The Wealth of Nations

by Adam Smith

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What are the main ideas of Adam Smith's The Wealth of Nations?

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One of the most important of Smith's ideas in The Wealth of Nations is that government should interfere in the running of the economy as little as possible. To be sure, Smith believed that the government still had an important role to play in establishing a legal and regulatory framework in which businesses operate, but beyond that, he regarded government intervention as tending towards more harm than good.

In Smith's day, the British government was run by the nobility, and the nobility, for the most part, were hopelessly ignorant of how a modern economy functioned. This was mainly because British noblemen were precluded by snobbery from getting involved too much with business and trade, which they thought beneath them. Yet despite this, the upper-classes still insisted on involving themselves with certain aspects of economic management.

Smith strongly believed that the running of the economy was way too important to leave in the hands of such amateurs. The best way to ensure that the economy operated to its utmost capacity was by allowing the free development of market forces, both in relation to the production of goods and their subsequent allocation.

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The Wealth of Nations by Adam Smith is an inquiry into how countries can generate their wealth. The book addresses and demonstrates economic principles that explain the role of the factors of production, among other factors, in the creation of wealth.

Adam Smith supported the idea that an economic system has the capability to regulate itself without external interference in what he termed the “invisible hand.” The context of his idea came from the need to balance incomes and production, suggesting that the balance can be achieved as an unintended benefit when individuals pursue their self-interest. Thus, the society benefits more when an individual pursues their personal progress.

Apart from the mainstream ideas that come out of the book, there is a point made by Adam Smith that is very fundamental to the creation of wealth. The author demonstrates the need for nations to measure their value in terms of the number of products that the nation can generate and not the number of precious metals that they hold. Thus, a country generates wealth based on their capacity to produce. The idea introduces the gross domestic product (GDP) to the field of economics.

The book also addresses the important role of the government in ensuring a favorable environment for commerce is created and maintained. The author emphasizes the need for ensuring justice, stability, and the development of infrastructure among other factors.

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Many fundamental economic principles found their first, or their most elegant, expression in Smith's The Wealth of Nations. This is by no means an exhaustive list, as Smith's work is very comprehensive, but below are a few of the main ideas of the work.

  • Division of labor: Using the production of pins as a sort of thought experiment, Smith showed that the best way to maximize efficiency in production was to foster specialization by dividing the production of goods into simple tasks.
  • Laissez-faire: Smith did not actually use this phrase, which is nevertheless often associated with him. But Smith did accept the basic premise that government intervention in the economy was not generally for the better. Smith was writing specifically about mercantilist laws, such as protective tariffs. He thought that, left alone, businessmen would make rational decisions about how best to employ their capital, which was best for everyone involved.
  • The "invisible hand": Smith argued that men were driven by self-interest, or, in economic terms, the profit motive. He did not imagine that this was a bad thing, but rather, as noted above, for the benefit of all. If people could make their own economic decisions, they would be more likely to make the decision that was best for them, and the overall economy would benefit. He said that people were guided by an "invisible hand" of self-interest to employ their capital in a way that benefited the most people.
  • The labor theory of value: Smith argued that it was actually labor that gave commodities their value, and that real wealth was the ability to purchase labor to employ in the creation of commodities. "Labour," he wrote, "is the real measure of the exchangeable value of all commodities."

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