The Wealth Of Nations begins with Smith explaining production and exchange, and their contribution to national income. Using the example of a pin factory, Smith shows how specialisation can boost human productivity enormously. By specialising, people can use their talents, or acquire skill. And they can employ labour-saving machinery to boost production.
Then they exchange those specialist products, spreading the benefits of specialisation across the whole population. How far and how fast the benefit spreads depends on how wide and efficient is the market. Often, employers try to rig markets in their own interests, and call on governments to help them.
But the best interests of ordinary people are served if policymakers avoid such interventions and promote open competition. Smith goes on to say that building up capital is an essential condition for economic progress.
By saving some of what we produce instead of immediately consuming it, we can invest in new, dedicated, labour-saving equipment. The more we invest, the more efficient our production becomes. It is a virtuous circle. Thanks to this growth of capital, prosperity becomes an expanding pie: everyone becomes richer.
But capital can be lost, through mistakes, or theft, or profligate government spending. Just as individuals gain from specialisation, says Smith, so do nations. There is no point trying to grow grapes in Scotland, when they grow so plentifully in France. Countries should do what they are best at, and trade their products. Restrictions on international trade inevitably make both sides poorer. Legislators think too much of themselves when they believe that by intervening, they can direct production better than the market can.
Smith is critical of government and officialdom, but is no champion of laissez-faire. He believes that the market economy he has described can function and deliver its benefits only when its rules are observed — when property is secure and contracts are honoured. The maintenance of justice and the rule of law is therefore vital. So is defence. If our property can be stolen by a foreign power, we are no better off than if our own neighbours steal it.
The composition of these headlines has not always been an easy matter, and I hope that critics who are inclined to condemn any of them will take into account the smallness of the space available. The numbers of the Book and Chapter given in the margin of the original are relegated, with the very necessary addition of the number of the Part of the chapter if it is divided into numbered parts , to the top of the page in order to make room for a marginal summary of the text.
The original index, with some slight unavoidable changes of typography, is reprinted as it appeared in the third, fourth and fifth editions, but I have added to it, in square brackets, a large number of new articles and references. This will, I hope, be found useful by students of the history of economics. The evidence having been once collected at the expense of very considerable labour, it was surely better to put it on record, especially as these trivial notes, though numerous, if collected together would not occupy more than three or four pages of the present work.
Where he quotes his authority by name, no difficulty ordinarily arises. Elsewhere there is often little doubt about the matter. The search for authorities has been greatly facilitated by the publication of Dr. The Catalogue tells us what books Smith had in his possession at his death, fourteen years after the Wealth of Nations was published, while the Lectures often enable us to say that a particular piece of information must have been taken from a book published before Of course a careful comparison of words and phrases often makes it certain that a particular statement must have come from a particular source.
Nevertheless many of the references given must be regarded as indicating merely a possible source of information or inspiration. I have refrained from quoting or referring to parallel passages in other authors when it is impossible or improbable that Smith ever saw them. That many more references might be given by an editor gifted with omniscience I know better than any one.
To discover a reference has often taken hours of labour: to fail to discover one has often taken days. When Adam Smith misquotes or clearly misinterprets his authority, I note the fact, but I do not ordinarily profess to decide whether his authority is right or wrong. It is neither possible nor desirable to rewrite the history of nearly all economic institutions and a great many other institutions in the form of footnotes to the Wealth of Nations.
I would beseech any one who thinks that this ought to have been done to consider seriously what it would mean. The book is surely a classic of great historical interest which should not be overlaid by the opinions and criticisms of any subsequent moment—still less of any particular editor.
Much of the heavier work involved in preparing the present edition, especially the collation of the original editions, has been done by my friend Mrs. The goal was to make cheap gas available to the public. Instead, gas stations had no incentive to stay open for more than a few hours. Oil companies had no incentive to increase production domestically. Consumers had every incentive to buy more gasoline than they needed. Large-scale shortages and gas lines resulted.
Those gas lines disappeared almost immediately after controls were eliminated and prices were allowed to rise. While it is tempting to say the invisible hand limits government, that wouldn't necessarily be correct. Rather, the forces that guide voluntary economic activity toward large societal benefit are the same forces that limit the effectiveness of government intervention. Boiling the principles Smith expressed regarding the invisible hand and other concepts down to essentials, Smith believed a nation needed the following three elements to bring about universal prosperity.
Smith wanted people to practice thrift , hard work, and enlightened self-interest. He thought the practice of enlightened self-interest was natural for the majority of people. In his famous example, a butcher does not supply meat based on good-hearted intentions, but because he profits by selling meat. If the meat he sells is poor, he will not have repeat customers and, thus, no profit.
Therefore, it's in the butcher's interest to sell good meat at a price that customers are willing to pay, so that both parties benefit in every transaction. Smith believed the ability to think long-term would curb most businesses from abusing customers.
When that wasn't enough, he looked to the government to enforce laws. Extending upon self-interest in trade, Smith saw thrift and savings as important virtues, especially when savings were used to invest. Through investment, the industry would have the capital to buy more labor-saving machinery and encourage innovation. This technological leap forward would increase returns on invested capital and raise the overall standard of living.
Smith saw the responsibilities of the government as being limited to the defense of the nation, universal education, public works infrastructure such as roads and bridges , the enforcement of legal rights property rights and contracts , and the punishment of crime. The government would step in when people acted on their short-term interests and would make and enforce laws against robbery, fraud, and other similar crimes.
He cautioned against larger, bureaucratic governments, writing, "there is no art which one government sooner learns of another, than that of draining money from the pockets of the people. His focus on universal education was to counteract the negative and dulling effects of the division of labor that was a necessary part of industrialization.
The third element Smith proposed was a solid currency twinned with free-market principles. By backing currency with hard metals, Smith hoped to curtail the government's ability to depreciate currency by circulating more of it to pay for wars or other wasteful expenditures.
With hard currency acting as a check on spending, Smith wanted the government to follow free-market principles by keeping taxes low and allowing free trade across borders by eliminating tariffs.
He pointed out that tariffs and other taxes only succeeded in making life more expensive for the people while also stifling industry and trade abroad. To drive home the damaging nature of tariffs, Smith used the example of making wine in Scotland. He pointed out that good grapes could be grown in Scotland in hothouses, but the extra costs of heating would make Scottish wine 30 times more expensive than French wines. Far better, he reasoned, would be to trade something Scotland had an abundance of such as wool, in return for French wine.
In other words, because France has a competitive advantage in producing wine, tariffs aimed to create and protect a domestic wine industry would just waste resources and cost the public money.
It lacks proper explanations for pricing or a theory of value and Smith failed to see the importance of the entrepreneur in breaking up inefficiencies and creating new markets.
Both the opponents of and believers in Adam Smith's free-market capitalism have added to the framework set up in "The Wealth of Nations. Marginal utility , comparative advantage , entrepreneurship, the time-preference theory of interest, monetary theory , and many other pieces have been added to the whole since There is still work to be done as the size and interconnectedness of the world's economies bring up new and unexpected challenges to free-market capitalism.
The publishing of "The Wealth of Nations" marked the birth of modern capitalism as well as economics. Oddly enough, Adam Smith, the champion of the free market, spent the last years of his life as the Commissioner of Customs, meaning he was responsible for enforcing all the tariffs.
Historical irony aside, his invisible hand continues to be a powerful force today. Smith overturned the miserly view of mercantilism and gave us a vision of plenty and freedom for all. The free market he envisioned, though not yet fully realized, may have done more to raise the global standard of living than any single idea in history. Adam Smith. National Bureau of Economic Research. Accessed March 5, Ian Simpson Ross.
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