The Wealth of Nations
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An Inquiry into the Nature and Causes of the Wealth of Nations is the magnum opus of Adam Smith, published in 1776. It is a clearly written account of economics at the dawn of the industrial revolution. It is widely considered to be the first modern work in the field of economics and is arguably the most important book on the subject ever published. Without a doubt, it is the most seminal text in the field of free-market capitalism. It is broken down into five books between two volumes.
The Wealth of Nations is often mischaracterized and politicized. Many people are confident in their opinions regarding the author, the work, and the subject matter, yet have never read it. It is as notable today for its continuing relevance as it is for its clear, straightforward style: It 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.
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Subject matter
The Wealth of Nations covers a variety of key economic subjects. Among them:
The Industrial Revolution
In Book One: Chapters I & III illustrate the growth in division of labor. Chapter X, 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: 1) the idea that protectionist tariffs serve the economic interests of a nation (or indeed any purpose whatsoever); and 2) that large reserves of gold bullion or other heavy metals are necessary for a country's economic success. In debunking the myths of protectionism, Smith helped set the stage for David Ricardo when he laid out his seminal Theory of Comparative Advantage.
The Invisible Hand
The Invisible Hand is an oft-referenced concept from the book. 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 One, Chapter 2)
This concept seems paradoxical and was heatedly attacked by both the religious community (which advocated charity as a means to serve community interest), and by statists. Indeed, it continues to be controversial to this day. A common equitable criticism is based primarily on the fact that Smith, by positing the concept of an invisible hand, seems to advocate selfishness and greed. In fact, this criticism is unfounded: 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 -- and this has beneficial rather than deleterious effects on the community).
On another level, though, the "invisible hand" also refers to the ability of the market to correct for seemingly disastrous situations with no intervention on the part of government or other organizations. 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 is a crucial concept in laissez faire economics.
The term "invisible hand" 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 Four, 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 labor 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 difficult for the then established economic minds to accept) 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.
This, like many of the seemingly paradoxical truths of The Wealth of Nations (and economics generally), met with a great deal of resistance from the established minds of Smith's time. However, most economists today accept it as true, at least on some level.
The Diamond-Water Paradox
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" (now discounted) and the labor theory of value (now discounted by most mainstream economists), 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 have no 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 falling back on 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 labor to mine, and are considerably rarer), or why a large, easily mined diamond is worth more than a small, difficult-to-spot one. In the end, the significance of the diamond-water paradox's appearance in The Wealth of Nations is not that it is solved, but that it points out flaws in the theories of valuation in Smith's time.
N.B.: While it is outside the scope of this article, the diamond-water paradox was brilliantly solved in two steps, by three separate economists. The first was Anne-Robert-Jacques Turgot, Baron de Laune (known as Turgot), a French contemporary of Smith's, who posited the "Subjective Theory of Value" (that objects only have value because people desire them in some way). The second two were Austrians Carl Menger and Eugen von Böhm-Bawerk, who, working together, advanced the marginal utility theory (now accepted as canon by most modern economists).
History
The Wealth of Nations came out of the Enlightenment Era in 1776. It influenced not only authors and economists, but governments and organizations. For example, Alexander Hamilton was impressed and influenced by The Wealth of Nations. It has been said that this work was a response to the French writing on the subjects of good governance, including commerce and regulation, which is partially true. However, the work is a leap forward in economics, similar to Principia for Physics and modern Mathematics and the Physical Sciences generally.
Many 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.
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.
- Feudalism was still dominant in Europe.
- The Feudal Corporations referenced by Smith were very different from modern corporations.
- Government Regulation: to equate Feudal Europe with the Trust Busting U.S. is improper.
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.
External links
- The Wealth of Nations (http://www.econlib.org/library/Smith/smWN.html) at the Library of Economics and Liberty (http://www.econlib.org/index.html). Cannan edition. Definitive, fully searchable, free online.
- The Wealth of Nations (http://www.adamsmith.org/smith/won-intro.htm) on the Adam Smith Institute (http://www.adamsmith.org/) website
- Works and Correspondence of Adam Smith (http://oll.libertyfund.org/Home3/BookSetToCPage.php?recordID=0141). Glasgow edition, 7 volumes of Adam Smith's works, at the Online Library of Liberty (http://oll.libertyfund.org/). Definitive, free online, includes The Wealth of Nations.
- The Wealth of Nations RSS Version (http://rss.duchs.com/smith/the-wealth-of-nations/) The RSS version of The Wealth of Nations
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