An Inquiry into the Nature and Causes of the Wealth of Nations

by Adam Smith

The value of the risk, either from fire, or from loss by sea, or by capture, though it cannot, perhaps, be calculated very exactly, admits, however, of such a gross estimation, as renders it, in some degree, reducible to strict rule and method. The trade of insurance, therefore, may be carried on successfully by a joint-stock company, without any exclusive privilege. Neither the London Assurance, nor the Royal Exchange Assurance companies have any such privilege.

When a navigable cut or canal has been once made, the management of it becomes quite simple and easy, and it is reducible to strict rule and method. Even the making of it is so, as it may be contracted for with undertakers, at so much a mile, and so much a lock. The same thing may be said of a canal, an aqueduct, or a great pipe for bringing water to supply a great city. Such under-takings, therefore, may be, and accordingly frequently are, very successfully managed by joint-stock companies, without any exclusive privilege.

To establish a joint-stock company, however, for any undertaking, merely because such a company might be capable of managing it successfully; or, to exempt a particular set of dealers from some of the general laws which take place with regard to all their neighbours, merely because they might be capable of thriving, if they had such an exemption, would certainly not be reasonable. To render such an establishment perfectly reasonable, with the circumstance of being reducible to strict rule and method, two other circumstances ought to concur. First, it ought to appear with the clearest evidence, that the undertaking is of greater and more general utility than the greater part of common trades; and, secondly, that it requires a greater capital than can easily be collected into a private copartnery. If a moderate capital were sufficient, the great utility of the undertaking would not be a sufficient reason for establishing a joint-stock company; because, in this case, the demand for what it was to produce, would readily and easily be supplied by private adventurers. In the four trades above mentioned, both those circumstances concur.

The great and general utility of the banking trade, when prudently managed, has been fully explained in the second book of this Inquiry. But a public bank, which is to support public credit, and, upon particular emergencies, to advance to government the whole produce of a tax, to the amount, perhaps, of several millions, a year or two before it comes in, requires a greater capital than can easily be collected into any private copartnery.

The trade of insurance gives great security to the fortunes of private people, and, by dividing among a great many that loss which would ruin an individual, makes it fall light and easy upon the whole society. In order to give this security, however, it is necessary that the insurers should have a very large capital. Before the establishment of the two joint-stock companies for insurance in London, a list, it is said, was laid before the attorney-general, of one hundred and fifty private usurers, who had failed in the course of a few years.

That navigable cuts and canals, and the works which are sometimes necessary for supplying a great city with water, are of great and general utility, while, at the same time, they frequently require a greater expense than suits the fortunes of private people, is sufficiently obvious.

Except the four trades above mentioned, I have not been able to recollect any other, in which all the three circumstances requisite for rendering reasonable the establishment of a joint-stock company concur. The English copper company of London, the lead-smelting company, the glass-grinding company, have not even the pretext of any great or singular utility in the object which they pursue; nor does the pursuit of that object seem to require any expense unsuitable to the fortunes of many private men. Whether the trade which those companies carry on, is reducible to such strict rule and method as to render it fit for the management of a joint-stock company, or whether they have any reason to boast of their extraordinary profits, I do not pretend to know. The mine-adventurers company has been long ago bankrupt. A share in the stock of the British Linen company of Edinburgh sells, at present, very much below par, though less so than it did some years ago. The joint-stock companies, which are established for the public-spirited purpose of promoting some particular manufacture, over and above managing their own affairs ill, to the diminution of the general stock of the society, can, in other respects, scarce ever fail to do more harm than good. Notwithstanding the most upright intentions, the unavoidable partiality of their directors to particular branches of the manufacture, of which the undertakers mislead and impose upon them, is a real discouragement to the rest, and necessarily breaks, more or less, that natural proportion which would otherwise establish itself between judicious industry and profit, and which, to the general industry of the country, is of all encouragements the greatest and the most effectual.

ART. II.—Of the Expense of the Institution for the Education of Youth.

The institutions for the education of the youth may, in the same manner, furnish a revenue sufficient for defraying their own expense. The fee or honorary, which the scholar pays to the master, naturally constitutes a revenue of this kind.

Even where the reward of the master does not arise altogether from this natural revenue, it still is not necessary that it should be derived from that general revenue of the society, of which the collection and application are, in most countries, assigned to the executive power. Through the greater part of Europe, accordingly, the endowment of schools and colleges makes either no charge upon that general revenue, or but a very small one. It everywhere arises chiefly from some local or provincial revenue, from the rent of some landed estate, or from the interest of some sum of money, allotted and put under the management of trustees for this particular purpose, sometimes by the sovereign himself, and sometimes by some private donor.