The classic statement of economic liberalism, the policy of laissez-faire, was written during a ten-year period by Adam Smith, a Scottish professor of moral philosophy. The book’s ideas were useful in encouraging the rise of new business enterprise in Europe, but the ideas could not have taken hold so readily had it not been for the scope of Smith’s work and the effectiveness of his style.
As a philosopher, Smith was interested in finding intellectual justification for certain economic principles that he came to believe, but as an economist and writer, he was interested in making his ideas prevail in the world of business. He was reacting against oppressive systems of economic control that were restricting the growth of business, but although he concerned himself with general principles and their practical application, he was aware of the value of the individual, whether employer or laborer. There is no reason to believe Smith would have sanctioned monopolistic excesses of business or any unprincipled use of the free enterprise philosophy. To cite him in reverential tones is not to gain his sanction.
Smith begins his work with the assumption that whatever a nation consumes either is the product of the annual labor of that nation or is purchased with the products of labor. The wealth of the nation depends upon the proportion of the produce that goes to the consumers, and that proportion depends partly upon the proportion of those who are employed to those who are not, but even more on the skill of the workers and the efficiency of the means of distribution.
Book 1 of The Wealth of Nations considers the question of how the skill of the laborers can best be increased. Book 2 is a study of capital stock, since it is argued that the proportion of workers to nonlaborers is a function of the amount of capital stock available. In book 3 Smith explains how Europe came to emphasize the industry of the towns at the expense of agriculture. Various economic theories are presented in book 4, some stressing the importance of industry in the town, others the importance of agriculture. Book 5 considers the revenue of the sovereign, or commonwealth, with particular attention paid to the sources of that revenue and the consequences of governmental debt.
In Smith’s view, the productive power of labor is increased most readily by the division of labor: If each worker is given a specific job, the worker becomes more skillful, time is saved, and machinery will be invented that further speeds the rate of production. Smith believes that, as a result of the increase in production that followed the division of labor, a well-governed community would enjoy a “universal opulence which extends itself to the lowest ranks of people.”
Smith regards the division of labor as a necessary consequence of the human propensity to trade or to exchange one thing for another. He believes that the propensity to trade is a consequence of a more fundamental human trait: self-love. Thus, for Smith, the basic motivating force of any economic system is the self-interest of each person involved in the system.
Money originated as a means of facilitating exchange when the products of those who wish to barter are not desired by those with whom they choose to trade. To use Smith’s example, a butcher who has all the bread and beer he or she needs will not accept more bread or beer in exchange for meat. If the person with bread or beer can exchange it elsewhere for “money”—whether it be shells, tobacco, salt, cattle, or, the most favored...
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medium of exchange, metal—the money can be used to buy meat from the butcher.
Among the most important ideas in The Wealth of Nations is Smith’s claim that labor is the real measure of the exchangeable value of commodities. Commodities have a value in use, but this value is unimportant to the producer, who seeks to exchange what was made for something that is needed. The amount of work that can be purchased with a commodity is the real exchangeable value of that commodity. Thus, Smith defines wealth as the power of purchasing labor. The nominal, as distinguished from the real, price of commodities is their money value.
Smith defines the natural price as the average price of a commodity in a community and the market price as the actual selling price. He presents the familiar principle of supply and demand by stating that market price increases when the quantity of a commodity brought to market falls short of the demand.
Wherever there is perfect liberty, the advantages and disadvantages of different uses of labor and stock must be either equal or tending to equality, according to Smith. There are counterbalancing circumstances that affect equality: the agreeableness of the job, the cost of learning the business, the constancy of employment, the amount of trust that must be put in the employee, and the probability of success.
Smith makes a distinction between productive and unproductive labor. Labor is productive when it adds to the value of something, unproductive when it does not. The labor of a manufacturer adds to the value of the material that is used, but the labor of a menial servant adds nothing to the value of the employer who is served. This distinction is important, because capital is explained by reference to the proportion of productive to unproductive labor. Capital can be used for purchasing raw materials, for manufacturing, for transportation, and for distribution.
Smith was confident that he could discover the natural order of economic matters. To later critics, however, it appeared that he was mistaking his own preferred kind of economic situation for that which would prevail if economic relations among people were in no way affected by social habit. His inclination is to regard what would prevail in a civilized community free from governmental restraint as the natural state of affairs. This view is acceptable when he says, for example, “According to the natural course of things, therefore, the greater part of the capital of every growing society is, first, directed to agriculture, afterwards to manufactures, and last of all to foreign commerce”; however, the following account of rent is more provocative: “Rent, considered as the price paid for the use of land, is naturally the highest which the tenant can afford to pay in the actual circumstances of the land.” Smith appears to have written without obvious interest in supporting one economic class against another, and his definitions of “natural” price, rent, and other economic factors are couched in neutral terms.
Smith’s experiences as a teacher and philosopher are reflected most clearly in his account “Of the Expence of the Institutions for the Education of Youth.” He is rather bitter about the quality of education that results when the teacher is not driven by economic necessity to do his or her best. He asserts that professors who are responsible only to their colleagues are likely to allow one another to neglect their duties as teachers. The result is that “In the university of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretense of teaching.” Smith favors giving students a considerable part to play in the selection and retention of teachers, and he warns that if this is not done, the professors would devise ways of giving “sham-lectures” and would force their students to attend regularly and keep silent.
Smith thinks that the wealthy and wellborn can see to the education of their young, but that the state should support education for those who cannot otherwise afford it. He argues that it is important, particularly in free countries, that the public be educated to exercise good judgment.
In considering the revenue of the state, Smith proceeds on the principle that whatever expense is beneficial to the whole society can justly be defrayed by the general contribution of the whole society. Thus, defending the society, supporting the chief magistrate, administering justice, maintaining good roads and communications, supporting state institutions or public works, and, under certain circumstances, defraying the expenses of educational institutions and institutions for religious instruction are all properly supported by general contribution of the whole society.
Support of the institutions and activities of the state must come either from some fund belonging to the state or from the revenue of the people. Smith considers three sources of the revenue of individuals: rent, profit, and wages. His discussion of taxes is based upon four maxims: The taxpayer ought to be taxed according to ability to pay, as determined by revenue; the tax should be certain in the sense that there should be no question as to the time, manner, or quantity of payment; taxes should be levied in a convenient manner, for example with taxes on consumer goods paid when the goods are bought; and the tax should be economical in the sense that it should not be expensive to collect.
Smith’s The Wealth of Nations is a temperate, thorough, engrossing analysis of the economic facts of life in a free industrial society. Insofar as it is, to some extent, a proposal, it is not surprising that it has not won universal approval; but it is a masterpiece of its kind, and its influence on modern thought and practice has been significant.