Adam Smith: Rule of Law as the Backbone for Markets
Adam Smith’s 1776 book, An Inquiry into the Nature and Causes of the Wealth of Nations, is often described in casual conversation (at least by noneconomists) as a manifesto for the benefits and power of free markets. That’s a part of it, to be sure. But Smith was a profound thinker, not a pamphleteer, and … Continue reading Adam Smith: Rule of Law as the Backbone for Markets The post Adam Smith:…
Adam Smith's 1776 work, An Inquiry into the Nature and Causes of the Wealth of Nations, is often mistaken for a manifesto promoting free markets. However, Smith was a deep thinker, not a pamphleteer, and he explores a broader discussion on why certain nations become wealthy. Barry R. Weingast highlights this in "What Every PhD Student Should Know About Adam Smith" (Annual Review of Economics 2026, pp.
647-668). While both emphasize familiar topics like division of labor, supply and demand, wages, money, poor laws, land rents, free trade, and more, Weingast specifically focuses on the laws and institutions that support these factors.
Under feudal rule, lords held complete control over the land and the people who worked it, referred to by Smith as "slaves." These individuals had no incentive to produce more, as any increase could lead to oppression from their lords. In contrast, free men produced about three times as much as those under feudal control. This is referred to as the "no-growth feudal equilibrium."
As trade routes expanded, towns began to develop along these routes, eventually breaking free from the feudal equilibrium. They established their own governments, magistrates, and laws, creating a political and legal infrastructure that supported markets. This process of separation from feudalism involved three major revolutions: security, liberty, and economic growth. The towns gained significant advantages over the lords, who valued the tax revenue, while the towns valued their newfound rights and economic opportunities.
This shift allowed the towns to accumulate wealth through long-distance trade, as they could supply scarce goods to other towns while receiving goods that were scarce in their own areas. This division of labor and growing economic power led towns to become significantly more developed than the countryside, often by two centuries. Despite the towns' growing economic influence, much of the surrounding countryside remained trapped in the feudal system.
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