Who hasn’t heard of the Industrial Revolution, the historical turning point that created modern society, for better or worse? Economist Donald Boudreaux has described this as the “hockey stick of human prosperity,” which launched the average person from subsistence to relative prosperity. Boudreaux credits the specialization and trade that characterized the eighteenth century. Likewise, he credits Adam Smith for describing the causes of modern prosperity, calling him the father of modern economics. This is a frequently told story, but is it true?
There are two important and related pieces of history that have been left out. The first is the British Agricultural Revolution’s role in providing the essential groundwork for the subsequent Industrial Revolution—increasing the land’s ability to feed a growing population and freeing up labor to work in factories. The second is economist Richard Cantillon’s recognition of the revolution’s significance in Essay on the Nature of Trade in General four decades before Adam Smith began writing The Wealth of Nations.
For Western societies, the Crusades enhanced trade. Certainly that trade had gotten a boost by the fifteenth century as a result of the discovery of the New World. Due to limited cargo space, the voyages’ length, and the risks associated with pirates and weather, the increase in transoceanic trade likely did little to address the so-called Malthusian trap that burdened the average person, that race between food supply gains and population growth.
If specialization and the division of labor were responsible for the Industrial Revolution, why did those factors suddenly kick in at the end of the eighteenth century, and how did they allow the land to support the significantly greater populations and living standards that suddenly came about? If any invention is associated with the Industrial Revolution, it’s James Watt’s 1765 steam engine. However, its first applications were pumping out mines and powering locomotives, which did little for food production. How, then, was agricultural productivity increased such that the labor needed in the factories of the Industrial era became available?
The British Agricultural Revolution (c. 1700–1850) was probably the major cause. Encyclopedia Britannica offers this description of the agricultural revolution:
gradual transformation of the traditional agricultural system that began in Britain in the 18th century. Aspects of this complex transformation, which was not completed until the 19th century, included the reallocation of land ownership to make farms more compact and an increased investment in technical improvements, such as new machinery, better drainage, scientific methods of breeding, and experimentation with new crops and systems of crop rotation.
If the British Agricultural Revolution was the forerunner of the Industrial Revolution, did Adam Smith expand upon his predecessor or did he introduce errors into economics and suppress Cantillon’s ideas? Cantillon had described three of the four currently recognized factors of production—land, labor, and entrepreneurship, identifying the latter as the factor that guided the others.
Curiously, Cantillon, a very successful banker, did not formally identify capital as the fourth factor, but French physiocrats later absorbed his work, and A.R.J. Turgot formalized the role of the entrepreneur-capitalist in his Reflections on the Formation and Distribution of Wealth (1766). In 1764, Adam Smith left his teaching position at the University of Glasgow to accompany Henry Scott, the Duke of Buccleuch, on a European tour during which he met the physiocrats and Turgot. During this time, Smith began writing The Wealth of Nations, which was published in 1776. Smith had clearly read Cantillon’s Essay because there is a criticism of it in The Wealth of Nations.
Instead of expanding on Cantillon and Turgot, Smith chose to ignore the entrepreneur’s role in the market (and thus the legitimacy of profit). He saw rent and profit as deductions from the return that ought to have gone to labor: “Rent and profit eat up wages, and the two superior orders of people oppress the inferior one.”
This interpretation laid the groundwork for the two-class system of bourgeoisie and proletarians set forth by Karl Marx and Friedrich Engels. “Marxists … hail Smith as the ultimate inspiration of their own Founding Father, Karl Marx,” wrote Murray Rothbard in Economic Thought before Adam Smith.
Much of The Wealth of Nations is devoted to opposing mercantilism. Smith appears to be antimercantilist domestically. International trade is another matter:
Some particular branches of commerce which are carried on with barbarous and uncivilized nations, require extraordinary protection. An ordinary store or counting house could give little security to the goods of the merchants who trade to the western coast of Africa. To defend them from the barbarous natives, it is necessary that the place where they are deposited should be in some measure fortified.
And what were the British trading on the west coast of Africa? Slaves. The quote above is also the basic justification for the British mercantilist system of imperialism. What could be more barbarous?
Smith’s Wealth of Nations had the advantage of a half century more of observation over Cantillon’s Essay, and yet it was the latter’s insights into the agricultural revolution and the guiding role of the entrepreneur in achieving economic progress that separated the two economists. It is high time Richard Cantillon and the British Agricultural Revolution got their due respect.