Adam Smith's "Tolerable Administration of Justice" and the Wealth of Nations

Douglas A. Irwin

NBER Working Paper No. 20636
Issued in October 2014
NBER Program(s):The Program on the Development of the American Economy, The Development Economics Program, The Law and Economics Program, The Political Economy Program

In the Wealth of Nations, Adam Smith argues that a country's national income depends on its labor productivity, which in turn hinges on the division of labor. But why are some countries able to take advantage of the division of labor and become rich, while others fail to do so and remain poor? Smith's answer, in an important but neglected theme of his work, is the security of property rights that enable individuals to "secure the fruits of their own labor" and allow the division of labor to occur. Countries that can establish a "tolerable administration of justice" to secure property rights and allow investment and exchange to take place will see economic progress take place. Smith's emphasis on a country's "institutions" in determining its relative income has been supported by recent empirical work on economic development.

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Document Object Identifier (DOI): 10.3386/w20636

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