Adam Smith on Commerce and Luxury

Adam Smith and David Hume came to be very good friends, and agreed about most things (though not everything). Smith was a dozen years younger than Hume, so it is reasonable to think of Hume as something of a mentor to the younger man, at least to begin with.

This section looks at the development of Smith’s economic thinking and at the ele­ments in his mature work that derive from (or are shared with) Hume. Subsequent sec­tions deal with the main thrust of the Wealth of Nations, and the legacy that Smith left to his “classical” successors.

We have some evidence about early versions of his economics from his Theory of Moral Sentiments of 1759 and from student reports of his lectures dating from the early 1760s. These sources have to be used with care, of course. The Theory of Moral Sentiments is a work of moral philosophy, not economics, although, as we shall see, it contains one brief but brilliant passage devoted to growth, luxuries and inequality, exactly the things that Enlightenment writers like Hume had discussed. The student notes on the lectures are just that, and are therefore subject to obvious limitations. Even so, the absence of any­thing like Smith’s mature theory of capital and accumulation in these early works tells us something about the development of his thinking.

In the Theory of Moral Sentiments, Smith tackled the question of luxury (without using the word) as a motivation.

The pleasures of wealth and greatness... strike the imagination as something grand and beau­tiful and noble.... 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. (Smith 1759 [1976]: 183)

This is Hume (even perhaps Mandeville) - luxury is the motive to produce more, to invent new products, and so on - but with a distinctive Smithian twist, in that the rich get no real benefit from their wealth.

Smith went further:

It is to no purpose, that the proud and unfeeling landlord views his extensive fields... The capacity of his stomach bears no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant. The rest he is obliged to distribute among those, who prepare,... that little which he himself makes use of,... among those who provide and keep in order all the different baubles and trinkets, which are employed in the oeconomy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice. The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. The rich... consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency...

So, the selfish desire for luxuries extracts a surplus from agriculture (via the rents of landlords) which is distributed again to the makers of luxuries, servants, and so on. The landlords “are led by an invisible hand” to distribute the necessaries of life to those who need them (ibid.: 184). Smith used the famous phrase “invisible hand” once only in the Theory of Moral Sentiments, in the passage under discussion, and once only in the Wealth of Nations.

The role of luxuries in stimulating agricultural (and non-agricultural) production continues in Smith’s lectures and in the Wealth of Nations:

When by the improvement and cultivation of the 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. (1776 [1976]: 180)

The desire of food is limited in every man by the narrow capacity of the human stomach; but the desire of the conveniences and ornaments of building, dress, equipage, and household fur­niture, seems to have no limit or certain boundary. Those, therefore, who have the command of more food than they themselves can consume, are always willing to exchange the surplus, or, what is the same thing, the price of it, for gratifications of this other kind. (1776 [1976]: 181)

Smith differed from Hume in that he was rather unwilling to admit that undeveloped countries may be held back by a lack of desire for luxuries. For Smith, some wants are unlimited.

Hume’s explanation of the decline of feudalism, in which feudal lords cut back on their (armed) retinues in favour of luxury consumption, was taken over by Smith in his lectures and in the Wealth of Nations, with his typical contempt for the rich:

the silent and insensible operation of foreign commerce and manufactures gradually...

The four stage theory of history is developed and used at length in Smith’s lectures. At the time when the notes we have were taken (probably 1762-64), others had already pub­lished versions of the theory, but it is possible, perhaps probable, that Smith had been using similar material in his lectures for years. The four stages are implicit in a number of places in the Wealth of Nations, though in a secondary role because the book is almost wholly about modern commercial societies.

There are, then, many echoes of Hume and of the Scottish Enlightenment generally in Smith’s economics, but it is time to turn to what is different in the Wealth of Nations.