Adam Smith and the “rich country–poor country” debate: eighteenth-century views on economic progress and international trade

Abstract

Despite his emphasis on economic development, Adam Smith did not participate in the contemporary “rich country–poor country” debate. Some see the absenteeism as a deficiency, while others assume that Smith propounds a theory of uneven development and agrees with the divergence argument. In this article, Smith's own theory is expounded and related to the contentious points of the “rich country–poor country” debate. It is concluded that Smith's theory does not fit easily into the categories of this debate. He rather takes up a third position, being neither a proponent of pure convergence nor of pure divergence.

Keywords:

• “rich country–poor country debate”
• Adam Smith
• Josiah Tucker
• David Hume
• economic progress

Acknowledgements

I am grateful to André Lapidus, N. Emrah Aydinonat, Anja Mücke, Peter Schmidt, Maria Pia Paganelli, and two anonymous referees of this journal for their comments and suggestions on earlier drafts of this paper.

Notes

1 The broader debates on this theme involved others as well (Low 1952, Hont 1983, 2008). I will omit all related topics which were not central to the debate discussed here. These include arguments about the influence of luxury and of governmental systems on economic development. Debates on these issues were not confined to Britain but also took place especially in France and Italy (see, e.g., Berg and Eger 2003, Wahnbaeck 2004, Shovlin 2006, 2008).

2 Some wrongly date Oswald's letter 10 October 1749, while its actual date is 10 October 1750. This error seems to originate in Rotwein (1955) and has been adopted by others (e.g., Semmel 1970, McNally 1988, Irwin 1996, Ross 2008, Schabas 2008, Sakamoto 2011, Berdell 2002). Rotwein (1955, 190 n.) suggests that Oswald might have received a manuscript of the other essays of Hume's Political Discourses. Since there is no evidence of this claim, Hont (1983, 283 n.) disputes it.

3 The original exchange between Hume and Tucker was made public in 1801 when Thomas Brooke Clarke published Hume's letter as part of his Survey of the Strength and Opulence of Great Britain after receiving it from William Petty (Lord Shelburne). It also includes “Dean Tucker's Reply” which is, however, not Tucker's original letter but a summary of it. It is not clear why Clarke did not publish the letter itself, nor whether Clarke himself summarised Tucker's letter or if he received this summary from Lord Shelburne. Additionally, it is unclear why Clarke puts the summary into quotation marks, suggesting it to be a direct quotation from Tucker.

4 Hume himself never used the term “price-specie-flow mechanism.” Moreover, he was not the first to develop the price-specie-flow argument and his contributions to it are disputed (see, e.g., Wennerlind 2008, pp. 116–23, Dimand 2013).

5 This only holds true if a nation grew rich through general industry. Tucker also considers the case in which a rich nation accumulated its money by idleness, e.g., by discovering a fertile gold mine: “In such a Case, certain it is, that their industrious Neighbours would soon drain them of this Quantity of Specie, and not only drain them, so far as to reduce them to a Level with the poor Country, but also sink them into the lowest State of abject Poverty” (1774, p. 16).

6 Tucker repeats this claim in a letter to Dr. Birch in 1760 (quoted in Shelton 1981, p. 132) and in a letter to Kames (Tucker 1807 [1764]). Among those who uphold Tucker's claim are Coats (1958), Elmslie (1995, p. 211), Gomes (2003, p. 68), Marshall (1998), Prendergast (2010, p. 418), Rotwein (1955, 204,n.), Semmel (1970, p. 15), and Shelton (1981, p. 132). McNally (1988, p. 162) and Meek (1973, p. 176) are more cautious but concede this claim some justification. Berdell (2002) and Hont (1983) reject Tucker's claim.

7 A further solution in Hume's thinking might be a policy that encourages hoarding and alternative uses of gold and silver which would lead to a decrease in the amount of money and thus of prices, as Paganelli (2007) discusses.

8 For more on the relationship of Smith to Oswald and Kames, see Rae (1895, pp. 6–7, 30–2, 36–8), Tytler (1807, pp. 190–4), and West (1969, p. 45); on Tucker and Smith, see Shelton (1981, p. 166).

9 Smith welcomes high wages because “what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable” (WN I.viii.36).

10 The Lectures on Jurisprudence consists of two student notes of Smith's lectures in 1762–3 (LJA) and presumably 1763–4 (LJB). The Early Draft was probably written in 1762 by Smith, but never published by him.

11 See especially WN II.ii. Most emphatically, Smith expresses this notion in WN IV.i.17: “It would be too ridiculous to go about seriously to prove, that wealth does not consist in money, or in gold and silver.”

12 In contrast, Hume argues that money is “having chiefly a fictitious value, arising from the agreement and convention of men” (1987 [1777], p. 297, the latter half of the sentence was only included in the editions published between 1752 and 1768).

13 Prices do increase or decrease when the “fertility of the mines” increases or decreases, thereby changing the labour necessary to produce gold and silver. In this case, the value of gold and silver changes.

14 Some wrongly argue that Smith accepts and even uses the price-specie-flow mechanism (Fisher 1911, Eagly 1970, Gomes 2003, Sinclair 1932). Laidler argues that though Smith did not include the price-specie-flow mechanism, he could have easily done so and he concludes, therefore, that “the effect of this omission is to render Smith's analysis incomplete” (1981, p. 188). However, these argumentations are not very convincing, because Smith's theory is not compatible with the price-specie-flow mechanism. Among those who argue that Smith does not use the price-specie-flow mechanism, the assessment of Smith's monetary theory differs. Some assess Smith's theory as more or less equally significant as Hume's price-specie-flow mechanism (Humphrey 1981, Petrella 1968), while others argue that Smith's theory is inferior (Angell 1926, O'Brien 1975, Rothbard 1995, Stigler 1976), and still others appreciate it as superior (Girton and Roper 1978, Glasner 1985, 1989, Laughlin 1903). This assessment is in many cases based on the own monetary approach of the respective author. Further accounts of Smith's monetary theory and Smith's relation to the price-specie-flow mechanism can be found in Berdell (1998), Blaug (1995), Bloomfield (1975), Hegeland (1969 [1951]), Hollander (1911), Low (1952), and Vickers (1975).

15 This point has not been noted widely; Verdera (1992) and Tsoulfidis and Paitaridis (2012) have brought it up recently. On the falling rate of profit in Smith's theory see also Tucker (1960). Smith supports his theory of a falling rate of profit with empirical evidence (see WN I.ix and II.iii.10). To argue that Smith assume that the rate of profits increases with economic growth, as Thweatt (1957) does, is untenable.

16 Higher wages enables workers “to provide better for their children, and consequently to bring up a greater number” (WN I.viii.40), which increases the working population and thus the supply of labour.

17 Yet the stationary state is described by Smith as “dull,” because of the hard “condition of the labouring poor, of the great body of the people” (WN I.viii.43); in this respect, it is inferior to the progressive state. The stationary state is not only characterized by a low rate of profit, but also by low wages, because “the competition for employment would necessarily be so great as to reduce the wages of labour to what was barely sufficient to keep up the number of labourers” (WN I.ix.14).

18 Heilbroner ascribes such a position to Smith. He argues that Smith has a “deeply pessimistic prognosis of an evolutionary trend in which both decline and decay attend – material decline awaiting at the terminus of the economic journey, moral decay suffered by society in the course of its journeying” (1973, p. 243). This, however, is unfounded because a nation will maintain its level of development in Smith's theory. As for the social or moral decay, Smith clearly points to solutions as to how the state can avoid such a development, e.g., by educating young people.

19 In Smith's theory, the wealth of a nation is augmented by productive labour only, not by unproductive labour, as he outlines in Chapter III of Book II of the Wealth of Nations. This categorisation is not unambiguous because Smith gives several different criteria for the distinction: “(i) whether employment produces a profit, (ii) whether employment produces something storable, and (iii) whether a particular kind of employment can be continued indefinitely without new infusions of capital” (Eltis 1975, p. 434). But as Eltis rightly notices, the most important difference in Smith's theory “is between labour that produces and makes available goods that can be used as capital and labour that does not” (1975, p. 434). Productive labour “produces a value” (WN II.iii.1), while unproductive labour does not. This does not mean that unproductive labour is not useful or necessary. Smith includes among others soldiers, lawyers, physicians, and men of letters to this group.

20 Even if a nation departs from the system of natural liberty, it can still progress economically, as did the European states after the fall of the Roman Empire as Smith discusses at length in Book III of the Wealth of Nations. As a result, European governments established an “unnatural and retrograde order” (WN III.i.9). However, the consequence of such a departure is that a nation cannot achieve its full economic potential. For that, it would have to introduce a system of natural liberty.

21 This rich country's advantage will by implication be higher in manufacturing than in agriculture: “The most opulent nations, indeed, generally excel all their neighbours in agriculture as well as in manufactures; but they are commonly more distinguished by their superiority in the latter than in the former. [...] In agriculture, the labour of the rich country is not always much more productive than that of the poor; or, at least, it is never so much more productive, as it commonly is in manufactures” (WN I.i.4).

22 Kames himself states that “nations go round in a circle, from weakness to strength, and from strength to weakness” (1774, p. 452). In Kames theory, this development is supported by luxury, which “is above all pernicious in a commercial state” (1774, p. 352). A similar argument of growth and decay was brought forward by contemporary French authors such as Étienne Bonnot de Condillac (see, e.g., Orain 2003).

23 His economic theory and his focus on Great Britain in the Wealth of Nations have given Smith a rather nationalistic reputation in economic relations. Nicholson argues that Smith's “point of view is national and imperial and not cosmopolitan” (1909, p. xi). Williams calls him “a nationalist of nationalists” (1929, p. 206). This might be harsh but it cannot be denied that Smith's main economic concern is Great Britain and her well-being. In cases, in which foreign trade could lead to a military disadvantage for Great Britain, he favoured trade restriction, as in the case of the Navigation Act (WN IV.ii.24–30), because defence “is of much more importance than opulence” (WN IV.ii.30). As Goodacre notes, “when the principle of natural liberty conflicted with the interests of the state, he unquestioningly and unconditionally accorded precedence to the latter” (2010, p. 861). For Smith's perceived “commercial cosmopolis,” see Forman-Barzilai (2010).

24 In the letter to Dundas, Smith speaks of “a century” instead of centuries (1977a [1779], p. 240).

25 See also Semmel (1970). Rashid (1998, pp. 144–5) argues that Smith's influence on these policy debates is overestimated. Hont, in contrast, stresses that, besides Tucker, Smith also “wielded considerable influence over both the British and some of the Irish political leadership” (2008, p. 250).

26 Among those who locate Smith on the optimist side of the debate are Darity and Davis (2005), Elmslie (1994b), Elmslie and Criss (1999), Irwin (1996), and Low (1952). Hollander (1973) and Hont (1983) consider this more carefully but ultimately link Smith with Oswald and Tucker. McNally (1988, p. 163) argues that Smith adapts Hume's view in the Wealth of Nations, suggesting Smith is closer to Hume.

27 This leads Elmslie, who disregards Smith's argumentation in the Wealth of Nations, to the incorrect conclusion that Smith takes the view that poor nations are generally not able to profit from technological transfer to the same extent as developed nations (1994a, pp. 660–1; 1994b, pp. 262–5).

28 Cannan, referring to LJB, notices that “[t]here is nothing at all about capital in the lectures, and stock is not given an important place” (1896, p. xxviii). However, in the introduction to his influential edition of the Wealth of Nations, Cannan downplays the introduction of capital into Smith's theory and thus the difference between LJB and Wealth of Nations. He argues that the “changes do not make so much real difference to Smith's own work” (1904, p. xxx).