient than Smith’s ideal model, but it still clearly worked. Europe’s emphasis on trade also helps explain why mercantilism, the system Smith critiques in Book IV, became so attractive there.
Themes
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