The prevailing view was that gold and silver was wealth, and that countries should boost exports and resist imports in order to maximize this metal wealth.
Today, we would call it gross national product. Another central theme is that this productive capacity rests on the division of labour and the accumulation of capital that it makes possible. Huge efficiencies can be gained by breaking production down into many small tasks, each undertaken by specialist hands.
This leaves producers with a surplus that they can exchange with others, or use to invest in new and even more efficient labour-saving machinery. The more that is invested in better productive processes, the more wealth will be created in the future. But if people are going to build up their capital, they must be confident that it will be secure from theft. The countries that prosper are those that grow their capital, manage it well, and protect it. A fourth theme is that this system is automatic.
Where things are scarce, people are prepared to pay more for them: there is more profit in supplying them, so producers invest more capital to produce them. Where there is a glut, prices and profits are low, producers switch their capital and enterprise elsewhere. But the system is automatic only when there is free trade and competition. When governments grant subsidies or monopolies to favoured producers, or shelter them behind tariff walls, they can charge higher prices.
The poor suffer most from this, facing higher costs for the necessities that they rely on. A further theme of The Wealth Of Nations is that competition and free exchange are under threat from the monopolies, tax preferences, controls, and other privileges that producers extract from the government authorities. For all these reasons, Smith believes that government itself must be limited.
Its core functions are maintaining defence, keeping order, building infrastructure and promoting education. It should keep the market economy open and free, and not act in ways that distort it. 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.
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. Norman Moor, without whose untiring assistance the book could not have been produced. Numerous friends have given me the benefit of their knowledge of particular points, and my hearty thanks are due to them. The text and footnotes are presented here in full.
Editor, Library of Economics and Liberty Book Cover. First Pub. Date Comments 5th edition. Copyright The text of this edition is in the public domain. Table of Content. Preface Editor's Introduction B. I, Introduction and Plan of the Work B. I, Ch. However, it is the absence of market mechanisms that frustrates government planning.
Some economists refer to this as the economic calculation problem. When people and businesses individually make decisions based on their willingness to pay money for a good or service, that information is captured dynamically in the price mechanism. This, in turn, allocates resources automatically toward the most valued ends.
When governments interfere with this process, unwanted shortages and surpluses tend to occur. Consider the massive gas shortages in the United States during the s. The Nixon and Ford administrations responded by introducing price controls to limit the cost of gasoline to American consumers. 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.
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