The Wealth of Nations
In 1776, Adam Smith published the first edition of An Inquiry into the Nature and Causes of the Wealth of Nations. The work sought to explore, through historical and contemporary examples, what made or caused nations to be wealthy.
Much of this discussion investigated the influence of commerce upon contemporary society, for better and for worse.
In 1776, Smith published the first edition of An Inquiry into the Nature and Causes of the Wealth of Nations. The work, which is split over five separate books, sought to explore, through historical and contemporary examples, what made or caused nations to be wealthy. Much of this discussion investigated the influence of commerce upon contemporary society, for better and for worse.
Smith's enquiry was both analytical study and a historical narrative, an approach which was innovative for the time. He is credited with heavily influencing the discipline which we now recognise as economics.
Smith found order in the complexities of the emerging commercial society. He was optimistic about this new society: it was wealthier and had the potential to better address society’s needs.
Social behaviour and morality continue to be central themes, as introduced in his earlier work, The Theory of Moral Sentiments. Smith argued that wealth of a nation was directly related to the wellbeing of its citizens.
Division of labour
The division of labour is one of the most important principles of modern management and the economy.
Smith gives the example of a pin factory to explain specialisation. One individual can make 20 pins a day, but when 10 people work together, with each worker specialising in one element of the process, they can make 48,000 a day. Smith described how each worker is devoted to carrying out a specific and specialist task within this process ('dividing' labour). Accordingly, the amount produced is increased as workers become more adept at their task.
A central role is played by the "bold undertakers", who we now refer to as entrepreneurs. This group owns firms, organises production, the division of labour, and devotes capital to continually trying to improve their position.
Surplus is the result of efficient processes, as 'extra' value is created. Surplus creates opportunities for reinvestment in further specialisation tools, such as machinery. The cycle continues, offering further profit as the newly created value can be once again claimed and reinvested.
Capital also refers to the transformation of raw materials into goods. As more, higher quality goods are produced more efficiently, prices fall and the goods become more readily available, improving the standard of living.
Specialisation is sustained through the act of trade; we ask others to do things which we cannot do ourselves. A stranger will provide goods to another, not out of kindness, but out of the benefit they derive from the sale.
The Invisible Hand and competitive markets
Smith is often associated with the concept of the 'Invisible Hand', a metaphor which explains how, under certain conditions, competitive society benefits from the unintended and uninterrupted consequences of individuals pursuing their own self-interest.
The 'invisible hand' as attributed to Smith has often come to be misused or misappropriated to explain how free markets - understood today as markets which 'self-regulate' and compete freely without third party/government intervention - reach a natural equilibrium. However, to suggest that Smith fully advocated for what we now understand as free markets, would be an oversimplification of his work. Smith was in favour of state intervention - at certain times and under certain conditions - to facilitate the benefits of "commercial society". An example of this would be Smith advocating for affordable education that would be subsidised by public funds.
Smith was aware that there were a number of forces which prevented the realisation of these benefits, such as merchants seeking protection from the government. However, he did not argue that humans were driven by self-interest alone. Moral sentiments, as discussed in The Theory of Moral Sentiments play a role here. There are virtues by which prosperous societies operate, which will inevitably influence markets.
The Wealth of Nations: The book that changed the world
Ahead of the 300th anniversary of the birth of Adam Smith, Professor Sir Anton Muscatelli, renowned economist and Principal of the University of Glasgow, and Dr Craig Smith, Adam Smith Senior Lecturer in the Scottish Enlightenment, share their views on the impact Smith's magnum opus has had on the world.
Adam Smith was a student and professor at the University of Glasgow during the flourishing of learning that marked the Scottish Enlightenment. He is a truly global figure whose work changed the world. His most famous book, An Inquiry into the Nature and Causes of the Wealth of Nations, was published in 1776 and remains in print to this day.
It is easy to regard The Wealth of Nations as a landmark in thinking about economics and society. While Smith was not the first to write about economic themes, he was the first to do so in a self-consciously scientific and systematic way.
His analysis of the new commercial society that he saw developing in 18th century Glasgow helped to shape the modern discipline of economics, giving us many of the core concepts that we still use to make sense of the economic world.
At the heart of the book is a new conception of wealth. Smith attacked those who thought the nature of wealth lay in the hoarding of gold or in the profits of merchants. Instead, he helped reframe our understanding of the nature of wealth, tracing it to the living standards enjoyed by the whole of the population.
Smith demonstrated how trade and the division of labour could transform productivity and benefit the whole of society.
The Wealth of Nations is also a deeply political, indeed a radical, book. Smith attacked the vested interests who advocated protectionism and who were driving forward Britain’s colonial and slave trades. He did so by demonstrating the faulty arguments used to support such positions. He was also deeply aware of the problems that came with this new form of society and advocated for public education as a means to improve the lives of workers.
Smith was more than an economist. He was a professor of moral philosophy who saw that our understanding of the economy involved understanding a range of political, legal, social and historical factors that impact on our lives. Smith’s commitment to understanding the world in an evidence-based and systematic fashion inspired future generations of social scientists and changed the way that we think about the modern world.
It was Adam Smith who, in book IV of The Wealth of Nations, wrote of his suspicion of merchants and manufacturers and what he called their 'interested sophistry'. He tells us to beware 'speculative physicians' with simple answers to complex problems.
As Smith was a 'political economist' he might have encouraged us not just to focus on the economic forces at play, but to ensure that the fundamental institutions in our society are cohesive, fair and resilient.
As we face some of the greatest and most complex intergenerational and transnational challenges of our time, be it the climate emergency, rising inequality, or post-pandemic recovery, there is much we can apply from Smith’s writings to today's society.
In our opinion, Adam Smith’s ideas changed the world beyond anything he could have anticipated, but his scholarly and optimistically humane outlook are as relevant today as they were 300 years ago.