The Wealth of Nations · Chapter
Of the Public Works and Institutions Which Are Necessary for Facilitating Particular Branches of Commerce explained
This chapter examines the role of joint stock companies and regulated companies in facilitating commerce, focusing on their effectiveness in managing public works, maintaining forts and garrisons, and governing distant territories.
What happens
This chapter examines the role of joint stock companies and regulated companies in facilitating commerce, focusing on their effectiveness in managing public works, maintaining forts and garrisons, and governing distant territories. Smith critiques the East India Company's governance in India, highlighting the indifference of proprietors to the prosperity of the empire and the failures of the 1773 regulations. He also discusses the conditions under which joint stock companies are justified, such as banking, insurance, canals, and water supply, and contrasts them with regulated companies, noting the latter's unsuitability for maintaining forts. The chapter concludes with an analysis of the Turkey Company and the African Company, illustrating the challenges of balancing private interest with public duty.
Themes in this chapter
Role of Government
Explores the government's involvement in regulating joint stock companies and maintaining public works, as well as the failure of the East India Company as a sovereign entity.
Self-Interest and the Invisible Hand
Highlights how the self-interest of proprietors and directors often conflicts with the public good, leading to mismanagement and indifference to the empire's prosperity.
Free Trade and Market Competition
Critiques monopolistic practices of regulated and joint stock companies, advocating for open trade and the natural proportion between industry and profit.
Characters to notice
- The Proprietors
Criticized for their indifference to the prosperity of the empire and their focus on personal influence and plunder.
- The Servants of the Company
Mentioned as those who might waste or embezzle surplus revenue, and whose interests could predominate in the court of proprietors.
- Sir Josiah Child
Quoted on the difference between regulated and joint stock companies regarding the maintenance of forts and garrisons.
- George II
Referenced in the act establishing the African Company (23rd of George II c. 31).
- Hyder Ali
Mentioned as the incursion that the East India Company was unprepared to stop or resist.
Key passages
“No other sovereigns ever were, or, from the nature of things, ever could be, so perfectly indifferent about the happiness or misery of their subjects, the improvement or waste of their dominions, the glory or disgrace of their administration; as, from irresistible moral causes, the greater part of the proprietors of such a mercantile company are, and necessarily must be.”
No other rulers have ever been, or could ever be, as completely unconcerned about the well-being of their subjects or the state of their territories as the majority of shareholders in a mercantile company inevitably are.
Smith emphasizes the inherent indifference of company proprietors to the empire's welfare.
“The trade of insurance gives great security to the fortunes of private people, and by dividing among a great many that loss which would ruin an individual, makes it fall light and easy upon the whole society.”
Insurance trade protects private wealth by spreading the risk of a loss that would destroy one person across many, making it manageable for society.
Smith illustrates the public utility of insurance as a justification for joint stock companies.
“In all trades, the regular established traders, even though not incorporated, naturally combine to raise profits, which are no-way so likely to be kept, at all times, down to their proper level, as by the occasional competition of speculative adventurers.”
In every trade, established merchants tend to collude to increase profits, which can only be kept at a fair level through the intermittent competition of speculative traders.
Smith argues for the importance of competition to prevent profit inflation.
