Managing America: The Wealth of Nations by Adam Smith, how wealth is created

Smith studied moral philosophy at the University of Glasgow and Oxford University. After graduating, he delivered a successful series of public lectures at Edinburgh, leading him to collaborate with David Hume during the Scottish Enlightenment. Smith obtained a professorship at Glasgow teaching moral philosophy, and during this time he wrote and published The Theory of Moral Sentiments.

It is true, indeed, that Alexander Hamilton was too broad-minded to maintain an economic and financial doctrine without any qualifications, for he only possessed an historical spirit that led him to the general teaching of a political economy by Adam Smith.

Was Adam Smith the original capitalist?

The answer is not a difficult one.

For instance, it would be fool hardy to state that Adam Smith was the first political economist in classic antiquity, what of Aristotle, Democritus, and Varro, but one will find economic theories from both to his English and to his French predecessors.

Based on Hamilton’s own writings we now know exactly the extent of his findings are indeed from Adam Smith, for one is able to compare the same economic views that are contained in Adam Smith’s lecture course in 1763 and his book The Wealth of Nations printed in 1776.

The two fundamental ideas of The Wealth of Nations are those of self-interest and natural liberty. It was by utilizing and applying these doctrines to his analysis of economic institutions that Adam Smith achieved his great success.

 "It is not from the benevolence of the butcher, the brewer, or the baker," he tells us," that we expect our dinner, but from their regard of their own interest. We address ourselves not to their humanity, but to their self-love, and never talk to them of our own necessities, but of their advantage."

In the first place, Hamilton borrowed from Smith the emphasis laid upon interests of the consumers and producers, whereas others only the interests of the producers.

Secondly, the entire theory of distribution and manufacturing by Adam Smith, with a division of the produce into rent, wages, and interest, is based upon the Physiocratic analysis, which Hamilton uses in his ideas about expanding American manufacturing.

Thirdly, Adam Smith’s theory of the nature and movement of stock or capital taken from the French writers, which led Hamilton’s writing concerning the development of an American National Banking System.

And finally, while Adam Smith did not accept the Physiocratic doctrine of the sole productivity of land, he was induced by them to make his not entirely fortunate distinction between productive and unproductive labour in general, which was also included in Hamilton’s writings.

Reduced to the simplest terms, however, it may be said that Adam Smith was the first great theorist of that stage of capitalist enterprise which we call the domestic system.

The economists of earlier times were unable to give an analysis of economic life which is at all satisfactory to us, because the economic institutions then were different.

However, Smith's thoughts were formed on the threshold of the English industrial revolution. In 1758 James Brindley built the first canal between Liverpool and Manchester. In 1769 the barber Arkwright rediscovered Wyatt's method of roller spinning. In 1770 Hargreaves perfected the spinning jenny. In 1776 Crompton patented his mule founded on the water frame and in 1765 Watt discovered the use of steam as a motive power. England was fast losing her agricultural characteristics and getting to be an industrial country, which is what Hamilton was seeking to develop in America.

Capitalist enterprise was in its first stage and Adam Smith was its earliest interpreter.

We now have a series of interviews with Adam Smith that influenced Hamilton’s ideas for the development of American enterprise, the basis for the Federal government’s ability to levy taxes.

Mr. Smith: To enhance a nation’s wealth; can you provide your thoughts on the first settlement of the different European colonies in America?

Adam Smith: The interest which occasioned the first settlement of the different European colonies in America and the West Indies was not altogether so plain and distinct as that which directed the establishment of those of ancient Greece and Rome.

All the different states of ancient Greece possessed, each of them, but a very small territory, and when the people in any one of them multiplied beyond what that territory could easily maintain, a part of them were sent in quest of a new habitation in some remote and distant part of the world; the warlike neighbours who surrounded them on all sides, rendering it difficult for any of them to enlarge very much its territory at home.

The colonies of the Dorians resorted chiefly to Italy and Sicily, which, in the times preceding the foundation of Rome, were inhabited by barbarous and uncivilised nations: those of the Ionians and Eolians, the two other great tribes of the Greeks, to Asia Minor and the islands of the Egean Sea, of which the inhabitants seem at that time to have been pretty much in the same state as those of Sicily and Italy. The mother city, though she considered the colony as a child, at all times entitled to great favour and assistance, and owing in return much gratitude and respect, yet considered it as an emancipated child over whom she pretended to claim no direct authority or jurisdiction.

The colony settled its own form of government, enacted its own laws, elected its own magistrates, and made peace or war with its neighbours as an independent state, which had no occasion to wait for the approbation or consent of the mother city. Nothing can be more plain and distinct than the interest which directed every such establishment.

Rome, like most of the other ancient republics, was originally founded upon an Agrarian law which divided the public territory in a certain proportion among the different citizens who composed the state. The course of human affairs by marriage, by succession, and by alienation, necessarily deranged this original division, and frequently threw the lands, which had been allotted for the maintenance of many different families, into the possession of a single person.

Smith continued: To remedy this disorder, for such it was supposed to be, a law was made restricting the quantity of land which any citizen could possess to five hundred jugera, about three hundred and fifty English acres. This law, however, though we read of its having been executed upon one or two occasions, was either neglected or evaded, and the inequality of fortunes went on continually increasing.

The greater part of the citizens had no land, and without it the manners and customs of those times rendered it difficult for a freeman to maintain his independency.

In the present times, though a poor man has no land of his own, if he has a little stock he may either farm the lands of another, or he may carry on some little retail trade; and if he has no stock, he may find employment either as a country labourer or as an artificer.

But among the ancient Romans the lands of the rich were all cultivated by slaves, who wrought under an overseer who was likewise a slave; so that a poor freeman had little chance of being employed either as a farmer or as a labourer.

All trades and manufactures too, even the retail trade, were carried on by the slaves of the rich for the benefit of their masters, whose wealth, authority, and protection made it difficult for a poor freeman to maintain the competition against them. The citizens, therefore, who had no land, had scarce any other means of subsistence but the bounties of the candidates at the annual elections.

The tribunes, when they had a mind to animate the people against the rich and the great, put them in mind of the ancient division of lands, and represented that law which restricted this sort of private property as the fundamental law of the republic.

The people became clamorous to get land, and the rich and the great, we may believe, were perfectly determined not to give them any part of theirs. To satisfy them in some measure, therefore, they frequently proposed to send out a new colony.

But conquering Rome was, even upon such occasions, under no necessity of turning out her citizens to seek their fortune, if one may say so, through the wide world, without knowing where they were to settle. She assigned them lands generally in the conquered provinces of Italy, where, being within the dominions of the republic, they could never form any independent state; but were at best but a sort of corporation, which, though it had the power of enacting bye-laws for its own government, was at all times subject to the correction, jurisdiction, and legislative authority of the mother city.

The sending out a colony of this kind not only gave some satisfaction to the people, but often established a sort of garrison, too, in a newly conquered province, of which the obedience might otherwise have been doubtful. A Roman colony therefore, whether we consider the nature of the establishment itself or the motives for making it, was altogether different from a Greek one.

Smith continued: The establishment of the European colonies in America and the West Indies arose from no necessity and though the utility which has resulted from them has been very great, it is not altogether so clear and evident. It was not understood at their first establishment, and was not the motive either of that establishment or of the discoveries which gave occasion to it, and the nature, extent, and limits of that utility are not, perhaps, well understood at this day.

Mr. Smith: The Venetians took a very different view of expanding their trade and development of wealth. What can you tell us about their activities?

Adam Smith: The Venetians, during the fourteenth and fifteenth centuries, carried on a very advantageous commerce in spiceries, and other East India goods, which they distributed among the other nations of Europe. They purchased them chiefly in Egypt, at that time under the dominion of the Mamelukes, the enemies of the Turks, of whom the Venetians were the enemies and this union of interest, assisted by the money of Venice, formed such a connection as gave the Venetians almost a monopoly of the trade.

The great profits of the Venetians tempted the avidity of the Portuguese. They had been endeavou ing, during the course of the fifteenth century, to find out by sea a way to the countries from which the Moors brought them ivory and gold dust across the desert.

They discovered the Madeiras, the Canaries, the Azores, the Cape de Verde Islands, the coast of Guinea, that of Loango, Congo, Angola, and Benguela, and, finally, the Cape of Good Hope. They had long wished to share in the profitable traffic of the Venetians, and this last discovery opened to them a probable prospect of doing so.

In 1497, Vasco de Gama sailed from the port of Lisbon with a fleet of four ships, and after a navigation of eleven months arrived upon the coast of Indostan, and thus completed a course of discoveries which had been pursued with great steadiness, and with very little interruption, for nearly a century together.

Some years before this, while the expectations of Europe were in suspense about the projects of the Portuguese, of which the success appeared yet to be doubtful, a Genoese pilot formed the yet more daring project of sailing to the East Indies by the West. The situation of those countries was at that time very imperfectly known in Europe. The few European travellers who had been there had magnified the distance, perhaps through simplicity and ignorance, what was really very great appearing almost infinite to those who could not measure it or, perhaps, in order to increase somewhat more the marvellous of their own adventures in visiting regions so immensely remote from Europe.

The longer the way was by the East, Columbus very justly concluded, the shorter it would be by the West. He proposed, therefore, to take that way, as both the shortest and the surest, and he had the good fortune to convince Isabella of Castile of the probability of his project. He sailed from the port of Palos in August I490, nearly five years before the expedition of Vasco de Garna set out from Portugal, and, after a voyage of between two and three months, discovered first some of the small Bahama or Lucayan islands, and afterwards the great island of St. Domingo.

But the countries which Columbus discovered, either in this or in any of his subsequent voyages, had no resemblance to those which he had gone in quest of. Instead of the wealth, cultivation, and populousness of China and Indostan, he found, in St. Domingo, and in all the other parts of the new world which he ever visited, nothing but a country quite covered with wood, uncultivated, and inhabited only by some tribes of naked and miserable savages.

He was not very willing, however, to believe that they were not the same with some of the countries described by Marco Polo, the first European who had visited, or at least had left behind him, any description of China or the East Indies; and a very slight resemblance, such as that which he found between the name of Cibao, a mountain in St. Domingo, and that of Cipango mentioned by Marco Polo, was frequently sufficient to make him return to this favourite prepossession, though contrary to the clearest evidence. In his letters to Ferdinand and Isabella he called the countries which he had discovered the Indies.

He entertained no doubt but that they were the extremity of those which had been described by Marco Polo, and that they were not very distant from the Ganges, or from the countries which had been conquered by Alexander. Even when at last convinced that they were different, he still flattered himself that those rich countries were at no great distance, and, in a subsequent voyage, accordingly, went in quest of them along the coast of Terra Firma, and towards the Isthmus of Darien.

Smith continued: In consequence of this mistake of Columbus, the name of the Indies has stuck to those unfortunate countries ever since; and when it was at last clearly discovered that the new were altogether different from the old Indies, the former were called the West, in contradistinction to the latter, which were called the East Indies.

It was of importance to Columbus, however, that the countries which he had discovered, whatever they were, should be represented to the court of Spain as of very great consequence and in what constitutes the real riches of every country, the animal and vegetable productions of the soil, there was at that time nothing which could well justify such a representation of them.

Mr. Smith: You mentioned the riches discovered by Columbus, what where the products that constitute those riches?

Adam Smith: The vegetable food of the inhabitants, though from their want of industry not very abundant, was not altogether so scanty. It consisted in Indian corn, yams, potatoes, bananas, etc., plants which were then altogether unknown in Europe, and which have never since been very much esteemed in it, or supposed to yield a sustenance equal to what is drawn from the common sorts of grain and pulse, which have been cultivated in this part of the world time out of mind.

The cotton plant, indeed, afforded the material of a very important manufacture, and was at that time to Europeans undoubtedly the most valuable of all the vegetable productions of those islands. But though in the end of the fifteenth century the muslins and other cotton goods of the East Indies were much esteemed in every part of Europe, the cotton manufacture itself was not cultivated in any part of it. Even this production, therefore, could not at that time appear in the eyes of Europeans to be of very great consequence.

Finding nothing either in the animals or vegetables of the newly discovered countries which could justify a very advantageous representation of them, Columbus turned his view towards their minerals and in the richness of the productions of this third kingdom, he flattered himself he had found a full compensation for the insignificancy of those of the other two.

The little bits of gold with which the inhabitants ornamented their dress, and which, he was informed, they frequently found in the rivulets and torrents that fell from the mountains, were sufficient to satisfy him that those mountains abounded with the richest gold mines. St. Domingo, therefore, was represented as a country abounding with gold, and, upon that account an inexhaustible source of real wealth to the crown and kingdom of Spain.

Mr. Martin Chekel, a noted international businessman and author of the thought provoking “Managing America” six book series and the retrospective eight book series “The Diary of American Foreign Policy 1938 – 1945” that laid the foundation for US foreign policy the past seventy-four years.