Persistent Inefficiency: Adam Smith’s Theory of Slavery and Its Abolition in Western Europe

Abstract

Adam Smith made two positive claims about slavery in the context of developing economies. First, Smith argued that slavery was in general highly inefficient. By his account, the net product under freedom is 12 times larger than under slavery. Second, he observes that, despite its inefficiencies, slavery persists in most of the world. Taken together, these claims create a fundamental puzzle: Why do elites – owning slaves and holding political control – fail to make themselves better off by freeing their slaves?

Smith gives two very different answers to this puzzle. The first is psychological. Smith asserts that people have a fundamental desire to dominate others, and slavery provided that opportunity for slaveholding elites. The first explanation is the most commonly advanced in the literature. Yet no where else does Smith use the assumption of domination. This explanation therefore seems ad hoc.

I favor instead Smith’s second explanation, which fits well with the recent literature on the political-economics of development. This argument, far less known in the Smith literature, involves commitment problems. Freeing the slaves would deprive slaveholders of their property. How would they be compensated? In principle, a long-term compensation scheme could solve this problem. But in the undeveloped societies Smith discusses, such as feudal Europe, long-term contracts were difficult – perhaps impossible – to enforce. Indeed, I show that both parties to the long-term compensation scheme had incentives to dishonor it. In the presence of commitment problems, masters could not be assured they would, in fact, be better off freeing their slaves. Slaveholders therefore rationally avoided emancipation despite its inefficiency. Smith, the so-called father of economics, provides here a political and legal argument for the failure of a more efficient system of labor markets to emerge.

Keywords: economics of slavery, abolition, political commitment problems, political-economics of development

JEL Classification: B15, B31, D23, D78, N42, N53, O16, Q15