Study Guide

The Wealth of Nations Book IV, Chapter 7

By Adam Smith

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Book IV, Chapter 7

Of Colonies

  • Now it's time for Smith to talk about something that was a really big deal in his time: the creation of overseas colonies. Let's not forget that he published The Wealth of Nations in 1776, the same year America went to war to win its independence from Great Britain.
  • Basically, a country creates colonies whenever it seems as though the wealth of that country has been mined. People on the bottom of society want a greater share in the wealth, but the folks up top don't want to share. So they send these folks off to some new country and wish them good luck with building their fortunes.
  • Smith is actually very critical of the way that Europe has stomped across the world, killing the native peoples of countless lands and grabbing everything for itself.
  • However, Smith also admits that new colonies create wealth more quickly than any other place on Earth. That's because they are constantly finding new land to farm, which creates more and more food and wealth. New land is practically there for whoever wants it, so more and more people make the land more and more productive by cultivating it.
  • Adam Smith also finds that America has been more successful at growing its economy because it is a democracy. Democracy does a better job of running things efficiently than a monarchy because monarchs quite often don't know what they're doing.
  • Smith returns to the concept of slavery, condemning it on both moral and economic grounds.
  • One really bad thing about colonies is that the mother country prohibits them from importing goods from anywhere other than the mother country. This ends up hurting both economies in the long run because it manipulates the natural prices of things and makes producers less productive. In the end, less stuff gets produced and the society as a whole becomes poorer, even though some individuals might get richer.
  • If you expose merchants to competition, they'll be much more careful with their money and more efficient in pursuing profit. And if you get all the merchants in an entire society acting this way, the overall wealth of that society increases.
  • Adam Smith believes that both England and its colonies would be better off if England just gave up these colonies and allowed them to be independent. But he's not foolish enough to think this will ever happen. There are too many private interests at stake.
  • Ultimately, he thinks England will have to give up its colonies because it will go broke by trying to keep them.
  • Smith goes through several examples to show how England's many colonies end up costing it more money than they make.

The Wealth of Nations Book IV, Chapter 7 Study Group

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