The Wealth of Nations

"to learn that capitalism is an economy of greed, a force of nature unto itself."

"The Wealth of Nations is, of course, one of the most famous, though certainly not most read or understood, books of all time. It was first published in 1776. In fact, I was once asked on an exam in high school ‘Who invented capitalism in 1776?’ It’s obviously an overstatement to say that Smith invented capitalism. First of all, the term ‘capitalism’ didn’t even emerge until the 19th century. But there’s no question that this book marked an enormous milestone in the development of economic thought and of reflection on the moral, social and political effects of commerce. It’s a long and sprawling work, so it’s difficult to sum up, but I suppose one place to start would be with the question implied in the title: What are the chief causes of economic prosperity? Smith argues that the chief source of productivity is the division of labour, and given that the division of labour is, as he says, limited by the extent of the market, free trade both within and among nations helps to promote the prosperity of all. I’ve already suggested that he wasn’t, by any means, a free market absolutist. But he did think that free trade was generally wise policy, that politicians aren’t very good at controlling people’s behaviour, and that even when they do so with the best intentions—and they don’t always do so with the best of intentions— they’re not always effective. Yes, that’s part of what I was referring to earlier, when I said he actually wasn’t that friendly toward merchants. He thought wealthy merchants were often going to collude against the public interest. But that’s really just the tip of the iceberg. I think one of the interesting things to note in connection with The Wealth of Nations is that Smith was far more willing than one might expect, given his current reputation, to acknowledge potential dangers and drawbacks associated with commercial society. This goes back to Griswold’s point about the potential drawbacks of the Enlightenment. For instance, Smith accepts that commercial society necessarily produces great inequalities. That great as the division of labour is for productivity, an extensive division of labour can exact an immense cost in human dignity by rendering people feeble and ignorant—the idea being that if you spend your whole life working on the 18th part of a pin you have no opportunity to exercise your body or your mind. In The Theory of Moral Sentiments he worries that too great an emphasis on wealth and material goods can corrupt people’s moral sentiments. “He worries that the desire for wealth often leads people to submit to endless toil and anxiety in the pursuit of frivolous material goods that will provide, at best, only fleeting satisfaction” And, also, there are worries about happiness. He worries that the desire for wealth often leads people to submit to endless toil and anxiety in the pursuit of frivolous material goods that he thinks will provide, at best, only fleeting satisfaction. Unlike many of today’s self-proclaimed Smithians, Smith himself was far from a mere apologist for commercial society. I should also emphasise, though, that none of this is to say that Smith didn’t ultimately defend commercial society. He absolutely did. He was absolutely convinced that commercial society’s real and important faults are not as numerous, or as great, as those of other forms of society. So, at least as I read him, Smith provides a kind of historical and comparative cost-benefit analysis, and concludes that, despite its very real problems, commercial society’s overall balance sheet remains preferable to other societies. It constitutes a definite improvement over the poverty and insecurity and dependence that dominated almost all pre-commercial ages. In other words, commercial society is unequivocally preferable for Smith, even if it’s only preferable on balance. Absolutely. I think there are a number of libertarians who would say we still have quite a bit of mercantilism left over, that we haven’t got rid of farm subsidies etc. But certainly he’s writing in a world where trade is far more restricted than it is now. One of the key reasons he argues for free trade—and I think this isn’t sufficiently appreciated today—is that he thinks free trade would benefit the poor. What are most of the restrictions that are in place in the 18th century? They’re restrictions put in place by the legislature that have been, as he says, ‘extorted’ by wealthy merchants for their own interests. The East India Company has monopolies on tea and the like, whereas if you instituted free trade, you’d get rid of all this rent-seeking and the result would be cheaper goods for ordinary people. We often pit free trade against helping the poor today, but he saw the two as going hand-in-hand. That’s one of the key reasons that he liked it so much. Yes, for all goods he thought that they were just being made more expensive by the rent-seeking behaviour of the rich. Smith wrote a page-long diatribe about the division of labour and its potential ill-effects. Karl Marx loved to quote it: ‘Even Smith, the great Smith sees that capitalism is terrible!’ But that’s not Smith’s point at all. He says, in effect, ‘Look, these are the effects the division of labour is going to have, unless government takes some means to prevent it.’ The passage comes not in the context of a discussion of the division of labour, but in the context of a discussion of education. In his view, it’s the state’s duty to ensure that the children of the poor and the workers get an education. Education should be compulsory so parents don’t throw their kids into the factory to start making money when they’re eight years old. For the ill-effects of the division of labour, he thought education was a great remedy. “Commercial society’s ills are less broad and important than those in most other forms of society” With regard to rent-seeking, this is, again, a big part of why he argues for free trade. The more free trade you have, the fewer restrictions there are available for the merchants to extort from the legislature. He does offer various counter-measures for the ills that he describes. But I don’t think he would have believed that utopia is possible. There are always going to be ills. Commercial society’s ills are less broad and important than those in most other forms of society, and we should try to tackle them with the means we have at our disposal. I think Smith would have said that commercial society and the activity of commerce might not encourage us to reach the moral heights, but it would discourage us from reaching the moral depths. If you live in a commercial society, you live by exchanging with others, so you depend a great deal on your reputation. When somebody sells me a book on Amazon and says it’s in great condition and it turns out to be in terrible condition, I’m not going to buy from them again. I’m going to give them bad reviews and they’ll stop making sales. The idea is that commerce encourages the virtues of what Smith, in The Theory of Moral Sentiments , calls the ‘prudent man’: somebody who is honest and conscientious and does his duty and follows the rules of justice. Which isn’t to say that this is some moral exemplar, some heroic being whom we should all strive to emulate. I don’t think he’s under any illusions that commerce is going to make us all perfectly virtuous people, but the activity of commerce itself does restrain at least some of the worst impulses of human nature. He uses it just once in both. He also used it once in an essay that was published posthumously. So from his pen, we have a total of three uses of the phrase ‘the invisible hand.’ As far as we can tell, he didn’t attach any particular importance to that phrase—nor did any of his interpreters until the 20th century. In the 20th century, the Chicago school of economists picked it out and made it the central thing to the point where now, when people hear the name Adam Smith, the invisible hand is the first thing that they think of. I do think the idea behind the invisible hand is pretty central to his work, though. The idea that there are often unintended consequences to various policies, that a lot of times things work in a bottom-up, Hayekian way, the idea that spontaneous order creates our system of morality and our economy without individuals intending it. So it’s not entirely wrong, but it is ironic, I think, that the phrase has become so deeply attached to our understanding of Smith. Yes, many people wore Adam Smith neckties . They were very popular in the Reagan White House, as I understand it."

"The reason I included The Wealth of Nations in my choices is because I see this as one of the major books in the world of development economics . At the time Adam Smith was writing Britain was a developing economy. It was around the time of the Industrial Revolution. And there are many things in the book which remain important even today. Often this work is misinterpreted. For example, he is widely cited as a market fundamentalist which he was not. He is regarded as the guru of greed – greed that is supposed to propel a capitalist economy, which is quite the opposite of his intention, as you can read from parts of this work and his preceding book, The Theory of Moral Sentiments . The problem is, he is always quoted from a very small part of The Wealth of Nations in which he is trying to explain economic exchange. But the rest of the book and the other book are about the whole plurality of human motivations. When he is explaining economic exchange he is saying self-interest alone is enough to get an exchange. But he is talking about what is the minimum assumption on which one can get an economic exchange rather than that this is what human beings are like, which is what many people took it to mean. “At the time Adam Smith was writing Britain was a developing economy.” Economic exchange is only one part of the subject of economics; another part is how goods are distributed, and he showed a great deal of concern for the poor. He wasn’t happy with how poverty relief in Britain was being carried out at the time. He was also in favour of free education. Once you concentrate on the other parts of his work you see he is focusing on economic development which is about improving the living standards of the masses of poor people."

"Of course. As somebody who grew up in west Scotland, I was raised to revere him, and he was a big influence during my childhood. I remember my father once left The Wealth of Nations on my bed, and said “read that”. Well, if one actually reads the book, it’s full of wise reflections on oversized corporations and monetary systems. It’s not a naive book. He was well aware of the dangers of corporations, and particularly of banks. So if you read it closely it’s not a naive apology for unregulated markets, but he’s quite keenly aware of the problems of financial regulation. Obviously it’s somewhat different in our time, but essentially what Smith grappled with was the instability of banks and the risk of bank runs. What happened to Northern Rock [in 2007] happened to the Ayr bank [in Scotland in 1772]. Smith also looked at ways in which the state, by intervening, can make matters worse. “It’s not a naive apology for unregulated markets, but Adam Smith is quite keenly aware of the problems of financial regulation.” One of the key points that he tried to make is that the market is very susceptible to distortion by government intervention. We can see that quite clearly in our own time. I think the crisis is in many ways a good illustration of Smith’s central point that it’s bad to let government meddle too much in the economy. This is a great opportunity to quote Karl Kraus, another author I select here. He said that Freudianism was the disease for which it purported to be the cure. I think much the same could be said of many of the policies that we [in the US] now pursue. The Federal Reserve system has had to take over the US banking system and indeed the US bond market, because the Federal Reserve system made such heinous errors from 2002 to 2004. So I think quantitative easing and fiscal stimulus are the diseases for which they purport to be the cure."

"Adam Smith, The Wealth of Nations. It was an extraordinary insight into how society works, and I stress the idea of society, rather than the economy, because his attempt was really to think about not just the famous things like division of labour, or the efficiency with which resources were allocated, but also how they were distributed: whether it was done in a moral, ethical way. And therefore he was thinking about winners and losers. Much of modern day economics, and the modern day reinterpretation of Smith, is all about the idea that you can create only winners if you allocate resources efficiently, that ultimately you are making the cake bigger and therefore, in theory, everyone can be better off. Of course those beliefs fed into the way we walked into the financial crisis, and the problem with that was that with time – which is what capital markets deal with – comes uncertainty. What is amazing about Smith is that he tried to relate economics to morals and ethics, in the sense that economics is only a small part of what society should be thinking about. I think it’s rather unfortunate: he’s been hijacked to a degree by a sort of right-wing free-market view of the world, which has done him a disservice in terms of his contribution to economic thought."

"Economists the world over are going to be celebrating the semiquincentennial of The Wealth of Nations this year, a book that was published on March 9, 1776. I first read it in college and recently, as we approach this milestone, decided to re-read it and was amazed about how fresh and vivid it felt, as well as how nuanced and humane it is. In many ways, all of the questions in my other four books came out of The Wealth of Nations which is, justly, credited with launching the field of economics. It asked big questions about the nature of money, why different economies developed in different ways (including the American colonies—not yet the United States—and China), the past and future of population growth, and even a bit of personal finance. Of course, we have learned an enormous amount since 1776, both through theory, experience, data and techniques that were not available to Smith, like statistical analysis. Economics is not hermeneutics, where economists pore over ancient texts hoping that by understanding them they can discover truths. That said, Smith does have some bigger picture wisdom that remains relevant up until today, and in some cases expressed in ways that have not been surpassed since. The Wealth of Nations centers people. Wealth is not gold accumulation or national power, it is the living standards of the citizens. The source of that wealth is the people as well, through their work. This work is able to produce more through a division of labor (his famous example is the division of labor in a pin factory). And that division of labor itself can be finer—and thus people more productive and living standards higher—if there is more trade. The division of labor then gives rise to how all these people are coordinated, the person farming the cotton, making the farming implements, making the thread, sewing the clothing, selling the clothing, making the die, and everything else. Smith’s answer is there is no coordinator but instead an ‘invisible hand’ where a combination of markets, prices and people acting largely in their own interest end up coordinating all of these efforts towards a common purpose. There is a lot of subtlety in Smith’s argument. He is very worried about monopolies and collusion between businesses. He discusses the way wages are set by a few businesses colluding on one side of the market, who take advantage of disorganized workers on the other side. He also has a broader and more subtle conception of morality than just the ‘greed is good’ made famous by Gordon Gekko in the film Wall Street. Perhaps most important, Smith was an empiricist. He was grounded in history and observation. In that way, he set up the paradigm that an additional nearly two-hundred and fifty years of data and observation has brought us all the insights discussed in the other four books and more. What will matter most is whether we’ve recognized that many of today’s problems aren’t temporary shocks but structural shifts. Slower population growth, tighter global constraints, more fragile households, and rising geopolitical tension aren’t going away. The open question for 2025 is whether we respond by clinging to outdated assumptions or by updating our institutions in ways that preserve prosperity, stability, and human flourishing. These books don’t offer easy answers, but they do make clear that pretending nothing has changed is the riskiest option of all."

"The Wealth of Nations was the first serious tract on economics in the English language and it profoundly shaped the way people thought about the economy and society. However, it has been seriously misrepresented by people who either have not read it or, if they have done so, overlooked important passages. Many people know Smith’s arguments in favour of free markets but how many people know his thoughts about the failings of market economics? In the book he argues things like: ‘People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public…’ or the even more damning: ‘Commerce sinks the courage of mankind? The minds of men are contracted and incapable of elevation.’"

"It’s a long book and it covers many things. But it’s particularly important for the history of reading. Smith thinks in terms of systems. There is an economic system, a financial system, an agricultural system and so on. He’s modern in that way, but he also looks at business practices. He offers data for the reader to consider and scrutinise. He does not argue as an ideologue. One of the systems that he looked at is monopoly and competition. There’s a terrific passage about the silversmiths and the guilds in various towns that were given exclusive rights to sell silver and control the prices and training of silversmiths. He shows that, contrary to what was claimed, this system led there to being less silver in the country than there would be if anybody was allowed to work in silver. So he’s saying the wealth of the nation is reduced by monopolistic structures that are publicly presented as increasing it. Smith says much the same about the monopoly of copyright and argues that, like any other monopoly, it should only be tolerated for a short time in order to encourage innovation that is of general usefulness to the society that gives the privilege. Until 1774 copyright was perpetual in England, although only 28 years maximum in Scotland. The eventual 1774 decision by the House of Lords to stop the book industry from unlawfully exercising perpetual copyright, that had been battled over for half a century, was greatly influenced by Smith’s lectures, which attracted much attention before his book was published. The Romantic period, when there was a short copyright, coincided with an amazingly rich episode in the writing not only of literature but in history and political economy, and with a huge increase in reading generally, as the prices of out-of-copyright books tumbled. Since then, the copyright term has gradually been lengthened and the situation now is that it’s nearly perpetual. So the link between the granting of a short-term monopoly to provide encouragement to innovation for the benefit of society as a whole has been lost. And the issues of freedom and access that confronted the 18th century and the Romantic period now have to be faced again in the age of the Internet."