Adam Smith's Political Economy: From Poison to Science

Kwok Ping Tsang for AdamSmithWorks


October 28, 2020
A widely-held view among economists is that the term “political economy” is simply an archaic name for the subject of economics as we know it today, and Adam Smith is the major figure for the development, or even the birth, of the subject.1 For example, Drazen (2002) wrote in his textbook: “From Adam Smith’s Wealth of Nations (WN) in 1776 or perhaps the Physiocrats even earlier until at least John Stuart Mill’s Principles of Political Economy in 1848, what we now call ‘economics’ was in fact generally referred to as ‘political economy.’ This terminology in large part reflected the belief that economics was not really separable from politics.” One of the top academic journals in economics is, indeed, called the Journal of Political Economy.
I argue that the story is not as simple as that. Actually, Smith’s stance was rather negative when using the term “political economy” in The Wealth of Nations. It is likely that the term was “misused” by writers shortly after Adam Smith, and it has since retained that “misuse” as its current meaning.

A Minority View
Other scholars have pointed out the negative connotation of the term “political economy” in WN. The earliest example I can find is by Jacob Viner (1968) in an article on Smith for the International Encyclopedia of the Social Sciences. According to Viner, “Smith used the term ‘political economy’ a dozen or so times, and every time, except perhaps once, he meant the economic policy of a nation. Since Smith generally took a dim view of the benefits to be derived from national economic policy, political economy must for him have been nearly synonymous with ‘economic poison’." Blaug (1985), in his famous text on history of thought, also mentioned that the introduction to Book IV “defines political economy as a branch of statecraft, a definition in violent opposition to the whole tenor of the Wealth of Nations.”
The one exception Viner singled out is from Book 4, Chapter 9, where the term is used to refer to a school of thought and is capitalized as “Political Economy”:
This sect, in their works, which are very numerous, and which treat not only of what is properly called Political Economy, or of the nature and causes of the wealth of nations, but of every other branch of the system of civil government, all follow implicitly and without any sensible variation, the doctrine of Mr. Quesnai.[WN IV. IX. 38]

Another notable example is Brown (1994) who made a stronger claim: “[I]t is not stated that WN itself constitutes a distinct or third system of political economy. This is the case throughout WN: the expression ‘political economy’ consistently refers to those systems of economic policy and analysis which are being opposed and criticized.” Brown actually singled out the passage that is likely to be the one referenced by Viner and argued that even that usage is sending the same message: “Here the placing of the word ‘of’ before ‘the nature and causes of the wealth of nations’ suggests that the title of WN is to be differentiated from the area of ‘political economy’; though both descriptors may be applied to the agricultural system, the presence of the word ‘of’ shows that they are not synonymous.”
A recent paper by Alonzi (2020) made a similar point, arguing that Smith clearly distinguished between his “science of wealth” and “political economy," with the former as some unchangeable rules that bind the choices of policymakers, and the latter as actual policies which intervene with natural liberty. While I agree with this distinction, I also find it important to point out that Smith was predominantly interested in verifying theories with empirical evidence. Smith was against systems of “political economy” that ignored or misinterpreted facts, and repeatedly pointed out that policies which claimed to serve public interest were actually induced by special interest. To Smith, “political economy” is a set of normative prescriptions without a sound positive foundation, and he painstakingly used observable facts in WN to build such a foundation.
But these views are in the minority. Most studies on Smith interpret what Smith did in WN as a kind of “political economy," and the term is not interpreted as having the negative connotation argued by Viner or Brown. For example, Griswold (1999) simply found Brown’s “radical reinterpretation” “untenable."
Why did not Smith use “political economy” in the book title then? Cannan explained in his editor’s introduction to WN:
It is clear from the passage at vol. ii., IV.9.38-40, that Smith regarded the title ‘An Inquiry into the Nature and Causes of the Wealth of Nations’ as a synonym for ‘political economy,’ and it seems perhaps a little surprising that he did not call his book ‘Political Economy’ or ‘Principles of Political Economy’. But we must remember that the term was still in 1776 a very new one, and that it had been used in the title of Sir James Steuart’s great book, An Inquiry into the Principles of Political Economy: being an Essay on the Science of Domestic Policy in Free Nations, which was published in 1767… But in 1776 Adam Smith may well have refrained from using it simply because it had been used by Steuart nine years before, especially considering the fact that the Wealth of Nations was to be brought out by the publishers who had brought out Steuart’s book.

Was Smith simply trying to avoid using a similar title?

The “General Tenor” of WN
Let’s begin by looking at how Smith defined “political economy” at the beginning of Book 4.
Political economy, considered as a branch of the science of a statesman or legislator, proposes two distinct objects: first, to provide a plentiful revenue or subsistence for the people, or more properly to enable them to provide such a revenue or subsistence for themselves; and secondly, to supply the state or commonwealth with a revenue sufficient for the public services. It proposes to enrich both the people and the sovereign. [WN IV. Intro. 1]

Was this what Smith was trying to do in WN? In my reading of WN up until Book 4, Smith was not addressing a statesman or legislator. Instead he wrote from the perspective of an observer or “philosopher” who wants to know how the economy works: the division of labor; determination of prices; the use of money; determination of wage, profits and rent; accumulation of stock; and stages of economic development, all are tools for us to know what is going on. WN is, after all, an “inquiry." Rarely did Smith provide policy recommendations and political advice for policymakers. Instead, what Smith was interested in is whether his system is consistent with observable facts, an example of which, among many, is his demonstration that silver price has no relation to economic development in the Digression on Silver.2
The “general tenor” of WN can also be captured by looking at how its different Books are described in the Introduction.
The causes of this improvement, in the productive powers of labour, and the order, according to which its produce is naturally distributed among the different ranks and conditions of men in the society, make the subject of the First Book of this Inquiry…[WN Intro and Plan. 5, emphasis added]The Second Book, therefore, treats of the nature of capital stock, of the manner of which it is gradually accumulated, and of the different quantities in labour which it puts into motion, according to the different ways in which it is employed…[WN Intro and Plan. 6, emphasis added]Since the downfal of the Roman empire, the policy of Europe has been more favourable to arts, manufactures, and commerce, the industry of towns; than to agriculture, the industry of the country. The circumstances which seem to have introduced and established this policy are explained in the Third Book…[WN Intro and Plan. 7, emphasis added]

The goals of the first three Books are to find out the “causes” of economic growth and its distribution, understand the “nature” of capital and its functions, and describe the “circumstances” that led to the particular mode of development in Europe. Smith was engaged in a positive or empirical mode of inquiry, and he was not telling statesmen and legislators what to do.
I have endeavoured, in the Fourth Book, to explain, as fully and distinctly as I can, those different theories, and the principal effects which they have produced in different ages and nations…[WN Intro and Plan. 8]
Only starting in Book 4 was Smith commenting on “the science of a statesman or legislator," though this was mostly showing how mercantilist policies only benefit some special groups at the cost of the society at large (the “poison” mentioned by Viner). Smith showed that mercantilism is not the “science” it is “considered” by others. Influenced or even intimated by merchants and manufacturers (remember the “overgrown standing army” of lobbyists), the “political economy” of mercantilism is just a theory whose function is to justify various sorts of rent seeking behavior.

Since the “political economy” theory of physiocrats did not get a chance to be implemented, Smith had a lot less to say about it.
For recommendations for policymakers, we have to wait until Book 5. In it Smith decided what are the “necessary expences” and how they “ought to be” paid for, and he also discussed the “principal advantages and inconveniencies of each of those methods” of taxation. While in Book 5 Smith has more to say about what to do, the suggestions are rather of a piece-meal or case-by-case nature and are far from forming a system of “science” that has a unifying theme. In contrast, mercantilism has a clear prescription for what statesmen or legislators should do for the government: use policies to accumulate as much silver and other precious metal as possible, and keep nominal prices high.
Overall, Smith did not offer a “science” to be adopted by policymakers in WN, and most of the time he ended up showing how natural liberty is enough to “enrich both the people and the sovereign." The “general tenor” of WN, or at least for the first three Books, is different from the definition of “political economy” provided at the beginning of Book 4.
It is worth contrasting Smith’s approach with that of James Steuart, who published An Inquiry Into the Principles of Political Economy in 1767. In the introduction to his Inquiry, Steuart wrote:
What economy is in a family, political economy is in a state: with these essential differences however, that in a state there are no servants, all are children: that a family may be formed when and how a man pleases, and he may establish what plan of economy he thinks fit; but states are found formed, and the economy of these depends upon a thousand circumstances.

Notice the analogy to a family. As the head of a family is responsible for earning and allocating resources, the head of state does something similar, though the problem to be solved is a lot more complex. “The great art therefore of political economy is, first to adapt the different operations of it to the spirit, manners, habits, and customs of the people, and afterwards to model these circumstances so, as to be able to introduce a set of new and more useful institutions.” Based on the cultural constraints, the statesman chooses a set of policies and the institutions to implement them.
The principal object of this science is to secure a certain fund of subsistence for all the inhabitants, to obviate every circumstance which may render it precarious; to provide every thing necessary for supplying the wants of the society, and to employ the inhabitants (supporting them to be freemen) in such a manner as naturally to create reciprocal relations and dependencies between them, so as to make their several interests lead them to supply one another with their reciprocal wants.

The science of political economy is to actively secure the fund to provide for its inhabitants and also to make sure that the inhabitants are employed in an interdependent manner. As the first person who presented mercantilist ideas in an organized treatise, Steuart showed a strong preference for government’s direction of and intervention in the economy. Indeed, throughout Steuart’s book we see numerous “policy recommendations” on how to manage every aspect of the economy. The “political economy” meant by Steuart is far from what Smith did in WN (who indeed called Steuart’s “fallacious principles”; see Rae (1945)), casting doubt on the explanation provided by Cannan.

Who Started It?
The next major publication in economics after WN is arguably An Essay on the Principle of Population by Thomas Malthus in 1798. Interestingly, the term “political economy” was not used in the essay at all. Only in 1820 did Malthus call his treatise Principles of Political Economy (which, of course, came after Ricardo’s Principles of Political Economy and Taxation in 1817).
Who started the current usage of the term? While it is difficult to pin down the first usage, I would like to suggest a possible culprit: Jean Baptiste Say, a major admirer and promoter from France of Smith’s ideas.3 In the introduction to his popular Treatise of Political Economy in 1803, he explained the origin of term “political economy” as follows:
In confounding in the same researches the essential elements of good government with the principles on which the growth of wealth, either public or private, depends, it is by no means surprising that authors should have involved these subjects in obscurity, instead of elucidating them. Steuart, who has entitled his first chapter `Of the Government of Mankind,’ is liable to this reproach; the sect of `Economists’ of the last century, throughout all their writings, and J. J. Rousseau, in the article `Political Economy’ in the Encyclopedie, lie under the same imputation.4
Say was arguing that authors before Smith had mixed up politics (“essential elements of good government”) and political economy (“principles” of “growth of wealth”). But, since WN, “these two very distinct inquiries have been uniformly separated, the term political economy being now confined to the science which treats of wealth, and that of politics, to designate the relations existing between a government and its people, and the relations of different states to each other.” 5
So, according to Say, Smith separated the study of wealth from the study of government, with the former bearing the name of “political economy." Again, this reminds us of the aforementioned passage from Book 4, Chapter 9 where “political economy” is allegedly equated to the inquiry into the nature and causes of wealth, and that is also most likely where Say got the idea. But if you are on the side of Viner and Brown, or if you are convinced by my argument above, here we see that Say wrongly gave the name “political economy” to the sort of inquiry engaged by Smith. Not only is “political economy” not separated from politics according to Smith, but all the poisonous features of “political economy” are actually due to its close and intricate connection with political power.6

What Is In A Name?
The word “impressionist” was originally used in 1874 as a denigrating term by the critic Louis Leroy who disliked the style of painting (Kemp (2000)). Over time, the term Impressionism became the proper term describing the major art movement, without any negative meaning. There are numerous examples of such changes in usage and meaning. “Political economy” is one of them, changing from a description of a sort of poison to a science of intellectual inquiry.









References
  1. Alonzi, Luigi. "The Term “Political Economy” in Adam Smith." Intellectual History Review (2020): 1-19.
  2. Bentham, Jeremy. The Works of Jeremy Bentham Volume 3, published under the Superintendence of his Executor, John Bowring (Edinburgh: William Tait, 1838-1843).
  3. Blaug, Mark. Economic Theory in Retrospect. Cambridge University Press (1997).
  4. Brown, Vivienne. Adam Smith’s Discourse: Canonicity, Commerce and Conscience. London: Routledge (1994).
  5. Drazen, Allan. Political Economy in Macroeconomics. Princeton University Press (2002).
  6. Griswold Jr, Charles L.. Adam Smith and the Virtues of Enlightenment. Cambridge University Press (1999).
  7. Kemp, Martin, ed. The Oxford history of western art. Oxford University Press, USA (2000).
  8. Paganelli, Maria Pia. ‬”Adam Smith’s Digression on Silver: the centerpiece of the Wealth of Nations,” working paper (2020).
  9. Rae, John. The Life of Adam Smith. London: Augustus M. Kelley (1945).
  10. Say, Jean Baptiste. A Treatise on Political Economy. Translated by C. R. Prinsep, Claxton, Remsen & Haffelfinger (1880).
  11. Smith, Adam. An Inquiry Into the Nature and Causes of the Wealth of Nations, Vols. 1–2 of The Glasgow Edition of the Works and Correspondence of Adam Smith, edited by R. H. Campbell, A. S. Skinner, and W. B. Todd. Oxford: Clarendon press and Indianapolis: The Liberty Fund (1976).
  12. Steuart, James. An Inquiry Into the Principles of Political Oeconomy: Being an Essay on the Science of Domestic Policy in Free Nations. In Which are Particularly Considered Population, Agriculture, Trade, Industry, Money, Coin, Interest, Circulation, Banks, Exchange, Public Credit, and Taxes. London: A. Millar and T. Cadell, in the Strand, (1767).
  13. Viner, Jacob. "Adam Smith." International Encyclopedia of the Social Sciences 14 (1968): 322-329.

  1. For the rest of the paper I will use “political economy” and not the archaic spelling of “political oeconomy."
  2. See Paganelli (2020) on how Smith painstakingly uses empirical facts to make a crucial point against Mercantilism in the Digression on Silver.
  3. It is worth mentioning that Étienne Bonnot de Condillac, another major figure from France who published his Commerce and Government slightly before WN in 1776, did not describe what he proposed as “political economy." Jeremy Bentham, who was greatly influenced by Smith, also began writing a Manual of Political Economy in 1793, but most of it was not published until the 20th century. In the Manual Bentham discussed what government should and should not do, which is actually quite close to what Smith had in mind as “political economy."
  4. I use the English translation of the fifth edition of the Treatise, which was published in 1826. After checking the first edition of the original French edition, I have confirmed that these passages were essential left unchanged after the several revisions.
  5. Notice how the separation described is in conflict with the passage by Drazen (2002) mentioned earlier.
  6. Did Say misread the original English version of WN? Or was Say misled by one of the many French translations? While interesting, such questions are beyond the scope of this paper.