Excerpt reproduced from the author’s English edition. The complete chapter is available in the e-book.
Mr Smith, Europe Is Rich. Why Isn’t It Getting Richer Faster?
Edinburgh, Panmure House on the Canongate, where Adam Smith spent the last 12 years of his life. October 2026.
Author: Mr Smith, you wrote a book about why some nations are rich and others are not. I come from a Europe that, by many measures, ought to be the richest part of the world. It has educated people, first-rate universities, centuries-old craft traditions and a single market of 450 million people. And yet it grows more slowly than it could. I would like to ask you why.
Smith: First we must agree on what you mean by rich. I never measured the wealth of a nation by the gold in its cellars or by the king’s treasury. I measured it by the annual produce of the land and labour of the country, divided among those who consume it. That produce depends on two things: the skill with which people work, and the share of people who do useful work. Skill grows with the division of labour. And the division of labour is limited by the extent of the market. So let us begin with the market. How large is it really?
Author: On the map, enormous. There are no tariffs between the states of the Union, and goods travel without customs checks. Trade in goods between the member states now amounts to more than 40% of everything the Union produces in a year. For services, meaning projects, repairs, consultancy, construction or accounting, it is only 16%. In January this year the European Central Bank calculated that the barriers to trade in services between the states of the Union act as if a tariff of around 95% had been imposed on them.
Smith: A tariff of 95 per cent? For twelve years I was a Commissioner of Customs in Scotland. I know what a duty of half that size does: it turns an honest merchant into a smuggler. A duty that nearly doubles the price strangles trade, and all that is left is what people cannot do without. That would explain why your second number is so small. But you say you have no tariffs between your states. Who, then, collects this one?
Author: Nobody. It is the sum of everything that holds back trade between states, converted into a tariff. Different rules for practising a profession, different recognition of qualifications, different registrations and insurance, a different language at every office. An engineer from Brno who wants to design a hall in Vienna needs neither a cart nor a ship. He can send the drawings in a second. But before he may sign his first contract, he has to find out and meet another state’s rules for his profession.
Smith: Then you have turned my problem inside out. I wrote about a nailer in the Highlands of Scotland. In a year he could make 300,000 nails, yet in his neighbourhood he could not sell even a thousand, because carriage to more distant places was dear. Every mile of the journey raised the price of every load. Your engineer hardly needs a journey at all. He needs an entry ticket. And he pays for it once for every state, whether he sends one project there or a hundred. A cost like that weighs most heavily on the small craftsman, because he has nothing to spread it across. So the extent of your market is set not by distance but by the number of gates you must pass through. Whoever has a market only at home cannot specialise. And whoever does not specialise will not grow more skilful.
Author: For goods, though, the journey still matters. And here the difficulty is a different one. Each state plans its railways and roads according to its own plan and its own priorities. The plans do not join up. The sections across the border that would connect two national networks come last. The European Court of Auditors followed eight large projects with a cross-border dimension. Their estimated costs have risen by 82% against the original estimates, and five of them are on average 17 years late.
Smith: Seventeen years is the whole time it takes an apprentice to become a master. And 82 per cent means the work costs almost twice what was promised. You ask why the plans do not join up. Because each state builds what it benefits from itself. A section at the border serves the neighbour in large part, so the home budget puts it off. I held that a public work should be paid for and managed by those who benefit from it. A local road should be managed by a local administration, because it knows what the road is for and will keep an eye on it. But when half the benefit lies across the border, one state’s plan is no longer local administration. It is a distant power that cannot see half the benefit. The neighbour must decide and pay as well. And your common budget should pay not for how much has been built, but for what actually travels over that link.
Author: Let us say the market is open and the goods arrive. A company that sells wants to grow. It needs money. And here we have a paradox. European households hold financial assets worth more than twice everything the Union produces in a year. Almost a third of it sits in cash and bank accounts.
Smith: Twice the annual produce, saved. No nation in my day had such a stock. But stock is not capital until it sets labour in motion. Money lying idle in the coffers I called dead stock. A bank that lends it to merchants turns it into active and productive stock. How much of your savings reaches the businesses that want to grow?
Author: Little. Young companies in rapid growth are financed with venture capital: an investor puts in money for a share of the company and expects to lose on most companies and make a great deal on a few. Last year American companies raised more than seven times as much this way as European ones. And in the later, large funding rounds, domestic investors provide European companies with only 30% of the money. American ones with 81%.
Smith: Seven times as much, in a country with fewer people than yours. That is not a shortage of savings. It is a decision about what to use them for. Capitals of the same size set very different quantities of labour in motion, depending on where the owner places them. And the owner prefers what he can see and understand. I myself distrusted projectors who promised great profits from uncertain undertakings, and I wanted to limit interest so that banks would not lend to them. Young Bentham reproached me for it, and he was partly right. Tell me, who bears the risk of loss in your countries?
Author: In the large rounds, often an investor from outside the company’s home market. Domestic savings leave that opportunity to others. But even when the money comes, another difficulty awaits. Europe spends 2.2% of everything it produces in a year on research. There is no shortage of inventions. Yet when the European Research Council examined the patents from its most prestigious grants, fewer than half were being used commercially. And when an invention has to become a product, a company struggles for years to get enough good units off the line. The Swedish battery maker Northvolt did not manage it in time. It went bankrupt in 2025, and this year its factories were bought by an American company.
Smith: In my day machines were improved chiefly by the workmen who operated them and by the makers of machines. Only some improvements came from those I called philosophers or men of speculation, whose trade it is to observe. You have turned observation into a great industry. But let me ask a different question. The division of labour presupposes that a stock has been accumulated beforehand. A weaver cannot apply himself to weaving alone unless a stock is lying somewhere that will maintain him and supply him with yarn until he has finished and sold his cloth. The longer the time between beginning the work and selling it, the larger the stock that must be prepared in advance. With you, the time in which an invention learns to become a product is long. Who pays for the stock to last that long?
Author: Research grants pay for the invention. Banks lend only once there is a working factory. In between, there is a gap.
Smith: Perhaps the stock ran out before manufacturing learned to hold its own. But the sale of the factory alone does not tell us whether more money would have saved it.
Author: The second gap is people. Fully 79% of European companies say they lack qualified workers. The Union has set itself the goal that 60% of adults should take part in learning every year. According to the latest survey, the figure was just under 40%. And public money pays mainly for the fact that someone came to a course, not for what they learned.
Smith: Four companies out of five: that is no longer the trouble of one industry. Here I must admit the dark side of my own theory. The division of labour, to which we owe our wealth, confines most people to a few simple operations. A man who spends his whole life performing a few operations has no occasion to exert his understanding, and without help from the public he loses the abilities he had. I therefore proposed schools where the master is paid only in part by the public, so that he does not learn to neglect his business. And I proposed that a man should pass an examination before he may set up in a trade. The public should pay little and ask for proof of what a person can do. You pay for the fact that someone sat on a school bench. Such a teacher soon learns, above all, how to keep his pupils on their benches.
Author: And once people have learned something, they often leave. The Commission has counted 46 European regions where the working-age population is shrinking fast and the share of university graduates is standing still. They are home to 16% of the Union’s population.
Smith: A sixth of the people. People go where the whole of the advantages of their work is greater: wages, security, the prospect of success. In my country the law of settlements stood in their way. It was often more difficult for a poor man to pass the artificial boundary of a parish than an arm of the sea or a ridge of high mountains. You have abolished that obstacle. Why do you complain that people move?
Author: Because it is not individuals who leave, but whole networks. When a doctor, an engineer and a teacher leave a district town, it is not just three jobs that disappear. The work of those who stay gets worse, because they have lost the people they worked with. And then others may leave too.
Smith: That is an objection I did not think through. In my reasoning, people leaving makes labour scarcer in the place they leave, and therefore better paid. The advantages thus even themselves out. But if one person’s departure lowers the advantage of those who stay by more than the scarcity of their labour raises it, there will be no evening out. The region may then empty of its own accord. In that case, do not look for the answer in holding people back. Look for ways in which a person can work for a large market and still stay where he lives.
Author: That brings us to rules. Small and medium-sized companies in Europe spend roughly 1.8% of their turnover on the wages of people who assess and comply with regulations and standards. The Commission has promised to cut the administrative burden on companies by a quarter, and on small and medium-sized ones by 35%.
Smith: Nearly 2 per cent of turnover, not of profit? Then for a merchant with a thin margin it swallows a good part of what he earns. And a promise to cut by a quarter is, for now, a promise to count. I know rules that have outlived their reason. Primogeniture and entails made sense in an age when every great estate was a small principality, and dividing it weakened its defence. That age passed, but the rules remained, because they suited the families who profited from them. Laws frequently continue in force long after the circumstances which first gave occasion to them, and which could alone render them reasonable, are no more. Do not ask how old a rule is. Ask whether it still does what it was made for. And ask who benefits from nobody asking.
Author: We have a similar question about public money. After the pandemic, the Union set up a joint instrument for economic recovery, and the states borrowed for it together. By October this year it had paid out 79% of the total. It did not pay against invoices, but for completed steps: a law passed, a tender launched, a contract signed. The European Court of Auditors has warned that paying this way does not in itself guarantee a result. The Commission nonetheless wants to apply the same logic to the Union’s entire next budget.
Smith: I studied at Oxford for six years. The professors there lived on endowments that paid them whether they taught or not. Most of them had for many years given up even the pretence of teaching. Supervision from outside did not help, because the supervisors had the same interest as those they supervised. The step you pay for is a lecture entered in the timetable. Nobody counts the student who has learned something. Ask whether those the service is meant to serve have any say in how much is paid for it. If not, you will get a timetable, not teaching.
Author: It shows most clearly in electricity. In the north of Germany the wind blows and there is plenty of power; in the south stand the factories. The lines between them are not enough. Even so, the whole of Germany has a single wholesale electricity price. When the lines cannot cope, the grid operator orders power stations in the north to produce less and those in the south to produce more, and pays both for it. In the second quarter of last year, roughly one kilowatt-hour in thirty from wind and sun went to waste this way. And part of the electricity takes a detour through neighbouring states and loads their networks.
Smith: That is as if the law prescribed one price for corn throughout the whole kingdom, whether one county had a bad harvest or a plentiful one. The price would cease to tell merchants where to carry the corn and people where to economise. The government would then have to move the corn by command and pay for it. I wrote that a famine in Europe has never arisen from the speculation of corn dealers. It arose from a government that tried to cure scarcity by improper means. And the neighbours? If your corn travels across other people’s fields, do you pay them for the passage?
Author: Only in part. And one last question. Even when the goods arrive and suppliers multiply, the customer need not get a better price. Prices are increasingly set by computing tools that watch competitors’ prices and respond to them within minutes. At German petrol stations, margins rose by about 15% after they were introduced.
Smith: The margin, not the price: the difference between what the dealer pays and what he sells for. With goods that everyone sells alike, that is a large difference. I wrote that people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. The law cannot forbid such meetings. But it ought not to facilitate them. You tell me they need not even meet, because their tools meet instead. Then ask who supplies those tools, and whether he does not give them all the same head. And keep asking the same thing: can someone new come in with a lower price? Can the customer walk away? As long as the answer is yes, it is a market. Once it is no, it is a guild, only without its charter.