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Introduction by Robert Reich
Commentary by R. H. Campbell and A. S. Skinner
Adam Smith’s masterpiece, first published in 1776, is the foundation of modern economic thought and remains the single most important account of the rise of, and the principles behind, modern capitalism. Written in clear and incisive prose, The Wealth of Nations articulates the concepts indispensable to an understanding of contemporary society; and Robert Reich’s Introduction both clarifies Smith’s analyses and illuminates his overall relevance to the world in which we live. As Reich writes, “Smith’s mind ranged over issues as fresh and topical today as they were in the late eighteenth century—jobs, wages, politics, government, trade, education, business, and ethics.”
Includes a Modern Library Reading Group Guide
The first truly scientific argument for the principles of political economy.
Adam Smith's ideas fit perfectly with this new democratic, individualistic idea. To him, the "wealth" of a nation wasn't determined by the size of its monarch's treasure or the amount of gold and silver in its vaults, nor by the spiritual worthiness of its people in the eyes of the Church. A nation's wealth was to be judged by the total value of all the goods its people produced for all its people to consume. To a reader at the start of the twenty-first century, this assertion may seem obvious. At the time he argued it, it was a revolutionary democratic vision.
Smith was born in 1723, in the small Scottish port of Kirkcaldy, which sits across the Firth of Forth from Edinburgh. His father was a collector of customs—a job that literally embodied the old mercantilist philosophy that Smith would later argue against. He was educated at the University of Glasgow, whose professors passionately debated the new concepts of individualism and ethics (one of his teachers, Francis Hutcheson, was prosecuted by the Scottish Presbyterian church for spreading the "false and dangerous" doctrines that moral goodness could be obtained by promoting happiness in others and that it was possible to know good and evil without knowing God), and then at Oxford, whose professors didn't debate or teach much of anything. In fact, the lassitude of Oxford's dons prompted Smith to suggest, in The Wealth of Nations, that professors be paid according to the number of students they attract, thereby motivating them to take a more lively interest in teaching—one of Smith's few suggestions with which today's tenured professors of economics generally disagree.
In 1748 Smith returned to the University of Glasgow, first as a professor of logic and then of moral philosophy, filling Francis Hutcheson's chair. There he published The Theory of Moral Sentiments in 1759, which brought him instant fame. In it, Smith asked how a normal self-interested person is capable of making moral judgments, when the essence of morality is selflessness. It was a question that troubled many of the new thinkers of the eighteenth century, who had liberated themselves from both theology and codes of aristocratic or chilvaric virtue. Smith's answer foreshadowed Sigmund Freud's superego: People possess within themselves an "impartial spectator" who advises them about moral behavior.
Smith resigned his professorship in 1764 to become tutor to the son of the late Duke of Buccleuch. The boy's mother, Countess of Dalkeith, had just remarried Charles Townshend, one of Smith's many admirers, who later became Britain's chancellor of the exchequer, and was responsible for imposing the taxes on the American colonies that prompted some Bostonians to throw large quantities of tea into Boston Harbor. For the next two years, Smith traveled throughout the Continent, beginning work on the book that was to become The Wealth of Nations. He visited Voltaire in Geneva, and in Paris met François Quesnay, a physician in the court of Louis XV who had devised a chart of the economy—a "tableau economique" he called it—showing the circulation of products and money in an economy analogous to the flow of blood through a body. Quesnay and his fellow Physiocrats believed that wealth came from a nation's production that enlarged the flow rather than from its accumulation of gold and silver, as the prevailing mercantilists believed, and that governments should therefore remove all impediments to the flow of money and goods in order to increase production.
Smith took these notions to heart, although he didn't agree with everything the Physiocrats propounded (such as their view that agricultural production was the only true source of wealth). Returning to Glasgow in 1766, he spent the better part of the following decade working out his theories. Occasionally he'd travel to London to discuss them with luminaries such as the philosopher Edmund Burke, historian Edward Gibbon, Benjamin Franklin (visiting from America), and the remarkable personalities Samuel Johnson and James Boswell. Smith's book finally appeared on March 9, 1776, in two volumes, and went through several subsequent editions. It was well received, although not an immediate sensation. Smith spent his remaining years back in Edinburgh as commissioner of customs, the same kind of mercantilist sinecure his father had held, and died in July 1790, at the age of sixty-seven.
The Wealth of Nations is resolutely about human beings—their capacities and incentives to be productive, their overall well-being, and the connection between productivity and well-being. In the very first sentence of his Introduction, Smith takes aim at the mercantilists and declares, "The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life. . . ." And two paragraphs later he states that a nation's wealth grows because of "the skill, dexterity, and judgment with which its labour is generally applied. . . ." Smith's concern about all of a nation's working people is evident. In a wealthy nation "a workman, even of the lowest and poorest order, if he is frugal and industrious, may enjoy a greater share of the necessaries and conveniences of life than it is possible for any savage to acquire." In the rest of the book he explains why this is so.
While The Theory of Moral Sentiments showed how normal, self-interested people could make moral judgments by consulting an internal "impartial spectator," in The Wealth of Nations Smith explains how such people will automatically contribute to the well-being of others even absent such consultations, simply by pursuing their own ends. "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner," writes Smith, in one of the most frequently cited passages in the history of economic thought, "but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love. . . ." With several strokes of his pen, Smith thereby provided a moral justification for motives that had been morally suspect in Western thought for thousands of years.
How can self-interested behavior—the "private interests and passions" of men Smith calls them—lead to the good of the whole? By means, he says, of an "invisible hand"—perhaps the most famous, or infamous, bodily metaphor in all of social science. By an "invisible hand" Smith does not mean a mystical force; he is referring to an unfettered market propelled both by competition among self-interested sellers and by buyers seeking the best possible deals for themselves. If sellers produce too little of something to meet buyers' demands, for example, the price of the product will rise until other sellers step in to fill the gap. If some sellers charge too high a price to begin with, others will step in and charge a lower one.
Unimpeded, the invisible hand will allocate goods efficiently. But the key to wealth creation, for Smith, comes in the division of labor—by which individuals specialize in doing or producing a particular thing. Smith famously illustrates this principle by reference to the making of pins within the kind of small factory that characterized the early years of the Industrial Revolution. "One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations . . . ," he explains. "I have seen a small manufactory of this kind where ten men only were employed . . . [who] could make among them upwards of forty-eight thousand pins a day." He contrasts this with the likely output of individuals who tried to make the entire pins themselves. "[I]f they had all wrought separately and independently . . . they certainly could not each of them have made twenty, perhaps not one pin in a day. . . ."
Specialization improves productivity because it allows workers to become more skilled in their specific tasks, motivates them to discover more efficient means of doing them, and saves them the time of changing over to different tasks. Here, Smith noticed something that modern managers often overlook: Innovation often begins with the workers closest to the things being worked upon. "A great part of the machines made use of in those manufactures in which labour is most subdivided, were originally the inventions of common workmen, who, being each of them employed in some simple operation, naturally turned their thoughts towards finding out easier and readier methods of performing it."
In order to reap the full benefits of specialization, the market must be sufficiently large. After all, there's little point in creating forty-eight thousand pins if there aren't enough people to buy them. The larger the market, the greater the opportunities for specialization. It follows that barriers to trade, within a nation or between nations—regulations, licenses, tariffs, quotas, and other market protections—reduce potential wealth. At the extreme, the necessity of self-sufficiency causes hardship, as in "the lone houses and very small villages which are scattered about in so desert a country as the Highlands of Scotland, [where] every farmer must be butcher, baker, and brewer for his own family."
Editor's Introduction by Johnathan B.Wight, University of Richmond
Notes on the Text
Introduction and Plan of the Work
Notable Quotes from The Wealth of Nations
Contents to The Wealth of Nations
Of the Causes of Improvement in the productive Powers of Labour, and of the order according to which its Produce is naturally distributed among the different Ranks of the people.
Of the Division of Labour
Of the Principle which gives Occasion to the Division of Labour
That the Division of labour is Limited by the Extent of the Market
Of the Origin and Use of Money
Of the Real and Nominal Price of Commodities, or of their Price in Labour, and their Price in Money
Of the Component parts of the Price of Commodities
Of the Natural and Market Price of Commodities
Of the Wages of Labour
Of the Profits of Stock
Of Wages and Profit in the Different Employments of Labour and Stock
PART I. Inequalities arising from the nature of the employments themselves
PART II Inequalities occasioned by the Policy of Europe
Of the Rent of Land
PART I. Of the Produce of Land which always affords Rent
PART II. Of the Produce of Land, which sometimes does, and sometimes does not, afford Rent
PART III. Of the variations in the Proportion between the respective Values of that sort of Produce which always affords Rent, and of that which sometimes does, and sometimes does not, afford Rent
Digression concerning the Variations in the value of Silver during the Course of the Four last Centuries
Variations in the Proportion between the respective Values of Gold and Silver Grounds of the suspicion that the Value of Silver still continues to decrease Different Effects of the Progress of Improvement upon three different sorts of rude Produce
Conclusion of the Digression concerning the Variations in the Value of Silver Effects of the Progress of Improvement upon the real Price of Manufactures
CONCLUSION of the CHAPTER
PRICES OF WHEAT
Of the Nature, Accululation, and Employment of Stock
Of the Division of Stock
Of Money, Considered as a Particular Branch of theGeneral Stock of the Society, or of the Expense of Maintaining the National Capital
Of the Accumulation of Capital, or of Productive and Unproductive Labour
Of Stock Lent at Interest
Of the Different Employment of Capitals
Of the Different Progress of Opulence in Different Nations
Of the Natural Progress of Opulence
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
Of Systems of Political Economy
Of the Principle of the Commercial or Mercantile System
Of Restraints upon the Importation from Foreign Countries of such Goods can be produced at Home
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
PART I. Of the Unreasonableness of those Restraints, even upon the Principles of the Commercial System
Digression concerning Banks of Deposit, particularly concerning that of Amsterdam
PART II. Of the Unreasonableness of those extraordinary Restraints, upon other Principles
Digression concerning the Corn Trade and Corn Laws
Of Treaties of Commerce
PART I. Of the Motives for Establishing New Colonies
PART II. Causes of the Prosperity of New Colonies
PART III. 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
Of the Agricultural Systems, or of those Systems of Political Economy which Represent the Produce of Land, as either the Sole or the Principle Source of the Revenue and Wealth of Every Country
Appendix to Book IV
Of the Revenue of the Sovereign or Commonwealth
Of the Expenses of the Sovereign or Commonwealth
PART I. Of the Expense of Defence
PART II. Of the Expense of Justice
PART III. Of the Expense of public Works and public Institutions
ARTICLE I. Of the public Works and Institutions for facilitating the Commerce of the Society, And, first, of those which are necessary for facilitating Commerce in general
Of the public Works and Institution which are necessary for facilitating particular Branches of Commerce
ARTICLE II. Of the Expense of the Institution for the Education of Youth
ARTICLE III. Of the Expense of the Institutions for the Instruction of People of all Ages
PART IV. Of the Expense of supporting the Dignity of the Sovereign
Of the Sources of the General or Public Revenue of the Society
PART I. Of the Funds, or Sources, of Revenue, which may peculiarly belong to the Sovereign or Commonwealth
PART II. Of Taxes
ARTICLE I. Taxes upon Rent - Taxes upon the Rent of Land Taxes which are proportioned, not in the Rent, but to the Produce of Land Taxes upon the Rent of Houses
ARTICLE II. Taxes upon Profit, or upon the Revenue arising from Stock Taxes upon the Profit of particular Employments
APPENDIX TO ARTICLES I AND II - Taxes upon the Capital Value of Lands, Houses, and Stock
ARTICLE III. Taxes upon the Wages of Labour
ARTICLE IV. Taxes which it is intended should fall indifferently upon every different Species of Revenue
Taxes upon Consumable Commodities
Consumable commodities are either necessaries or luxuries
Of Public Debts
1. Many of the concepts developed by Adam Smith in The Wealth of Nations-the nature of free trade, laissez-faire, the division of labor-were revolutionary notions in 1776, and remain central to contemporary liberal economic thought. Discuss contemporary economics in light of some of the key notions elaborated by Smith.
2. Smith famously writes: “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. We address ourselves, not to their humanity but to their self-love. . . .” What does Smith mean by “self-love” or “self-interest”?
3. As R. H. Campbell and A. S. Skinner write, The Wealth of Nations “was not only an intellectual achievement . . . embracing as it does the explanation of complex social relations on the basis of a few principles, but also a work which provided practical prescriptions for the problems of the day.” Discuss these aspects of Smith’s work-analytical and prescriptive or historical; what is their relation? Is the one necessary for an appreciation of the other?
4. In his Introduction to this volume, Robert Reich notes that “The Wealth of Nations is resolutely about human beings-their capacities and incentives to be productive, their overall well-being, and the connection between productivity and well-being.” How does this statement, taken as a point of departure, shed light on Smith’s book and its significance?
5. Although he is considered the founder of political economy (or modern economic thought more generally), Adam Smith considered himself a moral philosopher. How does looking at him in this way-as someone fundamentally concerned with questions of ethics-change your understanding or appreciation of his work?