Lecture Notes: History of Thought





In Class Monday I said we were not covering Book II. I was wrong. It is book III that is omitted on the syllabus; Book II is included, you should read it, and you will be responsible for it.

Book II


Book IV


Digression on the corn trade

  • A. Inland dealer--Smith is giving the argument that shows speculation (in our sense) is a desirable activity. His inland merchant is, among other things, what we would call a corn speculator.
    • 1. A possible exception exists if there were a single monopolist, who might destroy corn so as to raise the price.
    • 2. Hirshleifer's stamp auction story: Someone buys the only three copies in existence of a rare stamp, then publicly burns one--on the theory that demand is inelastic, so the remaining two will be worth more than the three were before.
    • 3. But that can't happen with corn, since it is divided among many merchants.
    • 4. History of dearths and famines shows that dearths are always due to a real shortage, not a conspiracy by the corn merchants--although they often get blamed.
    • 5. And the famines are due to government attempts to interfere with a dearth.
    • 6. For example, by holding prices down--with the result that the corn is not produced or is consumed too fast.
    • 7. Or old laws prohibiting middlemen in the corn trade.
    • 8. Without middlemen, the farmer must provide the capital that would have been provided by the corn merchant--and charge for it--so eliminating middlemen doesn't save the customers money. The error he is pointing out here is still around.
    • 9. Indeed, by reduced division of labor, eliminating corn merchants actually makes corn more expensive--it takes more work for the farmers to do the corn merchants job, since they are not as good at it as the corn merchants were.
    • 10. And a merchant buys to sell--if he actually keeps corn off the market when it is dear, he loses money--so merchants can only cause famine if they make a mistake, in which case they are also losing a lot of money.
    • 11. The fear of speculators is like the fear of witchcraft.

    B. Importer. Makes corn cheaper, so makes farmers and landlords poorer in money, but not in value, since labor also gets cheaper. And the lower price expands home industry, demand for corn.

  • C. Exporter increases supply of corn in bad years by providing a market for surplus in good.
  • D. If all countries had free import and export of corn, famine would be less of a problem.
  • E. The merchant carrier of corn, with warehouses in Britain, is a reserve in case of shortage.
  • F. If the mercantilists were right, and prosperity occurred because of such restrictions rather than in spite of them, why are Spain and Portugal doing so badly?
    • 1. Smith's explanation is that they are duing badly because of the bad effects of importing gold and silver and trying to keep them in
    • 2. Plus insecurity of property rights.

Chapter 7 part i

  • A. Gold mines are on average unprofitable for the same reason as being a lawyer--investors are overoptimistic.
    • 1. Hence should not be subsidized.
    • 2. Should they be discouraged? He never says so, but that is what the logic suggests.

...[the next bit is not in what you were assigned to read, but you may find my summary interesting, especially if you read part ii anyway]

  • B. New colonies are the most successful societies
    • 1. Plenty of land, essentially no rent or tax, so settler gets his full output, has an incentive to produce lots.
    • 2. Population increases since there is an incentive to marry early, lots of food for kids, kids are very profitable.
    • 3. Greek colonies had independence and lots of land, did well
    • 4. Roman colonies were dependent on Rome, founded in areas already well populated (he is talking about Roman colonies in Italy), did much less well.
    • 5. New World colonies had lots of land, were dependant in theory but so far away as to be mostly independent in fact (Parkinson's argument that the telegraph killed the British Empire), did well.

    C. Differences among among New World colonies

    • 1. New World colonies that were governed by exclusive companies of merchants, including Canada, did badly.
    • 2. Santo Domingo did well because it was settled by pirates, and the French couldn't push them around.
    • 3. English colonies did especially well because:
      • a. The rules made it hard for one person to get control of all the land, and ...
      • b. Lack of primogeniture kept breaking up estates in some of the colonies.
      • c. And the rest at least were alienable, which had the same effect more slowly
      • d. The Spanish and Portuguese colonies had their version of entail--meaning that an estate stays together, cannot be broken up and sold off.

Chapter VIII: Conclusion

  • A. Reverse version of mercantilism: Encourage the import and discourage the export of raw materials, tools of trade, etc. ,
    • 1. The theory is that you gain gold by converting cheap raw materials into expensive finished goods and selling the latter.
    • 2. And you want to have domestic raw materials finished at home, so as to get as much gold as possible for them.
    • 3. When you limit yourself to giving imported raw materials low or zero duties, this is a fine idea, and should be extended.
    • 4. In the case of linen yarn, which is actually a produced material (intermediate good in making linen cloth), they made it duty free, because ...
    • 5. The spinning was being done by dispersed poor people, the weaving by concentrated rich people (i.e. the owners of the weaving companies), so making import duty free held down the price of the intermediate good, benefitting the (politically powerful) weaving companies at the expense of the (powerless) home spinners.
    • 6. While bounties on exporting the finished linen, and bans on importing it, held up the price of the finished cloth.
    • 7. Bounties on goods from the colony: Double mistake:
      • a. One bad argument is that they are part of England, so spending money on them costs nothing--the gold stays in the British empire and eventually comes back to England in its monpoly trade with the colonies. The error is being demonstrated as Smith writes.
      • b. And in any case, bounties on home manufacture are wasteful for reasons Smith has already pointed out.

    B. Woolen trade.

    • 1. An elaborate set of regulations existed to prevent the export of British wool, including keeping track of it, limiting its movement near the coast, etc.
    • 2. Also to prevent the export of British sheep, with capital punishment for the second offense--although it is not clear it was ever actually imposed.
    • 3. Smith mentions the problem that when punishment are too high juries won't convict.
    • 4. The whole system is justified by fairytales about the innate superiority of British wool, so that if only they could maintain their monopoly ...
    • 5. When in fact British wool is of rather low quality by international standards.
    • 6. The result is to greatly lower the price of English wool, but ...
    • 7. Not much effect on quantity, because wool and mutton are joint products, with the mutton paying most of the cost
    • 8. So lowering the price of wool simply raises the price of mutton.
    • 9. You might expect elasticity on the separable cost part--less effort to raising sheep with good wool, taking care of the wool, etc., but even that seems slight, because taking good care of the sheep so as to produce good mutton also produces good wool.
    • 10. The joint cost argument does suggest that you could have a substantial export duty on wool without very much effect on the industry, which might well be a sensible way of raising money.

    C. Restraints on emigration of skilled workers:

    • 1. Not allowed to emigrate, under severe penalties at home
    • 2. Trying to hire them to emigrateis a serious crime.

    D. Summary:

    • 1. The system is crazy--the interest on the war debt due to the colonies is enormously more than any plausible estimate of the gains from the trading monopoly.
    • 2. It exists for the benefit of the merchants and manufacturers, at the cost of consumers and (sometimes) other merchants and manufacturers.

Book V

Chapter 1a: Cost of defense

  • A. How the cost varies among stages of development
    • 1. For hunters, every man has the relevant training, can go on war while feeding himself, but ... hunters cannot maintain an army of any significant size.
    • 2. For shepherds an army is similarly inexpensive, and since they routinely travel with their flocks, the whole people can go to war together.
    • 3. With the result that Mongols et. al. are a formidable threat, massing very large armies.
    • 4. With primitive agriculture,
      • a. The farmers are in good physical condition, many of their activities suit them to warfare.
      • b. And they can leave the farm once the crop is planted, until it is harvested, without much cost.
      • c. But must leave the rest of the population behind to care for the fields.
      • d. So can cheaply raise big armies, but only for a limited time.
      • e. Examples: The Germans vs the Romans, and the feudal armies
      • f. Both of which served at their own expense

      5. With further development, this becomes impractical, because:

      • a. Farmers do more, have less leisure, and craftsmen have almost none, so taking people out of their normal occupation is expensive.
      • b. Warfare gets more expensive in equipment, training, etc., so individuals on their own won't learn how to do it properly, or adequately equip themselves.
      • c. Campaigns get longer, so run past the time that farmers can afford to neglect their fields.
      • d. At which point you need paid armies.
      • e. With the result that the Greeks could field 20-25% of the population if they had to, and modern states only about 1%. The number is substantially higher in the 20th century--because we are a lot richer.

    B. Organizing armies in a developed society: Two alternatives

    • 1. Militia
    • 2. Professional standing army
    • 3. Smith thinks the latter is militarily much more effective, because
      • a. Better trained
      • b. Better disciplined
      • c. Although a militia that has foought for several years becomes a de facto standing army--which is happening to the colonial militia fighting the British.

      4. Militias are at their best among barbaric people such as the mongols, where their rulers in peace are their officers in war.

    • 5. Smith explains chunks of classical history, from Philip of Macedon on, as standing armies beating militias.
    • 6. He argues that a standing army is not a threat to civil society, providing that ...
    • 7. Its officers are the upper classes of the society, with an interest in civil well being.
    • 8. And with a loyal standing army, the King can afford to tolerate dissent, knowing his position is safe.

    C. Capital intensive military:

    • 1. The shift to firearms has made warfare much more capital intensive, both
      • a. Because guns are more expensive than bows.
      • b. Because gunpowder gets used up and
      • c. Because fortification becomes more expensive when it must defend against cannon.

      2. And the result is that rich nations are now dangerous to poor ones

    • 3. When it used to be the other way around.

Chapter II: Sources of Revenue


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