Adam Smith's “tolerable administration of justice” and the Wealth of Nations
| Published date | 01 July 2020 |
| DOI | http://doi.org/10.1111/sjpe.12229 |
| Author | Douglas A. Irwin |
| Date | 01 July 2020 |
Scott J Polit Econ . 2020;67:231–247. wileyonlinelibrary.com/journal/sjpe
|
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© 2019 Scottish Econ omic Society
1 | INTRODUCTION
Perhaps the mos t fundamental questi on in all of economics is explai ning why some countries are ric h and others
are poor. That was the cen tral question pose d by Adam Smith in the Wealth of Nations, justly rega rded as the disci‐
pline’s foundatio nal text. Smith’s answer is f ound in the first thre e chapters of Book I: a count ry’s income depend s
upon the produ ctivity of its lab or force, which in turn de pends on specializat ion and the division of lab or driven by
exchange (trade) an d limited by the extent of the ma rket.
But that explan ation leads to another que stion: why are some countr ies able to take advantag e of the division
of labor and other s not? Book III, “Of the di fferent Progress of Op ulence in different N ations,” promises an answe r
but fails to delive r. By far the sh ortest of the five books i n Smith’s treatise, Book III exam ines the symbiotic rela‐
tionship bet ween town and country, but does n ot give a clear answer to the que stion implicit in its tit le.
Accepted: 12 Jul y 2019
DOI: 10 .1111/sjpe.1 2229
ORIGINAL ARTICLE
Adam Smith's “tolerable administration of justice”
and the Wealth of Nations
Douglas A. Irwin
*I thank my coll eague Meir Kohn fo r many helpful dis cussions, as we ll as Henry Clar k and Dan Klein fo r useful commen ts. All refere nces are to the
Glasgow Editi on of the Works and C orresponde nce of Adam Smith . WN, Wealth of Natio ns; TMS, Theor y of Moral Sent iments (Smith , 1976 [1759];
1976 [1776]; 1978; 1980; 1983); LJ, Lectu res on Jurispr udence; LRBL , Lectures on R hetoric and Be lles Lettres ; Corr, Correspo ndence, follow ed by
the page numb er.
Dartmout h College and NBER, H anover,
New Hamphire
Correspondence
Douglas A. I rwin, Dartmo uth College and
NBER, Hanover, NH.
Email: douglas.irwin@dartmouth.edu
Abstract
Adam Smith argues t hat a country’s incom e depends on its
labor product ivity, which in turn hinges on t he division of
labor. But why are some countrie s able to take advantage
of the division of labor and b ecome rich, while oth ers fail
to do so and remain poor? Smith de scribes how the secu‐
rity of proper ty rights, thr ough a “tolerable a dministration
of justice,” allows investment a nd exchange to take place,
bringing about econ omic progress. Recent e mpirical work
on economic developm ent has supported S mith’s emphasis
on a country’s polit ical “institutions,” particularly t he judici‐
ary, in determining it s national income.
KEYWORDS
economic grow th, institutions, jud iciary, property rig hts, security,
weath of nations
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IRWIN
Yet, ultimately, Smith do es provide an answer to this ques tion: the security of prope rty. Without the protec‐
tion of proper ty, the division of labor will be s everely constrained . Secure propert y provides the necessar y incen‐
tive to align effo rt and reward, to enable pe ople to reap what they sow, and to all ow individuals and firms to p lan
for the future an d invest in economic imp rovements. The prote ction of private prop erty makes econo mic progress
possible and th erefore, in Smith’s view, is the most i mportant duty of gover nment.
In 1755, more than a decade b efore the publicat ion of the Wealth of Nations, Smith wrote a single sente nce that
encapsulates m uch of his thinking a bout economic d evelopment: “L ittle else is req uisite to carr y a state to the
highest degre e of opulence from the lowest barba rism, but peace , easy taxes, an d a tolerable admi nistration of
justice; all the r est being brought about by th e natural course of things.”1 Smi th believed that a “tolerabl e admin‐
istration of jus tice” required the establ ishment of a legal system to protec t private property f rom encroachment
and enforce contr acts and the r epayment of debt s. Of course, the a dministrati on of justice, a term S mith used
frequently, was mor e than just a means of incentivizing p roductive effort by enab ling individuals to “secure the
fruits of thei r own labor.” It was also a matter of peacefully a djudicating disputes and ens uring just relations be‐
tween indivi duals. And justice was ab solutely essential for so ciety to subsist at all; with out any “administration of
justice,” societ y would disintegra te and dissolve. Fur thermore, th e administrat ion of justice did not h ave to be
perfect , but it had to be tolerable. A n independent judiciar y was critical to ensur ing that this was the case.
Thus, Smith pr ovides a compelling explanat ion as to why the security of prop erty is important to a co untry’s
economic develo pment and, in turn, w hy an independent jud icial system is impor tant in providing t hat security. He
also provides seve ral illustra tions of the impac t of secure versus in secure proper ty on economi c development,
much in the way that t hose working on compa rative economic sys tems do today. Unfortunat ely, Smith’s discussion
of these issues wa s scattered throug hout the Wealth of Nations, the Theory of Moral Sentiments, and his Lectures on
Jurisprudence. Perhaps becaus e of this fragmentar y treatment, Smith’s emp hasis on the link betwee n the adminis‐
tration of just ice and the wealth of nations has n ever been fully appreciat ed.2
Smith’s analysis of th ese matters is worthy of stu dy because only recentl y have economists and polit ical scientists
returned to focu s on the role of a country ’s institutions, inc luding the legal sys tem and the securit y of property right s, in
fostering econ omic development. T hese factors wer e neglected both by th e classical economi sts (such as David Ric ardo
and Thomas Malt hus) and by later neoclas sical economist s (such as Alfred Ma rshall), althoug h Jeremy Bentham and J ohn
Stuart Mill app reciated their imp ortance. Not u ntil the work of Dougla ss North and othe rs gave renewed atte ntion to the
importan ce of institutions in econo mic development, and rea lly only in the past deca de, has there been much re search
on the role of prope rty rights (Besl ey & Ghatak, 2010), politic al institutions (Ace moglu & Robinson, 2012), and t he legal
system (La Por ta, Lopez‐de‐Salinas, and Shle ifer, 2008) in foste ring economic gro wth and develop ment. In doing so,
recent researc h has provided empirica l support for many of the pro positions that Smith ad vanced, including the i mpor‐
tance of an indep endent judiciary fo r ensuring the protect ion of property an d the sanctity of cont racts.
This paper provi des an account of Smit h’s important bu t neglected vie ws on the relations hip between th e
administrat ion of justice, the securi ty of property, and the w ealth of nations. After ex amining Smith’s belief that a
system of justi ce is needed so that proper ty rights can be protec ted, the paper sets out h is case for why security
of propert y provides an esse ntial incentive for e conomic acti vity to take place . Smith describ es the attrib utes
of a system for the im partial administrati on of justice and proposes a posit ive theory for its emerge nce in Great
Britain, alt hough he has less to say about how it c an be established elsewh ere. The paper then briefly e xamines
why the classica l economists neglec ted Smith’s views on this matte r and how Bentham and Mill ex tended Smith’s
1 Smith contin ued: “All governme nts which thwar t this natura l course, which f orce things into a nother channe l, or which ende avour to arrest t he
progress of so ciety at a part icular point, a re unnatural , and to support t hemselves are o bliged to be oppr essive and tyr annical” (EP S IV 25). This is
taken from a sh ort paper that S mith wrote to est ablish his pri ority in these i deas. Smith wr ote it out of fear tha t his ideas, whic h were presented i n
lectures at t he Universit y of Glasgow, might be p lagiarized. D ugald Stewar t quotes from the m anuscript in his m emoir of Smith , but unfortun ately
the documen t was later destr oyed.
2 Previous st udies of Smith’s vi ews on the impor tance of the leg al system (Lieb erman 2006) an d on the role of gover nment in econom ic development
(Roberts on 1983) touch on the se matters, b ut only tangent ially. Billet (1975) comes c losest to makin g the same point a s this paper.
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