His economic discussions are not as layered as his comments on morality, so the interpretive issues are often less complex. The logic of the book is transparent: its organizational scheme is self-explanatory, and its conclusions are meticulously supported with both philosophical argument and economic data. The first books outline the importance of the division of labor and of self-interest. The second discusses the role of stock and capital. The third provides an historical account of the rise of wealth from primitive times up until commercial society.
The fourth discusses the economic growth that derives from the interaction between urban and rural sectors of a commercial society. The fifth and final book presents the role of the sovereign in a market economy, emphasizing the nature and limits of governmental powers and the means by which political institutions are to be paid for. Smith, along with his Scottish Enlightenment contemporaries, juxtaposes different time periods in order to find normative guidance.
As TMS does , The Wealth of Nations contains a philosophy of history that trusts nature to reveal its logic and purpose. This is a remarkable scope, even for a book of its size. His most impressive accomplishment in The Wealth of Nations is the presentation of a system of political economy.
Smith makes seemingly disparate elements interdependent and consistent. He manages to take his Newtonian approach and create a narrative of both power and beauty, addressing the philosophical along with the economic, describing human behavior and history, and prescribing the best action for economic and political betterment. And, he does so building on a first principle that was at least as controversial as the sentence that began The Theory of Moral Sentiments.
He begins the introduction by asserting:. The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniencies of life which it annually consumes, and which consist always either in the immediate produce of that labour, or in what is purchased with that produce from other nations.
WN intro. It held that the wealth of a nation was to be assessed by the amount of money and goods within its borders at any given time. Smith opposed this, and the sentence cited above shifted the definition of national wealth to a different standard: labor. The main point of The Wealth of Nations is to offer an alternative to mercantilism. Labor brings wealth, Smith argues. The more one labors the more one earns. This supplies individuals and the community with their necessities, and, with enough money, it offers the means to make life more convenient and sometimes to pursue additional revenue.
Free trade, Smith argues, rather than diminishing the wealth of the nation, increases it because it provides more occasion for labor and therefore more occasion to create more wealth.
Limited trade keeps the amount of wealth within the borders relatively constant, but the more trade a country engages in, the wider the market becomes and the more potential there is for additional labor and, in turn, additional wealth. This point leads Smith to divide stock into two parts, that which is used for immediate consumption—the assets that allow a person to acquire necessities—and that which is used to earn additional revenue. This is, of course, a philosophical point as much as an economic one: Smith asks his readers to reconsider the meaning of wealth itself.
Is wealth the money and assets that one has at any given time, or is it these things combined with the potential to have more, to adjust to circumstances, and to cultivate the skills to increase such potential?
Smith thinks it is the latter. Smith is also concerned specifically with the distinction between necessities and conveniences. In other words, Smith believes that a commercial system betters the lives for the worst off in society; all individuals should have the necessities needed to live reasonably well.
Instead, he argues for a commercial system that increases both the general wealth and the particular wealth of the poorest members. Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers and workmen of different kinds, make up the far greater part of every great political society.
But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged.
Smith argues that the key to the betterment of the masses is an increase in labor, productivity, and workforce. Famously, he uses the division of labor to illustrate the efficiency of workers working on complementary specific and narrow tasks. The increase in efficiency is also an increase in skill and dexterity, and brings with it a clarion call for the importance of specialization in the market.
The more focused a worker is on a particular task the more likely they are to create innovation. He offers the following example:. In the first fire-engines, a boy was constantly employed to open and shut alternately the communication between the boiler and the cylinder, according as the piston either ascended or descended.
One of those boys, who loved to play with his companions, observed that, by tying a string from the handle of the valve which opened this communication, to another part of the machine, the valve would open and shut without his assistance, and leave him at liberty to divert himself with his play-fellows. One of the greatest improvements that has been made upon this machine, since it was first invented, was in this manner the discovery of a boy who wanted to save his own labour.
This example of a boy looking to ease his work day, illustrates two separate points. The first is the discussion at hand, the importance of specialization. However, the more important point—certainly the more revolutionary one—is the role of self-interest in economic life.
A free market harnesses personal desires for the betterment not of individuals but of the community. In an oft-cited comment, Smith observes,. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
Philosophically, this is a tectonic shift in moral prescription. Dominant Christian beliefs had assumed that any self-interested action was sinful and shameful; the ideal person was entirely focused on the needs of others. It accepts that the person who focuses on his or her own needs actually contributes to the public good and that, as a result, such self-interest should be cultivated.
Smith is not a proponent of what would today be called rampant consumerism. He is critical of the rich in both of his books. Instead, his argument is one that modern advocates of globalization and free trade will find familiar: when individuals purchase a product, they help more people than they attempted to do so through charity. Observe the accommodation of the most common artificer or day-labourer in a civilized and thriving country, and you will perceive that the number of people of whose industry a part, though but a small part, has been employed in procuring him this accommodation, exceeds all computation.
The woollen coat, for example, which covers the day-labourer, as coarse and rough as it may appear, is the produce of the joint labour of a great multitude of workmen. The shepherd, the sorter of the wool, the wool-comber or carder, the dyer, the scribbler, the spinner, the weaver, the fuller, the dresser, with many others, must all join their different arts in order to complete even this homely production. How many merchants and carriers, besides, must have been employed in transporting the materials from some of those workmen to others who often live in a very distant part of the country!
What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labour is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool.
The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the brick-layer, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them. Compared, indeed, with the more extravagant luxury of the great, his accommodation must no doubt appear extremely simple and easy; and yet it may be true, perhaps, that the accommodation of an European prince does not always so much exceed that of an industrious and frugal peasant, as the accommodation of the latter exceeds that of many an African king, the absolute master of the lives and liberties of ten thousand naked savages.
The length of this excerpt is part of its argumentative power. Smith is not suggesting, simply, that a single purchase benefits a group of people. Instead, he is arguing that once you take seriously the multitude of people whose income is connected to the purchase of the single coat, it is hard to even grasp the numbers we are considering.
A single purchase brings with it a vast network of laborers. It ought to be disregarded and has no impact on the argument itself. It is the effect of one minor purchase on the community of economic agents that allows Smith to claim, as he does in TMS , that the goods of the world are divided equally as if by an invisible hand. For Smith, the wealthy can purchase nothing without benefiting the poor. According to The Wealth of Nations , the power of the woolen coat is the power of the market at work, and its reach extends to national economic policy as well as personal economic behavior.
But the annual revenue of every society is always precisely equal to the exchangeable value of the whole annual produce of its industry, or rather is precisely the same thing with that exchangeable value. As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can.
He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.
It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it. WN IV. Smith recognizes that human beings and their interactions are part of nature and not to be understood separately from it. As in The Theory of Moral Sentiments , social and political behavior follows a natural logic. Now Smith makes the same claim for economic acts.
Human society is as natural as the people in it, and, as such, Smith rejects the notion of a social contract in both of his books. There was never a time that humanity lived outside of society, and political development is the product of evolution not his term rather than a radical shift in organization.
The state of nature is society for Smith and the Scots, and, therefore, the rules that govern the system necessitate certain outcomes. This is progress, Smith insists, and each form of society is superior to the previous one. It is also natural. This is how the system is designed to operate; history has a logic to it. According to Smith, agricultural lands supply the means of sustenance for any given society and urban populations provide the means of manufacture.
Urban areas refine and advance the means of production and return some of its produce to rural people. In each of the stages, the town and country have a different relationship with each other, but they always interact.
Here, Smith is indebted to the physiocrats, French economists who believed that agricultural labor was the primary measure of national wealth.
Smith accepted their notion that productive labor was a component of the wealth of nations but rejected their notion that only agricultural labor should be counted as value.
Again, there are philosophical issues here. First, is what one is to regard as labor; second is what counts towards economic value. Additionally, Smith is showing how the division of labor works on a large scale; it is not just for pin factories. Again, the butcher, brewer, and baker gain their livelihood by manufacturing the lunch of their customers. As the economic stage changes, so does the form of government.
Economics and politics are intertwined, Smith observes, and a feudal system could not have a republican government as is found in commercial societies. Two examples are his discussions of price and his paradox of value. Consumers look at prices to gauge value, but there are good and bad amounts; which is which is not always transparent.
Some items are marked too expensive for their actual value and some are a bargain. In developing a system to account for this interaction, Smith offers a range of different types of prices, but the two most important are natural price—the price that covers all the necessary costs of manufacture—and the market price, what a commodity actually goes for on the market. Whether this is a normative value, whether for Smith the natural price is better than other prices, and whether the market price of a commodity should be in alignment with the natural price, is a matter of debate.
Following the question of worth, Smith poses the paradox of value. Obviously, we are tempted to argue that scarcity plays a role in the solution to this paradox; water is more valuable than diamonds to a person dying of thirst. For Smith, however, value, here, is general utility and it seems problematic to Smith that the more useful commodity has the lower market price. Dividing the two analytically allows consumers to evaluate the goods both in terms of scarcity and in terms of usefulness.
However, Smith is also searching for a normative or objective core in a fluctuating and contextual system, as with the role of impartiality in his moral system. What Smith means by this is unclear and a matter of controversy. Labour, therefore, it appears evidently, is the only universal, as well as the only accurate measure of value, or the only standard by which we can compare the values of different commodities at all times and at all places.
We cannot estimate, it is allowed, the real value of different commodities from century to century by the quantities of silver which were given for them. We cannot estimate it from year to year by the quantities of corn. By the quantities of labour we can, with the greatest accuracy, estimate it both from century to century and from year to year. From century to century, corn is a better measure than silver, because, from century to century, equal quantities of corn will command the same quantity of labour more nearly than equal quantities of silver.
From year to year, on the contrary, silver is a better measure than corn, because equal quantities of it will more nearly command the same quantity of labour. Therefore, Smith seems to believe, the value of any object can be universally measured by the amount of labor that any person in any society might have to exert in order to acquire that object. Ultimately, according to Smith, a properly functioning market is one in which all these conditions—price, value, progress, efficiency, specialization, and universal opulence wealth —all work together to provide economic agents with a means to exchange accurately and freely as their self-interest motivates them.
None of these conditions can be met if the government does not act appropriately, or if it oversteps its justified boundaries. The Wealth of Nations is a work of political economy. It is concerned with much more than the mechanisms of exchange. It is also concerned with the ideal form of government for commercial advancement and the pursuit of self-interest.
Each of the responsibilities of the sovereign contains its own controversies. Regarding the first, protecting society, Smith debated with others as to whether a citizen militia or a standing army was better suited for the job, rooting his discussion, as usual, in a detailed history of the military in different stages of society WN V.
Given the nature of specialization, it should not be surprising that Smith favored the army WN V. The nature of justice—the second role of the sovereign—is also complicated, and Smith never fully articulated his theory of what justice is and how it ought to be maintained, although, as we have seen, he was liberal in his assumptions of the rights of individuals against the imposition of government on matters of conscience and debate. It is this last book—ostensibly about the expenditures of government—that shows most clearly what Smith had in mind politically; the government plays a much stronger role in society than is often asserted.
In particular, book five addresses the importance of universal education and social unity. Smith calls for religious tolerance and social regulation against extremism.
For Smith, religion is an exceptionally fractious force in society because individuals tend to regard theological leaders as having more authority than political ones. This leads to fragmentation and social discord. The government has no small interest in maintaining schools to teach basic knowledge and skills to young people. While some of the expense is born by parents, much of this is to be paid for by society as a whole WN V.
The government also has a duty to educate adults, both to help counter superstition and to remedy the effects of the division of labor. Regarding the first, an educated population is more resistant to the claims of extremist religions. Smith also advocates public scrutiny of religious assertions in an attempt to moderate their practices.
Finally, Smith insists that those who govern abandon associations with religious sects so that their loyalties do not conflict. Of the great and extensive interests of his country, he is altogether incapable of judging; and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war…. His dexterity at his own particular trade seems, in this manner, to be acquired at the expence of his intellectual, social, and martial virtues.
But in every improved and civilized society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it. Education helps individuals overcome the monotony of day to day life.
It helps them be better citizens, better soldiers, and more moral people; the intellect and the imagination are essential to moral judgment. No person can accurately sympathize if his or her mind is vacant and unskilled. We see here that Smith is concerned about the poor throughout The Wealth of Nations. We also see the connections between his moral theory and his political economy. It is impossible to truly understand why Smith makes the political claims he does without connecting them to his moral claims, and vice versa.
His call for universal wealth or opulence and his justification of limited government are themselves moral arguments as much as they are economic ones.
Without seeing how each of the parts fit together, one loses the power behind his reasoning—reasoning that inspired as much change as any other work in the history of the Western tradition.
Of course, Smith has his detractors and his critics. Smith began his book with a radical definition of "national wealth. Instead, Smith proposed that the wealth of a nation consisted of both farm output and manufactured goods along with the labor it took to produce them. To increase its wealth, Smith argued, a nation needed to expand its economic production.
How could a nation do this? Smith thought the key was to encourage the division of labor. Smith argued that workers could produce more if they specialized. He gave the example of a pin factory based on his real-life observations. One worker who did all the operations necessary to make a single pin, he said, could produce no more than 20 in one day. Ten workers could make pins this way. If, however, the 10 workers each specialized in one or two of the pin-making operations—from drawing the wire to putting the finished pin on a paper card—they would work more efficiently.
Smith estimated that these 10 workers could produce 4, pins per worker or 48, altogether in a day. Smith argued that if all production could be specialized like the pin factory, workers could produce more of everything.
Because humans naturally trade with one another, Smith reasoned, those involved in making one product will exchange it or the wages they earn for the goods produced by other workers. Thus, Smith concluded, "a great plenty diffuses itself through all the different ranks of the society. Smith did not just present a theory about increasing production and the wealth of a nation. He worked out exactly how this would occur by describing what he called the "free market mechanism.
Adam Smith described free markets as "an obvious and simple system of natural liberty. He saw, however, self-defeating forces at work, preventing the full operation of the free market and undermining the wealth of all nations.
In the 18th century, European nations practiced an economic system known as "mercantilism. The mercantilist nations believed that the more gold and silver they acquired, the more wealth they possessed.
Smith believed that this economic policy was foolish and actually limited the potential for "real wealth," which he defined as "the annual produce of the land and labor of the society. European mercantilism depended on a web of laws, subsidies, special economic privileges, and government-licensed monopolies designed to benefit specific manufacturers and merchants.
This system, however, inflated prices, hindered economic growth, limited trade, and kept the masses of people impoverished. Smith argued that the free-market system along with free trade would produce true national wealth, benefiting all social classes, not just the privileged few. In a major section of The Wealth of Nations , Smith attacked mercantilist trade practices. He insisted that what enriched European nations was not importing gold and silver, but opening up new free-trade markets in the world.
This trade, he wrote, further stimulated the division of labor, expanded the production of trade goods, and increased "the real revenue and wealth" of all. Smith criticized how the British Parliament had passed laws that crippled free trade and hindered the expansion of national wealth. These laws imposed high import duties, gave subsidies to favored companies, and granted monopolies to powerful special interests like the East India Company. These laws harmed society by limiting competition and keeping prices high.
Such measures, Smith wrote, were "extorted from our legislature" and "written in blood" since they served the interest of only a small class of privileged manufacturers and merchants. Smith reserved his greatest criticism for the British colonial empire. He concluded it was "hurtful to the general interest of society.
Smith opposed mercantilist policies that required Americans to export certain products like fur pelts only to England. The Americans also had to ship their exports on British ships. Regulations prohibited transporting woolen products from one colony to another. Laws made it illegal for Americans to operate steel-making furnaces.
Government-licensed monopolies like the East India Company held the exclusive right to sell goods like tea to the Americans. According to Smith, these and hundreds of other restrictions benefited British special interests. Smith concluded that to achieve economic growth and social betterment, Britain should sweep away its network of government economic privileges and restrictions.
Let the "free market mechanism" operate on its own without government intervention, Smith advised. Adam Smith advocated a limited role for government. But he recognized significant areas where only it could act effectively. Smith saw the first duty of government was to protect the nation from invasion.
He argued that a permanent military force, rather than citizen militias, was necessary to defend any advanced society.
Next, he supported an independent court system and administration of justice to control crime and protect property. Smith favored "public works" to create and maintain an infrastructure to promote the free flow of commerce. These works included such things as roads, bridges, canals, harbors, and a postal system that profit-seeking individuals may not be able to efficiently build and operate.
The following is a simplified version of the economic system Adam Smith believed would emerge once governments ended their oppressive mercantilist policies. Of course, now the entire community is busy making just one thing: they have a big pile of pins, but no food or clothing.
It is a place that is bad in the wintertime, difficult in the summertime. It is a place that is never really good.
But that was the last time this notion of economics ignoring division of labor was accurate. Even by the time of Xenophon, just years later, we learn:. There are two things to note here. The first is that the amount, and quality, of production, is much higher under division of labor. This is the very definition of wealth, of course. The second is that the system was irreversible : if the society had tried to return to a system of autarky, with each household supplying all its own needs, the result would not have been impoverishment, but starvation.
As Plato put it, in the Republic :. Division of labor, as Smith pointed out with breath-taking simplicity, is limited by the extent of the market. He identified three distinct and powerful reasons why division of labor dramatically increases the quantity produced by a market system. And he recognized that division of labor is limited only by the extent or size of that market. This latter insight is the most important, because it has the most striking implications for the creation and destruction of humanly devised institutional constraints on cooperation and competition.
Smith lays out the theory at the very outset of the Wealth of Nations. The first sentence in the whole book makes clear what his subject will be:. Later, in Chapter 5, Smith gives the essential definition. As I already noted, Smith believed that there were 18 steps in his pin factory example, but there is nothing fixed about this number.
It is perfectly possible that, if a larger market became available, the number could expand to 25, or more. If you have a successful pin factory, and there are additional workers to be hired, you are likely to try to seek out new external markets for your products. You will try to expand your ability to ship pins, to invent ways to transport pins more cheaply, and to find new retail outlets in other countries.
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