Studying the Wealth of Nations (Conclusion)
Debt, War, and Fiscal Illusion
This is the twelfth and final part of a weekly project marking the 250th anniversary of Adam Smith’s Wealth of Nations. You can find the earlier installments here.
There is something fitting about how The Wealth of Nations ends.
After hundreds of pages on trade, markets, and institutions, Smith closes with a warning—one that feels less like a conclusion and more like a diagnosis. The same commercial society that generates wealth also enables governments to access it more easily, and with fewer constraints than before. The mechanism that makes this possible is public debt.
In this final chapter, Smith takes aim at a series of arguments used to justify government borrowing—arguments that remain familiar today.
The Political Economy of Borrowing
Smith begins with a simple but underappreciated point: governments, regardless of type, do not typically save in good times.
The parsimony which leads to accumulation has become almost as rare in republican as in monarchical governments… The taste for some sort of pageantry, for splendid buildings, at least, and other public ornaments, frequently prevails as much in the apparently sober senate-house of a little republic as in the dissipated court of the greatest king.
This lack of restraint in peace creates a predictable problem in war. In need of immediate funds, governments cannot wait for the slow collection of newly imposed taxes; the answer is to borrow.
But what starts as a mechanical, temporary expedient does not remain one. Over time, borrowing becomes the preferred strategy of government—not because it is economically superior, but because it solves a political problem.
To see why, it is necessary to look at how borrowing compares to taxation, particularly in times of war.
Borrowing, Taxation, and Fiscal Illusion
Smith’s explanation for why governments borrow rather than tax—especially during war—reveals the core of that political advantage.
They [the politicians] are unwilling for fear of offending the people, who, by so great and so sudden an increase of taxes, would soon be disgusted with the war… The facility of borrowing delivers them from the embarrassment which this fear and inability would otherwise occasion.
Further, the physical and economic costs are not borne equally throughout society. Those in the capital and remote areas are insulated from the war and may even get some enjoyment from it:
In great empires the people who live in the capital, and in the provinces remote from the scene of action, feel, many of them, scarce any inconveniency from the war; but enjoy, at their ease, the amusement of reading in the newspapers the exploits of their own fleets and armies.
The result is more frequent and longer wars than would occur if citizens bore the full fiscal cost. If wars had to be financed entirely through current taxation, the public would feel the full burden immediately:
Wars would in general be more speedily concluded, and less wantonly undertaken. The people feeling, during the continuance of the war, the complete burden of it, would soon grow weary of it...The foresight of the heavy and unavoidable burdens of war would hinder the people from wantonly calling for it when there was no real or solid interest to fight for.
This is the core of the mechanism. Borrowing allows the public to enjoy the benefits of war without bearing its full cost in the present—a dynamic later described as fiscal illusion. The result is predictable: wars become easier to sustain, more frequent, and longer in duration, with their burden shifted onto future taxpayers.
The same dynamic, of course, is not limited to war. It occurs whenever governments can expand spending on politically popular programs without tying those increases to current taxation.
Once borrowing becomes politically easier than taxation, it is not surprising that a set of arguments emerges to justify and sustain it. Smith addresses several of these directly.
Fallacy #1: “We Owe It to Ourselves”
One of the most common defenses of public debt is that it is harmless when held domestically: “it is the right hand which pays the left,” goes the defense.
Buying our own government’s debt means that domestic capital has been redirected away from more productive, market uses and toward government uses.
Yes, interest payments flow back to domestic lenders. But those lenders are not receiving some unique gain from government borrowing. They are receiving returns that, absent the debt, could have been generated elsewhere in the market—often more productively.
If, instead, a portion of the debt were held by foreigners, the picture would look different. Domestic capital could remain employed in domestic production, while foreign capital financed government borrowing. That does not eliminate the fiscal cost, but it does reduce the economic burden.
Further, it would also mean a reallocation of resources from producers to nonproducers. Or as Smith states:
the interest… is paid by industrious people, and given to support idle people.
The issue is not where the money ends up, but how it is raised and what it displaces.
Fallacy #2: Public Debt as “Capital”
Closely related is the idea that public debt represents an addition to national capital.
Smith dismantles this argument by tracing the origin of that “capital”:
the capital… advanced to government was… a certain portion of the annual produce turned away from serving in the function of a capital to serve in that of a revenue…
The act of creating public debt does not create capital. It consumes it.
From the perspective of the individual lender, capital may appear to be preserved or even increased—especially if they can sell the government security or borrow against it. But at the level of the economy, nothing new has been created. Resources have simply been diverted.
Had they not advanced this capital to government, there would have been… two capitals… instead of one…
Public debt is not a pool of wealth—it reflects capital that has already been consumed, often without generating future returns.
Fallacy #3: If We Can Bear This Debt, We Can Bear More
These arguments help justify the existence of public debt. But they also give rise to a third, more dangerous belief: that because debt can be sustained, it can be expanded without limit.
Because government debt can be bought and sold, and because there is a willing class of lenders, it can appear sustainable—even as it grows.
Smith notes that “Great Britain seems to support with ease a burden which, half a century ago, nobody believed her capable of supporting,” but warns against concluding that it can bear any burden.
Part of this apparent sustainability comes from the incentives of lenders. As Smith observes, government debt is attractive not only for its returns, but because it can be resold—often at a profit:
The security which [the state] grants to the original creditor is made transferable to any other creditor… and… generally sells in the market for more than was originally paid for it… Hence the inclination or willingness… to lend.
Today, this dynamic is reinforced by modern financial institutions. What is often described as an “insatiable demand” for government debt is, in part, sustained by central banks that act as backstops in secondary debt markets and ensure liquidity.
The presence of demand does not mean the absence of cost. It simply makes that cost easier to ignore.
Closing: What Smith Saw Clearly
Taken together, these arguments form a coherent warning—one that stands somewhat apart from the rest of The Wealth of Nations.
Across this series, a few themes have come up repeatedly.
In earlier entries on mercantilism, Smith showed how concentrated interests distort policy for their own benefit. In the discussion of colonies, he demonstrated how institutional differences—particularly around land, taxation, and trade—shape economic outcomes. And in his treatment of taxation, he emphasized principles of transparency, proportionality, and restraint.
This final chapter pulls those threads together.
Public debt, as Smith describes it, is not just a financial instrument. It is a political tool—one that allows governments to spend without immediately taxing, to pursue policies that might otherwise face resistance, and to shift burdens across time.
What makes Smith so striking here is not simply that he criticizes debt. It is that he understands the system that sustains it: the incentives of politicians, the willingness of lenders, and the imperfect visibility of costs to the public.
That combination—more than any single policy—is what makes persistent borrowing possible.
And it is why, more than two centuries later, his warnings are not just relevant—they are recognizable.