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Book 3, Chapter 3
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 growth in towns helped the country in three ways. First, they created a market for the country’s produce, both rude and manufactured. Second, city merchants bought and improved rural land. Third and most importantly, businesspeople brought order, freedom, and security to the country.
Just as Europe’s countryside enriched its towns by guaranteeing food security for artisans and traders, its cities enriched its countryside in the three ways Smith cites here. These effects reflect Smith’s general principle that free trade enriches all parties. This principle is really an extension of the theory of specialization, markets, supply, and demand that he elaborated in Book I. Namely, by bringing the town and the country into the same market, trade enables each to sell the other what it produces best, while buying what the other produces best. In turn, this vision of the gains from trade is the foundation for Smith’s critique of mercantilism in Book IV.
Themes
Without foreign commerce and fine manufacture, wealthy country landowners can only spend their surplus in one way: by maintaining the people who surround them. This is why they throw massive feasts at their manors and even let tenants live comfortably off the land while charging them minimal rent. In turn, these tenants become loyal to the barons and readily take up arms to defend their interests. Many people think that feudal laws created these power dynamics, but actually, those laws were an attempt to restrict feudal lords’ power while expanding the king’s. But they weren’t enough: the feudal lords kept fighting wars, and the sovereign still couldn’t restrain them.
Medieval Europe’s massive feasts—a trope readers likely know from popular culture—show that perishable surplus goods’ value falls to zero if they cannot be traded for something else of value. This concept may seem complex, but it’s also quite intuitive: for instance, it’s why overripe fruit goes on discount at the supermarket. With no manufactured goods to buy, landlords preferred power to wealth. They even asked their tenants for military service rather than (or as a form of) rent. The power struggle between lords and the king undermined both security and economic growth. But the rise of commerce would eventually flip the script, making wealth more desirable than power.
Themes
The true solution to this violence was commerce—which enabled landlords to use all of their land’s surplus for their own benefit. Instead of directly supporting a few thousand dependent people, such landlords began indirectly supporting a far higher number of laborers, manufacturers, and traders, most of them overseas. To increase the surplus they could trade for manufactured goods, landlords dismissed most of their tenants and raised rents. But they offered the remaining tenants long-term leases, which led those tenants to improve the land and build their own wealth independently. This eroded the landlords’ power and ended their wars, which in turn allowed the government to reestablish peace and justice. This is why old, powerful family dynasties are less common in commercially successful countries. In this way, landlords, manufacturers, and traders revolutionized the European economy, all by separately pursuing their own self-interest.
Trade links give economic value to surplus goods by opening up new potential markets for them. If feudalism organized territory as an array of largely independent economic bubbles, each overseen by a lord, then commerce gave those lords a reason to burst their bubbles and join the larger, unified market instead. They began prioritizing economic logic over power. This finally made land improvement and manufacturing investment desirable, and accordingly, it enabled the European economy to grow. Ultimately, this is the same principle that motivates free trade: nations can get a far better deal if they join the integrated global market, cooperating through commerce rather than competing for power. Smith’s notion that markets channel individual self-interest towards peace, growth, and progress has long been central to Western economic thinking. But in Book III, he has shown that this only works in certain kinds of markets. And in Book IV, he will explain why giving powerful people too much freedom can backfire, by enabling them to set up monopolies that enrich them at the public’s expense.
Themes
By focusing entirely on agriculture, North America is growing even faster than Europe ever did. Individuals with a small amount of wealth can easily become planters in North America, where fertile land is cheap and abundant. But in Europe, they can never dream of making a fortune in agriculture, and they don’t have enough capital to succeed in trade or manufacturing.
Unlike Europe, which invested in commerce first, North America is following the most efficient sequence by focusing on agriculture first. But just like European feudalism, this is also largely an accident of history and geography. Namely, North America is focusing on agriculture simply because there’s lots of farmland available, and its political and social institutions enable settlers to expel native peoples and colonize it with relative ease.
Themes
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With its extensive coast and rivers, England is well-poised to succeed at manufacturing and commerce. Policies that support grain exports, while prohibiting both grain and meat imports, greatly enrich English farmers. France has grown somewhat slower, while Spain and Portugal have succeeded in foreign commerce but failed to invest in agriculture. Only Italy managed to turn its manufacturing and commercial success toward agricultural improvements. In general, capital built through commerce and manufacturing does not truly benefit a nation in the long term unless it gets redirected toward agriculture. This is because merchants can just take their capital to another country—and often do in the case of war or revolution—but land improvements continue to benefit the country in an enduring way for generations.
Most international trade has always taken place by sea, so if North America’s geography favors agriculture, then England’s favors trade. But these geographical factors don’t explain different countries’ development patterns on their own. Rather, as Smith showed throughout Book III, political institutions must incentivize the right kind of economic activity. These institutions must protect people’s economic rights, so that they feel secure investing capital in land or business over the long term. And these institutions must also do their best to encourage the right kinds of investment, while fighting monopolies. After all, for Smith, there is no hard-and-fast distinction between politics and economics; there is just political economy. Book IV will explore all of these issues in much more depth. In particular, it will show how different nations’ economic policies have combined with their particular histories and geography to shape their economic outcomes.
Themes
