The Competitiveness of Nations
in a Global Knowledge-Based Economy
April 2003
Nathan Rosenberg
Adam Smith, Consumer Tastes, and Economic
Growth
The Journal of Political Economy
Volume 76, Issue 3
May - June 1968
361-374.
Adam Smith’s neglect of demand in explaining the determination of natural price
is well known. But is it also true, as it is often inferred or assumed, that
demand forces play no important role in the Wealth of Nations? As an
analytical matter, the traditional interpretation is certainly a defensible
one. If one confines oneself to the theory of value, the pickings are
distinctly lean in that book. But, of course, only a rather small fraction of
Smith’s major work is explicitly concerned with the theory of value. If one is
interested also in inquiring into the nature and causes of the wealth of nations
- and it is at least arguable that Smith possessed such an interest - it is
possible that demand-side forces may be utilized in an important way. In
describing and accounting for the process of economic growth as it occurred in
Europe, does Smith rely heavily on demand forces as explanatory variables?
Granted his limited use of demand within an analytical context, are such forces
important within the framework of historical generalizations concerning
economic growth?
This paper will attempt to furnish an affirmative answer to the last question. It will be argued that the taste and preference structure of consumers - or at least certain classes of consumers - is indispensable to Smith’s explanation of the process of economic growth. More specifically, it will be shown that (1) the composition of demand and (2) the impact of the availability of new commodities upon household behavior have, historically, been critical determinants of the “progress of opulence in different nations.” [1]
It will be argued further that Smith has a fairly well integrated view of
*
The author wishes to acknowledge the benefit which he has derived from
discussions with James Lorimer.
1. Book III of the Wealth of Nations is
titled “Of the Different Progress of Opulence in Different Nations.” On the
contents of Book III Schumpeter stated: “It did not attract the attention it
seems to merit. In its somewhat dry and uninspired wisdom, it might have made
an excellent starting point of a historical sociology of economic life that was
never written” (Schumpeter, 1954, p. 187).
361
the nature and formation of human tastes and the manner and direction in which
human wants develop over time. This view is an essential part of his conception
of economic growth. It is not, however, expressed in a single place, and
therefore it will be necessary to draw upon various sources to achieve the
desired synthesis - in particular, to supplement Smith’s statement in various
portions of the Wealth of Nations with materials from the earlier
Theory of Moral Sentiments.
In examining the role played by demand in Smith’s view of development, it will
be helpful to concentrate our attention on the economic surplus generated by
different societies in different stages of development. For economic growth is
regarded as essentially a matter of the size of the surplus at any moment in
time and the manner in which it is disposed of. As we will see, certain aspects
of consumer tastes are regarded by Smith as affecting all of these factors in a
decisive way.
All of the earliest forms of society were, of course, preoccupied with the
acquisition of food. “Among savage and barbarous nations, a hundredth or little
more than a hundredth part of the labour of the whole year, will be sufficient
to provide them with such cloathing and lodging as satisfy the greater part of
the people. All the other ninety-nine parts are frequently no more than enough
to provide them with food” (Smith, 1937, p. 163). Adam Smith distinguishes two
stages prior to a settled agricultural society: (1) “hunters, the lowest and
rudest state of society, such as we find it among the native tribes of North
America” and (2) “nations of shepherds, a more advanced state of society, such
as we find it among the Tartars and Arabs” (Smith, 1937, p. 653). The
next more advanced stage is “a nation of mere husbandmen, “one where plants have
been domesticated and a settled agriculture is carried on, but where there is
“little foreign commerce, and no other manufactures but those coarse and
household ones which almost every private family prepares for its own use”
(Smith, 1937, p. 655). Subsequent stages, to which (and only to which)
Smith applies the term “civilized society,” possess more extensive commerce,
including foreign commerce, and a more extensive manufacturing sector, within
which there exists an elaborate specialization of function among workmen (Smith,
1937, pp. 656-57).
Since “subsistence is, in the nature of things, prior to conveniency and luxury”
(Smith, 1937, p. 357), the growth of the non-agricultural sector is dependent
upon improvements in productivity in agriculture. “When by the improvement and
cultivation of land the labour of one family can provide food for two, the
labour of half the society becomes sufficient to provide food for the whole.
The other half, therefore, or at least the greater part of them, can be employed
in providing other things, or in satisfying the other wants and fancies of
mankind” (Smith, 1937, p. 163). It is the growth in agricultural productivity,
then, which makes possible urban society and the productive activities which are
uniquely associated with
362
cities. [2] A surplus above subsistence
needs emerges at very early stages in the development of societies. Although a
nation of hunters provides only a “precarious subsistence” and “universal
poverty,” a nation of shepherds can produce a very substantial surplus above
subsistence requirements. [3] From this
early stage onward, therefore, the disposition of the surplus becomes a matter
of primary importance. This in turn raises the question of the distribution of
income and the manner in which above-subsistence incomes are disposed of.
In a society of shepherds the range of commodities available for consumption is
severely circumscribed. In the absence of the goods produced by a more advanced
state of the arts and manufactures (whether domestically produced or made
available through foreign trade), there are very few opportunities for
expenditures on personal consumption. The result is that the wealthy acquire
numerous dependents and retainers who rely for their subsistence entirely upon
their masters:
A Tartar chief, the increase of whose herds and
flocks is sufficient to maintain a thousand men, cannot well employ that
increase in any other way than in maintaining a thousand men. The rude state of
his society does not afford him any manufactured produce, any trinkets or
baubles of any kind, for which he can exchange that part of his rude produce
which is over and above his own consumption. The thousand men whom he thus
maintains, depending entirely upon him for their subsistence, must obey his
orders in war, and submit to his jurisdiction in peace. He is necessarily both
their general and their judge, and his chieftainship is the necessary effect of
the superiority of his fortune (Smith, 1937, p. 671; cf. Smith, 1956, pp.
15-16).
This point is, in fact, a general one applicable to all societies which do not
have available to them the products of a more advanced and refined
manufacturing. [4] The opportunity cost
to the rich of supporting the poor is, at the margin, quite literally zero, and
therefore the hospitality of the rich
2. “The cultivation and improvement of the
country... which affords subsistence, must, necessarily, be prior to the
increase of the town, which furnishes only the means of conveniency and luxury.
It is the surplus produce of the country only, or what is over and above the
maintenance of the cultivators, that constitutes the subsistence of the town,
which can therefore increase only with the increase of this surplus produce”
(Smith, 1937, p. 357).
3. Smith in fact attributes the establishment of
regular government to the inequalities of property which emerge among shepherd
societies. “The appropriation of herds and flocks which introduced an
inequality of fortune, was that which first gave rise to regular government.
Till there be property there can be no government, the very end of which is to
secure wealth, and to defend the rich from the poor” (Smith, 1956, p.
15).
4. All large countries, in fact, have some minimal
amount of manufacturing. See Smith’s qualification (Smith, 1937, p. 381).
363
“seems to be common in all nations to whom commerce and manufactures are little
known” (Smith, 1937, p. 386):
In a country which has neither foreign commerce,
nor any of the finer manufactures, a great proprietor, having nothing for which
he can exchange the greater part of the produce of his lands which is over and
above the maintenance of the cultivators, consumes the whole in rustic
hospitality at home. If this surplus produce is sufficient to maintain a
hundred or a thousand men, he can make use of it in no other way than by
maintaining a hundred or a thousand men. He is at all times, therefore,
surrounded with a multitude of retainers and dependants, who having no
equivalent to give in return for their maintenance, but being fed entirely by
his bounty, must obey him, for the same reason that soldiers must obey the
prince who pays them. Before the extension of commerce and manufactures in
Europe, the hospitality of the rich and the great, from the sovereign down to
the smallest baron, exceeded every thing which in the present times we can
easily form a notion of (Smith, 1937, p. 385).
In order to appreciate Smith’s further argument, it is important to understand
an aspect of his interpretation of human behavior. Smith believed that, in all
but the most primitive societies, “the necessities and conveniencies of the
body” were easily provided for (Smith, 1817, p. 343; see also Smith, 1956, p.
160). In more advanced societies, the striving in the economic arena takes
place not to procure goods which cater to human needs in any utilitarian sense;
for the goods acquired by the rich are of “frivolous utility” and provide, at
best, “trifling conveniencies.” [5] The
effort involved in their acquisition certainly cannot be justified in terms of
the direct utility they afford. Indeed, in speaking of the decision of the poor
man’s son to pursue wealth, Smith says: “To obtain the conveniencies which these
[wealth and greatness] afford, he submits in the first year, nay in the first
month of his application, to more fatigue of body, and more uneasiness of mind,
than he could have suffered through the whole of his life from the want of them”
(Smith, 1817, p. 291). [6]
5. “The poor man’s son, whom Heaven in its anger
has visited with ambition” finds, after a lifetime of “unrelenting industry”
that “wealth and greatness are mere trinkets of frivolous utility, no more
adapted for procuring ease of body or tranquility of mind, than the tweezer-cases
of the lover of toys; and, like them too, more troublesome to the person who
carries them about with him than all the advantages they can afford him are
commodious. There is no other real difference between them, except that the
conveniencies of the one are somewhat more observable than those of the other”
(Smith, 1817, pp. 290-92 [emphasis added]). In old age, “power and
riches appear then to be, what they are, enormous and operose machines contrived
to produce a few trifling conveniencies to the body” (Smith, 1817, p. 293; see
also pp. 236-37).
6. Also: “It is not ease or pleasure, but always
honour, of one kind or another, though frequently an honour very ill understood,
that the ambitious man really pursues” (Smith, 1817, p. 100).
364
What then is the object pursued by mankind if it is not the pleasure, comfort,
and ease afforded by the acquisition of a large stock of worldly goods?
Briefly, the recognition and admiration of our fellow human beings. “To deserve,
to acquire, and to enjoy, the respect and admiration of mankind, are the great
objects of ambition and emulation” (Smith, 1817, pp. 94-95).
[7]
Although this respect and admiration should properly be attained through
studying to be wise and practicing to be virtuous, “the great mob of mankind” is
not adequately equipped to discern and appreciate wisdom and virtue and
indiscriminately accords its respect and admiration to the rich and powerful.
[8] Hence arises a corruption of the
moral sentiments, [9] and hence the
pursuit of riches is primarily actuated not by the enjoyment of riches itself
but by the recognition and distinction which the possession and display of
wealth affords: [10]
It is chiefly from this regard to the sentiments
of mankind, that we pursue riches and avoid poverty. For to what purpose is all
the toil and bustle of this world? What is the end of avarice and ambition, of
the pursuit of wealth, or power, and preeminence? Is it to supply the
necessities of nature? The wages of the meanest labourer can supply them. We
see that they afford him food and clothing, the comfort of a house, and of a
family. If we examine his economy with rigour, we should find that he spends a
great part of them upon conveniencies, which may be regarded as superfluities,
and that, upon extraordinary occasions, he can give something even to vanity and
distinction. What then is the cause of our aversion to his situation, and why
should those who have been educated in the higher ranks of life, regard
7. The importance of the pursuit of rank, and the
unimportance of satisfying bodily needs, is expressed even more forcefully later
on: “Though it is in order to supply the necessities and conveniencies of the
body, that the advantages of external fortune are originally recommended to us,
yet we cannot live long in the world without perceiving that the respect of our
equals, our credit and rank in the society we live in, depend very much upon the
degree in which we possess, or are supposed to possess these advantages. The
desire of becoming the proper objects of this respect, of deserving and
obtaining this credit and rank among our equals, is perhaps, the strongest of
all our desires, and our anxiety to obtain the advantages of fortune is,
accordingly, much more excited and irritated by this desire, than by that of
supplying all the necessities and conveniencies of the body, which are always
very easily supplied” (Smith, 1817, p. 343).
8. “We frequently see the respectful attentions of
the world more strongly directed towards the rich and the great, than towards
the wise and the virtuous” (Smith, 1817, p. 94).
9. Chapter III, Part I, of the Theory of Moral
Sentiments is titled “Of the Corruption of Our Moral Sentiments, Which Is
Occasioned by This Disposition To Admire the Rich and the Great, and To Despise
or Neglect Persons of Poor and Mean Condition.”
10. “With the greater part of rich people, the
chief enjoyment of riches consists in the parade of riches” (Smith, 1937, p.
172; cf. Smith, 1817, p. 77).
365
it as worse than death, to be reduced to live,
even without labour, upon the same simple fare with him, to dwell under the same
lowly roof, and to be clothed in the same humble attire? Do they imagine that
their stomach is better, or their sleep sounder, in a palace than in a cottage?
The contrary has been so often observed, and, indeed, is so very obvious, though
it had never been observed, that there is nobody ignorant of it. From whence,
then, arises that emulation which runs through all the different ranks of men,
and what are the advantages which we propose by that great purpose of human life
which we call bettering our condition? To be observed, to be attended to, to be
taken notice of with sympathy, complacency, and approbation, are all the
advantages which we can propose to derive from it. It is the vanity, not the
ease, or the pleasure, which interests us. But vanity is always founded upon
the belief of our being the object of attention and approbation. The rich man
glories in his riches, because he feels that they naturally draw upon him the
attention of the world, and that mankind are disposed to go along with him in
all those agreeable emotions with which the advantages of his situation so
readily inspire him. At the thought of this, his heart seems to swell and
dilate itself within him, and he is fonder of his wealth, upon this account,
than for all the other advantages it procures him (Smith, 1817, pp. 77-78).
[11]
Furthermore:
Nature has wisely judged that the distinction of
ranks, the peace and order of society, would rest more securely upon the plain
and palpable difference of birth and fortune, than upon the invisible and often
uncertain difference of wisdom and virtue. The undistinguishing eyes of the
great mob of mankind can well enough perceive the former: it is with difficulty
that the nice discernment of the wise and the virtuous can sometimes distinguish
the latter (Smith, 1817, p. 366).
Thus, the behavior of upper income receivers must be understood in terms of
their pursuit of rank and distinction, and this underlies Smith’s
11. Later Smith states: “And thus, place,
that great object which divides the wives of aldermen, is the end of half the
labours of human life; and is the cause of all the tumult and bustle, all the
rapine and injustice, which avarice and ambition have introduced into this
world. People of sense, it is said, indeed despise place; that is, they despise
sitting at the head of the table, and are indifferent who it is that is pointed
out to the company by that frivolous circumstance, which the smallest advantage
is capable of overbalancing. But rank, distinction, pre-eminence, no man
despises, unless he is either raised very much above, or sunk very much below,
the ordinary standard of human nature” (Smith, 1817, p. 90).
366
continuous reference, in the Wealth of Nations, to the vanity of the rich
in attempting to account for the pattern of their consumption expenditures.
[12]
In a society where the finer manufactures are not available, opportunities for
cultivating one’s vanity are necessarily limited. In the absence of such
commodities, large rental incomes are employed in hospitality, in the
maintenance of a large group of retainers, and in acts of bounty to one’s
tenants. In spite of these acts of generosity, however, the typical behavior of
large landowners as late as the time of European feudalism was reasonably
frugal. Large landowners were not extravagant, and it was even common for them
to save. This was true not only of the nobility but of the sovereign himself,
who frequently accumulated treasure. “In countries where a rich man can spend
his revenue in no other way than by maintaining as many people as it can
maintain, he is not apt to run out, and his benevolence it seems is seldom so
violent as to attempt to maintain more than he can afford” (Smith, 1937, p. 391;
cf. also pp. 414, 859-60).
All this was, however, transformed by the growth of commerce and manufactures,
which brought an enormous enlargement of the commodity universe. Although the
finer manufactures have sometimes grown up out of the “gradual refinement of
those household and coarser manufactures which must at all times be carried on
even in the poorest and rudest countries” (Smith, 1937, p. 382), foreign trade
has, historically, played a crucial role in European countries:
The inhabitants of trading cities, by importing the improved manufactures and expensive luxuries of richer countries, afforded some food to the vanity of the great proprietors, who eagerly purchased them with great quantities of the rude produce of their own lands. The commerce of a great part of Europe in those times, accordingly, consisted chiefly in the exchange of their own rude, for the manufactured produce of more civilized nations. Thus the wool of England used to be exchanged for the wines of France, and the fine cloths of Flanders, in the same manner as the corn of Poland is at this day exchanged for the wines and brandies of France, and for the silks and velvets of France and Italy.
A taste for the finer and more improved
manufactures, was in this manner introduced by foreign commerce into countries
where no such works were carried on (Smith, 1937, p. 380).
12. “To be pleased with... groundless applause is
a proof of the most superficial levity and weakness. It is what is properly
called vanity” (Smith, 1817, p. 186). And later: “He is guilty of vanity who
desires praise for qualities which are either not praiseworthy in any degree, or
not in that degree in which he expects to be praised for them, who sets his
character upon the frivolous ornaments of dress and equipage, or upon the
equally frivolous accomplishments of ordinary behaviour” (Smith, 1817, p. 501).
367
In making available a wide range of goods with which a great proprietor could
gratify his “most childish vanity,” a “revolution of the greatest importance to
the public happiness” was brought about (Smith, 1937, p. 391). For the
resulting alteration in expenditure flows, reflecting the tastes of
(non-capitalist) upper income groups when confronted with an enlarged range of
consumer goods, was directly responsible for events of major significance.
These include, in addition to an accelerated rate of growth of output, the
gradual erosion of the political power of the landowning classes and the decline
of feudal institutions generally, the accelerated growth of capitalist
institutions, and a large-scale shift in the composition of resource use and
output.
The expansion in the range of alternatives for the disposition of the economic
surplus had the immediate effects of (1) shifting the composition of consumer
expenditure flows away from services and toward goods; (2) shifting upward the
consumption functions of large property owners, who previously lived within
their incomes because of the limited scope afforded for the exercise of personal
vanity; and (3) less obvious, but at least as important, the strength of the
desire for these new goods provided a motive for efficient cultivation which was
previously lacking. The increased incentive provided by the availability of new
goods led to the elimination of known inefficiencies which had previously been
tolerated and to legal and institutional changes which, by strengthening
economic incentives, Smith regarded as indispensable to sustained economic
growth.
The transformation in the consumption expenditures of the wealthy which is
wrought by the availability of finer manufactured goods in a previously
agricultural society is, Smith appears to believe, highly predictable. For he
argues that all members of higher income classes in an agricultural society -
landlords, clergy, and sovereign - succumb equally, and with the same
consequences, to the seductive attractions of these new goods. For, although
“the desire of food is limited in every man by the narrow capacity of the human
stomach,” it is also true that “the desire of the conveniencies and ornaments of
building, dress, equipage, and household furniture, seems to have no limit or
certain boundary” (Smith, 1937, p. 164). [13]
As a result,
What all the violence of the feudal institutions
could never have effected, the silent and insensible operation of foreign
commerce and manufactures gradually brought about. These gradually furnished
the great proprietors with something for which they could exchange the whole
surplus produce of their lands, and which they could consume themselves without
sharing it either with tenants or retainers. All for ourselves, and nothing for
other
13. Some of the more misleading implications of
Smith’s dictum concerning the “narrow capacity of the human stomach” are
examined in Davis (1954). Somewhat surprisingly, Davis did not call attention
to the even stronger statement by Smith on the same subject (in Smith, 1817, pp.
295-96).
368
people, seems, in every age of the world, to have
been the vile maxim of the masters of mankind. As soon, therefore, as they
could find a method of consuming the whole value of their rents themselves, they
had no disposition to share them with any other persons. For a pair of diamond
buckles perhaps, or for something as frivolous and useless, they exchanged the
maintenance, or what is the same thing, the price of the maintenance of a
thousand men for a year, and with it the whole weight and authority which it
could give them. The buckles, however, were to be all their own, and no other
human creature was to have any share of them; whereas in the more ancient method
of expence they must have shared with at least a thousand people. With the
judges that were to determine the preference, this difference was perfectly
decisive; and thus, for the gratification of the most childish, the meanest and
the most sordid of all vanities, they gradually bartered their whole power and
authority (Smith, 1937, pp. 388-89).
The behavior of the clergy on their large landed estates was in no essential way
different from that of other substantial landowners.
[14] Similarly, the sovereign himself,
the greatest single landowner, is subjected to the same forces and responds to
them in the same manner. [15]
14. The large rents and tithes received by the
clergy were usually paid in the form of agricultural products. “The quantity
exceeded greatly what the clergy could themselves consume; and there were
neither arts nor manufactures for the produce of which they could exchange the
surplus. The clergy could derive advantage from this immense surplus in no
other way than by employing it, as the great barons employed the like surplus of
their revenues, in the most profuse hospitality, and in the most extensive
charity. Both the hospitality and the charity of the ancient clergy,
accordingly, are said to have been very great. They not only maintained almost
the whole poor of every kingdom, but many knights and gentlemen had frequently
no other means of subsistence than by travelling about from monastery to
monastery, under pretence of devotion, but in reality to enjoy the hospitality
of the clergy.... The gradual improvements of arts, manufactures, and commerce,
the same causes which destroyed the power of the great barons, destroyed in the
same manner, through the greater part of Europe, the whole temporal power of the
clergy. In the produce of arts, manufactures, and commerce, the clergy, like
the great barons, found something for which they could exchange their rude
produce, and thereby discovered the means of spending their whole revenues upon
their own persons, without giving any considerable share of them to other
people. Their charity became gradually less extensive, their hospitality less
liberal or less profuse. Their retainers became consequently less numerous, and
by degrees dwindled away altogether. The clergy too, like the great barons,
wished to get a better rent from their landed estates, in order to spend it, in
the same manner, upon the gratification of their own private vanity and folly.
But this increase of rent could be got only by granting leases to their tenants,
who thereby became in a great measure independent of them” (Smith, 1937, pp.
753-55).
15. In a society with little commerce and
manufactures, “the expence even of a sovereign is not directed by the vanity
which delights in the gaudy finery of a court, but is employed in bounty to his
tenants, and hospitality to his retainers. But bounty and hospitality very
seldom lead to extravagance; though vanity almost always does... In a commercial
country abounding with every sort of expensive luxury, the sovereign, in the
same manner as almost all the great proprietors in his dominions,
[naturally spends a great part of his revenue
in purchasing those luxuries. His own and the neighbouring countries supply him
abundantly with all the costly trinkets which compose the splendid, but
insignificant pageantry of a court. For the sake of an inferior pageantry of
the same kind, his nobles dismiss their retainers, make their tenants
independent, and become gradually themselves as insignificant as the greater
part of the wealthy burghers in his dominions. The same frivolous passions,
which influence their conduct, influence his” (Smith, 1937, pp. 414, 861; see
also pp. 859-60).]
HHC: [bracketed]
displayed on page 370 of original.
369
The intensity of the landlord’s desire for “trinkets and baubles” led him
gradually to dismiss his retainers and to reduce the number of the tenants on
his land “to the number necessary for cultivating it.”
By the removal of the unnecessary mouths, and by
exacting from the farmer the full value of the farm, a greater surplus, or what
is the same thing, the price of a greater surplus, was obtained for the
proprietor, which the merchants and manufacturers soon furnished him with a
method of spending upon his own person in the same manner as he had done the
rest. The same cause continuing to operate, he was desirous to raise his rents
above what his lands, in the actual state of their improvement, could afford.
His tenants could agree to this upon one condition only, that they should be
secured in their possession, for such a term of years as might give them time to
recover with profit whatever they should lay out in the further improvement of
the land. The expensive vanity of the landlord made him willing to accept of
this condition; and hence the origin of long leases (Smith, 1937, p. 390).
Again the same forces operated, with the same consequences, upon the clergy.
[16]
Thus, in addition to its other consequences, the structure of tastes of the
major propertied classes when confronted with the introduction of new goods
resulted in a substantial increase in the economy’s output. Agriculture came to
be reorganized in a manner which, for the first time, provided strong incentives
to the cultivator to raise output over previous levels.
[17]
There is another aspect of men’s evaluations of the satisfactions afforded by
economic success to which Smith attaches much significance. Although, as we
have seen, the satisfactions afforded by great wealth are not substantial, they
nevertheless appear to be so from the vantage point of those less
favorably situated. This is, apparently, a systematic bias in men’s
expectations. Moreover, this overestimation of the pleasures of wealth is one
of the most important features of man’s psychological endowment, since it has
furnished the propelling force for the greater part of his earthly
16. See n. 14.
17. The role of legal and institutional
factors in conditioning economic behavior is discussed at greater length in
Rosenberg (1960).
370
achievements. It is fortunate for society that most men are incapable of making
an accurate appraisal of the satisfactions to be derived from success in the
pursuit of wealth. [18]
We must now confront a further implication of Smith’s proposition that “some
forms of expence... seem to contribute more to the growth of public opulence
than others” (Smith, 1937, p. 329). From the point of view of economic growth,
Smith’s position is not only that a taste for goods is preferable to a taste for
services. [19] It is also the case that a
taste for durable goods is better than a taste for non-durables:
A man of fortune... may either spend his revenue
in a profuse and sumptuous table, and in maintaining a great number of menial
servants, and a multitude of dogs and horses; or contenting himself with a
frugal table and few attendants, he may lay out the greater part of it in
adorning his house or his country villa, in useful or ornamental buildings, in
useful or ornamental furniture, in collecting books, statues, pictures; or in
things more frivolous, jewels, baubles, ingenious trinkets of different kinds;
or, what is most trifling of all, in amassing a great wardrobe of fine clothes
(Smith, 1937, p. 329).
A man who purchases durables is every day adding to the stock of useful assets
which will be available in the future. [20]
Smith’s preference for durables
18. “And it is well that nature imposes
upon us in this manner. It is this deception which rouses and keeps in
continual motion the industry of mankind. It is this which first prompted them
to cultivate the ground, to build houses, to found cities and commonwealths, and
to invent and improve all the sciences and arts, which ennoble and embellish
human life; which have entirely changed the whole face of the globe, have turned
the rude forests of nature into agreeable and fertile plains, and made the
trackless and barren ocean a new fund of subsistence, and the great high road of
communication to the different nations of the earth. The earth, by these
labours of mankind, has been obliged to redouble her natural fertility, and to
maintain a greater multitude of inhabitants” (Smith, 1817, p. 295).
19. Here we confront, from the output side,
Smith’s distinction between productive and unproductive labor. We have no
intention of entering into that tortured and protracted controversy, or
defending Smith’s rather confused and inconsistent treatment. It will be
sufficient to state that, from the point of view of Smith’s interest in
economic growth, there was as much conceptual justification for attempting
to distinguish between the two types of labor as there is for classifying
expenditures in “consumption” and “investment” categories in the national income
accounts.
Notice that educational services are an exception
to Smith’s general preference for goods over services. Working-class parents,
he points out, typically purchase insufficient educational services for their
children (Smith, 1956, p. 256; Smith, 1937, pp. 736-37). Although teachers
produce a service, it is one which, as he elsewhere recognizes, is capable of
being accumulated. In his chapter on capital (Book II, chap. I), he
explicitly recognizes that talents and skills acquired through education
constitute part of the fixed capital of society (pp. 265-66).
20. “A stock of clothes may last several years: a
stock of furniture half a century or a century: but a stock of houses, well
built and properly taken care of, may last many centuries” (Smith, 1937, p. 265;
cf. Smith, 1817, pp. 314-15).
371
is, of course, in a sense an extension of the logic underlying his distinction
between productive and unproductive labor. Although the effects of the
expenditures of the wealthy on non-durables do not perish quite so quickly as
the “declamation of the actor, the harangue of the orator, or the tune of the
musician” (which perish “in the very instant” of production) (Smith, 1937, p.
315), they do not add directly to the future stock of useful things.
Similarly, nations are better off when “men of fortune” shift their expenditures
to durable goods. For the current purchases of the rich in this fashion augment
the supply of useful goods at some future date. These goods then become
available to the “inferior and middling ranks of people” when they are
eventually cast off by the wealthy (Smith, 1937, p. 330).
[21] If we look upon economic
growth as a matter of accumulating things which will provide a flow of useful
services in the future, then it is clear that the greater the durability of an
item, the more it approximates the characteristics of an investment good. A
growing taste for durables is, therefore, favorable to economic growth.
[22]
It is worth noting that Smith treats taste itself as a phenomenon which becomes
important only in civilized societies where subsistence is easily acquired. His
treatment of the conduct of people in savage societies, which are preoccupied
with procuring a bare subsistence, suggests that they are controlled by social
values and attitudes which provide as little scope as possible for the
expression of personal tastes (Smith, 1817, Part V, chap. ii). Furthermore, in
his own discussion of the influence of taste in societies where its exercise is
allowed some importance, he is usually concerned with consumer durables -
furniture, equipage, clothing, watches, palaces, ear-pickers, etc. This is, of
course, consistent with the uniformity of content of food consumption implied by
his curious statement that “the desire of food is limited in every man by the
narrow capacity of the human stomach.”
Moreover, the growing taste for goods as opposed to services is crucial for
economic growth because it is responsible for the expansion of the capitalist
sector of the economy. In part this was a reflection of the technological fact
that material goods required a substantial accumulation of capital for their
production, whereas the provision of services typically required little
capital. This growing preference, therefore, was responsible for fundamental
structural changes in both the economy and society. The
21. “What was formerly a seat of the family of
Seymour, is now an inn upon the Bath road. The marriage-bed of James the First
of Great Britain, which his Queen brought with her from Denmark, as a present
fit for a sovereign to make to a sovereign, was, a few years ago, the ornament
of an ale-house at Dunfermline. In some ancient cities, which either have been
long stationary, or have gone somewhat to decay, you will sometimes scarce find
a single house which could have been built for its present inhabitants” (Smith,
1937, p. 330).
22. Cf. Nassau Senior: “The wealth of a Country
will much depend on the question, whether the tastes of its inhabitants lead
them to prefer objects of slow or of rapid destruction” (Senior, 1951, p. 54).
372
resulting enlargement of the capitalist sector and a growth in a middle class in
turn led to a rise in the share of profits in the national income; with this, of
course, went a higher proportion of saving and capital accumulation.
[23] The growth of the capitalist sector
was important also because it inculcated other qualities - thrift, discipline,
orderliness, honesty, industry - and provided a new model (the abstemious and
industrious capitalist) for the old one (the dissolute and profligate
landowner). Smith seems to have regarded the mere presence of great wealth as
exerting a demoralizing influence on the population.
[24] He advances the generalization that, in mercantile and
manufacturing towns, the poor will be found to be “in general industrious,
sober, and thriving”; whereas, in court towns where the population is supported
out of revenue rather than capital, “they are in general idle, dissolute and
poor” (Smith, 1937, p. 319) [25]
Finally, the growth of commerce and manufactures produces stability in the
political and institutional structure of society and security of expectations on
the part of the individual which Smith refers to as “by far the most important
of all their effects.” Hume is cited as the only writer who had previously
noted this relationship. Hume’s own treatment of the origin, historical growth,
and social consequences of capitalist institutions is both fascinating and
complex, but that is another story. [26]
23. Malthus followed Adam Smith very closely here
(see Malthus, 1951, pp. 42-43). For an illuminating discussion of the
historical background, contemporary observations, and intellectual antecedents
for Smith’s treatment of profit as a distinct income category, see Meek (1954).
24. Even capitalists are so corrupted. When
profits are too high, that is, in the absence of competitive conditions, the
capitalist behaves, in effect, like a large landowner. “The high rate of profit
seems every where to destroy that parsimony which in other circumstances is
natural to the character of the merchant. When profits are high, that sober
virtue seems to be superfluous, and expensive luxury to suit better the
affluence of his situation... Compare and you will be sensible how differently
the conduct and character of merchants are affected by the high and by the low
profits of stock… Light come, light go, says the proverb; and the ordinary tone
of expence seems every where to be regulated, not so much according to the real
ability of spending as to the supposed facility of getting money to spend”
(Smith, 1937, pp. 578-79; see the dissenting opinion of Maithus, 1951, p. 192).
25. He adds: “The idleness of the greater part of
the people who are maintained by the expence of revenue, corrupts, it is
probable, the industry of those who ought to be maintained by the employment of
capital, and renders it less advantageous to employ a capital there than in
other places” (Smith, 1937, p. 320). Smith accounts for the past superiority of
Glasgow over Edinburgh in these terms. The corrupting effects of wealth can,
apparently, nullify or reverse the effects of earlier progress. “The
inhabitants of a large village, it has sometimes been observed, after having
made considerable progress in manufactures, have become idle and poor, in
consequence of a great lord’s having taken up his residence in their
neighbourhood” (Smith, 1937, p. 320; see also Rae, 1895, pp. 180-81).
26. “Commerce and manufactures gradually
introduced order and good government and with them, the liberty and security of
individuals, among the inhabitants of the country, who had before lived almost
in a continual state of war with their neighbours, and of servile dependency
upon their superiors. This, though it has been the least observed, is by far
the most important of all their effects. Mr. Hume is the only writer who, so
far as I know, has hitherto taken notice of it” (Smith, 1937, p. 385).
373
References
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Stomach,” Q.J.E., LXVIII, No. 2 (May, 1954), 275-86.
Malthus, T. R. Principles of Political Economy.
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Meek, Ronald. “Adam Smith and the Classical
Concept of Profit,” Scottish J. Pout. Econ., I, No. 2 (June, 1954),
138-53.
Rae, John. Life of Adam Smith. London:
Macmillan Co., 1895.
Rosenberg, Nathan. “Some Institutional Aspects of
The Wealth of Nations,” J.P.E., LXVIII, No. 6 (December, 1960), 557-70.
Schumpeter, Joseph. History of Economic
Analysis. New York: Oxford University Press, 1954.
Senior, Nassau. An Outline of the Science of
Political Economy. New York: Augustus M. Kelley, 1951.
Smith, Adam. The Theory of Moral Sentiments.
Philadelphia: Anthony Finley, 1817.
__________ . The Wealth of Nations.
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__________ . Lectures on Justice, Police,
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The Competitiveness of Nations
in a Global Knowledge-Based Economy
April 2003