The latest issue of the Independent Review is devoted to hidden gems in Adam Smith’s Inquiry Into the Nature and Causes of the Wealth of Nations. I was very happy to accept Robert Whaples’s invitation to contribute an essay surveying Smith’s great 1776 work. Here’s a slice from my essay:
The mercantilists’ confusion about the relationship between money and wealth mirrors their confusion about the relationship between production and consumption. Starting with the correct observation that consumption depends on production—and furthered by the also correct observation that producers earn money for what they produce and sell— the mercantilists leaped to the mistaken conclusion that production is an economic activity superior to consumption. After all, consumption, by its nature, consumes goods, resources, and capital, while production produces goods, resources, and capital. Surely we should do as much as possible of the latter and as little as possible of the former. But because people, left to their own devices, are more eager to consume than they are to produce— people, alas, willingly pay to do the former but must be paid to do the latter— intervention by a wise state is necessary to promote production and control consumption.
Although Smith was aware that individuals (and governments) might well consume excessively, he nevertheless understood— as he famously put it, contradicting the mercantilists—that “consumption is the sole end and purpose of all production” (Smith [1776] 1981, 660). For Smith, a person can indeed consume excessively. But such excessiveness occurs only if and when that person’s consumption today reduces his ability to consume tomorrow by an amount that—when tomorrow arrives— the person will regret. Such a person realizes with remorse that his imprudent consumption yesterday diminished the total amount he’s able over time to consume. Ditto when an organization, including government, consumes: That consumption is excessive today only if it reduces its principals’ ability to consume tomorrow by an amount that the principals will regret.
In short, excessive consumption for Smith is consumption that imprudently reduces an economic entity’s ability to consume over a lifetime. Far from being opposed to consumption, Smith sought to maximize it over time.
The mercantilist attitude toward consumption differs categorically from Smith’s attitude. Whereas Smith understood that consumption is the end of economic activity, with production being exclusively a means to promote this end, mercantilists reverse this relationship, treating consumption as a means of promoting production. Smith could barely mask his contempt for this misunderstanding.
