The Wealth Of Nations

''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the '' magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in 1776, the book offers one of the world's first collected descriptions of what builds nations' wealth, and is today a fundamental work in classical economics. By reflecting upon the economics at the beginning of the Industrial Revolution, the book touches upon such broad topics as the division of labour, productivity, and free markets.

History

''The Wealth of Nations'' was published in two volumes on 9 March 1776 (with books I–III included in the first volume and books IV and V included in the second), during the Scottish Enlightenment and the Scottish Agricultural Revolution. It influenced several authors and economists, such as Karl Marx, as well as governments and organizations, setting the terms for economic debate and discussion for the next century and a half. For example, Alexander Hamilton was influenced in part by ''The Wealth of Nations'' to write his '' Report on Manufactures'', in which he argued against many of Smith's policies. Hamilton based much of this report on the ideas of Jean-Baptiste Colbert, and it was, in part, Colbert's ideas that Smith responded to, and criticised, with ''The Wealth of Nations''.

''The Wealth of Nations'' was the product of seventeen years of notes and earlier studies, as well as an observation of conversation among economists of the time (like Nicholas Magens) concerning economic and societal conditions during the beginning of the Industrial Revolution, and it took Smith some ten years to produce. The result was a treatise which sought to offer a practical application for reformed economic theory to replace the mercantilist and physiocratic economic theories that were becoming less relevant in the time of industrial progress and innovation. It provided the foundation for economists, politicians, mathematicians, and thinkers of all fields to build upon. Irrespective of historical influence, ''The Wealth of Nations'' represented a clear paradigm shift in the field of economics, comparable to what Immanuel Kant's '' Critique of Pure Reason'' was for philosophy.

Five editions of ''The Wealth of Nations'' were published during Smith's lifetime: in 1776, 1778, 1784, 1786 and 1789. Numerous editions appeared after Smith's death in 1790. To better understand the evolution of the work under Smith's hand, a team led by Edwin Cannan collated the first five editions. The differences were published along with an edited sixth edition in 1904. They found minor but numerous differences (including the addition of many footnotes) between the first and the second editions; the differences between the second and third editions are major.K. Sutherland ed., ''Wealth of Nations'' (Oxford 2008) pp. xlvi–xlvii In 1784, Smith annexed these first two editions with the publication of ''Additions and Corrections to the First and Second Editions of Dr. Adam Smith's Inquiry into the Nature and Causes of the Wealth of Nations'', and he also had published the three-volume third edition of the ''Wealth of Nations'', which incorporated ''Additions and Corrections'' and, for the first time, an index. Among other things, the ''Additions and Corrections'' included entirely new sections, particularly to book 4, chapters 4 and 5, and to book 5, chapter 1, as well as an additional chapter (8), "Conclusion of the Mercantile System", in book 4.

The fourth edition, published in 1786, had only slight differences from the third edition, and Smith himself says in the ''Advertisement'' at the beginning of the book, "I have made no alterations of any kind." Finally, Cannan notes only trivial differences between the fourth and fifth editions—a set of misprints being removed from the fourth and a different set of misprints being introduced.

Synopsis

Book I: Of the Causes of Improvement in the productive Powers of Labour

Of the Division of Labour:
Division of labour has caused a greater increase in production than any other factor. This diversification is greatest for nations with more industry and improvement, and is responsible for "universal opulence" in those countries. This is in part due to increased quality of production, but more importantly because of increased efficiency of production, leading to a higher nominal output of units produced per time unit. Agriculture is less amenable than manufacturing to division of labour; hence, rich nations are not so far ahead of poor nations in agriculture as in manufacturing.

Of the Principle which gives Occasion to the Division of Labour:
Division of labour arises not from innate wisdom, but from humans' propensity to barter.

That the Division of Labour is Limited by the Extent of the Market:
Limited opportunity for exchange discourages division of labour. Because "water-carriage" (i.e. transportation) extends the market, division of labour, with its improvements, comes earliest to cities near waterways. Civilization began around the highly navigable Mediterranean Sea.

Of the Origin and Use of Money:
With division of labour, the produce of one's own labour can fill only a small part of one's needs. Different commodities have served as a common medium of exchange, but all nations have finally settled on metals, which are durable and divisible, for this purpose. Before coinage, people had to weigh and assay with each exchange, or risk "the grossest frauds and impositions." Thus nations began stamping metal, on one side only, to ascertain purity, or on all sides, to stipulate purity and amount.
The quantity of real metal in coins has diminished, due to the "avarice and injustice of princes and sovereign states," enabling them to pay their debts in appearance only, and to the defraudment of creditors.

Of the Wages of Labour: In this section, Smith describes how the wages of labour are dictated primarily by the competition among labourers and masters. When labourers bid against one another for limited opportunities for employment, the wages of labour collectively fall, whereas when employers compete against one another for limited supplies of labour, the wages of labour collectively rise. However, this process of competition is often circumvented by combinations among labourers and among masters. When labourers combine and no longer bid against one another, their wages rise, whereas when masters combine, wages fall. In Smith's day, organised labour was dealt with very harshly by the law.

Smith himself wrote about the "severity" of such laws against worker actions, and made a point to contrast the "clamour" of the "masters" against workers associations, while associations and collusions of the masters "are never heard by the people" though such actions are "always" and "everywhere" taking place:

"We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the wages of labour above their actual rate ..Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy till the moment of execution; and when the workmen yield, as they sometimes do without resistance, though severely felt by them, they are never heard of by other people". In contrast, when workers combine, "the masters ..never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combination of servants, labourers, and journeymen."

In societies where the amount of labour exceeds the amount of revenue available for waged labour, competition among workers is greater than the competition among employers, and wages fall. Conversely, where revenue is abundant, labour wages rise. Smith argues that, therefore, labour wages only rise as a result of greater revenue disposed to pay for labour. Smith thought labour the same as any other commodity in this respect:

However, the amount of revenue must increase constantly in proportion to the amount of labour for wages to remain high. Smith illustrates this by juxtaposing England with the North American colonies. In England, there is more revenue than in the colonies, but wages are lower, because more workers flock to new employment opportunities caused by the large amount of revenue – so workers eventually compete against each other as much as they did before. By contrast, as capital continues to flow to the colonial economies at least at the same rate that population increases to "fill out" this excess capital, wages there stay higher than in England.

Smith was highly concerned about the problems of poverty. He writes:

The only way to determine whether a man is rich or poor is to examine the amount of labour he can afford to purchase.
"Labour is the real exchange for commodities".

Smith also describes the relation of cheap years and the production of manufactures versus the production in dear years. He argues that while some examples, such as the linen production in France, show a correlation, another example in Scotland shows the opposite. He concludes that there are too many variables to make any statement about this.

Of the Profits of Stock: In this chapter, Smith uses interest rates as an indicator of the profits of stock. This is because interest can only be paid with the profits of stock, and so creditors will be able to raise rates in proportion to the increase or decrease of the profits of their debtors.

Smith argues that the profits of stock are inversely proportional to the wages of labour, because as more money is spent compensating labour, there is less remaining for personal profit. It follows that, in societies where competition among labourers is greatest relative to competition among employers, profits will be much higher. Smith illustrates this by comparing interest rates in England and Scotland. In England, government laws against usury had kept maximum interest rates very low, but even the maximum rate was believed to be higher than the rate at which money was usually loaned. In Scotland, however, interest rates are much higher. This is the result of a greater proportion of capitalists in England, which offsets some competition among labourers and raises wages.

However, Smith notes that, curiously, interest rates in the colonies are also remarkably high (recall that, in the previous chapter, Smith described how wages in the colonies are higher than in England). Smith attributes this to the fact that, when an empire takes control of a colony, prices for a huge abundance of land and resources are extremely cheap. This allows capitalists to increase their profits, but simultaneously draws many capitalists to the colonies, increasing the wages of labour. As this is done, however, the profits of stock in the mother country rise (or at least cease to fall), as much of it has already flocked offshore.

Of Wages and Profit in the Different Employments of Labour and Stock: Smith repeatedly attacks groups of politically aligned individuals who attempt to use their collective influence to manipulate the government into doing their bidding. At the time, these were referred to as "factions", but are now more commonly called "special interests," a term that can comprise international bankers, corporate conglomerations, outright oligopolies, trade unions and other groups. Indeed, Smith had a particular distrust of the tradesman class. He felt that the members of this class, especially acting together within the guilds they want to form, could constitute a power block and manipulate the state into regulating for special interests against the general interest:

Smith also argues against government subsidies of certain trades, because this will draw many more people to the trade than what would otherwise be normal, collectively lowering their wages.

Of the Rent of the Land: Chapter 10, part ii, motivates an understanding of the idea of feudalism. Rent, considered as the price paid for the use of land, is naturally the highest the tenant can afford in the actual circumstances of the land. In adjusting lease terms, the landlord endeavours to leave him no greater share of the produce than what is sufficient to keep up the stock from which he furnishes the seed, pays the labour, and purchases and maintains the cattle and other instruments of husbandry, together with the ordinary profits of farming stock in the neighbourhood.

This is evidently the smallest share with which the tenant can content himself without being a loser, and the landlord seldom means to leave him any more. Whatever part of the produce, or, what is the same thing, whatever part of its price, is over and above this share, he naturally endeavours to reserve to himself as the rent of his land, which is evidently the highest the tenant can afford to pay in the actual circumstances of the land. Sometimes, indeed, the liberality, more frequently the ignorance, of the landlord, makes him accept of somewhat less than this portion; and sometimes too, though more rarely, the ignorance of the tenant makes him undertake to pay somewhat more, or to content himself with somewhat less, than the ordinary profits of farming stock in the neighbourhood. This portion, however, may still be considered as the natural rent of land, or the rent for which it is naturally meant that land should for the most part be let.

Book II: Of the Nature, Accumulation, and Employment of Stock

Of the Division of Stock:

When the stock which a man possesses is no more than sufficient to maintain him for a few days or a few weeks, he seldom thinks of deriving any revenue from it. He consumes it as sparingly as he can, and endeavours by his labour to acquire something which may supply its place before it be consumed altogether. His revenue is, in this case, derived from his labour only. This is the state of the greater part of the labouring poor in all countries.

But when he possesses stock sufficient to maintain him for months or years, he naturally endeavours to derive a revenue from the greater part of it; reserving only so much for his immediate consumption as may maintain him till this revenue begins to come in. His whole stock, therefore, is distinguished into two parts. That part which, he expects, is to afford him this revenue, is called his capital.

Of Money Considered as a particular Branch of the General Stock of the Society:

Of the Accumulation of Capital, or of Productive and Unproductive Labour:

Of Stock Lent at Interest:

Of the different employment of Capital:

Book III: Of the different Progress of Opulence in different Nations

Long-term economic growth

Adam Smith uses this example to address long-term economic growth. Smith states, "As subsistence is, in the nature of things, prior to conveniency and luxury, so the industry which procures the former, must necessarily be prior to that which ministers to the latter". In order for industrial success, subsistence is required first from the countryside. Industry and trade occur in cities while agriculture occurs in the countryside.

Agricultural jobs

Agricultural work is a more desirable situation than industrial work because the owner is in complete control. Smith states that:

In our North American colonies, where uncultivated land is still to be had upon easy terms, no manufactures for distant sale have ever yet been established in any of their towns. When an artificer has acquired a little more stock than is necessary for carrying on his own business in supplying the neighbouring country, he does not, in North America, attempt to establish with it a manufacture for more distant sale, but employs it in the purchase and improvement of uncultivated land. From artificer he becomes planter, and neither the large wages nor the easy subsistence which that country affords to artificers, can bribe him rather to work for other people than for himself. He feels that an artificer is the servant of his customers, from whom he derives his subsistence; but that a planter who cultivates his own land, and derives his necessary subsistence from the labour of his own family, is really a master, and independent of all the world.

Where there is open countryside agriculture is much preferable to industrial occupations and ownership.

Adam Smith goes on to say "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". This sequence leads to growth, and therefore opulence.

Of the Discouragement of Agriculture: Chapter 2's long title is "Of the Discouragement of Agriculture in the Ancient State of Europe after the Fall of the Roman Empire".

Of the Rise and Progress of Cities and Towns, after the Fall of the Roman Empire:

How the Commerce of the Towns Contributed to the Improvement of the Country: Smith often harshly criticised those who act purely out of self-interest and greed, and warns that,

... l for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind.

Book IV: Of Systems of political Economy

Smith vigorously attacked the antiquated government restrictions he thought hindered industrial expansion. In fact, he attacked most forms of government interference in the economic process, including tariffs, arguing that this creates inefficiency and high prices in the long run. It is believed that this theory influenced government legislation in later years, especially during the 19th century.

Smith advocated a government that was active in sectors other than the economy. He advocated public education for poor adults, a judiciary, and a standing army—institutional systems not directly profitable for private industries.

Of the Principle of the Commercial or Mercantile System: The book has sometimes been described as a critique of mercantilism and a synthesis of the emerging economic thinking of Smith's time. Specifically, ''The Wealth of Nations'' attacks, ''inter alia'', two major tenets of mercantilism:
# The idea that protectionist tariffs serve the economic interests of a nation (or indeed any purpose whatsoever) and
# The idea that large reserves of gold bullion or other precious metals are necessary for a country's economic success. This critique of mercantilism was later used by David Ricardo when he laid out his Theory of Comparative Advantage.

Of Restraints upon the Importation: Chapter 2's full title is "Of Restraints upon the Importation from Foreign Countries of such Goods as can be Produced at Home". The " invisible hand" is a frequently referenced theme from the book, although it is specifically mentioned only once.

The metaphor of the "invisible hand" has been widely used out of context. In the passage above Smith is referring to "the support of domestic industry" and contrasting that support with the importation of goods. Neoclassical economic theory has expanded the metaphor beyond the domestic/foreign manufacture argument to encompass nearly all aspects of economics.

Of the extraordinary Restraints: Chapter 3's long title is "Of the extraordinary Restraints upon the Importation of Goods of almost all Kinds, from those Countries with which the Balance is supposed to be Disadvantageous".

Of Drawbacks: Merchants and manufacturers are not contented with the monopoly of the home market, but desire likewise the most extensive foreign sale for their goods. Their country has no jurisdiction in foreign nations, and therefore can seldom procure them any monopoly there. They are generally obliged, therefore, to content themselves with petitioning for certain encouragements to exportation.

Of these encouragements what are called Drawbacks seem to be the most reasonable. To allow the merchant to draw back upon exportation, either the whole or a part of whatever excise or inland duty is imposed upon domestic industry, can never occasion the exportation of a greater quantity of goods than what would have been exported had no duty been imposed. Such encouragements do not tend to turn towards any particular employment a greater share of the capital of the country than what would go to that employment of its own accord, but only to hinder the duty from driving away any part of that shares to other employments.

Of Bounties: Bounties upon exportation are, in Great Britain, frequently petitioned for, and sometimes granted to the produce of particular branches of domestic industry. By means of them our merchants and manufacturers, it is pretended, will be enabled to sell their goods as cheap, or cheaper than their rivals in the foreign market. A greater quantity, it is said, will thus be exported, and the balance of trade consequently turned more in favour of our own country. We cannot give our workmen a monopoly in the foreign as we have done in the home market. We cannot force foreigners to buy their goods as we have done our own countrymen. The next best expedient, it has been thought, therefore, is to pay them for buying. It is in this manner that the mercantile system proposes to enrich the whole country, and to put money into all our pockets by means of the balance of trade.

Of Treaties of Commerce:

Of Colonies:

''Of the Motives for establishing new Colonies'':

''Causes of Prosperity of new Colonies'':

''Of the Advantages which Europe has derived from the Discovery of America, and from that of a Passage to the East Indies by the Cape of Good Hope'':

Conclusion of the Mercantile System: Smith's argument about the international political economy opposed the idea of Mercantilism. While the Mercantile System encouraged each country to hoard gold, while trying to grasp hegemony, Smith argued that free trade eventually makes all actors better off. This argument is the modern 'Free Trade' argument.

Of the Agricultural Systems: Chapter 9's long title is "Of the Agricultural Systems, or of those Systems of Political Economy, which Represent the Produce of Land, as either the Sole or the Principal, Source of the Revenue and Wealth of Every Country".

Book V: Of the Revenue of the Sovereign or Commonwealth

Smith postulated four "maxims" of taxation: proportionality, transparency, convenience, and efficiency. Some economists interpret Smith's opposition to taxes on transfers of money, such as the Stamp Act, as opposition to capital gains taxes, which did not exist in the 18th century. Other economists credit Smith as one of the first to advocate a progressive tax. Smith wrote, "The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion." Smith believed that an even "more proper" source of progressive taxation than property taxes was ground rent. Smith wrote that "nothing ouldbe more reasonable" than a land value tax.

Of the Expenses of the Sovereign or Commonwealth: Smith uses this chapter to comment on the concept of taxation and expenditure by the state. On taxation, Smith wrote,

Smith advocates a tax naturally attached to the "abilities" and habits of each echelon of society.

For the lower echelon, Smith recognised the intellectually erosive effect that the otherwise beneficial division of labour can have on workers, what Marx, though he mainly opposes Smith, later named "alienation"; therefore, Smith warns of the consequence of government failing to fulfill its proper role, which is to preserve against the innate tendency of human society to fall apart.

Under Smith's model, government involvement in any area other than those stated above negatively impacts economic growth. This is because economic growth is determined by the needs of a free market and the entrepreneurial nature of private persons. A shortage of a product makes its price rise, and so stimulates producers to produce more and attracts new people to that line of production. An excess supply of a product (more of the product than people are willing to buy) drives prices down, and producers refocus energy and money to other areas where there is a need.

Of the Sources of the General or Public Revenue of the Society: In his discussion of taxes in Book Five, Smith wrote:

He also introduced the distinction between a '' direct tax'', and by implication an ''indirect tax'' (although he did not use the word "indirect"):

And further:

This term was later used in United States, Article I, Section 2, Clause 3 of the U.S. Constitution, and James Madison, who wrote much of the Constitution, is known to have read Smith's book.

Of War and Public Debts:

Smith then goes on to say that even if money was set aside from future revenues to pay for the debts of war, it seldom actually gets used to pay down the debt. Politicians are inclined to spend the money on some other scheme that will win the favour of their constituents. Hence, interest payments rise and war debts continue to grow larger, well beyond the end of the war.

Summing up, if governments can borrow without check, then they are more likely to wage war without check, and the costs of the war spending will burden future generations, since war debts are almost never repaid by the generations that incurred them.

Reception and impact

Greater Britain

Intellectuals, critics, and reviewers

The first edition of the book sold out in six months. The printer William Strahan wrote on 12 April 1776 that David Hume said ''The Wealth of Nations'' required too much thought to be as popular as Edward Gibbon's '' The History of the Decline and Fall of the Roman Empire''. Strahan also wrote: "What you say of Mr. Gibbon's and Dr. Smith's book is exactly just. The former is the most popular work; but the sale of the latter, though not near so rapid, has been more than I could have expected from a work that requires much thought and reflection (qualities that do not abound among modern readers) to peruse to any purpose." Gibbon wrote to Adam Ferguson on 1 April: "What an excellent work is that with which our common friend Mr. Adam Smith has enriched the public! An extensive science in a single book, and the most profound ideas expressed in the most perspicuous language". The review of the book in the '' Annual Register'' was probably written by Whig MP Edmund Burke. In 1791, the English-born radical Thomas Paine wrote in his '' Rights of Man'' that "Had Mr. Burke possessed talents similar to the author 'On the Wealth of Nations,' he would have comprehended all the parts which enter into, and, by assemblage, form a constitution."

In 1800, the ''Anti-Jacobin Review'' criticized ''The Wealth of Nations''.J. J. Sack, ''From Jacobite to Conservative. Reaction and orthodoxy in Britain, c. 1760–1832'' (Cambridge University Press, 2004), p. 182. In 1803, ''The Times'' argued against war with Spain:

She is our best customer; and by the gentle and peaceable stream of commerce, the treasures of the new world flow with greater certainty into English reservoirs, than it could do by the most successful warfare. They come in this way to support our manufactures, to encourage industry, to feed our poor, to pay taxes, to reward ingenuity, to diffuse riches among all classes of people. But for the full understanding of this beneficial circulation of wealth, we must refer to Dr. Adam Smith's incomparable ''Treatise on the Wealth of Nations''.

In 1810, a correspondent writing under the pseudonym