May 12th, 2012 Wealth of Nations
The Wealth of Nations was Adam Smith's most influential work, and is considered to be very important in the creation of the field of economics and its development into an autonomous systematic discipline. In the Western world, it is considered one of the most influential books on the subject ever published. The work is also the first comprehensive defense of free market policies. When the book, which has become a classic manifesto against mercantilism (the theory that large reserves of bullion are essential for economic success), appeared in 1776, there was a strong sentiment for free trade in both Britain and America. This new feeling had been born out of the economic hardships and poverty caused by the American War of Independence. However, at the time of publication, not everybody was immediately convinced of the advantages of free trade: the British public and Parliament still clung to mercantilism for many years to come.
The Wealth of Nations also rejects the Physiocratic school's emphasis on the importance of land; instead, Smith believed labour was paramount, and that a division of labour would effect a great increase in production. One example he used was the making of pins. One worker could probably make only twenty pins per day. But if ten people divided up the eighteen steps required to make a pin, they could make a combined amount of 48,000 pins in one day. However, Smith also concluded that excessive division of labor would negatively affect worker's intellect through the carrying out of monotonous and repetetive tasks and hence he called for the establishment of a public education system.
Nations was so successful, in fact, that it led to the abandonment of earlier economic schools, and later economists, such as Thomas Malthus and David Ricardo, ffocused on refining Smith's theory into what is now known as classical economics. Both Modern economics and, separately, Marxian economics owe significantly to classical economics. Malthus expanded Smith's ruminations on overpopulation, while Ricardo believed in the "iron law of wages"that overpopulation would prevent wages from topping the subsistence level. Smith postulated an increase of wages with an increase in production, a view considered more accurate today.
One of the main points of The Wealth of Nations is that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called "invisible hand". The image of the invisible hand was previously employed by Smith in Theory of Moral Sentiments, but it has its original use in his essay, "The History of Astronomy". If a product shortage occurs, for instance, its price rises, creating a profit margin that creates an incentive for others to enter production, eventually curing the shortage. If too many producers enter the market, the increased competition among manufacturers and increased supply would lower the price of the product to its production cost, the "natural price".
Even as profits are zeroed out at the "natural price", there would be incentives to produce goods and services, as all costs of production, including compensation for the owner's labour, are also built into the price of the goods. If prices dip below a zero profit, producers would drop out of the market; if they were above a zero profit, producers would enter the market. Smith believed that while human motives are often selfishness and greed, the competition in the free market would tend to benefit society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of businessmen and argued against the formation of monopolies.
Smith vigorously attacked the antiquated government restrictions which he thought were hindering 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. (However this was not an anarchistic opposition to government. Smith advocated a Government that was active in sectors other than the economy: he advocated public education of poor adults; institutional systems that were not profitable for private industries; a judiciary; and a standing army.)
Two of the most famous and often-quoted passages in The Wealth of Nations are:
"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, and never talk to them of our own necessities but of their advantages."
"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 value of 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 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."
Another favorite quote, usually recited by economists, also from The Wealth of Nations is:
"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary."
Smith postulated four "maxims" of taxation: proportionality, transparency, convenience and efficiency. Smith is credited by economists as one of the first to advocate a progressive tax. Smith wrote, "It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more in proportion." In another quote he supported taxation in proportion to the revenue (income) of the individual:
"The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation."