The Wealth of Nations by Adam Smith

The Birth of Modern Economics

Adam Smith, a Scottish economist and philosopher, wrote what is considered the “bible of capitalism,” The Wealth of Nations. In this seminal work, he advocates for free trade and minimal government interference in markets. Over time, The Wealth of Nations earned Smith a far-reaching reputation, becoming a foundational work of classical economics and one of the most influential books ever written.

Profile of Adam Smith by James Tassie, 1787

Profile of Adam Smith by James Tassie, 1787

Born in June 1723 in Kirkcaldy, a port town on the eastern shore of Scotland, Smith’s exact birthdate remains unknown. His father, the Comptroller and Collector of Customs, died while Smith’s mother was pregnant but left the family with sufficient financial resources. Young Adam was educated in a local parish school and, at thirteen, attended Glasgow College before moving on to Oxford University.

After graduating from Oxford, Smith delivered public lectures on moral philosophy in Edinburgh. With support from the literati, he secured his first academic position as the Chair of Logic at Glasgow University. The Scottish Enlightenment philosophers, known as the literati, were a close-knit group who socialized, critiqued, and debated each other’s work. They frequently met in social clubs to discuss politics and philosophy. Smith’s closest friendship within the group—and likely his most important non-familial relationship throughout his life—was with David Hume, who is generally regarded as one of the most important English-writing philosophers.

Smith is sometimes credited as one of the founders of sociology. He and the other literati believed that human activities were governed by discoverable principles, much like Newton’s principles explaining motion.

Science is the great antidote to the poison of enthusiasm and superstition.

Adam Smith, The Wealth of Nations

In March 1776, after nine years of work, Smith published An Inquiry into the Nature and Causes of the Wealth of Nations, commonly known as The Wealth of Nations, just four months before the American Declaration of Independence. The full title reflects Smith’s aim to systematically and objectively explore the best political system for maximizing a nation’s economic success, similar to how scientists approached their fields during the Scientific Revolution.

In the book, Smith outlines four main stages of societal organization: the original “rude” state of hunters; a second stage of nomadic agriculture; a third stage of feudal farming; and a fourth and final stage of commercial interdependence. He believed that societies progress through these stages unless impeded by wars, resource deficiencies, or poor government policies.

According to Smith, commerce is the inevitable concluding stage because humans are inherently social beings, and trade is a fundamentally social activity. Moreover, he believed that a thriving economy relies on a complex web of interdependence among diverse individuals.

Portrait of Adam Smith by John Kay, 1790

Portrait of Adam Smith by John Kay, 1790

During Smith’s time, mercantilism was the dominant economic theory, emphasizing that a country’s wealth was best measured by its store of gold and silver. Smith challenged this view, proposing instead that a nation’s wealth should be judged by its total production and commerce—what we now call gross domestic product (GDP). He also delved into the theories of the division of labor, an idea dating back to Plato, suggesting that specialization would lead to a significant increase in productivity.

To illustrate specialization, Smith used the example of a pin factory. While one person could produce 20 pins a day, ten people working together, each specializing in a specific task, could produce 48,000 pins a day. By dividing labor, each worker becomes adept at a specific task, which greatly increases overall production.

Central to Smith’s theory are the “bold undertakers,” now known as entrepreneurs. These individuals own firms, organize production, manage the division of labor, and invest capital to improve their market positions continually.

Smith argued that the key to improving the masses’ well-being lies in increased labor, productivity, and workforce. Two main factors influence this: “the skill, dexterity, and judgment with which its labor is generally applied” and “the proportion between the number of those who are employed in useful labor and that of those who are not.”

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 interest.

Adam Smith, The Wealth of Nations

Smith believed the state should only intervene in economic markets to prevent unfair competition. He argued that the economy should largely be left to operate independently, guided by the “Invisible Hand” of the market. This concept describes a self-regulating system where the economy adjusts to changes in production and consumption based on people’s self-interest, similar to how gravity dictates planetary motion. This idea evolved into “laissez-faire” economics (meaning “leave things alone”), advocating for minimal governmental interference in trade and commerce.

Furthermore, Smith emphasized the importance of investing money to increase national wealth rather than letting it stagnate in bank accounts. He believed that the wealthy should be encouraged to invest their surplus funds back into the economy, thereby generating more wealth for themselves and contributing to overall economic growth.

The Wealth of the Nation by Seymour Fogel, 1938

The Wealth of the Nation by Seymour Fogel, 1938

In his book, Smith also sought to refute the Christian disdain for wealth, rooted in biblical passages like “it is easier for a camel to go through the eye of a needle than for someone who is rich to enter the kingdom of God” (Matthew 19:24). He argued that wealth accumulation had no inherent moral flaw and was crucial for societal progress. He suggested that helping the rich get richer ultimately benefits everyone in society, as it encourages those who are not rich to strive for self-improvement by imitating successful individuals.

Smith authored only two major works. From his mid-50s, he served as a customs commissioner in Edinburgh. He lived with his elderly mother, as he never married, and had an extensive library of 3,000 books. Adam Smith passed away in Edinburgh on July 17, 1790, and was buried in the Canongate churchyard, close to where he had lived.

Words of wisdom

“If you owe your bank a hundred pounds, you have a problem. But if you owe a million, it has.” —John Maynard Keynes

“Money can’t buy happiness, but it can make you awfully comfortable while you’re being miserable.” —Clare Boothe Luce

“Wealth consists not in having great possessions, but in having few wants.” —Epictetus

“Most human beings have an almost infinite capacity for taking things for granted.” —Aldous Huxley, Brave New World

Bibliography

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