Adam Smith the Wealth of Nations

¶ … Wealth of Nations, According to Adam Smith

Adam Smith's seminal text The Wealth of Nations stands a tribute to the value of capitalism. Fundamentally its author espouses an optimistic faith in the essential rationalism of human society and human desires. He believes in the ability of human economic impulses to balance one another in a state of equilibrium of supply, costs, and consumer demand, if not interfered with by outside forces. Smith suggests that there is a famously invisible hand that guides market forces in a harmonious way that the state should not interfere with. The state should only enforce laws so conflict between human beings is kept at a minimum, and so the economy can function. The reason for the existence of this invisible hand is not purely generated by the economy, but by the nature of modern, human social life that Smith believes is, at is essence, rational and good.

The division of labor, states Smith, is such that a harmony of desires exists between the interests of all whom are engaged in mutually productive efforts. Modern society has shown, Smith states in Chapter I of The Wealth of Nations, the "greatest improvement in the productive powers of labor, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied," because of the division of labor. The division of labor introduced into the economy a proportionate "increase of the productive powers of labor. The separation of different trades and employments from one another, seems to have taken place, in consequence of this advantage." (Chapter I, "The Division of Labor, Values and Distribution) The division of labor allowed for human beings to specialize in the trades and occupations they do best. Thus a cobbler could exchange shoes with a farmer for food, and thus, in an industrial plant, different workers could concentrate and specialize on specific cogs in specific aspects of production and ensure that more goods are produced.

In Chapter II, Smith discussed the nature of exchange and his theory of value regarding money. If the barter system between the cobbler and the farmer outlined above seems crude, he notes that now money has improved notions of valuing human labor because it has provided individuals with "a great wheel of circulation, the great instrument of commerce" by which labor can be valued in more objective terms. Although Smith allows that the division of labor is finite and limited by the extent of the market, money makes exchanges of value much easier. Smith does not see the notion of setting a natural exchange value for goods as very much of a problem. The exchange of the value and prices of goods and services is usually fairly set by the market, according to Smith, and based on market supply and consumer demand.

Smith allows that there is a different kind of value attached by the market to money, as money has a place setting value rather than a value in its intrinsic utility, as in a barter system of goods. Still, Smith believes that the market will always set a fair natural value for a good, based upon the labor required to make a good and the good's costs of production, and the rent expended by the manufacturer. Natural prices made up of wages, profit and rent may be distinct from the market price as determined by supply and demand but the natural price and the market price usually or eventually meet in a state of equilibrium.

In his third chapter, Smith shows that although he is the ideological father of modern capitalism, he still had a great deal of faith in the modern state. However, Smith believes the state should exercise minimal influence in economic affairs. In his Chapter III entitled, "The Revenue of the Sovereign or Commonwealth," Smith separated the role of the state into the defense or armed militia, the role of the judicial and civil ruling elements and the role of those elements devoted to erecting and maintaining public institutions and those public works. The relations of these three great ranks of society, Smith states, are to enable society to function in a harmonious fashion, so that the natural market forces can also remain in harmony.