By identifying economics as a field of study in its own right, Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations established a new discipline. It was the first book on economics really to catch the public’s attention, and is as much as anything else a great work of literature. Smith’s informal style, and his fearlessness in criticising the folly of rulers and the corrupting effects of vested interests, made him into a popular figure.
The effect of self-interest
Smith argues that it does not actually matter if societies are mainly driven by self-interest, since the overall effect is good. The ‘invisible hand’ of the free market makes sure that individuals acting to their own highest benefit end up elevating the whole. This is not an excuse to act greedily or unjustly. It simply means that a person’s honest labours to progress in life for the sake of himself or his family will lead to a good use of resources. A society allowed to act in this way will inevitably make the most of what it has, and over time grow prosperous. It underlined his philosophy of self-reliance: that we are more likely to help others, and be in a position to help them, when we have our own needs covered.
Wealth through specialisation
Smith believed that how wealthy a country becomes depends more than anything on the organisation of its labour force, specifically, as he put it, the ‘skill, dexterity, and judgment with which its labour is generally applied’. It also rested on the proportion of the population engaged in useful work.
He comments that in rich countries, even though many people do not work, society as a whole abundantly supplies most people’s needs. This is because rich countries characteristically have a much greater ‘division of labour’ than poor ones. There is great efficiency in dividing up tasks according to the ability of people best able to do them, and time is saved in not changing from one task to another.
But it is not just in physical production that the principle of the division of labour applies. In advanced societies, Smith writes, the creation of new ideas becomes the ‘trade’ of a whole group of people, co-existing beside the more mundane jobs. With such specialisation, ‘each individual becomes more expert in his own peculiar branch, more work is done upon the whole, and the quantity of science is considerably increased by it’. In a well-governed society, the division of labour leads to ‘universal opulence’, allowing every workers to cover their needs.
What determines value
According to Smith, value is the amount of labour that has gone into something’s creation, saving the buyer having to go through the same labour, that sets its value. People become rich by providing something of extremely high utility that saves.
How nations grow rich
Smith provides a simple recipe for how countries can become wealthy, which begins with their citizens being good savers. These savings are then invested toward productive ends.
In Smith’s time this wealth formula of savings–investment–employment was not at all the prevailing view of how nations could grow rich. The mercantilist view held that the economic object of a nation was to build up its store of gold, silver, and other precious metals, either through trade or war. Smith’s recipe, in contrast, seemed rather middle class and modest.
The other avenue by which countries could grow rich is trade. Countries who trade will always be richer than those who do not, since the trading country is able to buy raw materials that it does not have itself and turn them into manufactured goods, which are much more valuable than raw commodities and which it can then sell at great profit to other countries. Medieval European cities such as Florence amassed huge riches not by doing business simply with the countryside surrounding them, but with ‘the most remote corners of the globe’.
What not to do: Looting, wars, and luxuries
If a person spends their money on luxuries instead of building up capital, the day of financial reckoning will come. Likewise, Smith writes, a sovereign who spends huge sums on palaces, the pageantry of court, and unnecessary wars is looking for trouble.
Equally bad is the nation that believes it can get rich by looting other countries for all they are worth. Instead of plundering in search of fantastic gains, a country is better off slowly developing its own resources, and using trade to sell its surpluses and bring it what it needs to make high-value products.
Natural liberty
In Smith’s time legions of officials ensured that every possible penny could be extracted by the state through various taxes, customs, excises, and arbitrary rules. The Wealth of Nations was a success because it pointed instead to the principle of natural liberty, which assumed that people should be free to follow their economic interests with minimum government interference.
Smith insisted there were only three areas where government should have a role:
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Protecting a society from invasion.
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Protecting citizens ‘from the injustice or oppression of every other member of it’ with a corresponding judicial system.
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Building and maintaining public works and institutions that are too expensive for a single individual to undertake, but would benefit society greatly as a whole.
All these things should be paid for through taxes. However, when something benefits only a section of society, this should be paid for either privately, or by a tax on the users. Though Smith advocated the creation of a basic schooling system, he suggested that those who benefited the most from education should also be willing to pay for it.
Final comments
At first glance, rulers no doubt thought that the title of the book referred to the wealth of states, when in fact Smith used the term ‘nation’ to mean the people of those countries. The smartest governments did not put faith in themselves to create prosperity, he believed, but in the ingenuity of their citizens.
The simplicity and common sense of Smith’s delineation of government’s role has largely stood the test of time. Today, governments may grow large and bloated, moving into areas that are not really their business, but in time this inevitably makes the public poorer overall. Smith warns that such investment tends to corrupt the natural tendency of a society to allocate resources in
the best way.
In A Similar Vein
Milton Friedman: Capitalism and Freedom
Ayn Rand: Capitalism
Max Weber: The Protestant Ethic
Adam Smith
Smith was born in 1723 in Kirkcaldy, Scotland. At 15 Smith went to Glasgow University to study moral philosophy, and then on to Oxford University. In 1748 he began giving public lectures in Edinburgh, and in 1751 was appointed to a chair of logic, later moral philosophy, at Glasgow University. He resigned his post in 1763 to become the private tutor to a young Scottish nobleman, the Duke of Buccleuch. The pair travelled around Europe and met intellectuals including Turgot, Helvetius, and Quesnay. On returning to Scotland, Smith spent most of the following decade writing The Wealth of Nations. Following in his father’s footsteps, in 1778 he was appointed commissioner of customs in Edinburgh. He died in 1790, and never married.
