The Wealth of Nations

INTRODUCTION Adam Smith's The Wealth of Nations (1776) has proved to be one of the most influential books of the last 300 years, but that did not happen immediately. In this passage, he criticizes two of his favorite targets—mercantilist trade policies and licensed monopolies—and thus runs up against some of the most powerful vested interests of his day.

If free trade prevailed, according to Smith, capital (what he here calls "stock") would be attracted to a particular trade as long as it offered above-average profits; eventually, though, the inflow of more capital from elsewhere would even out the profits available in different sectors. The additional participants in the initially more profitable trade would also increase available supplies of its products, pushing down prices paid by consumers. But monopolies blocked these mechanisms, leaving some capital underemployed and all consumers paying excessive prices. These results occurred whether the monopoly was based on threatening all ships not licensed by a particular government (e.g., the Portuguese in the sixteenth-century Indian Ocean), banning foreigners from buying from islands the monopoly dominated militarily (e.g., the Dutch East India Company in the "Spice Islands"), or granting one company the sole right to import certain goods to the home market (e.g., the English East India Company).

But most European governments of Smith's day were less concerned with maximizing output or consumer welfare than with financing increasingly expensive wars. Thus they wished to amass gold and silver for military expenses abroad and to deny gold and silver to others; this required maximizing exports and minimizing imports, which was easier if monopolies pushed up consumer prices for "unnecessary" imports such as tea and spices. It also required increasing government revenues, and groups of investors often paid substantial sums for grants of monopoly (which were thus regarded as property, not to be tampered with). It took decades for mercantilist policies to be fully abandoned, even in Britain. ∎

It is thus that the private interests and passions of individuals naturally dispose them to turn their stock towards the employments which in ordinary cases are most advantageous to the society. But if from this natural preference they should turn too much of it towards those employments, the fall of profit in them and the rise of it in all other immediately dispose them to alter this faulty distribution. Without any intervention of law, therefore, the private interests and passions of men naturally lead them to divide and distribute the stock of every society, among all the different employments carried on in it, as nearly as possible in the proportion which is most agreeable to the interest of the whole society.

All the different regulations of the mercantile system necessarily derange more or less this natural and most advantageous distribution of stock. But those which concern the trade to American and the East Indies de-range it perhaps more than any other; because the trade to those two great continents absorbs a greater quantity of stock than any tow other branches of trade. The regulations, however, by which this derangement is effected in those two different branches of trade are not altogether the same. Monopoly is the great engine of both; but it is a different sort of monopoly. Monopoly of one kind or another, indeed, seems to be the sole engine of the mercantile system.

In the trade to America every nation endeavours to engross as much as possible the whole market of its own colonies, by fairly excluding all other nations from any direct trade to them. During the greater part of the sixteenth century, the Portugueze endeavoured to manage the trade to the East Indies in the same manner, by claiming the sole right of failing in the Indian seas, on account of the merit of having first found out the road to them. The Dutch still continue to exclude all other European nations from any direct trade to the spice islands. Monopolies of this kind are evidently established against all other European nations, who are thereby not only excluded from a trade to which it might be convenient for them to turn some part of their flock, but are obliged to buy the goods which that trade deals in, somewhat clearer than if they could import them themselves directly from the countries which produce them.

But since the fall of the power of Portugal no European nation has claimed the exclusive right of failing in the Indian seas, of which the principal ports are now open to the ships of all European nations. Except in Portugal, however, and within these few years in France, the trade to the East Indies has in every European country be subjected to an exclusive company. Monopolies of this kind are properly established against the very nation which erects them. The greater part of that nation are thereby not only excluded from a trade to which it might be convenient for them to turn some part of their stock, but are obliged to buy the goods which that trade deals in, somewhat dearer than if it was open and free to all their countrymen. Since the establishment of the English East India Company, for example, the other inhabitants of England, over and above being excluded from the trade, must have paid in the price of the East India goods which they have consumed, not only for all the extraordinary profits which the company may have made upon those goods in consequence of their monopoly, but for all the extraordinary waste which the fraud and abuse inseparable from the management of the affairs of so great a company, must necessarily have occasioned. The absurdity of this second kind of monopoly, therefore, is much more manifest than that of the first.