The Development of a System: Adam Smith and the Physiocrats

Adam Smith's early writings on economics (apart from two short fragments on the division of labour) are contained in the two sets of lecture notes currently available to us and in the document first discovered by W. R. Scott and described by him as an ‘Early Draft’ of the Wealth of Nations. The account that Smith provides in the second set of lecture notes is concerned with an economic system featuring the activities of agriculture, manufacture, and commerce where these activities are characterized by a division of labour, with the patterns of exchange facilitated by the use of money. There are three main features of the central analysis: the treatment of the division of labour, the analysis of price and allocation, and the exposure of the mercantile fallacy. This chapter also discusses Smith's account of the physiocratic system, which consists of proprietors, cultivators, manufacturers, and merchants. It also considers Smith's application of the basic principles of the system to a relatively neglected area of physiocracy — international trade.