An Inquiry into the Nature and Causes of the Wealth of Nations
By Adam Smith
An Inquiry into the Nature and Causes of the Wealth of Nations was first published in 1776. This edition of Smith’s work is based on Edwin Cannan’s careful 1904 compilation (Methuen and Co., Ltd) of Smith’s fifth edition of the book (1789), the final edition in Smith’s lifetime. Cannan’s preface and introductory remarks are presented below. His extensive footnotes, detailing the changes undergone by the book over its five editions during Smith’s lifetime, as well as annotated references to the book, are also included here. Only Cannan’s marginal notes, indexes, and contents are not presented here, because the wonders of electronic searches and the speed of the net replace most of the intended function of those features. Internal references by page numbers have been replaced by linked paragraph reference numbers appropriate for this online edition. Paragraph references typically have three parts: the book, chapter, and paragraph. E.g.,
IV.7.111 refers to Book IV, Chapter VII, paragraph 111. Like Cannan, we have chosen to preserve the occasional erratic spelling in Smith’s fifth edition, which reflects changes in the language going on at the time Smith was writing. Editor,
Library of Economics and Liberty
Edwin Cannan, ed.
First Pub. Date
London: Methuen & Co., Ltd.
The text of this edition is in the public domain. Picture of Adam Smith courtesy of The Warren J. Samuels Portrait Collection at Duke University.
- Editor's Introduction
- B.I, Introduction and Plan of the Work
- B.I, Ch.1, Of the Division of Labor
- B.I, Ch.2, Of the Principle which gives Occasion to the Division of Labour
- B.I, Ch.3, That the Division of Labour is Limited by the Extent of the Market
- B.I, Ch.4, Of the Origin and Use of Money
- B.I, Ch.5, Of the Real and Nominal Price of Commodities
- B.I, Ch.6, Of the Component Parts of the Price of Commodities
- B.I, Ch.7, Of the Natural and Market Price of Commodities
- B.I, Ch.8, Of the Wages of Labour
- B.I, Ch.9, Of the Profits of Stock
- B.I, Ch.10, Of Wages and Profit in the Different Employments of Labour and Stock
- B.I, Ch.11, Of the Rent of Land
- B.II, Introduction
- B.II, Ch.1, Of the Division of Stock
- B.II, Ch.2, Of Money Considered as a particular Branch of the General Stock of the Society
- B.II, Ch.3, Of the Accumulation of Capital, or of Productive and Unproductive Labour
- B.II, Ch.4, Of Stock Lent at Interest
- B.II, Ch.5, Of the Different Employment of Capitals
- B.III, Ch.1, Of the Natural Progress of Opulence
- B.III, Ch.2, Of the Discouragement of Agriculture in the Ancient State of Europe after the Fall of the Roman Empire
- B.III, Ch.3, Of the Rise and Progress of Cities and Towns
- B.III, Ch.4, How the Commerce of the Towns Contributed to the Improvement of the Country
- B.IV, Introduction
- B.IV, Ch.1, Of the Principle of the Commercial or Mercantile System
- B.IV, Ch.2, Of Restraints upon the Importation from Foreign Countries
- B.IV, Ch.3, Of the extraordinary Restraints upon the Importation of Goods of almost all Kinds
- B.IV, Ch.4, Of Drawbacks
- B.IV, Ch.5, Of Bounties
- B.IV, Ch.6, Of Treaties of Commerce
- B.IV, Ch.7, Of Colonies
- B.IV, Ch.8, Conclusion of the Mercantile System
- B.IV, Ch.9, Of the Agricultural Systems, or of those Systems of Political Oeconomy, which Represent the Produce of Land
- B.V, Ch.1, Of the Expences of the Sovereign or Commonwealth
- B.V, Ch.2, Of the Sources of the General or Public Revenue of the Society
- B.V, Ch.3, Of Public Debts
Of the Natural and Market Price of Commodities
Book I, Chapter VII
There is in every society or neighbourhood an ordinary or average rate both of wages and profit in every different employment of labour and stock. This rate is naturally regulated, as I shall show hereafter,
*66 partly by the general circumstances of the society, their riches or poverty, their advancing, stationary, or declining condition; and partly by the particular nature of each employment.
There is likewise in every society or neighbourhood an ordinary or average rate of rent, which is regulated too, as I shall show hereafter,
*67 partly by the general circumstances of the society or neighbourhood in which the land is situated, and partly by the natural or improved fertility of the land.
These ordinary or average rates may be called the natural rates of wages, profit, and rent, at the time and place in which they commonly prevail.
When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price.
The commodity is then sold precisely for what it is worth, or for what it really costs the person who brings it to market; for though in common language what is called the prime cost of any commodity does not comprehend the profit of the person who is to sell it again, yet if he sells it at a price which does not allow him the ordinary rate of profit in his neighbourhood, he is evidently a loser by the trade; since by employing his stock in some other way he might have made that profit. His profit, besides, is his revenue, the proper fund of his subsistence. As, while he is preparing and bringing the goods to market, he advances to his workmen their wages, or their subsistence; so he advances to himself, in the same manner, his own subsistence, which is generally suitable to the profit which he may reasonably expect from the sale of his goods. Unless they yield him this profit, therefore, they do not repay him what they may very properly be said to have really cost him.
Though the price, therefore, which leaves him this profit, is not always the lowest at which a dealer may sometimes sell his goods, it is the lowest at which he is likely to sell them for any considerable time; at least where there is perfect liberty,
*68 or where he may change his trade as often as he pleases.
The actual price at which any commodity is commonly sold is called its market price. It may either be above, or below, or exactly the same with its natural price.
The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity, or the whole value of the rent, labour, and profit,
*69 which must be paid in order to bring it thither. Such people may be called the effectual demanders, and their demand the effectual demand; since it may be sufficient to effectuate the bringing of the commodity to market. It is different from the absolute demand. A very poor man may be said in some sense to have a demand for a coach and six; he might like to have it; but his demand is not an effectual demand, as the commodity can never be brought to market in order to satisfy it.
When the quantity of any commodity which is brought to market falls short of the effectual demand, all those who are willing to pay the whole value of the rent, wages, and profit, which must be paid in order to bring it thither, cannot be supplied with the quantity which they want. Rather than want it altogether, some of them will be willing to give more. A competition will immediately begin among them, and the market price will rise more or less above the natural price, according as either the greatness of the deficiency, or the wealth and wanton luxury of the competitors, happen to animate more or less the eagerness of the competition. Among competitors of equal wealth and luxury the same deficiency
*70 will generally occasion a more or less eager competition, according as the acquisition of the commodity happens to be of more or less importance to them.
*71 Hence the exorbitant price of the necessaries of life during the blockade of a town or in a famine.
When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid in order to bring it thither. Some part must be sold to those who are willing to pay less, and the low price which they give for it must reduce the price of the whole. The market price will sink more or less below the natural price, according as the greatness of the excess increases more or less the competition of the sellers, or according as it happens to be more or less important to them to get immediately rid of the commodity. The same excess in the importation of perishable, will occasion a much greater competition than in that of durable commodities; in the importation of oranges, for example, than in that of old iron.
When the quantity brought to market is just sufficient to supply the effectual demand and no more, the market price naturally comes to be either exactly, or as nearly as can be judged of, the same with the natural price. The whole quantity upon hand can be disposed of for this price, and cannot be disposed of for more. The competition of the different dealers obliges them all to accept of this price, but does not oblige them to accept of less.
The quantity of every commodity brought to market naturally suits itself to the effectual demand. It is the interest of all those who employ their land, labour, or stock, in bringing any commodity to market, that the quantity never should exceed the effectual demand; and it is the interest of all other people that it never should fall short of that demand.
If at any time it exceeds the effectual demand, some of the component parts of its price must be paid below their natural rate. If it is rent, the interest of the landlords will immediately prompt them to withdraw a part of their land; and if it is wages or profit, the interest of the labourers in the one case, and of their employers in the other, will prompt them to withdraw a part of their labour or stock from this employment. The quantity brought to market will soon be no more than sufficient to supply the effectual demand. All the different parts of its price will rise to their natural rate, and the whole price to its natural price.
If, on the contrary, the quantity brought to market should at any time fall short of the effectual demand, some of the component parts of its price must rise above their natural rate. If it is rent, the interest of all other landlords will naturally prompt them to prepare more land for the raising of this commodity; if it is wages or profit, the interest of all other labourers and dealers will soon prompt them to employ more labour and stock in preparing and bringing it to market. The quantity brought thither will soon be sufficient to supply the effectual demand. All the different parts of its price will soon sink to their natural rate, and the whole price to its natural price.
The natural price, therefore, is, as it were, the central price, to which the prices of all commodities are continually gravitating. Different accidents may sometimes keep them suspended a good deal above it, and sometimes force them down even somewhat below it. But whatever may be the obstacles which hinder them from settling in this center of repose and continuance, they are constantly tending towards it.
The whole quantity of industry annually employed in order to bring any commodity to market, naturally suits itself in this manner to the effectual demand. It naturally aims at bringing always that precise quantity thither which may be sufficient to supply, and no more than supply, that demand.
But in some employments the same quantity of industry will in different years produce very different quantities of commodities;
*73 while in others it will produce always the same, or very nearly the same. The same number of labourers in husbandry will, in different years, produce very different quantities of corn, wine, oil, hops, &c. But the same number of spinners and weavers will every year produce the same or very nearly the same quantity of linen and woollen cloth. It is only the average produce of the one species of industry which can be suited in any respect to the effectual demand; and as its actual produce is frequently much greater and frequently much less than its average produce, the quantity of the commodities brought to market will sometimes exceed a good deal, and sometimes fall short a good deal of the effectual demand. Even though that demand therefore should continue always the same, their market price will be liable to great fluctuations, will sometimes fall a good deal below, and sometimes rise a good deal above, their natural price. In the other species of industry, the produce of equal quantities of labour being always the same, or very nearly the same, it can be more exactly suited to the effectual demand. While that demand continues the same, therefore, the market price of the commodities is likely to do so too, and to be either altogether, or as nearly as can be judged of, the same with the natural price. That the price of linen and woollen cloth is liable neither to such frequent nor to such great variations as the price of corn, every man’s experience will inform him. The price of the one species of commodities varies only with the variations in the demand: That of the other varies not only with the variations in the demand, but with the much greater and more frequent variations in the quantity of what is brought to market in order to supply that demand.
The occasional and temporary fluctuations in the market price of any commodity fall chiefly upon those parts of its price which resolve themselves into wages and profit. That part which resolves itself into rent is less affected by them. A rent certain in money is not in the least affected by them either in its rate or in its value. A rent which consists either in a certain proportion or in a certain quantity of the rude produce, is no doubt affected in its yearly value by all the occasional and temporary fluctuations in the market price of that rude produce; but it is seldom affected by them in its yearly rate. In settling the terms of the lease, the landlord and farmer endeavour, according to their best judgment, to adjust that rate, not to the temporary and occasional, but to the average and ordinary price of the produce.
Such fluctuations affect both the value and the rate either of wages or of profit, according as the market happens to be either over-stocked or under-stocked with commodities or with labour; with work done, or with work to be done. A public mourning raises the price of black cloth
*74 (with which the market is almost always under-stocked upon such occasions) and augments the profits of the merchants who possess any considerable quantity of it. It has no effect upon the wages of the weavers. The market is under-stocked with commodities, not with labour; with work done, not with work to be done. It raises the wages of journeymen taylors. The market is here under-stocked with labour. There is an effectual demand for more
*75 labour, for more work to be done than can be had. It sinks the price of coloured silks and cloths, and thereby reduces the profits of the merchants who have any considerable quantity of them upon hand. It sinks too the wages of the workmen employed in preparing such commodities, for which all demand is stopped for six months, perhaps for a twelvemonth. The market is here over-stocked with commodities and with labour.
But though the market price of every particular commodity is in this manner continually gravitating, if one may say so, towards the natural price, yet sometimes particular accidents, sometimes natural causes, and sometimes particular regulations of police, may, in many commodities, keep up the market price, for a long time together, a good deal above the natural price.
When by an increase in the effectual demand, the market price of some particular commodity happens to rise a good deal above the natural price, those who employ their stocks in supplying that market are generally careful to conceal this change. If it was commonly known, their great profit would tempt so many new rivals to employ their stocks in the same way, that, the effectual demand being fully supplied, the market price would soon be reduced to the natural price, and perhaps for some time even below it. If the market is at a great distance from the residence of those who supply it, they may sometimes be able to keep the secret for several years together, and may so long enjoy their extraordinary profits without any new rivals. Secrets of this kind, however, it must be acknowledged, can seldom be long kept; and the extraordinary profit can last very little longer than they are kept.
Secrets in manufactures are capable of being longer kept than secrets in trade. A dyer who has found the means of producing a particular colour with materials which cost only half the price of those commonly made use of, may, with good management, enjoy the advantage of his discovery as long as he lives, and even leave it as a legacy to his posterity. His extraordinary gains arise from the high price which is paid for his private labour. They properly consist in the high wages of that labour. But as they are repeated upon every part of his stock, and as their whole amount bears, upon that account, a regular proportion to it, they are commonly considered as extraordinary profits of stock.
Such enhancements of the market price are evidently the effects of particular accidents, of which, however, the operation may sometimes last for many years together.
Some natural productions require such a singularity of soil and situation, that all the land in a great country, which is fit for producing them, may not be sufficient to supply the effectual demand. The whole quantity brought to market, therefore, may be disposed of to those who are willing to give more than what is sufficient to pay the rent of the land which produced them, together with the wages of the labour, and the profits of the stock which were employed in preparing and bringing them to market, according to their natural rates. Such commodities may continue for whole centuries together to be sold at this high price;
*77 and that part of it which resolves itself into the rent of land is in this case the part which is generally paid above its natural rate. The rent of the land which affords such singular and esteemed productions, like the rent of some vineyards in France of a peculiarly happy soil and situation, bears no regular proportion to the rent of other equally fertile and equally well-cultivated land in its neighbourhood. The wages of the labour and the profits of the stock employed in bringing such commodities to market, on the contrary, are seldom out of their natural proportion to those of the other employments of labour and stock in their neighbourhood.
Such enhancements of the market price are evidently the effect of natural causes which may hinder the effectual demand from ever being fully supplied, and which may continue, therefore, to operate for-ever.
A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly under-stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate.
The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion indeed, but for any considerable time altogether. The one is upon every occasion the highest which can be squeezed out of the buyers, or which, it is supposed, they will consent to give: The other is the lowest which the sellers can commonly afford to take, and at the same time continue their business.
The exclusive privileges of corporations, statutes of apprenticeship,
*78 and all those laws which restrain, in particular employments, the competition to a smaller number than might otherwise go into them, have the same tendency, though in a less degree. They are a sort of enlarged monopolies, and may frequently, for ages together, and in whole classes of employments, keep up the market price of particular commodities above the natural price, and maintain both the wages of the labour and the profits of the stock employed about them somewhat above their natural rate.
Such enhancements of the market price may last as long as the regulations of police which give occasion to them.
The market price of any particular commodity, though it may continue long above, can seldom continue long below, its natural price. Whatever part of it was paid below the natural rate, the persons whose interest it affected would immediately feel the loss, and would immediately withdraw either so much land, or so much labour, or so much stock, from being employed about it, that the quantity brought to market would soon be no more than sufficient to supply the effectual demand. Its market price, therefore, would soon rise to the natural price. This at least would be the case where there was perfect liberty.
The same statutes of apprenticeship and other corporation laws indeed, which, when a manufacture is in prosperity, enable the workman to raise his wages a good deal above their natural rate, sometimes oblige him, when it decays, to let them down a good deal below it. As in the one case they exclude many people from his employment, so in the other they exclude him from many employments. The effect of such regulations, however, is not near so durable in sinking the workman’s wages below, as in raising them above their natural rate. Their operation in the one way may endure for many centuries, but in the other it can last no longer than the lives of some of the workmen who were bred to the business in the time of its prosperity. When they are gone, the number of those who are afterwards educated to the trade will naturally suit itself to the effectual demand. The police must be as violent as that of Indostan or antient Egypt
*80 (where every man was bound by a principle of religion to follow the occupation of his father, and was supposed to commit the most horrid sacrilege if he changed it for another), which can in any particular employment, and for several generations together, sink either the wages of labour or the profits of stock below their natural rate.
This is all that I think necessary to be observed at present concerning the deviations, whether occasional or permanent, of the market price of commodities from the natural price.
The natural price itself varies with the natural rate of each of its component parts, of wages, profit, and rent; and in every society this rate varies according to their circumstances, according to their riches or poverty, their advancing, stationary, or declining condition. I shall, in the four following chapters, endeavour to explain, as fully and distinctly as I can, the causes of those different variations.
First, I shall endeavour to explain what are the circumstances which naturally determine the rate of wages, and in what manner those circumstances are affected by the riches or poverty, by the advancing, stationary or declining state of the society.
Secondly, I shall endeavour to show what are the circumstances which naturally determine the rate of profit, and in what manner too those circumstances are affected by the like variations in the state of the society.
Though pecuniary wages and profit are very different in the different employments of labour and stock; yet a certain proportion seems commonly to take place between both the pecuniary wages in all the different employments of labour, and the pecuniary profits in all the different employments of stock. This proportion, it will appear hereafter, depends partly upon the nature of the different employments, and partly upon the different laws and policy of the society in which they are carried on. But though in many respects dependent upon the laws and policy, this proportion seems to be little affected by the riches or poverty of that society; by its advancing, stationary, or declining condition; but to remain the same or very nearly the same in all those different states. I shall, in the third place, endeavour to explain all the different circumstances which regulate this proportion.
In the fourth and last place, I shall endeavour to show what are the circumstances which regulate the rent of land, and which either raise or lower the real price of all the different substances which it produces.
Essai, pp. 1, 2.]
Political Discourses, 1752, p. 12.]
Leviathan, I., x.]
Chronicon Preciosum, p. 174.]
Hist. of the University of Cambridge, 1655, p. 144. quoted in Strype,
Life of the learned Sir Thomas Smith, 1698, p. 192.]
Commentaries, 1765, vol. ii., p. 322.]
vice versa, it must needs fall out that it keeps the nearest proportion to its consumption (which is more studied and designed in this than other commodities) of anything, if you take it for seven or twenty years together: though perhaps the scarcity of one year, caused by the accidents of the season, may very much vary it from the immediately precedent or following. Wheat, therefore, to this part of the world (and that grain which is the constant general food of any other country) is the fittest measure to judge of the altered value of things in any long tract of time: and therefore wheat here, rice in Turkey, etc., is the fittest thing to reserve a rent in, which is designed to be constantly the same for all future ages. But money is the best measure of the altered value of things in a few years: because its vent is the same and its quantity alters slowly. But wheat, or any other grain, cannot serve instead of money: because of its bulkiness and too quick change of its quantity.’—Locke,
Some Considerations of the Consequences of the Lowering of Interest and Raising the Value of Money, ed. of 1696, pp. 74, 75.]
Economic Journal, March, 1898. Lead tokens were corned by individuals in the reign of Elizabeth. James I. coined copper farthing tokens, but abstained from proclaiming them as money of that value. In 1672 copper halfpennies were issued, and both halfpennies and farthings were ordered to pass as money of those values in all payments under sixpence.—Harris,
Money and Coins, pt. i., § 39; Liverpool,
Treatise on the Coins of the Realm, 1805, pp. I30, 131.]
I.e., if 21 pounds may be paid with 420 silver shillings or with 20 gold guineas it does not matter whether a ‘pound’ properly signifies 20 silver shillings or 20/21 of a gold guinea.]
Money and Coins, pt. ii., §§ 36, 37, below, vol. ii.,
Coins Of the Realm, p. 216, note.]
Universal Merchant, ed. Horsley, 1753, pp. 53-55, gives the proportions thus: French coin, 1 to 14 5803/12279, Dutch, 1 to 14 82550/154425, English, 1 to 15 14295/68200.]
Further Considerations Concerning Raising the Value of Money, 2nd ed., 1695, pp. 58-60. The exportation of foreign coin (misprinted ‘kind’ in Pickering) or bullion of gold or silver was permitted by 15 Car. II, c. 7, on the ground that it was ‘found by experience that’ money and bullion were ‘carried in greatest abundance (as to a common market) to such places as give free liberty for exporting the same’ and in order ‘the better to keep in and increase the current coins’ of the kingdom.]
Money and Coins, pt. i., § 36.]
I.e., an ounce of standard gold would not actually fetch £3 17
s. 10 1/2
d. if sold for cash down.]
Wealth of Nations, 1814, vol. i., p. 80, says: ‘They do so. But the question is why this apparently unreasonable demand is so generally complied with. Other men love also to reap where they never sowed, but the landlords alone, it would appear, succeed in so desirable an object.’]
I.7.2-3 below ‘rent, labour and profit’ and ‘rent, wages and profit’ are both used; see below,
II.3.4, and note.]
i.e., the periodical expenditure of the earlier manufacturer, does not necessarily require him to have a greater capital to deal with the same produce. It need not be greater if he requires less machinery and buildings and a smaller stock of materials.]
viz., interest and taxes, are mentioned in the next paragraph. It is perhaps also intended to include the rent of houses; see below,
Lectures, pp. 173-182, very closely.]
I.10.56-89. Playfair, in a note on this passage, ed.
Wealth of Nations, 1805, vol. i. p. 97, says: ‘This observation about corporations and apprenticeships scarcely applies at all to the present day. In London, for example, the freemen only can carry on certain businesses within the city: there is not one of those businesses that may not be carried on elsewhere, and the produce sold in the city. If Mr. Smith’s principle applied, goods would be dearer in Cheapside than in Bond Street, which is not the case.’]
Lectures, p. 168, the Egyptian practice is attributed to ‘a law of Sesostris’.]