The Wealth of Nations

Book 5, Chapter 1

The Expenses of the Sovereign or Commonwealth

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Chapter 1 Summary


Part I

The Expense of Defense


The most important duty of a sovereign is to protect his society from violence and invasion. This is ensured by means of military force.


Agricultural workers, used to the rugged life of outdoor labor, are well equipped to prepare themselves for war. Furthermore, if war occurs after the sowing season and before harvest time, farm workers can be spared without too much loss to the business. In a more advanced society, the progress of industry and the evolution of war over time mean that it would be impossible for citizens to go to war at their own expense. In a country in which the majority of the citizens are craftsmen and manufacturers, the majority of the people who go to war must be drawn from these citizens, and therefore maintained by the public.


In a lengthy war, it becomes necessary for the public to maintain those in the army. The number of citizens who can go to war must therefore never exceed what a society can maintain. As a rule of thumb for modern European nations, no more than one-hundredth of the total population of a country can be employed as soldiers.


With the evolution of warfare, the question is raised as to whether the army should be a professional standing army employing a specific class of citizens. Division of labor is implemented in an army to improve its efficiency, as with every other form of employment.


A state may opt to enforce a professional, standing, army or may train its citizens for a limited time and maintain a militia. The practice of military exercises is the sole or principal occupation of the soldiers in a standing army, and they receive maintenance or pay from the state for their subsistence.


A militia that has served during successive wars becomes in every respect a standing army. The soldiers are exercised daily in the use of firearms, and, being constantly under the command of their officers, are used to the same form of strict regime as that in the standing armies.


The most important duty of a sovereign, therefore, grows gradually more expensive as the society develops. The military force of the society, which originally cost the sovereign no expense, must be maintained by him during war as well as times of peace. The introduction of firearms has brought with it much expense, with both arms and ammunition prices on the rise. A musket is more costly than a javelin; a cannon and mortar are not only more expensive but much heavier machines, making them more costly both in terms of purchase price and transportation costs.


Part II

The Expense of Justice


The second duty of the sovereign is to protect each member of society from injustice or oppression. This involves two very different degrees of expense.


Inequality between the rich and poor, with the wealthy owning grand properties, incites resentment amongst the poor. In this situation, implementing a civil magistrate provides peace of mind for the owner of the valuable property. The acquisition of property therefore requires the establishment of a civil government, which grants power to educated professionals, particularly older individuals, who command more respect than the young, as well as wealthy individuals and those from established families.


The judicial authority of the sovereign, far from being a cause of expense, was for a long time a source of revenue. Citizens seeking justice were willing to pay for it, with gifts from the requesting party being commonplace. Individuals found guilty were required to compensate both the prosecuting party as well as a fine to the sovereign. With the introduction of compulsory taxes for judicial services, the giving of gifts was prohibited. Judges were paid fixed salaries, and since the taxes more than compensated the sovereign, the justice system was administered gratis.


The expense for justice could have been covered by the court fees, without exposing the administration of justice to potential corruption, but it is difficult to regulate court fees when a person of such high power as the sovereign contributes to them. Court fees were originally the main source of maintenance for Britain’s courts of justice, with each court endeavoring to attract as much business as possible.


Impartial administration of justice is necessary in a society, to protect each individual’s liberty and to provide security. In order to ensure individuals’ rights are respected, the judicial system needs to be separate and independent from executive power. Executive power should not have any authority to remove a judge from office, nor should it control the payment of his salary.


Part III

Expense of Public Works and Public Institutions


The third duty of the sovereign is to establish and maintain the public institutions and public works the profit of which does not cover their expenses. Institutions of this kind are chiefly involved in facilitating commerce and promoting education.


The expense involved in building and maintaining public works that facilitate a country’s commerce, such as roads, bridges, canals, harbors, etc., varies. The cost of constructing and maintaining public roads increases in line with the volume and weight of goods transported on them. The strength of a bridge must be suited to the number and weight of vehicles likely to pass over it. The depth and the supply of water for a navigable canal must be appropriate for the number and tonnage of the vessels likely to transport goods on it, and the extent of a harbor will depend on the volume of ships that will dock there.


The majority of public works can be managed so as to bring in revenue sufficient to cover their expenses without burdening society. Transport facilities can be constructed and maintained by charging a small toll on the vehicles using them; coinage provides a small revenue to the sovereign; the post office provides a considerable revenue.


In some parts of Europe, the toll or lock duty on a canal is given to private individuals, who then have a personal interest in the upkeep of the canal since if it is not properly maintained, navigation will cease—and with it their profit. If tolls are managed by commissioners who have no personal interest in them, they may well be less attentive to the maintenance of the works. An example is the tolls for the upkeep of a highway, which cannot be made the property of private individuals; the proprietors of these tolls often neglect the repair and maintenance of the road, yet continue to levy the same tolls. It is therefore preferable for such tolls to be managed by commissioners or trustees. Government, by taking the management of the turnpikes into its own hands, could employ soldiers to keep the roads in good order. If government neglected the reparation of the highways, it would be difficult to impose the turnpike tolls, with the result that the high levies charged to the people would not actually be used for their intended purpose.


Public works that are confined to a particular place or district are better managed by a local administration than by the state. If the streets of London were lit and paved at the expense of the treasury, would they be so well lit and paved as they are at present?


Of the public Works and Institution which are necessary for facilitating particular Branches of Commerce.


The object of public works and institutions is to facilitate commerce in general. But in order to facilitate a particular branch of trade, specific institutions are necessary. When commerce is conducted with barbarous nations, protection is required for those involved. English and French East Indian companies were authorized to erect forts for this purpose. Certain countries, however, did not authorize the building of such fortified places within their territory, and what tended to happen in this situation was that an “ambassador” was elected who mediated disputes between the companies and the natives—his character affording the traders protection. The Turkey Company employed such an ambassador in Constantinople. The first British embassies to Russia were established out of commercial interests.


It seems logical that the considerable expense of this protection for a particular branch of commerce should be paid for through a duty imposed on the commodities involved. This protection of trade, for the most part from pirates and freebooters, is said to have been the origin of what we now know as customs duties.


The protection of trade is viewed as essential to the defense of the Commonwealth, and is the responsibility of the authorities. The collection and application of customs duties has therefore always fallen to the authorities, but some nations have deviated from this, with merchants in parts of Europe persuading the legislature to entrust this responsibility to them, resulting in them subsequently mismanaging or confining the trade.


Regulated companies resemble in every respect the trade corporations that are so common throughout Europe—a sort of enlarged monopoly of the same form. The regulated foreign-trade companies currently operating in Britain are the ancient merchant-adventurers company, now known as the Hamburg Company, the Russia Company, the Eastland Company, the Turkey Company, and the African Company.


Terms of admission into the Hamburg Company are said to be fairly straightforward, and the directors do not have the power to impose restraints or regulations on the trade conducted.


The Turkey Company previously charged an admission fee of twenty-five pounds for persons below the age of twenty-six, and fifty pounds for persons above that age. Only merchants were permitted admission, with a restriction excluding all shopkeepers and retailers. A bylaw stipulated that British commodities could only be exported to Turkey in the company’s ships, and since those ships always sailed from the port of London, this restriction confined the trade to that expensive port, and to traders who lived in and around London. Another bylaw stipulated that no person living within twenty miles of London could become a member. These abuses led to the implementation of the Act of George II, which reduced admission fees, removed age restrictions, and granted merchants and freemen of London the right to export all forms of British goods, from any of Britain’s ports to any port in Turkey, against payment of general customs duties in accordance with the laws of the British ambassador and consuls resident in Turkey, and the company’s bylaws.


Regulated companies never maintained forts or garrisons in countries they traded with, whereas joint-stock companies frequently did. The directors of a joint-stock company do not carry out any trade personally; their interest lies in the success of the company’s general trade, which goes hand in hand with maintaining the forts and garrisons necessary for its defense. The directors of a joint-stock company manage a large amount of capital—the joint stock of the company—a portion of which they employ in building, repairing and maintaining these forts and garrisons. The directors of a regulated company, on the other hand, do not have this capital, their income consisting of revenue from admission fees and corporation duties imposed on the company’s traders.


In 1750, a regulated company was established to maintain all of the British forts and garrisons located between Cape Blanc and the Cape of Good Hope, and later on those located between Cape Rouge and the Cape of Good Hope. The company was prohibited from exporting Negroes from Africa or importing any African goods into Britain; however, since they were responsible for the maintenance of forts and garrisons, they were allowed to export certain commodities from Britain to Africa. Parliament allocated the company an annual sum for the maintenance of the forts—generally about £13,000. The captains of his majesty's navy and any other commissioned officers appointed by the board of admiralty were allowed to inquire as to the condition of the forts and garrisons, and report their observations to their board. The garrisons of Gibraltar and Minorca were originally established to protect Mediterranean trade.


The trade of a joint-stock company is always managed by a court of directors, but the total exemption from risk beyond a limited sum incited many an entrepreneur to join these companies. The trading stock of the South Sea Company at one time amounted to over thirty-three million eight hundred thousand pounds. The capital of the Bank of Britain amounts at present to ten million seven hundred and eighty thousand pounds. Joint-stock companies for foreign trade have seldom been able to compete against private entrepreneurs. They seldom succeed without the grant of a monopoly – and frequently fail even if they have this.


The Hudson's Bay Company exclusive charter has not been confirmed by act of parliament. The South Sea Company, as long as they remained a trading company, were granted a monopoly through an act of parliament; so, too, was the United Company of Merchants, which trades to the East Indies.


The Royal African Company soon found that they could not maintain competition against private entrepreneurs, and in 1732 they resolved to sell the Negroes they had purchased on the coast to companies trading to America.


The Hudson's Bay Company had been much more fortunate. No private entrepreneurs ever entered into competition with them to that country.


The South Sea Company had a huge amount of capital divided among a huge number of proprietors. It was naturally to be expected, therefore, that there would be some recklessness and negligence in the management of their affairs. The first trade they engaged in was that of supplying the Spanish West Indies with Negroes, but both Portuguese and French companies had been ruined by this trade. In 1724, the company ventured into the whale fishery business; however, only one of the eight journeys their ships made to Greenland made a profit. In 1722, the company’s immense capital of thirty-three millions pounds was lent to government; an end was put to their trade with the Spanish West Indies, and the company ceased operations as a trading company.


The old English East India Company was established in 1600 by a charter from Queen Elizabeth, after which it traded successfully for many years. In 1698, a new East India company was established. Competition between the two companies and with private traders ended up destroying both. In 1702, the two companies were united by an indenture tripartite, to which the queen was the third party. During the French war that began in 1755, East India shared in the general good fortune of Britain; they defended Madras, took Pondicherry, recovered Calcutta and acquired the revenues of a rich and extensive territory.


The only areas of trade a joint-stock company can carry out successfully without the grant of a monopoly seem to be those in which operations can be standardized, such as banking, insurance against fire, sea and capture during wartime, construction of navigable canals, and water supply businesses.



The Expense of the Institution for the Education of Youth


Educational institutions can be managed in such a way as to largely carry their own costs. In every profession, an individual’s motivation is driven by need; those whose salaries are their only source of survival will be more motivated to perform well. In some universities, teachers’ salaries are supplemented by tuition fees paid by students. Reputation remains important to these teachers, who are motivated towards excellence by the results achieved amongst their students.


In other universities, a teacher is prohibited from receiving any fee from his pupils, and his salary constitutes his entire revenue. If his salary remains the same whether or not he performs well, he is likely to cut corners and work as little as possible. If the school is regulated by a minister of state, he is not likely to abuse his position totally, but all that such superiors can force him to do is give a certain number of lectures.


Europe’s universities were originally instituted to educate churchmen, with theology the principal subject. A corrupted form of Latin had become the common language throughout Western Europe, and was used in church services and translations of the Bible read out in church. Over time, however, this language gradually ceased to be used in Europe.


European universities saw metaphysics as a more useful science than physics. The proper subject of experiment and observation, a subject in which careful attention often led to useful discoveries, was almost entirely neglected. Though universities were originally intended only for the education of churchmen, they gradually opened their doors to other students, most of whom were wealthy gentlemen. The majority of what is taught in universities, however, is not geared towards the world of business. In Britain, it became customary for young people to go off on a sabbatical break after leaving school, travelling abroad in order to widen their horizons. A young man, however, would commonly return home incapable of serious application to either study or business. Spending years away, free of parental control, they often go off the rails. Nothing can have a worse effect on young people than this absurd practice of a sabbatical at this young age.


There are no public educational institutions for women, who tend to be taught just what their parents or guardians believe is necessary. This education generally focuses on useful life skills such as preparing them for marriage and motherhood.


Division of labor, which touches the majority of the population, is such that it is intellectually confining, since a worker will generally repeat just one or two actions all day long and is therefore not mentally stimulated. His dexterity in his trade comes at the expense of his intellectual virtue.


The wealthy are not affected by this phenomenon as they generally do not start their professional lives until the age of eighteen or nineteen, and as such have plenty of time to acquire useful life skills, often supported financially by their parents or guardians. This is not the case for the less wealthy, who are obliged to enter the workforce as early as possible in order to make a living, which leaves them little leisure time. The essential aspects of education, however—reading, writing, math—can be acquired at an early age, before students start their working lives. As such, schools should be established in every parish, in which children can receive education for a small fee, so that even the working classes can afford it. In Scotland, nearly the entire population has been educated in such establishments.


The Expense of the Institutions for the Instruction of People of all Ages


Religious educational institutions traditionally focused not so much on making people good citizens in today’s world, but more on preparing them for the afterlife. Teachers’ salaries were paid either through voluntary contributions from their audience or a fixed salary or stipend. In every hierarchical society, there are always two different systems of morality: one strict, the other liberal. The liberal system favors the pursuit of pleasure—contrary to the austere system, which abhors such behavior. For the common laborer, a single week of such behavior can cost him his job; the wiser among them avoid such excesses.


Almost all religious sects are started by the lower classes, from whom they generally draw their earliest proselytes. These sects exercise an austere system of morality. Whereas a common laborer living in a small country village is likely to be known and respected by his fellow villagers, in a large city he will just be one of the masses, unnoticed and uncared for. Individuals in this situation often seek a sense of belonging and respect by joining a religious sect. They will be required to adhere to strict moral codes within the sect, and failure to do so resulting in expulsion. One way of decreasing the unsocial and extreme behaviors promoted by these sects is through the study of science and philosophy, or encouraging people to pursue cultural activities such as painting, poetry, music, etc., which dissipate melancholy and gloom.


The clergy of every established church constitute a great corporation. Their interest as an incorporated body is never the same as that of the sovereign, and is sometimes directly opposed to it. Their main concern is to maintain their authority over the people, which the do by promoting faith as a means of avoiding eternal misery. The authority of religion is superior to every other authority, with the fears it instigates conquering all other fears.


In the ancient state of Europe, the wealth of the clergy gave them the same sort of influence over the common people as that of the great barons over their subordinates. The estates granted to the church established jurisdictions that did not fall under the king’s authority.


The church’s revenues exceeded what the clergy could consume, and the surplus was employed in charity work. With the gradual advancement of the arts, business and commerce, however, the church’s charity work and hospitality gradually decreased. Their tenants started to grow independent of them, with the lower classes no longer reliant on them as they had been in the past. The power of the church was reduced to their spiritual authority, which itself was greatly weakened as its charity work diminished. The reformation began in Germany and soon spread through every part of Europe. The followers of Luther, together with what was known as the Church of Britain, exercised episcopal government. This system of church government promoted peace, good order, and respect of the civil sovereign. The followers of Calvin, on the contrary, allowed the people of each parish to elect their own pastor and established equality among the clergy.


In Presbyterian churches, where patronage is respected, the clergy endeavor to gain the respect of their superiors through their knowledge, irreproachable lifestyle and diligent work. Indeed, the Presbyterian clergy of the Netherlands, Geneva (Switzerland) and Scotland are some of the most respectable men in the Europe.


Benefices (the income and property provided for pastoral duties) are on the whole equal and minimal, which has a positive effect in that only exemplary morals can give dignity to a man of low income. People tend to view a pastor with the kindness with which we normally view someone in similar circumstances to our own, but whom we think ought to be in a higher position. Their kindness naturally encourages his kindness, and he strives to assist them.


In countries in which church benefices are very moderate, a chair in a university is generally a better establishment than a church benefice. The universities have, in this case, the picking of their members from all the churchmen of the country, who are all highly educated. Where church benefices are more substantial, the church naturally draws their educated clergy from the universities. In Britain, the church continually drains universities of their most educated members; whereas in protestant countries, the most educated men will have been professors in universities.


Part IV

The Expense of supporting the Dignity of the Sovereign


The expense of supporting the majesty or dignity of the sovereign is naturally high, since we expect the king to live in splendor.


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