The Wealth of Nations

by Adam Smith

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What was Adam Smith's purpose in writing The Wealth of Nations?

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One could argue that Adam Smith's purpose in writing The Wealth of Nations was to criticize the existing economic system and put forward a more efficient alternative. Smith was strongly critical of the mercantilist system and believed that an economy based on the operation of free trade and free markets would generate more wealth and prosperity.

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Previous educators have rightly drawn attention to The Wealth of Nations as a critique of mercantilism, the dominant economic system at that time. For Smith, mercantilism wasn't just economically inefficient, it represented a failure to understand human wants and needs, which he felt would be much better served by a system based on free markets and free trade between nations.

For critics like Smith, mercantilism represented everything that was wrong with economic policy when amateurs get involved with running the economy.

At the time when Smith wrote The Wealth of Nations, British economic policy was predominantly in the hands of aristocrats who tended to have little or no experience of how a modern economy actually worked. And so they fell back on the tried and trusted policy of mercantilism as a way of maintaining economic prosperity.

But Smith argued strongly that, though there was undoubtedly a role for government to play in regulating the economy, the key decisions about the production and allocation of goods should be made according to the operation of the free market. The market, not well-meaning amateurs in government departments, would determine what, where, and at what price goods would be produced.

Smith was sure that without the constraints imposed by the mercantilist system, the economy would be able to generate considerably more wealth and prosperity. In putting forward his economic philosophy in The Wealth of Nations, he was challenging the prevailing orthodoxy and trying to convince his readers that there was a much better, more efficient way of doing things.

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Adam Smith wrote The Wealth of Nations in 1776 to criticize mercantilism, which was the primary economic system at the time. Under mercantilism, it was believed that wealth was finite. Prosperity could be increased by keeping gold and precious metals and tariffing goods from other countries. Through mercantilism, a country attempts to become more prosperous through trade and exporting more than it is importing.

For over ten years, Smith observed conversations with top economists, analyzed notes and prior works, and developed what is still used today as one of the fundamental works for classical economics. The main idea throughout his book is that as humans, we have a natural tendency to put our own needs and interests first, so an economy in which people are able to freely produce and exchange goods through free trade will lead to more prosperity. Smith also advocated opening the markets for competition, both domestic and foreign, for increased prosperity.

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At the time that Adam Smith wrote The Wealth of Nations, mercantilism was the predominant economic system in Europe. Mercantilism, a term that was popularized by Smith, was characterized by state control and regulation of the economy; a belief in the efficacy of stockpiling gold, silver and other precious metals; and a belief that a successful nation should maintain colonies as a source of raw materials and a market for finished products manufactured in the home nation. Proponents of mercantilism believed that trade was essential for wealth and looked at the economics of trade as a zero-sum game, meaning one nation could prosper only as a result of another nation losing out, and thus a successful nation must maintain a favorable trade balance. When Adam Smith wrote "An Inquiry into Nature Causes of the Wealth of Nations" in 1776, he intended it as an attack on the mercantilist system. Smith argued that there was a natural human tendency toward self-interest and that prosperity would naturally result if people were able to produce, sell, and trade goods as they pleased. In addition, he looked at trade economics more as a case of a rising tide raising all ships, than a zero-sum game, meaning that all nations engaged in trade could benefit from it. Smith argued that an "invisible hand" would guide free market economies if they were free from government regulation.

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Adam Smith's purpose in writing The Wealth of Nations was to critique and offer an alternative to the mercantilist economic system, which he believed would eventually stifle countries' productivity. Under that system, the belief was that in order to protect the nation's wealth, wealth is defined by a country's gold or silver, and the country should endeavor to limit imports as much as possible, usually by imposing high tariffs.

Smith argued that instead of a finite store of precious metals, the nation's wealth was really reflected in the flow of goods and services it produced. People naturally worked to promote their own self-interest, Smith argued, and even if they didn't have bigger motives, an environment in which they were free to do so—with free markets and minimal government interference—would guide everyone's economic activities to contribute positively to the collective good of the nation. This was the "invisible hand" for which Smith and his landmark work are most famous.

Additional reading: Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776 (Paperback published by Bantam Classics, 2003)

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