The Wealth of Nations

The Wealth of Nations Summary and Analysis of Book V


Of the expenses of the sovereign or the commonwealth

Summary – Section One

The most important duty of the sovereign is to protect society from violence and invasion from other societies, and this can only be done by means of military force. The expense of preparing the force in times of peace and of employing it in times of war varies from society to society.

Smith begins to consider the nature of military force by adopting a historical perspective. The smaller and more mobile a society is, the higher percentage of its population will be ready to fight in battle. Once a society has a permanent settlement, agricultural societies are better able to quickly and effectively prepare themselves for war than non-agricultural societies. For modern nations, the most significant policy question is whether to maintain a professional, standing army or, by training a great proportion of its citizens for a limited time, whether it should maintain a militia. Adam Smith concludes that, as war has evolved over time, the standing armies are far superior to militias, although he also recognizes that a standing army can pose a political risk to the sovereign if it turns again the government.

The second duty of the sovereign is to protect each member of society from injustice or oppression enacted by other members. In primitive societies, where the concept of property does not exist in the sense that we understand it, there is no need for an established magistrate. While people can certainly harm their fellow citizens, the lack of property and accumulated wealth does not give them much motivation to do so. For Adam Smith, avarice is the primary motivation for crime, and justice exists to protect from the avarice that becomes criminal.

Smith goes on to discuss the cost of public works, and how this cost is distributed. He points out that the expense of maintaining public works is higher in countries that are very productive, because in these countries, the public works are used more intensively. Often, a small charge for the use of these public works is enough to cover the cost of their construction and maintenance. In these cases, public works can only be constructed where they are most needed, so that a price can be effectively attached to their use.

Adam Smith then considers whether public works might be privately funded. If the toll or charge for the use of public works is given to private persons, he writes, the private persons in charge of managing and maintaining the work in question will have a personal interest in attending to it, due to the monetary incentive to keep it in good repair. This situation works best for public works upon which maintenance is required after construction to keep the the construction functioning and useful. In cases where poor maintenance does not preclude all use (as with roads, for instance), private persons are liable to continue to collect tolls, directing only a tiny portion of these tolls toward maintenance, and reserving the majority of these tolls as profit. In this case, then, the public works that require less maintenance, failing to provide incentives for their own upkeep when owned by private persons, are liable to fall into disrepair. Therefore, for such public goods, tolls should be managed by a group of persons.

In the case that public works are managed by governments, tolls collected should only be used to manage the constructions on behalf of which they are collected. No other exigencies of the state should be financed with the money collected from tolls. If tolls were used in this disparate way, they would increase so much so that they would in turn discourage industry. Using the tolls only for the maintenance of the construction they are associated with provides an upward limit that is just necessary for maintenance, and friendly for business.

Particular branches of commerce might necessitate certain expenses that might be shared in common among the practitioners of that particular trade. Certain trades, Smith writes, might, for example, necessitate the installation of an ambassador abroad. Joint-stock companies, for example, may find it worthwhile to install forts and garrisons abroad. When such things are implemented, there are high costs associated with their creation and maintenance. Trades that necessitate such measures, in order to represent the common benefit of a public work, might exact some sort of membership due.

Barriers to entry such as membership dues or high levels of internal regulation may also arise in situations where a monopoly exists, in order to prevent competitive entrants into the market from decreasing profit.

While Smith is generally opposed to this sort of regulation, given that it prevents competition and the free exercise of market forces, he understands that in certain cases, the temporary artificial protection of a competitive advantage may be necessary. Smith argues that it is only natural that successful endeavors should be granted a temporary monopoly, in compensation for undertaking risk and for making possible a new kind of trade. However, after a time, there must be an end to the monopoly and forts and garrisons should be taken over and maintained by the government.

Smith goes on to discuss education, first considering a number of ways in which educational institutions could be designed in a manner in which they would largely carry their own costs. They might, for instance, impose tuition fees upon their students. Smith goes on to make the point that competition, if introduced into the academic structure, may serve as a driver of excellence. Teachers might be motivated to improve the quality of their teaching is they were to receive fees or honoraries from their students, based on their performance or the popularity of their courses. Smith argues that students should be allowed to select their teachers in this case, and that the teachers would be motivated to increase the quality of their teaching in order to attract more students.

Smith goes on to write that private institutions are often superior to public ones because, at a private institution, it almost never happens that a student will graduate without having acquired at least a minimum of skills. Public institutions, on the other hand, because they are funded by the state, allow for certain things to be taught that are not in demand, or, Smith implies, not useful.

Having expounded upon the virtues of privately-funded and privately-operated schools, Smith also warns that education should be made available to everyone, especially to the laboring poor. The modern division of labor is such that it is intellectually harmful, causing the mind to degenerate and preventing laborers from "conducting a full, fulfilling private life." Insofar as the modern system degrades the quality of life, education can and should be used as a tool to defray these harms. Rich people are spared from this phenomenon because, generally, they do not begin to work until the age of 18 or 19, and, even when they do begin their professional lives, they are still afforded considerable leisure. Poor people, destined to be laborers, should be sent to school, but their schooling may end at a young age, so that it does not interfere with their working lives. They should have to pay a small fee for their education, but, in order to ensure that they will be able to attend school, their education should be subsidized by the state.

Better education, Smith argues, is finally a social good. A more educated populace makes for a more orderly society, the inhabitants of which are more disposed to respect and also to be respected by their superiors. Such a populace would make better political choices than an uneducated populace that holds its leaders in contempt.

Governments may find it worthwhile to subsidize education for other reasons, as well. In Smith's time, the majority of educational institutions were religious. However, he argues, toleration of extreme or dissident sects is politically dangerous. One method of decreasing the appeal of such sects is through education, specifically through the study of science or philosophy. Furthermore, the attractiveness of these sects can be mitigated by the "frequency and gaiety of public diversions" (the arts). The diffusion of culture also serves to dissipate melancholy and gloom, which act as nurses to superstition. In short, education and culture may help the state to discourage the development of extreme ideologies and sectarianism.

At the close of the section on education, Smith goes on to make a number of cautionary comments about the power of the Church. He writes that the wealth of the Church necessarily comes at the expense of the state. There arises a natural competition between the two as tax-levying bodies, and, since the Church and the state use the same avenues for levying and collecting taxes, the existence of one limits the amount that may be collected by the other. Moreover, the wealth of the Church, when excessive, serves not only to destroy the perceived sanctity of the institution, but also distracts Churchmen from their proper duties. For these reasons, the appeal of the church should be checked by the power of the state.

Smith then directs his attention to the expense of supporting the “dignity of the sovereign.” He explains that the expense of the majesty or dignity of the sovereign varies with the era and the form of government. However, it can be generally said that in a very opulent society, the sovereign should be correspondingly opulent. Smith argues that the dignity of the sovereign, along with defense, is something that benefits the whole society and should therefore be supported by the whole society in the form of taxes. Justice, as well, is for the benefit of society, but it is also reasonable that those who seek justice should be made to defray its costs.

Infrastructure (such as roads, or organized systems of communication like the post) is also of benefit to the whole society. Tax money should be used for these endeavors, but their costs may also be partially defrayed by people who make most use of this infrastructure (e.g., merchants). Education could certainly be paid for with public money, but, with equal justification, it could be paid for by those individuals who mostly directly benefit from it. In short, however, Smith argues that if public institutions cannot or are not paid for by those who make the most use of them, they must be paid for with public money, for they are integral to public life.


Smith seems to argue that, on the whole, the free market should control access to public goods insofar as is reasonably possible. But he does make a strong argument for using public monies in certain instances, thereby articulating and expanding upon the idea of the public good. Smith believes that people who use certain public goods should be made to pay as much as they can afford (whether in school fees, court fees, or tolls). His argument is that, in general, if public goods are privately-funded, they will be more likely to operate efficiently, and provide more effective services to their users. This is because, when the livelihoods of specific persons depend entirely upon the maintenance of these goods, those persons are likely to keep them in good repair, and hold them to high standards.

Smith's argument in favor of private schools is based on his personal experience. He was disappointed with his public school education, making the critique that, because teachers at publicly funded schools received their salaries whether or not their students found their courses relevant or useful, the coursework was not held to a high standard of effectiveness. If students are allowed to express their esteem through paying teachers that they find particularly talented, instructors will be motivated to teach well.

Though Smith makes the general argument that many things run more efficiently if they are privately funded, he also makes a clear point that, in cases where a person cannot afford to pay, the good should be made available to them anyway. This is because, Smith suggests, certain goods are simply necessary for public life, and their existence dispels or decreases certain risks to public order. Despite his personal experience, Smith writes that education falls into this category. Though private schools are generally better than public ones, he writes, education must be made available to everyone, even those who cannot afford it. Not only does it help to decrease feelings of alienation that the working class might experience in the drudgery of factory life, but education and, above all, exposure to arts and culture makes people less likely to fall prey to religious extremism, which can alienate them from political life and cause them to resent their government. Finally, Smith warns, the power of the Church over the minds and ultimately the pocketbooks of the people can only be checked by education, which serves to undermine suspicion and antagonism.

These concerns show Smith to be relatively progressive when it comes to his social conception—articulating the value of education in training the rational mind against dogma, the dangerous power of a strong church, and emphasizing the risk of alienation faced by the working classes. This last point would later become critical in Marxist ideology. Smith, meanwhile, had already predicted such risks before the industrial revolution got well underway.

Other expenses which must necessarily be funded by the state are those of defense and the the lifestyle of the sovereign. Smith's argument for defense funding is in line with what he considers to be the fundamental role of government. Since the government is charged, first and foremost in Smith's view, with protecting society, it is necessary that it maintain access to weaponry and to an army for this purpose. In more advanced, larger societies, this can be very expensive, since it is necessary to maintain a standing army. However, this expense cannot be avoided.

Interestingly perhaps, another expense of the state that Smith devotes considerable attention to is that of the “dignity” of the sovereign. Here, Smith is referring to the magnificent lifestyle, or pomp, of the sovereign. This is one of the few expenses that Smith thinks must definitely be carried by the state. This seems curious because the idea that the sovereign must have a visibly splendid appearance is not reflected in Smith's broader perspective on government. Smith, it seems, would have as limited a government as possible, and it does not seem to follow that the lifestyle of the sovereign should be supported with taxes levied on the people. Smith, however, surprises his readers when he argues that the lifestyle of the sovereign must reflect the opulence of the nation. The wealthier a nation, the more ostentatious the need be the lifestyle of the sovereign.

Summary – Sections 2 - 3

Most states derive much of their revenue from publicly owned stock or land. Stock may be lent out, and revenue may be derived from interest. Alternately, revenue may also be derived from rented land. Stock and credit, in general, are less stable revenue-generating tools than land. However, in the case of large states, land and stock do not produce enough revenue for the state to properly maintain itself. Taxes must therefore be levied upon the possessions or income of the inhabitants of the state in order that the state receive enough income to offset its costs.

Smith observes that there are four different kinds of taxes by means of which the state can raise money: taxes on the rent of land, the rent of houses, on profit, and on particular employments. Smith has clear ideas about what kind of taxation is most effective, and he expounds these ideas in Section Two.

Smith observes that rent may either be taxed by canon, or according to non-variable rates. This, however, seems unfair due to the varying levels of land value and cultivation, which make some plots of land far more productive than others. Alternately, taxes may vary according to the level of cultivation of the land, recognizing that some land is more productive.

Smith goes on to expound upon an ideal tax system for the rent of land. In such a system, landlords and tenants would publish their lease in a public register. Landlords would raise the rent instead of, as often happened, taking a fine for the renewal of the lease. Rent should be taken in money, as rents taken in kind, or in service, are in most cases both more harmful to the tenant and less beneficial to the landlord than money rents.

Smith warns against land taxes that vary with the level of cultivation, because it seems like such a tax, which would ultimately motivate the landlord to raise rent, would make both landlords and tenants less likely to cultivate their land, discouraging productivity. The problem with levying a blanket-tax upon the rent of land, which seems to be the clearest alternative, is that it would be hard to determine the rate of the tax that would be necessary for the tax to be effective for the state and yet not hinder the activities of landlords and tenants. Smith argues that taxes should be levied in proportion to the rent of the land. This would allow for the productivity level of the land to be captured in the tax, and would not serve as a direct hindrance to cultivation.

Smith points out that there are two ways to tax the rent of houses. One may choose either to tax the rent of the ground upon which the building is built, or the rent of the building itself. However, it is important to remember that the rent of buildings is fundamentally different than the rent of land. Insofar as land is productive, it may be said, when it is under cultivation, to pay for its own rent through what is produced upon it. Buildings or the ground underneath them are, by contrast, unproductive. Tenants residing in these buildings must pay for their rent by some other means. In this way, tax on buildings is more like the tax upon a commodity. Because buildings are unproductive and do not serve as a source of revenue unless they are inhabited, Smith argues, it is wrong to levy taxes upon uninhabited buildings.

Smith goes on to observe that taxes on buildings will be inversely proportional to the rent. It is important to remember Smith's earlier point that the taxes upon land will always be directed through the landlord back onto the tenant. The higher the taxes levied upon buildings, the lower the landlord will be forced to make the rent. Because buildings are not productive, tenants will only be able to pay a set amount in rent. If the proportion of tax is high, the proportion of rent will have to be sufficiently low in order to fit in the pre-established budget of a particular tenant.

The section continues by pointing out two important reasons why the interest of money is less suitable for tax than the rent of land. Firstly, the quantity or value of land which a man possesses can never be hidden from the authorities, while the whole capital of stock can easily be kept a secret. Also, profit is liable to be in continual variation, and, even if it were as public as the quantity and value of land, is constantly changing. Secondly, stock may be moved from country to country, becoming subject to different tax laws as it is transported from place to place, while land, by contrast, is immovable.

The taxes upon a particular branch of trade are always redirected so they fall on the consumers of the products of that trade, or the service that it affords. In cases where a personal taille takes place (a personal taille is a tax levied upon individuals), people tend to conceal the quantity or quality of their stock in order to avoid this tax.

Adam Smith begins the section on public debts by considering how debt was largely foreign to pre-industrial societies. In pre-industrial society, the rich spent their money largely on maintaining others. The richer a person was, the more people he could afford to maintain. Debt was therefore checked before it was even incurred.

The most significant expense for modern states, according to Smith, is war. Most states are required to go into debt when they conduct war. This is because war disrupts the natural cycle of the market and, instead of reinvestment, vast amounts of capital are directed toward an endeavor that is not, in the short run, economically productive. In modern governments, peacetime expenses are largely equal to peacetime revenues, and when war occurs, the government is both unwilling and unable to increase their revenue in proportion to the increase in expense. To increase revenue, of course, would be to increase taxes. This is largely impossible because an increase in taxes would most likely spell widespread disillusionment with the war. However, governments are generally able to borrow from individuals. In commercial states, people depend on the government to provide for the levels of security and justice that make commerce possible. Dependence on these things, as well as a general belief in the power of the government to provide them, disposes people to lend money to the government when it is absolutely necessary. Governments are also generally able to make the conditions of the loan extremely favorable.


The various methods for levying tax Smith analyzes suggest that, in his opinion, tax on land is the most effective method for collecting taxes. Despite the complexities of adopting an appropriate model for tax, which must take into account both the value of the land and the incentive structure surrounding its cultivation, tax levied on land seems to be the most appropriate. Land taxes interfere the least with existing price structures, and avoids the problem of citizens hiding their income from the government.

Smith also expresses the concern that taxes should be levied in a manner that does not decrease the motivation for productivity or prove overly burdensome for citizens. He therefore suggests that taxes should be levied openly and clearly, upon property (land) that is easy to measure. These opinions would make him an automatic critic of the tax systems of most large states, many of which levy taxes on goods that are potentially profitable (untenanted buildings, and capital), as well as the dividends of stock. On the other hand, it might be argued that Smith could not have foreseen the complexities of an economy in which large amounts of unproductive land were owned by average citizens (neither large landowners, nor the government).

Smith also makes the important point that the cost of taxes, wherever possible, will be passed on to the consumer, or have the result of affecting prices. If a tax is levied upon the practice of a particular profession, then, this tax will result in a higher cost to persons who consume that service. If taxes are levied upon landowners who rent, these taxes will be passed on to tenants, and will limit the amount of rent that landowners may charge. In short, poorly designed taxes will always interfere with prices, and may distort the necessary balance between the factors that affect pricing.

While taxes are used to pay for a wide variety of public works, they are not generally used to offset the enormous cost of war. This is because the structure of a democracy will lead elected officials to use up nearly all tax revenues on public works during peace-time, in order to increase the quality of life within their jurisdiction and win the approval of their constituencies. When war is being waged, governments will be compelled to borrow from private sources. The more attractive the government can make itself as a borrower, the more money it will be able to access, and the broader the scope of its wars may be.

These observations are certainly true in the United States example. With the dollar regarded as one the most reliable currencies in the world, often serving as the constant against the fluctuation of other currencies, the United States had incredible borrowing power in the second half of the twentieth century. Despite a considerable and ever-growing deficit, the United States found itself in a position to take on large-scale military operations around the globe. It would be incorrect and overly simplistic to attribute the scope of the United States' military engagements to its ability to borrow, but the correlation between these two factors, articulated by Smith, is certainly enlightening.