Studying the Wealth of Nations (Part 8)

Institutions and Prosperity in the Colonies

This is the eighth part of a weekly project marking the 250th anniversary of Adam Smith’s Wealth of Nations. You can find the seventh installment here.

Smith examined the progress of various colonies—both historical, such as ancient Greece and Rome, and contemporary, including the English, French, Spanish, and Portuguese. Yet he observes that none experienced the same rapid progress as the English colonies in North America.

This striking prosperity gap, according to Smith, was not an accident of luck or geography—it was the product of institutions. Broadly speaking, he attributes that prosperity to two primary factors: “Plenty of good land, and the liberty [of colonists] to manage their own affairs their own way.”

By “plenty of good land,” Smith does not simply mean that the colonies possessed large territories. Rather, he means that good land was both available and affordable for ordinary settlers. Two policies in the English colonies contributed to this, according to Smith: the limited effect of primogeniture and an unusual law that could lead to the forfeiture of uncultivated land. Beyond land institutions, he identifies two additional advantages enjoyed by the English colonies: modest taxation and relatively free trade.

Primogeniture and Land Use Restrictions

Adam Smith was adamantly opposed to what he called the “engrossing of land,” or the accumulation of large estates in the hands of a few individuals, which he described as “the greatest obstruction to its improvement.” One institutional mechanism that could contribute to such concentration was primogeniture, the practice by which the eldest child inherits the entirety of an estate.

Smith suggests this practice existed in most colonies (as it did in many European countries). However, he singles out Pennsylvania and several New England colonies as exceptions. Even where primogeniture existed in the English colonies, however, there was an important difference from the institutional arrangements found in some other colonial systems.

Specifically, land in the English colonies could generally be freely sold or divided—what Smith calls “alienation.” In contrast, the French colonial system imposed legal restrictions that could effectively undo such transactions. As Smith explains:

In the French colonies, if any part of an estate…is alienated, it is, for a limited time, subject to the right of redemption, either by the heir of the superior or by the heir of the family…which necessarily embarrasses alienation. But in a new colony, a great uncultivated estate is likely to be much more speedily divided by alienation than by succession.

In other words, if someone sold part of an estate in the French colonies, another heir could later reclaim it through a right of redemption. The possibility that voluntary transactions could be reversed made land transfers more uncertain and discouraged the breakup of large estates. When land cannot easily be sold or subdivided, it is more likely to remain idle rather than move into more productive uses.

For Smith, the problem is therefore not merely the accumulation of land itself, but the legal restrictions that prevent land from moving to those who are willing and able to improve it.

Smith also notes a second policy that encouraged the availability of land in the English colonies. Some colonies required landowners to cultivate a portion of their land within a certain period of time. If they failed to do so, those “neglected lands [became] grantable to any other person.”

This rule seems, at first, at odds with Smith’s emphasis on liberty. But he treats it less as a binding constraint and more as a background pressure against leaving land idle. Because enforcement was inconsistent, its importance lies not in direct application but in how it may have shaped expectations about land use.

Modest Taxes (and Tithes)

A third institutional advantage Smith identifies in the English colonies was their relatively low level of taxation. This was partly because the colonies “did not contribute any thing towards the defence of the mother country,” and partly because their local governments were comparatively modest, lacking the “excessive pomp or parade” that characterized many European states.

But Smith also includes tithes in his discussion of taxation, contrasting the absence of mandatory tithes in the English colonies with the situation in the colonies of France, Spain, and Portugal. In those systems, he writes rather bluntly that “the ecclesiastical government is extremely oppressive,” and that the beggary of the “mendicant friars…is a most grievous tax upon the poor people.” In his telling, the clergy in these colonies had become some of “the greatest engrossers of land.”

Importantly, the tithes Smith criticizes were not merely voluntary religious contributions. In much of Europe—and in several colonial systems—tithes were legally mandated payments, often tied to agricultural production. In that sense, they functioned as a form of taxation.

Because these payments were tied to output, they could also distort agricultural incentives. While Smith does not dwell on this point directly, the implication is straightforward: if a portion of agricultural output must be surrendered as a compulsory tithe, the return to cultivation is reduced.

The absence of legally mandated tithes in many English colonies is therefore noteworthy. One likely reason is the greater degree of religious pluralism and freedom that existed there compared with the state-church systems common in Europe and in other colonial empires.

Where churches must rely on voluntary contributions rather than legal privilege, they face competitive pressures similar to those in other sectors. Congregations must persuade rather than compel. In contrast, established state churches enjoy a monopoly on religious authority, reinforcing teachings that emphasize the duty to give—and the sinfulness of refusing.

Freedom of Trade and Production

The final institutional factor Smith highlights is the degree of freedom in trade allowed to the colonies. He describes several possible systems, arranged roughly from least free to most:

1. Trade conducted exclusively through a chartered company, such as the Dutch East India Company.

2. Trade restricted to ships of the mother country and conducted only through designated ports and seasons.

3. Trade freely conducted with the mother country.

4. Trade permitted with other countries, except for certain “enumerated commodities” reserved for the mother country.

According to Smith, the English colonies generally enjoyed the greatest degree of commercial freedom within this hierarchy.

Even so, England imposed several curious restrictions on colonial production. Laws limited the intercolonial trade of certain manufactured goods, including hats and woolens produced in America. Other policies prohibited the establishment of certain types of iron manufacturing, such as steel furnaces and slit mills, effectively ensuring colonial dependence on English industry.

In response to these policies, Smith offers one of his more forceful statements:

To prohibit a great people… from making all that they can of every part of their own produce, or from employing their stock and industry in the way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind... In their present state of improvement those prohibitions… are only impertinent badges of slavery imposed upon them, without any sufficient reason, by the groundless jealousy of the merchants and manufacturers of the mother country. In a more advanced state they might be really oppressive and insupportable.

For Smith, the lesson is clear: prosperity follows from institutions that allow land, labor, and capital to flow to their most productive uses—and falters when policy stands in the way.