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 he digs down into a much wider discussion of why the people of certain nations become wealthy. Barry R. Weingast offers his own thematic emphasis emphasis in “What Every PhD Student Should Know About Adam Smith” (Annual Review of Economics 2026, pp. 647-668).
Weingast runs through the Smithian topics that are familiar to most economists: division of labor, supply and demand, wages and apprenticeships, the role of money, poor laws, land rents, free trade, and so on. But Weingast’s emphasizes Smith’s discussion of how the laws and institutions supporting these factors arose. Where the lords ruled, those who worked the land called “slaves” by Smith. They had no right to move to another area, and if the land was transferred from one lord to another, the farmers also transferred automatically with the land. In this situation, Smith explains, no farmer under a lord had any incentive to increase production, because as Smith wrote, “[M]en in this defenseless state naturally content themselves with their necessary subsistence, because to acquire more might only tempt the injustice of their oppressors.” Smith also offers data that free men, in contrast to the “slaves” under control of feudal lords, produced about three times as much. Weingast calls this the no-growth “feudal equilbrium.”
Weingast encapsulates the Smithian argument about the transition away from feudalism in this way. In this feudal times in England involved three primary groups: the king, the great lords, and people in towns. However, commerce begins to travel up and down rivers, and at key points along those rivers, towns start building up to handld and manage the flow of commercial traffic. Weingast describes the power shift in this way:
The trading towns of Northern Europe managed to escape the feudal equilibrium, creating liberty, the rule of law, and long-term economic growth—at least for the merchant elite. How did the towns make this escape? … Smith began with the townsmen as part of the feudal equilibrium. He reports that the king and the lords attacked these unfortunate souls without “pity or remorse.” Over time, however, the king and the townsmen came to see that they had a common enemy in the barons and lords. Indeed, the townsmen were the enemies of his enemies. The king and towns therefore could benefit from a political exchange in which the
towns gave the king taxes, fixed for all time, in exchange for various rights. These included the right to build walls around their cities and to create their own militias for security, to have their own magistrates and judicial systems, and to create their own laws and mechanisms to enforce them. These changes provided the critical political and legal infrastructure to support markets, allowing the towns to get rich over time.The towns thus created three separate and non-incremental revolutions—in security, liberty, and the economy. The towns controlled all of these revolutions. Moreover, these exchanges were incentive-compatible. The kings valued the revenue, giving them advantages over the lords, and the towns valued their rights, greater security, and the income and profits from long-distance trade. Both parties to the exchange therefore had incentives to maintain the deal, and both had an interest in seeing the lords lose power relative to their own power. Over time, the towns grew in income and stature relative to the stagnant agriculture in the countryside. Indeed, as the towns grew rich, they were ahead of the countryside by two centuries from the standpoint of political and economic development. Smith summarizes this process: “Order and good government, and along with them the liberty and security of individuals, were, in this manner, established in cities at a time when the occupiers of land in the country were exposed to every sort of violence” …
The towns also created an important transformation of the local countrysides as the towns brought these areas under their (local) security umbrella and with it a semblance of property rights, contract enforcement, and other aspects of the foundations of liberty and the rule of law. This allowed the former slaves in these areas to become specialists in the production of food and raw materials sold to merchants in the town for local consumption or for export in long-distance trade. Per Smith’s division of labor, their incomes were sure to rise above
the subsistence agriculture they had previously suffered for generations. Of course, this transformation occurred largely in the vicinity of the towns at first, spreading into the countryside far more slowly. Nonetheless, much of the agrarian hinterland remained trapped in the feudal equilibrium.The towns used these rights from the king to take part in long-distance trade. I argue that, in many areas, resources became scarce over time, especially wood for building and for warmth (e.g., firewood). Every year this problem worsened as the scarcity increased. Holding constant for the risks, this scarcity slowly raised the value of taking part in long-distance trade. These merchants became enormously rich as they supplied the local economy with various goods that were scarce in their own towns while at the same time brought goods made or prepared locally that were scarce in other towns, often hundreds or even thousands of miles away. Again, we see here Smith’s division of labor at work.
The towns also had considerable violence potential. Given the violence of the lords, the violence potential of the towns had to be even higher. Indeed, this prowess in violence seemed a necessary and existential condition for the town’s survival. Had this condition failed, the lords would have continued to plunder the towns without pity or remorse.
In short, Smith (and Weingast) argued that the underlying conditions for division of labor, supply and demand, trade, and the other aspects of market forces were a balance of violence that allowed for public order, and then for contracts and markets to function. Weingast writes:
Indeed, in 1793, Dugald Stewart gave a eulogy for Smith [Stewart 1982 (1793)]. He reported a 1755 paper by Smith then in his possession (now lost), which said, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things.” To a neoclassical scholar of development, this sentence makes development sound formulaic. The reason, as I mention in the introduction, is that these economists assume the first and the third conditions when studying the developed world. But, as I suggest, Smith argued that creating these conditions is the task of development. To create a rule-of-law judicial system rather than a corrupt one based on bribery and privilege represents one of the central problems of modern development.
Of course, no country eliminated bribery and privilege altogether. There is always an element of “you-scratch-my-back, I’ll-scratch yours” and “who you know matters as much as what you know.” There are always interest groups lobbying politicians, and politicians seeking contributions. There are always people looking to build their own power. Adam Smith was a consummate realist, and in the quotation above refers to “a tolerable administration of justice,” rather than perfect justice. But even in a high-income country, pushing back hard against bribery, corruption, and privilege matters, because those factors erode the foundations on which the wealth of a nation is built.
