The Wealth of Nations

An Inquiry into the Nature and Causes of the Wealth of Nations is the magnum opus of the Scottish economist Adam Smith, published in 1776 during the Scottish Enlightenment. It is a clearly written account of political economy at the dawn of the Industrial Revolution, and is widely (if perhaps incorrectly, see below) considered to be the first modern work in the field of economics. The work is also the first comprehensive defense of free market policies. It is broken down into five books between two volumes.

The Wealth of Nations is often mischaracterised and politicised. As with a good number of literary works of this sort, many people are confident in their opinions regarding the author, the work, and the subject matter, yet have never read it. The book was written for the average educated individual of the 18th century rather than for specialists and mathematicians. Thus, the book remains relatively accessible, even for the modern reader.

Subject matter

The Wealth of Nations covers a variety of key economic subjects. Among them:

The Industrial Revolution

In Book 1:

Chapters 2 and 3 illustrate the growth in division of labor.
Chapter 10, part ii, motivates an understanding of the sunset of feudalism.

Mercantilism

The book has sometimes been described as a critique of mercantilism and a synthesis of the emerging economic thinking of Smith's time. Specifically, The Wealth of Nations attacks, inter alia, two major tenets of mercantilism:

The idea that protectionist tariffs serve the economic interests of a nation (or indeed any purpose whatsoever) and
The idea that large reserves of gold bullion or other precious metals are necessary for a country's economic success. This critique of mercantilism was later used by David Ricardo when he laid out his Theory of Comparative Advantage.

The concept of Invisible Hand

The "Invisible Hand" is a frequently referenced theme from the book, although it is only specifically mentioned once. The idea behind the Invisible Hand is, on one level, that people benefit the community around them simply by acting solely in their own self-interest, without conscious regard to community service. In other words, self-interest equates with general interest:

It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest. (Book 1, Chapter 2)

This concept seems paradoxical and was the source of much controversy — indeed, the controversy continues to this day. Among its harshest critics are the religious community (which argues that self-interest is a sin, and charity is the best means to serve community interest), and the political Left. There are two important features of Smith's concept of the "invisible hand" that are often overlooked, however. Firstly, Smith was not advocating a social policy (that people should act in their own self interest), but rather was describing an observed economic reality (that people do act in their own interest). Secondly, Smith was not claiming that all self-interest has beneficial effects on the community. He did not argue that self-interest is always good; he merely argued against the view that self-interest is necessarily bad. Indeed, he often harshly criticizes those who act purely out of self-interest and greed, and warns that, "^*ll for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind." (Book 3, Chapter 4)

It is worth noting that, upon his death, Smith left much of his personal wealth to charity.

On another level, though, the "invisible hand" refers to the ability of the market to correct for seemingly disastrous situations with no intervention on the part of government or other organizations (although Smith did not, himself, use the term with this meaning in mind). For example, Smith says, if a product shortage were to occur, that product's price in the market would rise, creating incentive for its production and a reduction in its consumption, eventually curing the shortage. The increased competition among manufacturers and increased supply would also lower the price of the product to its production cost plus a small profit, the "natural price." Smith believed that while human motives are often selfish and greedy, the competition in the free market would tend to benefit society as a whole anyway. This was later adopted as a universal principle by the laissez-faire economists of the 19th century.

Further, in Wealth of Nations, Smith displays a serious distrust of the tradesman class. He felt that the members of this class, especially acting together within the guilds they were wont to form, could constitute a power bloc and manipulate the state into regulating for "special interests" (i.e., the tradesmen) against the general interest: "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." (Book 1, Chapter 10).

The term "invisible hand" itself actually comes from a later portion of the book:

....by preferring the support of domestic to that of foreign industry, he intends only his own security, and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. (Book 4, Chapter 2)

Meritocracy

Meritocracy is a strong theme in the work. Specifically, Smith stresses the critical importance of allowing individuals to achieve what their "God-given talents" will allow them to, without interference from outside forces seeking to shape larger societal outcomes. Smith posits that these outside forces lead to inefficiency in the division of labour and hamstring progress generally.

"Both-Benefit" Transactions

Of all the innovative theories and observations in The Wealth of Nations, perhaps none was as trenchant (and as revolutionary for the economic thinking of the time) as Smith's recasting of the results of a mercantile transaction. Up until The Wealth of Nations it was generally accepted that in any economic transaction one side always "won." In other words, either the buyer or seller got to "put one over" on his "opponent" — one went home happy, the other went home and eventually got angry at himself for being a dupe.

Smith rejected this notion, however, and famously stated that "a voluntary, informed transaction always benefits both parties." That is, provided that there is no coercion or fraud, when the buyer gives something of value to the seller in exchange for something else of value, both parties "win." This is because the buyer values what the seller is selling more than what he is giving to the seller in exchange for it. And, for his part, the seller is all too happy to part with what he is selling for the buyer's property, because he values that more. The transaction would not occur if this were not the case, because neither party would want to exchange something he values highly for something he does not value very much. In short, each party gets something he wants more in exchange for something he wants less — they both benefit.

The Diamond-Water Paradox

Main article: Paradox of value

Smith addresses in The Wealth of Nations a problem that was torturing the best economic minds of his day. This problem was rooted in the means by which objects are valued. The two predominant theories of value in Smith's time were the so-called "Practical Theory of Value" and the labor theory of value, as delineated by David Ricardo.

The practical theory of value (also called the objective or intrinsic theory of value) held that an object's value was rooted in how useful it is to mankind. This had been the general consensus theory of value for many years, up to Smith's era. However, if this theory were true, why was it that diamonds (which had, at the time, little practical use) command a much higher price than water (which is utterly crucial to man's existence)? This problem was known as "the diamond-water paradox", as it seemed to make no sense.

Smith does not solve the riddle in The Wealth of Nations, but he points it out as an important question remaining to be answered in the field of economics. He does attempt to give a solution by adopting the labor theory: he concludes that diamonds are worth more than water because of their rarity, and because great effort is required to mine and cut them. However, Smith admits that even this solution is unsatisfactory because it does not sufficiently describe why diamonds are worth more than, say, emeralds (which require even more labour to mine, and are considerably rarer), or why a large, easily mined diamond is worth more than a small, difficult-to-spot one.

History and significance

The Wealth of Nations was published in 1776, during The Age of Enlightenment. It influenced not only authors and economists, but governments and organizations. For example, Alexander Hamilton was influenced in part by The Wealth of Nations to write his Report on Manufactures, in which he argued against many of Smith's policies. Interestingly, Hamilton based much of this report on the ideas of Jean-Baptiste Colbert, and it was, in part, to Colbert's ideas that Smith wished to respond with The Wealth of Nations.

Many other authors were influenced by the book and used it as a starting point in their own work, including Jean-Baptiste Say, David Ricardo, Thomas Malthus and, later, Karl Marx and Ludwig von Mises. The Russian national poet Aleksandr Pushkin refers to The Wealth of Nations in his 1833 verse-novel Eugene Onegin.

Irrespective of historical influence, however, The Wealth of Nations represented a clear leap forward in the field of economics, similar to Sir Isaac Newton's Principia Mathematica for physics or Antoine Lavoisier's Traité Élémentaire de Chimie for chemistry.

Anachronisms

Some commentary on the work suffers from anachronism. This is the result of reading the work as though it were written today. The book is written in modern English, but there are some points to consider:

The term economics was not yet in use.
The term capitalism was not yet in use. Smith talks about a "system of perfect liberty" or "system of natural liberty."
Feudalism was still dominant in Europe.
The feudal corporations referenced by Smith were very different from modern corporations.

Publishing history

Five editions of The Wealth of Nations were published during Smith's lifetime: in 1776, 1778, 1784, 1786, and 1789. Numerous editions appeared after Smith's death in 1790. To better understand the evolution of the work under Smith's hand, a team led by Edwin Cannan collated the first five editions. The differences were published along with an edited fifth edition in 1904 (see An Inquiry into the Nature and Causes of the Wealth of Nations, London: Methuen and Co., Ltd., ed. Edwin Cannan, 1904. Fifth edition.) They found minor but numerous differences (including the addition of many footnotes) between the first and the second editions, both of which were published in two volumes. The differences between the second and third editions, however, are major: In 1784, Smith annexed these first two editions with the publication of Additions and Corrections to the First and Second Editions of Dr. Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations, and he also had published the now three volume third edition of the Wealth of Nations which incorporated Additions and Corrections and, for the first time, an index. Among other things, the Additions and Corrections included entirely new sections. The fourth edition published in 1786 had only slight differences with the third edition, and Smith himself says in the Advertisement at the beginning of the book, "I have made no alterations of any kind." Finally, Cannan notes only trivial differences between the fourth and fifth editions — a set of misprints being removed from the fourth, and a different set of misprints being introduced into the fifth.

The first work of economics?

Eleven years prior to the publication of The Wealth of Nations, a Swedish-Finnish priest and economist called Anders Chydenius published The National Gain (Den Nationnale Winsten). Chydenius's work lays out several key principles of liberalism, free markets and free trade, many of which are also to be found in The Wealth of Nations. This has led some to argue that The Wealth of Nations was not the founding work of the modern school of economics after all, but was instead a kind of runner-up.

It is undoubtedly true (as Smith himself admitted) that The Wealth of Nations was composed, in part, of syntheses and analyses of existing political and economic theories. This is especially so with regard to the book's positions on mercantilism and protectionism (Smith owed much of his work on those subjects to the Physiocrats, for example).

However, it is equally true that The National Gain and works like it, have had nowhere near the international impact that The Wealth of Nations has had. The causes of this state of affairs are outside the scope of this article, but whatever the reasons, Smith's work continues to be canon in the field of economics down to this day, whereas The National Gain was not influential whatsoever outside of Chydenius's homeland.

Thus, while it cannot accurately be said to be the first modern work of political economy, The Wealth of Nations must still be termed the founding work of economics, as it, and no other work, is the progenitor of almost all modern economic theory. This situation may be seen as somewhat akin to the influence of The Origin of Species on the fields of evolution and anthropology. While Darwin's work was certainly not the first to lay out its theories, it remains the most important and the "original" work in those fields. Chydenius and others may have been first in the sense of strict timing, but Smith's work was the first to have a wide influence.

External links

Life of Adam Smith, by John Rae, at the Library of Economics and Liberty
An Inquiry into the Nature and Causes of the Wealth of Nations, by Adam Smith. Definitive, complete Cannan edition of the 5th edition of the Wealth of Nations.

1776 books | Adam Smith | Economics books | Non-fictional Scottish literature

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