The Competitiveness of Nations
in a Global Knowledge-Based Economy
Adam Smith, Consumer Tastes, and Economic Growth
The Journal of Political Economy
Volume 76, Issue 3
May - June 1968
Adam Smith’s neglect of demand in explaining the determination of natural price is well known. But is it also true, as it is often inferred or assumed, that demand forces play no important role in the Wealth of Nations? As an analytical matter, the traditional interpretation is certainly a defensible one. If one confines oneself to the theory of value, the pickings are distinctly lean in that book. But, of course, only a rather small fraction of Smith’s major work is explicitly concerned with the theory of value. If one is interested also in inquiring into the nature and causes of the wealth of nations - and it is at least arguable that Smith possessed such an interest - it is possible that demand-side forces may be utilized in an important way. In describing and accounting for the process of economic growth as it occurred in Europe, does Smith rely heavily on demand forces as explanatory variables? Granted his limited use of demand within an analytical context, are such forces important within the framework of historical generalizations concerning economic growth?
This paper will attempt to furnish an affirmative answer to the last question. It will be argued that the taste and preference structure of consumers - or at least certain classes of consumers - is indispensable to Smith’s explanation of the process of economic growth. More specifically, it will be shown that (1) the composition of demand and (2) the impact of the availability of new commodities upon household behavior have, historically, been critical determinants of the “progress of opulence in different nations.” 
It will be argued further that Smith has a fairly well integrated view of
* The author wishes to acknowledge the benefit which he has derived from discussions with James Lorimer.
1. Book III of the Wealth of Nations is titled “Of the Different Progress of Opulence in Different Nations.” On the contents of Book III Schumpeter stated: “It did not attract the attention it seems to merit. In its somewhat dry and uninspired wisdom, it might have made an excellent starting point of a historical sociology of economic life that was never written” (Schumpeter, 1954, p. 187).
the nature and formation of human tastes and the manner and direction in which human wants develop over time. This view is an essential part of his conception of economic growth. It is not, however, expressed in a single place, and therefore it will be necessary to draw upon various sources to achieve the desired synthesis - in particular, to supplement Smith’s statement in various portions of the Wealth of Nations with materials from the earlier Theory of Moral Sentiments.
In examining the role played by demand in Smith’s view of development, it will be helpful to concentrate our attention on the economic surplus generated by different societies in different stages of development. For economic growth is regarded as essentially a matter of the size of the surplus at any moment in time and the manner in which it is disposed of. As we will see, certain aspects of consumer tastes are regarded by Smith as affecting all of these factors in a decisive way.
All of the earliest forms of society were, of course, preoccupied with the acquisition of food. “Among savage and barbarous nations, a hundredth or little more than a hundredth part of the labour of the whole year, will be sufficient to provide them with such cloathing and lodging as satisfy the greater part of the people. All the other ninety-nine parts are frequently no more than enough to provide them with food” (Smith, 1937, p. 163). Adam Smith distinguishes two stages prior to a settled agricultural society: (1) “hunters, the lowest and rudest state of society, such as we find it among the native tribes of North America” and (2) “nations of shepherds, a more advanced state of society, such as we find it among the Tartars and Arabs” (Smith, 1937, p. 653). The next more advanced stage is “a nation of mere husbandmen, “one where plants have been domesticated and a settled agriculture is carried on, but where there is “little foreign commerce, and no other manufactures but those coarse and household ones which almost every private family prepares for its own use” (Smith, 1937, p. 655). Subsequent stages, to which (and only to which) Smith applies the term “civilized society,” possess more extensive commerce, including foreign commerce, and a more extensive manufacturing sector, within which there exists an elaborate specialization of function among workmen (Smith, 1937, pp. 656-57).
Since “subsistence is, in the nature of things, prior to conveniency and luxury” (Smith, 1937, p. 357), the growth of the non-agricultural sector is dependent upon improvements in productivity in agriculture. “When by the improvement and cultivation of land the labour of one family can provide food for two, the labour of half the society becomes sufficient to provide food for the whole. The other half, therefore, or at least the greater part of them, can be employed in providing other things, or in satisfying the other wants and fancies of mankind” (Smith, 1937, p. 163). It is the growth in agricultural productivity, then, which makes possible urban society and the productive activities which are uniquely associated with
cities.  A surplus above subsistence needs emerges at very early stages in the development of societies. Although a nation of hunters provides only a “precarious subsistence” and “universal poverty,” a nation of shepherds can produce a very substantial surplus above subsistence requirements.  From this early stage onward, therefore, the disposition of the surplus becomes a matter of primary importance. This in turn raises the question of the distribution of income and the manner in which above-subsistence incomes are disposed of.
In a society of shepherds the range of commodities available for consumption is severely circumscribed. In the absence of the goods produced by a more advanced state of the arts and manufactures (whether domestically produced or made available through foreign trade), there are very few opportunities for expenditures on personal consumption. The result is that the wealthy acquire numerous dependents and retainers who rely for their subsistence entirely upon their masters:
A Tartar chief, the increase of whose herds and flocks is sufficient to maintain a thousand men, cannot well employ that increase in any other way than in maintaining a thousand men. The rude state of his society does not afford him any manufactured produce, any trinkets or baubles of any kind, for which he can exchange that part of his rude produce which is over and above his own consumption. The thousand men whom he thus maintains, depending entirely upon him for their subsistence, must obey his orders in war, and submit to his jurisdiction in peace. He is necessarily both their general and their judge, and his chieftainship is the necessary effect of the superiority of his fortune (Smith, 1937, p. 671; cf. Smith, 1956, pp. 15-16).
This point is, in fact, a general one applicable to all societies which do not have available to them the products of a more advanced and refined manufacturing.  The opportunity cost to the rich of supporting the poor is, at the margin, quite literally zero, and therefore the hospitality of the rich
2. “The cultivation and improvement of the country... which affords subsistence, must, necessarily, be prior to the increase of the town, which furnishes only the means of conveniency and luxury. It is the surplus produce of the country only, or what is over and above the maintenance of the cultivators, that constitutes the subsistence of the town, which can therefore increase only with the increase of this surplus produce” (Smith, 1937, p. 357).
3. Smith in fact attributes the establishment of regular government to the inequalities of property which emerge among shepherd societies. “The appropriation of herds and flocks which introduced an inequality of fortune, was that which first gave rise to regular government. Till there be property there can be no government, the very end of which is to secure wealth, and to defend the rich from the poor” (Smith, 1956, p. 15).
4. All large countries, in fact, have some minimal amount of manufacturing. See Smith’s qualification (Smith, 1937, p. 381).
“seems to be common in all nations to whom commerce and manufactures are little known” (Smith, 1937, p. 386):
In a country which has neither foreign commerce, nor any of the finer manufactures, a great proprietor, having nothing for which he can exchange the greater part of the produce of his lands which is over and above the maintenance of the cultivators, consumes the whole in rustic hospitality at home. If this surplus produce is sufficient to maintain a hundred or a thousand men, he can make use of it in no other way than by maintaining a hundred or a thousand men. He is at all times, therefore, surrounded with a multitude of retainers and dependants, who having no equivalent to give in return for their maintenance, but being fed entirely by his bounty, must obey him, for the same reason that soldiers must obey the prince who pays them. Before the extension of commerce and manufactures in Europe, the hospitality of the rich and the great, from the sovereign down to the smallest baron, exceeded every thing which in the present times we can easily form a notion of (Smith, 1937, p. 385).
In order to appreciate Smith’s further argument, it is important to understand an aspect of his interpretation of human behavior. Smith believed that, in all but the most primitive societies, “the necessities and conveniencies of the body” were easily provided for (Smith, 1817, p. 343; see also Smith, 1956, p. 160). In more advanced societies, the striving in the economic arena takes place not to procure goods which cater to human needs in any utilitarian sense; for the goods acquired by the rich are of “frivolous utility” and provide, at best, “trifling conveniencies.”  The effort involved in their acquisition certainly cannot be justified in terms of the direct utility they afford. Indeed, in speaking of the decision of the poor man’s son to pursue wealth, Smith says: “To obtain the conveniencies which these [wealth and greatness] afford, he submits in the first year, nay in the first month of his application, to more fatigue of body, and more uneasiness of mind, than he could have suffered through the whole of his life from the want of them” (Smith, 1817, p. 291). 
5. “The poor man’s son, whom Heaven in its anger has visited with ambition” finds, after a lifetime of “unrelenting industry” that “wealth and greatness are mere trinkets of frivolous utility, no more adapted for procuring ease of body or tranquility of mind, than the tweezer-cases of the lover of toys; and, like them too, more troublesome to the person who carries them about with him than all the advantages they can afford him are commodious. There is no other real difference between them, except that the conveniencies of the one are somewhat more observable than those of the other” (Smith, 1817, pp. 290-92 [emphasis added]). In old age, “power and riches appear then to be, what they are, enormous and operose machines contrived to produce a few trifling conveniencies to the body” (Smith, 1817, p. 293; see also pp. 236-37).
6. Also: “It is not ease or pleasure, but always honour, of one kind or another, though frequently an honour very ill understood, that the ambitious man really pursues” (Smith, 1817, p. 100).
What then is the object pursued by mankind if it is not the pleasure, comfort, and ease afforded by the acquisition of a large stock of worldly goods? Briefly, the recognition and admiration of our fellow human beings. “To deserve, to acquire, and to enjoy, the respect and admiration of mankind, are the great objects of ambition and emulation” (Smith, 1817, pp. 94-95). 
Although this respect and admiration should properly be attained through studying to be wise and practicing to be virtuous, “the great mob of mankind” is not adequately equipped to discern and appreciate wisdom and virtue and indiscriminately accords its respect and admiration to the rich and powerful.  Hence arises a corruption of the moral sentiments,  and hence the pursuit of riches is primarily actuated not by the enjoyment of riches itself but by the recognition and distinction which the possession and display of wealth affords: 
It is chiefly from this regard to the sentiments of mankind, that we pursue riches and avoid poverty. For to what purpose is all the toil and bustle of this world? What is the end of avarice and ambition, of the pursuit of wealth, or power, and preeminence? Is it to supply the necessities of nature? The wages of the meanest labourer can supply them. We see that they afford him food and clothing, the comfort of a house, and of a family. If we examine his economy with rigour, we should find that he spends a great part of them upon conveniencies, which may be regarded as superfluities, and that, upon extraordinary occasions, he can give something even to vanity and distinction. What then is the cause of our aversion to his situation, and why should those who have been educated in the higher ranks of life, regard
7. The importance of the pursuit of rank, and the unimportance of satisfying bodily needs, is expressed even more forcefully later on: “Though it is in order to supply the necessities and conveniencies of the body, that the advantages of external fortune are originally recommended to us, yet we cannot live long in the world without perceiving that the respect of our equals, our credit and rank in the society we live in, depend very much upon the degree in which we possess, or are supposed to possess these advantages. The desire of becoming the proper objects of this respect, of deserving and obtaining this credit and rank among our equals, is perhaps, the strongest of all our desires, and our anxiety to obtain the advantages of fortune is, accordingly, much more excited and irritated by this desire, than by that of supplying all the necessities and conveniencies of the body, which are always very easily supplied” (Smith, 1817, p. 343).
8. “We frequently see the respectful attentions of the world more strongly directed towards the rich and the great, than towards the wise and the virtuous” (Smith, 1817, p. 94).
9. Chapter III, Part I, of the Theory of Moral Sentiments is titled “Of the Corruption of Our Moral Sentiments, Which Is Occasioned by This Disposition To Admire the Rich and the Great, and To Despise or Neglect Persons of Poor and Mean Condition.”
10. “With the greater part of rich people, the chief enjoyment of riches consists in the parade of riches” (Smith, 1937, p. 172; cf. Smith, 1817, p. 77).
it as worse than death, to be reduced to live, even without labour, upon the same simple fare with him, to dwell under the same lowly roof, and to be clothed in the same humble attire? Do they imagine that their stomach is better, or their sleep sounder, in a palace than in a cottage? The contrary has been so often observed, and, indeed, is so very obvious, though it had never been observed, that there is nobody ignorant of it. From whence, then, arises that emulation which runs through all the different ranks of men, and what are the advantages which we propose by that great purpose of human life which we call bettering our condition? To be observed, to be attended to, to be taken notice of with sympathy, complacency, and approbation, are all the advantages which we can propose to derive from it. It is the vanity, not the ease, or the pleasure, which interests us. But vanity is always founded upon the belief of our being the object of attention and approbation. The rich man glories in his riches, because he feels that they naturally draw upon him the attention of the world, and that mankind are disposed to go along with him in all those agreeable emotions with which the advantages of his situation so readily inspire him. At the thought of this, his heart seems to swell and dilate itself within him, and he is fonder of his wealth, upon this account, than for all the other advantages it procures him (Smith, 1817, pp. 77-78). 
Nature has wisely judged that the distinction of ranks, the peace and order of society, would rest more securely upon the plain and palpable difference of birth and fortune, than upon the invisible and often uncertain difference of wisdom and virtue. The undistinguishing eyes of the great mob of mankind can well enough perceive the former: it is with difficulty that the nice discernment of the wise and the virtuous can sometimes distinguish the latter (Smith, 1817, p. 366).
Thus, the behavior of upper income receivers must be understood in terms of their pursuit of rank and distinction, and this underlies Smith’s
11. Later Smith states: “And thus, place, that great object which divides the wives of aldermen, is the end of half the labours of human life; and is the cause of all the tumult and bustle, all the rapine and injustice, which avarice and ambition have introduced into this world. People of sense, it is said, indeed despise place; that is, they despise sitting at the head of the table, and are indifferent who it is that is pointed out to the company by that frivolous circumstance, which the smallest advantage is capable of overbalancing. But rank, distinction, pre-eminence, no man despises, unless he is either raised very much above, or sunk very much below, the ordinary standard of human nature” (Smith, 1817, p. 90).
continuous reference, in the Wealth of Nations, to the vanity of the rich in attempting to account for the pattern of their consumption expenditures. 
In a society where the finer manufactures are not available, opportunities for cultivating one’s vanity are necessarily limited. In the absence of such commodities, large rental incomes are employed in hospitality, in the maintenance of a large group of retainers, and in acts of bounty to one’s tenants. In spite of these acts of generosity, however, the typical behavior of large landowners as late as the time of European feudalism was reasonably frugal. Large landowners were not extravagant, and it was even common for them to save. This was true not only of the nobility but of the sovereign himself, who frequently accumulated treasure. “In countries where a rich man can spend his revenue in no other way than by maintaining as many people as it can maintain, he is not apt to run out, and his benevolence it seems is seldom so violent as to attempt to maintain more than he can afford” (Smith, 1937, p. 391; cf. also pp. 414, 859-60).
All this was, however, transformed by the growth of commerce and manufactures, which brought an enormous enlargement of the commodity universe. Although the finer manufactures have sometimes grown up out of the “gradual refinement of those household and coarser manufactures which must at all times be carried on even in the poorest and rudest countries” (Smith, 1937, p. 382), foreign trade has, historically, played a crucial role in European countries:
The inhabitants of trading cities, by importing the improved manufactures and expensive luxuries of richer countries, afforded some food to the vanity of the great proprietors, who eagerly purchased them with great quantities of the rude produce of their own lands. The commerce of a great part of Europe in those times, accordingly, consisted chiefly in the exchange of their own rude, for the manufactured produce of more civilized nations. Thus the wool of England used to be exchanged for the wines of France, and the fine cloths of Flanders, in the same manner as the corn of Poland is at this day exchanged for the wines and brandies of France, and for the silks and velvets of France and Italy.
A taste for the finer and more improved manufactures, was in this manner introduced by foreign commerce into countries where no such works were carried on (Smith, 1937, p. 380).
12. “To be pleased with... groundless applause is a proof of the most superficial levity and weakness. It is what is properly called vanity” (Smith, 1817, p. 186). And later: “He is guilty of vanity who desires praise for qualities which are either not praiseworthy in any degree, or not in that degree in which he expects to be praised for them, who sets his character upon the frivolous ornaments of dress and equipage, or upon the equally frivolous accomplishments of ordinary behaviour” (Smith, 1817, p. 501).
In making available a wide range of goods with which a great proprietor could gratify his “most childish vanity,” a “revolution of the greatest importance to the public happiness” was brought about (Smith, 1937, p. 391). For the resulting alteration in expenditure flows, reflecting the tastes of (non-capitalist) upper income groups when confronted with an enlarged range of consumer goods, was directly responsible for events of major significance. These include, in addition to an accelerated rate of growth of output, the gradual erosion of the political power of the landowning classes and the decline of feudal institutions generally, the accelerated growth of capitalist institutions, and a large-scale shift in the composition of resource use and output.
The expansion in the range of alternatives for the disposition of the economic surplus had the immediate effects of (1) shifting the composition of consumer expenditure flows away from services and toward goods; (2) shifting upward the consumption functions of large property owners, who previously lived within their incomes because of the limited scope afforded for the exercise of personal vanity; and (3) less obvious, but at least as important, the strength of the desire for these new goods provided a motive for efficient cultivation which was previously lacking. The increased incentive provided by the availability of new goods led to the elimination of known inefficiencies which had previously been tolerated and to legal and institutional changes which, by strengthening economic incentives, Smith regarded as indispensable to sustained economic growth.
The transformation in the consumption expenditures of the wealthy which is wrought by the availability of finer manufactured goods in a previously agricultural society is, Smith appears to believe, highly predictable. For he argues that all members of higher income classes in an agricultural society - landlords, clergy, and sovereign - succumb equally, and with the same consequences, to the seductive attractions of these new goods. For, although “the desire of food is limited in every man by the narrow capacity of the human stomach,” it is also true that “the desire of the conveniencies and ornaments of building, dress, equipage, and household furniture, seems to have no limit or certain boundary” (Smith, 1937, p. 164).  As a result,
What all the violence of the feudal institutions could never have effected, the silent and insensible operation of foreign commerce and manufactures gradually brought about. These gradually furnished the great proprietors with something for which they could exchange the whole surplus produce of their lands, and which they could consume themselves without sharing it either with tenants or retainers. All for ourselves, and nothing for other
13. Some of the more misleading implications of Smith’s dictum concerning the “narrow capacity of the human stomach” are examined in Davis (1954). Somewhat surprisingly, Davis did not call attention to the even stronger statement by Smith on the same subject (in Smith, 1817, pp. 295-96).
people, seems, in every age of the world, to have been the vile maxim of the masters of mankind. As soon, therefore, as they could find a method of consuming the whole value of their rents themselves, they had no disposition to share them with any other persons. For a pair of diamond buckles perhaps, or for something as frivolous and useless, they exchanged the maintenance, or what is the same thing, the price of the maintenance of a thousand men for a year, and with it the whole weight and authority which it could give them. The buckles, however, were to be all their own, and no other human creature was to have any share of them; whereas in the more ancient method of expence they must have shared with at least a thousand people. With the judges that were to determine the preference, this difference was perfectly decisive; and thus, for the gratification of the most childish, the meanest and the most sordid of all vanities, they gradually bartered their whole power and authority (Smith, 1937, pp. 388-89).
The behavior of the clergy on their large landed estates was in no essential way different from that of other substantial landowners.  Similarly, the sovereign himself, the greatest single landowner, is subjected to the same forces and responds to them in the same manner. 
14. The large rents and tithes received by the clergy were usually paid in the form of agricultural products. “The quantity exceeded greatly what the clergy could themselves consume; and there were neither arts nor manufactures for the produce of which they could exchange the surplus. The clergy could derive advantage from this immense surplus in no other way than by employing it, as the great barons employed the like surplus of their revenues, in the most profuse hospitality, and in the most extensive charity. Both the hospitality and the charity of the ancient clergy, accordingly, are said to have been very great. They not only maintained almost the whole poor of every kingdom, but many knights and gentlemen had frequently no other means of subsistence than by travelling about from monastery to monastery, under pretence of devotion, but in reality to enjoy the hospitality of the clergy.... The gradual improvements of arts, manufactures, and commerce, the same causes which destroyed the power of the great barons, destroyed in the same manner, through the greater part of Europe, the whole temporal power of the clergy. In the produce of arts, manufactures, and commerce, the clergy, like the great barons, found something for which they could exchange their rude produce, and thereby discovered the means of spending their whole revenues upon their own persons, without giving any considerable share of them to other people. Their charity became gradually less extensive, their hospitality less liberal or less profuse. Their retainers became consequently less numerous, and by degrees dwindled away altogether. The clergy too, like the great barons, wished to get a better rent from their landed estates, in order to spend it, in the same manner, upon the gratification of their own private vanity and folly. But this increase of rent could be got only by granting leases to their tenants, who thereby became in a great measure independent of them” (Smith, 1937, pp. 753-55).
15. In a society with little commerce and manufactures, “the expence even of a sovereign is not directed by the vanity which delights in the gaudy finery of a court, but is employed in bounty to his tenants, and hospitality to his retainers. But bounty and hospitality very seldom lead to extravagance; though vanity almost always does... In a commercial country abounding with every sort of expensive luxury, the sovereign, in the same manner as almost all the great proprietors in his dominions, [naturally spends a great part of his revenue in purchasing those luxuries. His own and the neighbouring countries supply him abundantly with all the costly trinkets which compose the splendid, but insignificant pageantry of a court. For the sake of an inferior pageantry of the same kind, his nobles dismiss their retainers, make their tenants independent, and become gradually themselves as insignificant as the greater part of the wealthy burghers in his dominions. The same frivolous passions, which influence their conduct, influence his” (Smith, 1937, pp. 414, 861; see also pp. 859-60).]
HHC: [bracketed] displayed on page 370 of original.
The intensity of the landlord’s desire for “trinkets and baubles” led him gradually to dismiss his retainers and to reduce the number of the tenants on his land “to the number necessary for cultivating it.”
By the removal of the unnecessary mouths, and by exacting from the farmer the full value of the farm, a greater surplus, or what is the same thing, the price of a greater surplus, was obtained for the proprietor, which the merchants and manufacturers soon furnished him with a method of spending upon his own person in the same manner as he had done the rest. The same cause continuing to operate, he was desirous to raise his rents above what his lands, in the actual state of their improvement, could afford. His tenants could agree to this upon one condition only, that they should be secured in their possession, for such a term of years as might give them time to recover with profit whatever they should lay out in the further improvement of the land. The expensive vanity of the landlord made him willing to accept of this condition; and hence the origin of long leases (Smith, 1937, p. 390).
Again the same forces operated, with the same consequences, upon the clergy. 
Thus, in addition to its other consequences, the structure of tastes of the major propertied classes when confronted with the introduction of new goods resulted in a substantial increase in the economy’s output. Agriculture came to be reorganized in a manner which, for the first time, provided strong incentives to the cultivator to raise output over previous levels. 
There is another aspect of men’s evaluations of the satisfactions afforded by economic success to which Smith attaches much significance. Although, as we have seen, the satisfactions afforded by great wealth are not substantial, they nevertheless appear to be so from the vantage point of those less favorably situated. This is, apparently, a systematic bias in men’s expectations. Moreover, this overestimation of the pleasures of wealth is one of the most important features of man’s psychological endowment, since it has furnished the propelling force for the greater part of his earthly
16. See n. 14.
17. The role of legal and institutional factors in conditioning economic behavior is discussed at greater length in Rosenberg (1960).
achievements. It is fortunate for society that most men are incapable of making an accurate appraisal of the satisfactions to be derived from success in the pursuit of wealth. 
We must now confront a further implication of Smith’s proposition that “some forms of expence... seem to contribute more to the growth of public opulence than others” (Smith, 1937, p. 329). From the point of view of economic growth, Smith’s position is not only that a taste for goods is preferable to a taste for services.  It is also the case that a taste for durable goods is better than a taste for non-durables:
A man of fortune... may either spend his revenue in a profuse and sumptuous table, and in maintaining a great number of menial servants, and a multitude of dogs and horses; or contenting himself with a frugal table and few attendants, he may lay out the greater part of it in adorning his house or his country villa, in useful or ornamental buildings, in useful or ornamental furniture, in collecting books, statues, pictures; or in things more frivolous, jewels, baubles, ingenious trinkets of different kinds; or, what is most trifling of all, in amassing a great wardrobe of fine clothes (Smith, 1937, p. 329).
A man who purchases durables is every day adding to the stock of useful assets which will be available in the future.  Smith’s preference for durables
18. “And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth, by these labours of mankind, has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants” (Smith, 1817, p. 295).
19. Here we confront, from the output side, Smith’s distinction between productive and unproductive labor. We have no intention of entering into that tortured and protracted controversy, or defending Smith’s rather confused and inconsistent treatment. It will be sufficient to state that, from the point of view of Smith’s interest in economic growth, there was as much conceptual justification for attempting to distinguish between the two types of labor as there is for classifying expenditures in “consumption” and “investment” categories in the national income accounts.
Notice that educational services are an exception to Smith’s general preference for goods over services. Working-class parents, he points out, typically purchase insufficient educational services for their children (Smith, 1956, p. 256; Smith, 1937, pp. 736-37). Although teachers produce a service, it is one which, as he elsewhere recognizes, is capable of being accumulated. In his chapter on capital (Book II, chap. I), he explicitly recognizes that talents and skills acquired through education constitute part of the fixed capital of society (pp. 265-66).
20. “A stock of clothes may last several years: a stock of furniture half a century or a century: but a stock of houses, well built and properly taken care of, may last many centuries” (Smith, 1937, p. 265; cf. Smith, 1817, pp. 314-15).
is, of course, in a sense an extension of the logic underlying his distinction between productive and unproductive labor. Although the effects of the expenditures of the wealthy on non-durables do not perish quite so quickly as the “declamation of the actor, the harangue of the orator, or the tune of the musician” (which perish “in the very instant” of production) (Smith, 1937, p. 315), they do not add directly to the future stock of useful things. Similarly, nations are better off when “men of fortune” shift their expenditures to durable goods. For the current purchases of the rich in this fashion augment the supply of useful goods at some future date. These goods then become available to the “inferior and middling ranks of people” when they are eventually cast off by the wealthy (Smith, 1937, p. 330).  If we look upon economic growth as a matter of accumulating things which will provide a flow of useful services in the future, then it is clear that the greater the durability of an item, the more it approximates the characteristics of an investment good. A growing taste for durables is, therefore, favorable to economic growth. 
It is worth noting that Smith treats taste itself as a phenomenon which becomes important only in civilized societies where subsistence is easily acquired. His treatment of the conduct of people in savage societies, which are preoccupied with procuring a bare subsistence, suggests that they are controlled by social values and attitudes which provide as little scope as possible for the expression of personal tastes (Smith, 1817, Part V, chap. ii). Furthermore, in his own discussion of the influence of taste in societies where its exercise is allowed some importance, he is usually concerned with consumer durables - furniture, equipage, clothing, watches, palaces, ear-pickers, etc. This is, of course, consistent with the uniformity of content of food consumption implied by his curious statement that “the desire of food is limited in every man by the narrow capacity of the human stomach.”
Moreover, the growing taste for goods as opposed to services is crucial for economic growth because it is responsible for the expansion of the capitalist sector of the economy. In part this was a reflection of the technological fact that material goods required a substantial accumulation of capital for their production, whereas the provision of services typically required little capital. This growing preference, therefore, was responsible for fundamental structural changes in both the economy and society. The
21. “What was formerly a seat of the family of Seymour, is now an inn upon the Bath road. The marriage-bed of James the First of Great Britain, which his Queen brought with her from Denmark, as a present fit for a sovereign to make to a sovereign, was, a few years ago, the ornament of an ale-house at Dunfermline. In some ancient cities, which either have been long stationary, or have gone somewhat to decay, you will sometimes scarce find a single house which could have been built for its present inhabitants” (Smith, 1937, p. 330).
22. Cf. Nassau Senior: “The wealth of a Country will much depend on the question, whether the tastes of its inhabitants lead them to prefer objects of slow or of rapid destruction” (Senior, 1951, p. 54).
resulting enlargement of the capitalist sector and a growth in a middle class in turn led to a rise in the share of profits in the national income; with this, of course, went a higher proportion of saving and capital accumulation.  The growth of the capitalist sector was important also because it inculcated other qualities - thrift, discipline, orderliness, honesty, industry - and provided a new model (the abstemious and industrious capitalist) for the old one (the dissolute and profligate landowner). Smith seems to have regarded the mere presence of great wealth as exerting a demoralizing influence on the population.  He advances the generalization that, in mercantile and manufacturing towns, the poor will be found to be “in general industrious, sober, and thriving”; whereas, in court towns where the population is supported out of revenue rather than capital, “they are in general idle, dissolute and poor” (Smith, 1937, p. 319) 
Finally, the growth of commerce and manufactures produces stability in the political and institutional structure of society and security of expectations on the part of the individual which Smith refers to as “by far the most important of all their effects.” Hume is cited as the only writer who had previously noted this relationship. Hume’s own treatment of the origin, historical growth, and social consequences of capitalist institutions is both fascinating and complex, but that is another story. 
23. Malthus followed Adam Smith very closely here (see Malthus, 1951, pp. 42-43). For an illuminating discussion of the historical background, contemporary observations, and intellectual antecedents for Smith’s treatment of profit as a distinct income category, see Meek (1954).
24. Even capitalists are so corrupted. When profits are too high, that is, in the absence of competitive conditions, the capitalist behaves, in effect, like a large landowner. “The high rate of profit seems every where to destroy that parsimony which in other circumstances is natural to the character of the merchant. When profits are high, that sober virtue seems to be superfluous, and expensive luxury to suit better the affluence of his situation... Compare and you will be sensible how differently the conduct and character of merchants are affected by the high and by the low profits of stock… Light come, light go, says the proverb; and the ordinary tone of expence seems every where to be regulated, not so much according to the real ability of spending as to the supposed facility of getting money to spend” (Smith, 1937, pp. 578-79; see the dissenting opinion of Maithus, 1951, p. 192).
25. He adds: “The idleness of the greater part of the people who are maintained by the expence of revenue, corrupts, it is probable, the industry of those who ought to be maintained by the employment of capital, and renders it less advantageous to employ a capital there than in other places” (Smith, 1937, p. 320). Smith accounts for the past superiority of Glasgow over Edinburgh in these terms. The corrupting effects of wealth can, apparently, nullify or reverse the effects of earlier progress. “The inhabitants of a large village, it has sometimes been observed, after having made considerable progress in manufactures, have become idle and poor, in consequence of a great lord’s having taken up his residence in their neighbourhood” (Smith, 1937, p. 320; see also Rae, 1895, pp. 180-81).
26. “Commerce and manufactures gradually introduced order and good government and with them, the liberty and security of individuals, among the inhabitants of the country, who had before lived almost in a continual state of war with their neighbours, and of servile dependency upon their superiors. This, though it has been the least observed, is by far the most important of all their effects. Mr. Hume is the only writer who, so far as I know, has hitherto taken notice of it” (Smith, 1937, p. 385).
Davis, Joseph S. “Adam Smith and the Human Stomach,” Q.J.E., LXVIII, No. 2 (May, 1954), 275-86.
Malthus, T. R. Principles of Political Economy. New York: Augustus M. Kelley, 1951.
Meek, Ronald. “Adam Smith and the Classical Concept of Profit,” Scottish J. Pout. Econ., I, No. 2 (June, 1954), 138-53.
Rae, John. Life of Adam Smith. London: Macmillan Co., 1895.
Rosenberg, Nathan. “Some Institutional Aspects of The Wealth of Nations,” J.P.E., LXVIII, No. 6 (December, 1960), 557-70.
Schumpeter, Joseph. History of Economic Analysis. New York: Oxford University Press, 1954.
Senior, Nassau. An Outline of the Science of Political Economy. New York: Augustus M. Kelley, 1951.
Smith, Adam. The Theory of Moral Sentiments. Philadelphia: Anthony Finley, 1817.
__________ . The Wealth of Nations. New York: Random House, 1937.
__________ . Lectures on Justice, Police, Revenue and Arms. Edited by Edwin Cannan. New York: Kelley & Millman, 1956.
The Competitiveness of Nations
in a Global Knowledge-Based Economy