Context

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The Wealth of Nations was a critique of the existing organization of state controls referred to by social philosopher Adam Smith as mercantilism. Although rudimentary forms of capitalism existed as far back as ancient times, modern capitalism began to unfold in the late Middle Ages with the development of a merchant class. Continued exploration during the next few centuries and the formation of joint-stock companies allowed the development of mercantilism, a state-dominated commercial system that primarily endeavored to use commerce to strengthen state power. Factors such the Protestant Reformation, which supported a more positive view of wealth, the rise of scientific reasoning, and corresponding population increases influenced the desire for new economic systems. Drawing on Enlightenment thought—individual human beings came to replace God at the center of things—humans, with their rational minds, could improve themselves and society through systematic and rational action.

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In the late seventeenth century, philosopher John Locke proposed that the state had a responsibility for maintaining people’s rights—one right, in particular, the right to own property. Smith’s economic theories met the desire for economic change that would benefit the individual. However, mercantilism, which stimulated economic nationalism and encouraged government intervention in every aspect of trade, was the major economic system in the still primarily agricultural economy of late eighteenth century Britain.

The publication of The Wealth of Nations, the first comprehensive system of political economy, in 1776 marks the birth of economics as a separate discipline. The central theme is the growth of national wealth, which Smith, the moral and social philosopher, saw as the nation’s annual production of goods and services among the three classes: laborers, landlords, and manufacturers. Smith theorized that the liberty to trade unhindered by government intervention would result in increased abundance and wealth for all involved. Deeply opposed to mercantilist practices, which encouraged government intervention in every aspect of trade, Smith’s policy of free-trade economic liberalism, otherwise known as laissez-faire (“Let it be, let it go”) led to extraordinary economic growth, particularly in Britain and the United States.

Economic Systems and the State

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In his immensely popular and wide-ranging The Wealth of Nations, Smith provides an elaborate analysis of how economic systems function and develop over time, outlining the four main revolutionary economic stages that motivate society: the original “rude” state of hunters, a second stage of nomadic agronomy, a third period of feudal “farming,” and a fourth and final stage of business interdependence. During the hunter stage, a legal system remains unnecessary because “there is scarce any property . . . so there is seldom any established magistrate or any regular administration of justice.” However, as society becomes more complex and people begin to enclose flocks of animals, an legal system becomes paramount. Although Smith frowned on government controls, he clearly recognized the need for law enforcement for “the defence of the rich against the poor, or of those who have some property against those who have none at all.” Feudalism, the next stage in economic evolution, Smith describes primarily as a transition period leading from a guild-determined to a market-driven economy. The final phase, commercial capitalism, Smith referred to as a self-correcting system of “perfect liberty.”

The crux of the Scottish Enlightenment philosopher’s argument was that economics and politics should remain separate and independent. A proponent of efficiency, Smith argued that state intervention not only reduces freedom to trade but also is economically inefficient. His major thesis strongly maintains that the state should refrain from interfering with the economic life of a nation and limit itself to “legitimate areas of government”—protecting and defending property, enforcing contracts and maintaining certain public works. Free of government intervention, the market would maintain sole responsibility for production (land, labor, and capital) and distribution (channels through which goods move from the producer to the market) among different groups and people, and would flourish as a result. In addition, Smith viewed the labor involved in government jobs are “unproductive” because the work did not generate wealth.

Society would be better served if merchants and business people could be free to seek their own interests. When this freedom was granted, Smith proposed, the economy would be guided “as if by an invisible hand . . . without knowing it, without intending it, [to] advance the interest of the society.” Smith viewed merchants and business people primarily as selfish, their motives suspect. People who participate in the same type of trade, he wrote, never socialize together or conspire against each other or constantly attempt to raise prices. With the marketplace as the center of a capitalist system, Smith explained, the market itself would determine prices, what products would be produced, who would produce them, and even to whom to distribute the resultant profits.

This free-market commercial type of system, historians and economist argue, far outweighed the benefits of mercantilism because capitalism’s circular and diffuse nature assured that no one individual or group could ever control the marketplace. Rewards in the form of fortune and profit would naturally come to those who worked hard and, most important, efficiently; but punishment in the form of financial losses, or ruin, would be the consequence for inefficient work methods.

Further, Smith criticized the supporters of mercantilism who advocated state intervention in international trade. Using the Law of Comparative Advantage, Smith asserted that nations should export goods that they were most efficient at producing and import only goods that they were less efficient in producing. If there were no international barriers to the exchange of goods, a market guided by the forces of supply and demand increased the wealth of nations, while government intervention and restrictions only decreased the nation’s wealth.

Competition and Society

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In addition, competition promoted the best interests of society. Monopolies, private or state-controlled were evil, Smith believed. The natural trend of economic development is upward, and a framework of an “obvious and simple system of liberty,” or perfect competition, is vital to this movement. Competition in the marketplace, he stated, would automatically result in the availability of goods that consumers desired. More firms producing the same product would result in increased efficiency and ultimately lower costs to the consumer: in other words, spur economic growth.

Economic growth depended upon the accumulation of capital, distinguished by Smith from land and labor, the two other major factors of production. His primary concern focused on a system of “natural liberty” that would result in “maximizing general welfare.” He emphasized that it was not nature but human effort that produced commodities and strongly suggested that people possessed a desire to advance socially: “a desire that comes with us from the womb, and never leaves us until we go into the grave.” To advance upward, people needed to accumulate capital by saving and investing for the future. This innate desire at “self-betterment,” Smith viewed as a direct outcome of people’s natural competitive nature.

Taking the idea of innate competition one step further, Smith argued that this constant internalized competitive struggle not only forced the prices of commodities down to their “natural” level but also regulated the distribution of income among workers in the form of wages, in the form of rents to landlords, and to manufacturers in profits. In addition, he pointed out that the impetus behind this acquisitive drive would guarantee the steady increase of national wealth.

However, Smith did not foresee the tendency of individual businesses to increase dramatically in size. Industrial plants grew ever larger to gain the advantage of lower unit costs from mass production. Businesses expanded from small shops to large corporations employing thousands of workers, and corporations ultimately merged together forming enormous trusts, which in fact threatened a competitive economy.

Smith’s Considerable Influence

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The Wealth of Nations has to be considered one of the most influential studies of Western civilization. It provides a comprehensive view of political and social evolution. Indeed, economists and historians maintain that Smith’s theory of a laissez-faire or free-market economy transformed society. Certainly Smith, often called the founder of modern economics, played a major role in the development of the Industrial Revolution first in Britain, France, and Germany and later in the United States. As a result of a free-market economy, large corporations and industrial cities developed. Such business innovations as the ability of the public to purchase stocks and bonds enabled corporations to accumulate wealth. Under the watchful eyes of stockholders anxious for profitable returns on investments, more qualified managers and workers were hired. Naturally, attacks on capitalism ensued, particularly the writings of Karl Marx and Friedrich Engels, which ultimately acted as the foundation of socialism and communism.

Bibliography

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Additional Reading

Brown, Vivienne. Adam Smith’s Discourse: Canonicity, Commerce and Conscience. London: Routledge & Kegan Paul, 1994. Discusses the attack on mercantilism in The Wealth of Nations and reveals problems with Smith’s theories. Examines those theories from political, moral, and economic viewpoints. Discusses inconsistency between The Wealth of Nations and Smith’s The Theory of Moral Sentiments (1759).

Brown, Maurice. Adam Smith’s Economics: Its Place in the Development of Economic Thought. London: Routledge, 1992. Scholarly but approachable work sets forth the economic and historical contexts of Smith’s theories.

Campbell, R. Hutchinson, and Andrew S. Skinner. Adam Smith. New York: St. Martin’s Press, 1985. This volume not only provides biographical information on the philosopher but also furnishes facts on eighteenth century Scotland and Smith’s well-known circle of acquaintances, which included such luminaries as Benjamin Franklin.

Fay, Charles R. Adam Smith and the Scotland of His Day. Cambridge, London: Cambridge University Press, 1956. A loosely linked collection of essays that places Smith in the larger context of his time and place.

Fay, Charles R. The World of Adam Smith. New York: A.M. Kelley, 1965. Classic work on the philosopher. This book presents an historical, economical, and philosophical overview of Scotland and England in the eighteenth century, providing insight into the development of Smith’s philosophy. It particularly illustrates the reasoning behind his disdain for mercantilism.

Glahe, Fred R., ed. Adam Smith and the Wealth of Nations: 1776-1996. Bicentennial Essays. Boulder: Colorado Associated Press, 1978. A collection of appreciations by twentieth century champions of the free market.

Heilbroner, Robert. The Nature and Logic of Capitalism. New York: W. W. Norton, 1985. Well-recognized authority on Smith dissects the philosopher’s works, in particular The Wealth of Nations, to indisputably establish Smith as a predominant figure in the rise of capitalism and a free-market economy.

Hollander, Samuel. The Economics of Adam Smith. Toronto: University of Toronto Press, 1973. The best survey of Smith’s economic ideas.

Lindgren, J. Ralph. The Social Philosophy of Adam Smith. The Hague: Martinus Nijhoff, 1973. Undertakes to survey the full breadth of Smith’s philosophy, including moral judgment, psychology, religion, and science.

Muller, Jerry. Adam Smith in His Time and Ours. New York: Free Press, 1993. Describes the basic economic theories in The Wealth of Nations. Examines the effect of those theories on the mercantilism of Smith’s time, on the growth of capitalism, and on the late twentieth century.

Pack, Spencer J. Capitalism as a Moral System: Adam Smith’s Critique of the Free Market Economy. Brookfield, Vt.: Edward Elgar, 1991. Draws out Smith’s criticisms of laissez-faire and of capitalism.

Rae, John. Statement of Some New Principles on the Subject of Political Economy: Exposing the Fallacies of the System of Free Trade, and of Some Other Doctrines Maintained in “The Wealth of Nations.” Boston: Hillard, Gray, and Company, 1834. Very critical evaluation. Views The Wealth of Nations as a philosophy to explain known phenomena, not as an inquiry producing new economic laws.

Raphael, D. D. Adam Smith. Oxford: Oxford University Press, 1985. A brief intellectual biography written for the general reader.

Rashid, Salim. The Myth of Adam Smith. Lyme, N.H.: Edward Elgar, 1998. The author argues that Smith’s economic analysis is greatly overrated and finds inaccuracies in factual data and inconsistencies and fallacies in Smith’s analysis.

Skinner, Andrew S. A System of Social Science: Papers Relating to Adam Smith. Oxford: Clarendon Press, 1979. A collection of essays dealing with different aspects of Smith’s thought by a leading authority on the subject.

Tawney, Richard H. Religion and the Rise of Capitalism. New Brunswick, N.J.: Transaction Publications, 1998. Reprint of Harcourt Brace’s popular 1926 edition. The author dramatically illustrates the social conditions of eighteenth century Britain and the role Christianity played as the religion of capitalism.

West, E. G. Adam Smith: The Man and His Works. Indianapolis: Liberty Press, 1976. Presents the historical context of The Wealth of Nations and its immediate impact on Great Britain. Examines in detail many of Smith’s ideas. Discusses misconceptions about The Wealth of Nations.

Winch, Donald. Adam Smith’s Politics: An Essay in Historiographic Revision. Cambridge, England: Cambridge University Press, 1978. Discusses the concepts in The Wealth of Nations from the perspective of liberal capitalism. Examines the influence of Smith’s involvement in Whig politics on his economic theories in The Wealth of Nations.

Wood, John Cunningham, ed. Adam Smith: Critical Assessments. 4 vols. London: Croom Helm, 1983. Presents 150 articles and excerpts, many of which extend beyond Smith’s economic analysis.

Young, Jeffrey T. Economics as A Moral Science: The Political Economy of Adam Smith. Lyme, N.H.: Edward Elgar, 1997. Stresses the moral and ethical dimensions of Smith’s economic ideas.

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