Book IV of Wealth of Nations: Political Economy as Moral Philosophy

• For Adam Smith, moral philosophy transcends mere ethical deliberation; it encompasses the study of virtue and the cognitive faculties that enable us to discern commendable and condemnable behavior. By grasping the essence of moral sentiments, we can appreciate how Smith applies similar reasoning in his examinations of political economy, which serves as a framework for refining our understanding of virtue and ethical conduct.

Book IV of Wealth of Nations is frequently examined for its elucidation of the essential institutions underpinning political economy, highlighting the intersection of economic theory and political practice. Smith critiques the mercantilist paradigm that dominated his era, advocating for a vision of trade that not only benefits the sovereign but also empowers individuals to “provide such a revenue or subsistence for themselves” (IV.Introduction.1). Yet, he deftly employs this economic discourse to articulate a moral framework, illustrating how economic policy impacts not only material wealth but also human dignity. The dignity of both his compatriots and the colonized peoples is often compromised by the “groundless jealousy of the merchants and manufacturers of the mother country” (WN IV.vii.b.44), “private interests and the spirit of monopoly” (WN V.iii.1), and “national prejudice and animosity” (WN IV.iii.1). Smith aims to supplant policies driven by such passions with sound economic institutions that cultivate empathy and respect for the dignity of all individuals.

In Book IV, Smith advances a moral agenda that elevates human beings by prioritizing their autonomy and liberty, distinguishing between beneficial and detrimental economic institutions. Commonly, we interpret Smith’s project in this book as a “very violent attack…upon the whole commercial system of Great Britain” (Correspondence, 250). However, he further develops the moral project initially introduced in TMS in 1759 and refined through 1790, by emphasizing the intrinsic value of human life and the importance of individual judgment in the context of collective well-being. While moral discourse permeates Wealth of Nations, it is crucial to recognize that Smith employs political economy as a pragmatic vehicle to promote a moral philosophy in Book IV, where he grapples with the threats posed by political actions to human welfare. In contrast to the character sketches in TMS, Smith’s method in Wealth of Nations relies on empirical examples to substantiate normative assertions. A secondary aim of this analysis is to illustrate Smith’s belief that theory must remain grounded in human experience; otherwise, human liberty and dignity risk being sidelined.

So, what does moral philosophy entail according to Smith? In Book VII of TMS, Smith transitions from his own moral framework to scrutinize historical perspectives on moral sentiments. He contends that a comprehensive theory of moral sentiments must address:

• “First, wherein does virtue consist? Or what is the tone of temper, and tenor of conduct, which constitutes the excellent and praise-worthy character, the character which is the natural object of esteem, honor, and approbation? And, secondly, by what power or faculty in the mind is it, that this character, whatever it be, is recommended to us? Or in other words, how and by what means does it come to pass, that the mind prefers one tenor of conduct to another, denominates the one right and the other wrong” (TMS VII.i.2).

For Smith, moral philosophy is fundamentally the study of virtue and the cognitive faculties that enable us to discern commendable from condemnable behavior. Understanding the project of moral sentiments reveals that Smith employs similar logic in his exploration of political economy, which serves as a prism through which we can refine our sensibilities about virtue and ethical behavior. Smith posits that moral philosophy must entail opportunities for individuals to exercise their judgment.

Smith acknowledges the paradoxical nature of advocating for a political economy that fosters moral behavior. The “thirst for gold” and power creates perverse incentives (WN IV.vii.a.17). He notes that “Folly and injustice seem to have been the principles which presided over and directed the first project of establishing the colonies; the folly of hunting after gold and silver mines, and the injustice of coveting the possession of a country whose harmless natives, far from having ever injured the people of Europe, had received the first adventurers with every mark of kindness and hospitality” (WN IV.vii.b.59). He reflects that “it was not the wisdom and policy, but the disorder and injustice of the European governments which peopled and cultivated America” (WN.vii.b.61). Smith underscores the uphill battle he faces in demonstrating that political economy can transcend individual greed and be redirected toward justice.

To this end, Smith initially appeals to self-interest by illustrating the wealth that can be accrued through the pursuit of a system of natural liberty, as opposed to one that grants special privileges to the few. He critiques the expeditions to the New World in search of precious metals as “expensive and uncertain,” where explorers and rulers “flattered themselves that veins of those metals might in many places be found as large and…abundant” when “the value of those metals has, in all ages and nations, arisen chiefly from their scarcity” (WN IV.vii.a.18–19). He argues that colonization squanders resources and rarely yields the expected riches. In the opening chapter of the book, Smith also critiques mercantilism on economic grounds. He compares the price of tobacco in the American colonies, asserting that while “by means of the monopoly which England enjoys of it” tobacco “certainly comes cheaper to England than it can do to France,” he contends that “had France and all other European countries been, at all times, allowed a free trade to Maryland and Virginia, the tobacco of those colonies might…have come cheaper than it actually does…to all those other countries, but likewise to England” (WN IV.vii.c.17). In essence, tobacco would become less expensive through free trade. He also critiques the inefficiencies stemming from allowing national prejudice to dictate economic policy. In a frequently cited example, he points out its effect on wine prices, arguing that while wine could be cultivated in Scotland, it would require exorbitant resources, costing “thirty times the expense for which at least equally good can be bought in foreign countries” (WN IV.ii.15).

However, asserting that Smith’s political economy equates to moral philosophy does not imply that profit or self-interest vanish as motivating factors. Indeed, in Book IV, Smith emphasizes the pivotal roles of profit and self-interest in driving industry, asserting that “It is only for the sake of profit that any man employs a capital in the support of industry” (WN IV.ii.8). By prioritizing human dignity, Smith foregrounds the individual as the principal unit of analysis. Throughout TMS, he connects individual interest with virtue, asserting that justice is the highest virtue upheld throughout his oeuvre, defined as negative virtue, or the principle of not harming others (TMS II.ii.1.9). Smith clarifies that “mere justice” will not suffice to win the esteem of others, yet this baseline standard underscores the significance of human dignity. He further correlates this understanding of justice with self-interest, noting that “In the race for wealth” individuals can compete, but cannot harm one another, as this constitutes a “violation of fair play,” and the “most sacred laws of justice…guard the life and person of our neighbour” (TMS II.ii.2.1–2). Justice allows for the pursuit of personal interests, provided that one does not infringe upon the interests of others, thereby acknowledging their humanity as equal to one’s own.

Smith proposes an alternative political economy founded on free trade and mutual benefits, which he dubs the system of natural liberty. He contends that this framework would: “break down the exclusive privileges of corporations, and repeal the statute of apprenticeship…add to these the repeal of the law of settlements, so that a poor workman, when thrown out of employment either in one trade or in one place, may seek for it in another trade or in another place, without the fear either of a prosecution or of a removal” (WN IV.ii.42–3). Additionally, Smith critiques “unfortunate…regulations” that violate this system (WN IV.vii.c.44). The system of natural liberty not only entails free trade, but also obligates the sovereign to protect “the society from violence and invasion,” to shield its members from “injustice or oppression” from one another, and to ensure “the exact administration of justice” (WN IV.ix.51).

Through Book IV, Smith constructs a normative case for why free trade eclipses mercantilism. He argues that a system favoring special privileges undermines human dignity, fellow-feeling, equality, political representation, and the rule of law by prioritizing the interests of a select few over the majority.

Smith articulates his political economy as moral philosophy to defend the dignity and worth of individuals, emphasizing individual freedom throughout his writings. His critique of mercantilism centers on its erosion of individual judgment and welfare in favor of a privileged elite. He notes that “the vile…masters of mankind” consistently pursue their own interests (WN III.iv.10). He explicitly connects the capability of individuals to make economic decisions for themselves with their intrinsic rights and the obligations of the sovereign: “To prohibit a great people, however, from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind” (WN IV.vii.b.44). For institutions to honor human dignity, they must empower individuals to make their own choices instead of letting the powerful dictate decisions that merely serve their interests. Smith advocates for this point on utilitarian grounds, asserting that “every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him” (WN IV.ii.10). He also supports this assertion from a normative perspective: “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way” (WN IV.ix.51). Justice, as the preeminent moral law, necessitates individual freedom, which enables people to seek their own interests—an essential aspect of Smith’s definition of “the obvious and simple system of natural liberty” (WN IV.ix.51).

Moreover, the system of special favors breeds animosity among subjects. Given that a core tenet of Smith’s moral philosophy is to foster sympathetic relationships among individuals through “fellow-feeling” (TMS I.i.1.4), any institutional framework that deliberately pits individuals against each other undermines this moral structure. Smith observes that “many manufactures have…obtained in Great Britain, either altogether, or very nearly a monopoly against their countrymen” (WN IV.ii.1). He notes that manufacturing groups are increasingly recognizing the benefits of pursuing prohibitions on foreign goods. Corn, woolen, and silk manufacturers have “obtained the same advantage. The linen manufacture has not yet obtained it, but is making great strides towards it” (WN IV.ii.1). Such advantages are gained at the expense of fellow citizens, as these duties compel them to pay inflated prices for essential goods.

The system of special favors also sows discord between nations and undermines the rule of law. Imposing taxes on goods from other countries carries moral repercussions: 1) It strains relationships between nations, prompting retaliatory measures (WN IV.ii.39) and 2) “Those mutual restraints have put an end to almost all fair commerce between the two nations” (WN IV.iii.a.1). While “commerce” should ideally serve as “a bond of union and friendship” among nations, mercantilist theories have led nations to believe that their interests lie in impoverishing their neighbors (WN IV.iii.c.9). Smith counters this inclination by advocating for the dignity of individuals from diverse cultures and ethnicities. He acknowledges the risk posed to British subjects’ liberty by these economic policies, while also condemning slavery (WN IV.vii.b.54) and the treatment of indigenous populations by Columbus (WN IV.vii.a.14–16). In discussing slavery, Smith presents an economic rationale to underscore a moral stance. He asserts that “the profit and success of that which is carried on by slaves, must depend equally upon the good management of those slaves” (WN IV.vii.b.54). He elaborates on the meaning of good management, highlighting its moral benefits for the enslaved and its economic advantages for the master: “Gentle usage renders the slave not only more faithful but more intelligent, and therefore, upon a double account, more useful. He approaches more to the condition of a free servant, and may possess some degree of integrity and attachment to his master’s interest, virtues which frequently belong to free servants” (WN IV.vii.b.54). While Smith may not robustly denounce slavery as modern readers might wish, he diverges from many contemporaries who viewed it as essential to imperial economic success by recognizing the humanity and potential for virtue among the enslaved.

Smith’s political economy also serves as moral philosophy through its emphasis on the necessity of political representation. Justice mandates that individuals have the freedom to make their own decisions and pursue their interests. Ideally, the political dynamic between rulers and the ruled should empower citizens with “liberty…to manage their own affairs their own way” (WN IV.vii.b.52). Smith argues that Great Britain allows this type of governance in its colonies more than the “absolute governments of Spain, Portugal, and France… in their colonies…the discretionary powers which such governments commonly delegate to all their inferior officers are, on account of the great distance, naturally exercised there with more than ordinary violence” (WN IV.vii.b.52). He expresses concern that such governments, lacking sufficient centralized authority to enforce laws or self-governance to check their power, become “arbitrary and violent” (IV.vii.b.52). In the context of the American colonies’ rebellion against the crown, Smith articulates in a letter to Britain’s solicitor general Alexander Wedderburn, known as Thoughts on America, that the ideal resolution would involve “both parts of the empire enjoying the same freedom of trade and sharing in their proper proportion both in the burden of taxation and in the benefit of representation…the principle security of every government arises always from the support of those whose dignity, authority and interest depend upon its being supported” (Correspondence, Appendix B, 381). The moral failings of mercantilism lie in its capacity to undermine rights, the dignity of individuals, and political representation.

Although Smith perceives the American rebellion as largely motivated by the ambitions of “the leading men of America,” he also suggests that Britain should contemplate “the blood which must be shed in forcing” America to remain within the empire (WN IV.vii.c.74-75). Smith resists both violence and arbitrary rule, as these erode human dignity. Though he is not always sympathetic to the American colonists’ calls for representation—arguing, for instance, that they are not contributing their fair share to defense (IV.vii.c.73)—the overarching argument remains that all political regime members deserve representation. He asserts, “The assembly which deliberates and decides concerning the affairs of every part of the empire, in order to be properly informed, ought certainly to have representatives from every part of it” (WN IV.vii.c.77). A lack of political representation fosters an environment where the powerful can infringe upon the rights of others, exploiting the populace to enrich themselves and entrench their power further.

Smith elucidates how political economic policies can even undermine the constitution of a state: “Every such regulation introduces some degree of real disorder into the constitution of the state, which it will be difficult afterwards to cure without occasioning another disorder” (WN IV.ii.44). Such economic policies also promote smuggling, which further weakens the rule of law (WN IV.iii.a.1). To Smith, politics and economics, intertwined with morality, cannot be separated. Policies that favor select subjects over others diminish the state’s ability to ensure an equitable administration of justice.

Ultimately, Smith critiques systemic thinking. This perspective often overlooks the actual effects of such systems on real human beings. While he posits a “system” of natural liberty in Book IV, he avoids the pitfall he attributes to other moral philosophies by incorporating various caveats as needed to preserve human dignity. For instance, he allows exceptions for export subsidies or bounties (WN IV.v.a.35), retaliatory tariffs (WN IV.ii.39), tariffs that support national defense (WN IV.ii.23–4; 31), and public education (WN V.i.f.54). Smith suggests that while the legislature should strive to restore “the importation of foreign goods,” “humanity may in this case require that the freedom of trade should be restored only by slow gradations, and with a good deal of reserve and circumspection” (WN IV.ii.40). He takes into account those whose jobs may be jeopardized by the transition from mercantile policy to the system of natural liberty, ensuring that these individuals can adapt as free trade is reintroduced.

Instead of advocating for a system that prioritizes internal perfection and coherence, effective political economic policies should establish rules and institutions that both cherish individual judgment and promote ethical conduct alongside positive economic outcomes.

Book IV is noteworthy for containing the sole reference to the invisible hand in the entirety of Wealth of Nations. Contrary to popular belief, this discussion does not endorse the notion that greed is inherently virtuous; instead, it suggests that institutions can channel humanity’s innate self-interest towards the collective good. Smith argues that under such institutions, “by pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good” (WN IV.ii.9). Political economic institutions that authentically support the common good are those that enable individuals to coordinate their pursuits of diverse ends.

Smith’s commitment to this perspective is evident in Part VI of TMS, which he expanded in 1790, where he critiques the “man of system” who fails to recognize that each individual operates according to their own distinct motivations, separate from those imposed by the legislature (TMS VI.ii.2.17). For Smith, political economy embodies moral philosophy, as it fosters avenues for individuals to exercise their judgment, connect with their peers, be treated equitably under impartial rules, and attain political representation—all of which dignifies the individual and contributes to overall economic prosperity.

This article has been cross-posted from Liberty Matters, part of the Liberty Fund network. It is part of the series “Compounding Interest: Revisiting the Wealth of Nations at 250“.