6. Trading and spending

Abstract

In Book IV of the Wealth of Nations, Smith identifies two faulty alternatives to his own explanation of the wealth of nations: the French Physiocrats, who argued that land is the sole source of wealth and revenue, and the mercantile system that aimed to achieve a favourable balance of trade by encouraging a surplus of exports over imports. ‘Trading and spending’ outlines the core of Smith’s system: free trade underlined by the principle of natural liberty. Smith believed that government in a commercial society has three duties: protection from external foes, maintenance of public works, and an ‘exact administration of justice’. How public expenses can be met through taxation and through borrowing is also explained.