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Chapter 1a Simplified

What is the Political Economy?

by Adam Smith

10 minutes • 2065 words

Table of contents

Introduction
Chapter 1: The Principle of the Commercial or Mercantile System
- Mercantilism believes that money is wealth

Introduction

¹ Political economy, as a science of a legislator, proposes:

To provide a plentiful revenue or subsistence for the people by enabling them to provide it for themselves
To supply the state with a revenue for the public services

It proposes to enrich both the people and the sovereign.

² The progress of opulence in different nations has created 2 systems of political economy:

The system of commerce

This is the modern system best understood in our own country and in our own times

The system of agriculture

Chapter 1: The Principle of the Commercial or Mercantile System

¹ The popular notion that wealth consists in metal money or in gold and silver naturally arises from the double function of money as:

the instrument of commerce

Money allows us to obtain what we need more readily than any other commodity. The great affair is to get money. With money, there is no difficulty in making any purchase.

the measure of value

The amount of money is the basis for the estimated value of other commodities.

We say that:

a rich man is worth a lot of money
a poor man is worth very little money.
a frugal man, or a man eager to be rich, is said to love money.
a careless, a generous, or a profuse man, is said to be indifferent about money.

To grow rich is to get money. Wealth and money are considered synonymous in common language.

Mercantilism believes that money is wealth

² A rich country, like a rich man, is supposed to be abounding in money. Heaping up gold and silver is supposed to be the readiest way to enrich it.

After the discovery of America, the Spaniards’ first inquiry was if there was any gold or silver whenever they arrived at an unknown coast.

They then judged whether to make a settlement there or if the country was worth conquering.

Plano Carpino was a monk sent as ambassador from the King of France to one of Genghis Khan’s sons.

The Mongols asked him frequently if there was plenty of sheep and oxen in France.
Like the Spaniards, they wanted to know if the country was rich enough to be worth conquering.

Among the Mongols and shepherd nations who are ignorant of the use of money, cattle are the instruments of commerce and the measures of value. Wealth to them consisted in cattle, as to the Spaniards it consisted in gold and silver.

Of the two, the Mongol notion, perhaps, was the nearest to the truth.

³ Mr. Locke distinguished money from other movable goods. He says:

Locke

All other movable goods are consumable. This makes the wealth in them undependable. A nation rich in movable goods in one year may be lacking in the next, merely due to their own waste and extravagance of those goods.

On the contrary, money is a steady friend which is not wasted and consumed. Even if it travels from hand to hand, it can be kept from leaving the country. Gold and silver are the most solid and substantial part of a nation’s movable wealth.

He thinks the great object of its political economy should be to multiply those metals.

⁴ Others admit that if a nation could be entirely isolated, it would not matter how much money circulated in it.

The consumable goods circulated by this money would only be exchanged for a different amount of money.
The country’s real wealth would depend on the amount of those consumable goods.

It is otherwise with countries which:

have connections with foreign nations
carry on foreign wars and maintain fleets and armies in distant countries – this can only be done by sending money abroad to pay them with.

A nation cannot send much money abroad unless it has much at home. Therefore, every such nation must accumulate gold and silver in peacetime so that it can carry on foreign wars.

⁵ Because of these popular notions, all European nations studied every means of accumulating gold and silver, to little purpose.

Spain and Portugal own the principal gold and silver mines which supply Europe. They prohibited the exportation of those metals under the severest penalties or subjected it to a high duty.

Most European nations had the same prohibition as part of their ancient policy.

It is even found in some old Scotch acts of Parliament, where we should least expect to find it.
These forbid the carrying gold or silver away from the kingdom, under heavy penalties.
The same policy anciently took place in France and England.

⁶ When those countries became commercial, the merchants found this prohibition extremely inconvenient.

They could import foreign goods or bring them to another foreign country better with gold and silver than with any other commodity.

They remonstrated against this prohibition as hurtful to trade.

⁷ They said that the exportation of gold and silver for buying foreign goods did not always lessen those metals in the kingdom.

On the contrary, the exportation of gold and silver could increase the gold and silver at home, by buying goods which could be re-exported for a large profit overseas. It might bring back more treasure than was originally paid for them.

Mr. Mun compares this foreign trade to the seed-time and harvest of agriculture. He says that

Mun

We may think a husbandman is a madman when he casts good grains into the ground in the seed-time. But after we see his harvest, we realize that his actions increased the grains.

⁸ He said that:

Mun

This prohibition would not stop gold and silver exportation because the smallness of their size relative to their value allowed them to be easily smuggled abroad. This exportation could only be prevented by a proper attention to the balance of trade.

When the country exported more value than it imported, a better balance came from foreign nations. This balance was paid in gold and silver. It increased the amount of gold and silver in the kingdom.

But when it imported more value than it exported, a contrary balance was due to foreign nations. This balance was paid to them in gold and silver. It reduced the amount of gold and silver. In this case, the export prohbition on those metals could not prevent it.

Mun

The export prohibition on goods would only make exportation more dangerous and expensive. A prohibition on gold and silver exports would make the balance still worse.

The merchant who bought a bill on the foreign country was obliged to pay its banker:

the natural risk, trouble, and expence of sending the money
the extraordinary risk from the prohibition

Since the exchange would be against his country, the balance of trade would be still less to his favour. His country’s money would get much less value than the foreign country’s money to which the balance was due.

Mun

For example, if the exchange between England and Holland was 5% against England, it would require 105 ounces of silver in England to purchase a bill for 100 ounces of silver in Holland.

105 ounces of silver in England would buy goods worth only 100 ounces of silver in Holland.
But 100 ounces of silver in Holland would buy goods worth 105 ounces of silver in England.
English goods sold to Holland would be sold much cheaper.
Dutch goods sold to England would be much dearer.
English goods would draw so much less Dutch money to England.
Dutch goods would draw so much more English money to Holland, according to this difference.
The balance of trade would be more against England as it would require more gold and silver to be exported to Holland.

*Superphysics Note: Mun’s assertion is now known as balance of payments deficit or surplus. This is only true because international barter trade is non-existent. Smith’s assertions will be valid after an international barter trade system is established as to provide competition to the money system. This is what Pantrypoints is aiming for.

⁹ Those arguments were partly solid and partly sophistical.

They were solid in asserting:

that gold and silver exportation can be advantageous to the country
that no prohibition could prevent their exportation when private people found any advantage in exporting them

But they were sophistical in supposing:

that preserving or increasing the amount of those metals required more government attention than preserving or increasing the amount of other commodities. In reality, free trade always supplies those commodities in the proper amount without any such attention.
that the high price of foreign exchange:
- increased the unfavourable balance of trade, and
- led to the exportation of more gold and silver.

That high price was extremely disadvantageous to the merchants who paid coins to foreign countries.

They paid dearer for the paper bills which their bankers granted them in those countries.

The prohibition of exporting gold and silver coins increases the risk in smuggling.

This increases the bankers’ expenses.
But these increased expenses would be spread over all the smuggling operations in the country to export those coins.
- It could seldom lead to any extra coin exportation beyond the precise sum drawn for.
The high price of foreign exchange would also dispose the merchants to make their exports balance their imports. In this way, they would pay the least money at this high exchange.
- This high price of exchange operated like a tax.
- It raised the price of foreign goods and reduced their consumption.
- It would reduce the unfavourable balance of trade and the exportation of gold and silver.

¹⁰ However, those arguments convinced the parliaments, councils of princes, nobles, and country gentlemen.

Those arguments were created by those who were supposed to understand trade for those who knew nothing about trade.

The nobles, country gentlemen, and merchants knew that foreign trade enriched the country. But how it enriched the country, none of them knew well.

The merchants knew perfectly how it enriched themselves.

It was their business to know it.
But to know how it enriched the country was none of their business.

They only considered it when they tried to change the laws on foreign trade. It then became necessary for them to explain=

the benefits of foreign trade
how those benefits were obstructed by the current laws

The judges were satisfied with their explanation that foreign trade=

brought money into the country
was hindered by the laws in question

Those arguments produced the wished-for effect.

In France and England, the exportation of foreign coins and bullion was deregulated and allowed. Only the exportation of French and English coins was banned.
In Holland and other places, this deregulation was extended even to their national coin.

The attention of government was turned away from guarding against the exportation of gold and silver, into watching over the balance of trade.

They were told that only this balance could change the amount of those metals.
From one fruitless care, it was turned to another equally fruitless, but much more intricate and embarrassing.

Mun’s book, England’s Treasure in Foreign Trade , became a fundamental maxim in the political economy of England and all commercial countries.

The inland or home trade is the most important of all trades.

With equal capitals, it creates the greatest revenue and employment for its people. Mun considered the inland or home trade as subsidiary only to foreign trade.

He said that:

the inland trade did not bring money into the country nor carried money out
the country could never be richer or poorer by means of the inland trade, except when the inland trade indirectly influences the foreign trade

¹¹ A country that has no mines of its own must draw its gold and silver from overseas, in the same way as one that has no vineyards must draw its wines from others.

It is unnecessary that the government’s attention should be turned towards metals than towards wines.

A country that can buy wine will always get the wine it needs.
A country that can buy gold and silver can always get those metals.

Those metals are bought for a certain price like all other commodities. As those metals are the price of all other commodities, so all other commodities are the price of those metals.

We fully trust that the freedom of trade will always supply us with the wine and the precious metals that we can afford, without any government attention.