Adam Smith Wealth of Nations

Adam Smith Wealth of Nations

In his classic text on political economy, an Inquiry into the Nature and Causes of the Wealth of Nations, eighteenth-century Scottish philosopher-economist Adam Smith deftly lays the foundation for contemporary discourse concerning ethical issues in business; modern scholars characterize the scholarly work as one "which [argues] that a nation's wealth is maximized by permitting individuals to pursue their own interests, rather than through political intervention to secure some notion of the common good" (Oakley, 1997, p. 383). Smith largely focuses on topics such as the division of labor, self-interest as the main principle of economics, national wealth as represented by production capacity rather than by stocks of gold (introducing in a rough form the concept of gross national product), free markets, a theory of real price, a theory of rent, and not least, the principles of the market forces:

"The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgement with which it is any where directed, or applied, seem to have been the effects of the division of labour." (Smith, 1776).

Adam Smith describes free market as "an obvious and simple system of natural liberty" (Smith, 1776). In short, he reveals the theoretical basis of the economic system known today as capitalism.

Smith is generally known as the founder of the modern school of political economy, particularly with his celebrated Wealth of Nations, published in 1776. Those theorists who support free market economics have conferred on Smith the honor of being the founder of their discipline. Yet despite his special status in the history of economic thought it is not generally recognized that Smith was a philosopher by vocation and published in the areas of moral philosophy and jurisprudence. The reason is that economic theory has undergone a radical epistemological transformation ever since the days of Smith, now considered a political economist whose theories were founded not only on the facts of human economic life but also on the value judgments that yielded optimal economic decision making thereon.

Smith's liberalism was qualified by his commitment to a moral world-view. Contemporary scholarly fixations with the psychological judgments on which the Wealth of Nations is frequently-based have not merely given Smith's economic analysis renewed prominence but have also attracted attention and made familiar Smith's classic statement:

"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. Nobody but a beggar chooses to depend chiefly upon the benevolence of his fellow citizens. Even a beggar does not depend upon it entirely" (Smith, 1776, pg. 19).

Smith expounds two seemingly contradictory but ultimately empirical observations about economic man:

"[the] division of labour [sic], from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another" (Smith, 1776).

He accepts that greed and other desires were an aspect of human nature, but be does not conclude that the satisfaction of the desires should become the high point of human endeavor or the governing principle of public life. The foundation of Smith's society was legal constraint on excessive self-love, and not self-love itself. "Self-interest" was barely mentioned in the Wealth of Nations, but there are frequent references to both self-love and self-interest in the Theory of Moral Sentiments, where the two terms were given seemingly incongruous meanings. Smith did not regard self-love as the foundation of society; or in modern words the capitalist system was not originally meant to be built on greed.

Given that Smith's approach to economics was much influenced by his previous work in moral philosophy developed in Theory of Moral Sentiments, it would be instructive to note in what moral context Smith formulated the key ideas in the Wealth of Nations. He had previously established himself as not only a brilliant economist but as a moral philosopher deeply concerned with the human element:

"Are you in earnest resolved never to barter your liberty for the lordly servitude of a court, but to live free, fearless, and independent? [Then…never] enter the place from whence so few have been able to return; never come within the circle of ambition; nor ever bring yourself into comparison with those masters of the earth who have already engrossed the attention of half mankind before you" (Smith, 1759).

The tension between the altruistic and egoistic mode of human behavior is often exemplified by references to Adam Smith. In the Wealth of Nations, Smith emphasizes the notion that we cannot expect people to help each other out of sheer good will: where help is given, selfish motives lurk behind it (Smith, 1776). Nonetheless, he begins the Theory of Moral Sentiments with a touching testimony to altruism:

"There are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it" (Smith, 1759).

Building on the Theory of Moral Sentiments, Smith, at the University of Glasgow in 1762, stated in Lecture 16 of his Lectures on Rhetoric that:

".. It is with the misfortunes of others that we most commonly as well as most deeply sympathise [sic]. -- a Historian who related a battle and the effects attending, if he was no way interested would naturally dwell more on the misery and lamentations of the vanquished than on the triumph and exultations of the Victors" (Smith, 1762).

This principle springs from Smith with his principle of human nature. According to Smith, humans are motivated by two traits: self-love and benevolence. And the bridge between both sentiments is determined by the human psychological characteristic of sympathy. Adam Smith's earlier work laid great emphasis on the spirit of benevolence. It argued, seemingly paradoxically, at least at first glance, that the well-spring of benevolence is self-love, combined with man's capacity of sympathy with his fellows:

"How selfish soever [sic] man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it" (Smith, 1759).

The ultimate goal in all of this is human happiness, which is a quasi-Aristotelian balance between tranquility and enjoyment. It should be noted that Smith's idea of human happiness is not founded on some principle of utilitarianism, which later came to dominate post-classical economic theory.

In Wealth of Nations, Smith recommends a free enterprise system based on the argument that free interactions among self-seeking individuals may lead to opulence. However, in the Theory of Moral Sentiment, Smith suggests the possibility that the manner of moral judgment, namely sympathy, may reduce individual differences among people in society (Smith, 1759). There are passages, however, in Wealth of Nations that indicate that the attempt to locate sympathy in the treatise may not be excessively unfounded. Advocating "[addressing] ourselves to their humanity," Smith develops the idea in the afore-mentioned quote:

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard for their own self-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" (Smith, 1776, p. 119).

The preceding quote says very little about modus operandi of an individual; instead, it merely informs us about the preponderant motives in the market places. In addition to underlining the selfish motives in trade, this passage drives home the fact that modern conveniences and plenty that people enjoy are obtained from trade, and it is human propensity to trade that it is behind the division of labor:

"As it is by treaty, by barter, and by purchase, that we obtain from one another the greater part of those mutual good offices which we stand in need of, so it is this same trucking disposition which originally gives occasion to the division of labour" (Smith, 1776).

Again he emphasizes self-love, but with a twist: it is the needs of commerce that mediate, explaining:

"Man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour [sic], and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer" (Smith, 1776, p. 118-119).

The unintentional consequence is thee same as it was before: an increasingly respectable and thriving nation, one so much so that it is as if shaped by what Smith deems the "invisible hand," from which Smith thus concludes that "it is the necessary, certain propensity in human nature . . . To truck, barter, and exchange one thing for another" (Smith, 1776).

Also of significance is the interplay and conflict between self-love and benevolence by way of "sympathy" that would serve as the template on which all of subsequent economic theory would be founded. Consider the fact that most of economic theory is essentially a debate between the virtues of individualism and benevolent altruism by way of the state as intermediary. In short, economic theory concerns but two phenomena only: production as the goal of the most efficient combinations of human labor when combined with capital and the subsequent distribution of such. Smith explains:

"What improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable" (Smith, 1776).

But this is the issue: once production has been effected the hugely important question of how to distribute it arises. It is this question that implicitly informs Smith's political economy.

That Wealth of Nations and the Theory of Moral Sentiments, flowed from the same pen may be regarded as enigmatic. However, it is important to underscore the fact that to deny inconsistency between the Theory of Moral Sentiments and the Wealth of Nations is not to deny the existence of tension between ethics and economics in the thought of Adam Smith. Smith likely assumed that readers of the Wealth of Nations would also have read the Theory of Moral Sentiments. It is certainly to the latter that one must turn before the dimension of Smith's thought can be fully illuminated, as it is only in the Theory of Moral Sentiments that readers are confronted with a full treatment of the complex psychology of self-love. Smith exhibits a scientific purpose in Wealth of Nations, much in the same way as he had years before with the Theory of Moral Sentiments, both of which arguably utilize means in direct pursuit of the ends of revealing the hidden foundations of decent society.

Adam Smith is traditionally considered to be one of the principal founders of scientific economics and the first great advocate of economic liberalism based on the principle of laissez-faire. This principle appeared before Smith, of course, but it was Smith, who, through his famous parable of the invisible hand, first imbued it with a potency it has held, aside from the Keynesian interlude, ever since.

"Every individual...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." (Smith, 1776).

Perhaps the most well-known of Smith's theories is that of the aforementioned "invisible hand," which states that "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" (Smith, 1776). The disciples of what we call neoliberalism claim Adam Smith as their prophet, the first to demonstrate how the pursuit of self-interest spontaneously generates the best possible social order, the maximum good for all, the best allocation and full employment of a society's resources.

The idea is hardly new. The capability of a well-ordered polity to exploit selfishness to the greater good, without duress or overt design, has been depicted by many other scholars, with perhaps the most well-known being that by Bernard Mandeville in Fable of the Bees (Mandeville. 1988). Adam Smith's role of consequence is that he takes the proposal earnestly, elaborates it admirably, and scrutinizes all of its consequences. In Book Three of the Wealth of Nations, Smith attempts to explain the mechanism by which feudal economic and social relations in Europe eventually came to be transformed into relations typical of and dependent on capital markets. The feudal varieties were exemplified by the sway and clout of larger landowners, who sustained countless retainers. However, Smith argues that, with the steady manifestation of lavish possessions, the grand proprietors chose to garnish themselves rather than to maintain their retainers:

"For a pair of diamond buckles perhaps, or for something as frivolous and useless, they exchanged..,the price of the maintenance of a thousand men for a year, and with it the whole weight and authority which it could give them" (Smith, 1980, pp. 418-119).

Smith notes that powerful landholders, faced with the realities of their retainers dismissed coupled with their tenants newfound independence, ultimately bargained their power away "not like Esau in time of hunger and necessity, but in wantonness of plenty, for trinkets and baubles fitter to be the playthings of children than the serious pursuits of men" (Smith, 1980, p. 421).

Wealth of Nations illustrates how self-interest, controlled by sympathy and inhibited by economic competition, leads to a prevalent affluence that Adam Smith calls "universal opulence" (Smith, 1776). How? Individuals want to generate more so that they are free to consume more. and, according to Smith, the answer to generating more lays in the division of labor. When workers specialize, they become more productive; on top of this, opportunities to mechanize become easier to identify and exploit. Purposefully failing to cite documentary sources, quantitative evidence, or empirical calculations to provide support to the latter argument, Smith instead provides a plausible hypothetical narrative to bridge the gap between earlier and later stages of society. His account is consistent with known and/or accepted facts, as well as with an understanding of psychology, illustrated by his astute observation that "all for ourselves, and nothing for other people, seems, in every age of the world, to have been the vile maxim of the masters of mankind" (Smith, 1980, p. 418).

Adam Smith is a great believer in machines. But the division of labor can flourish only in a system that lets people trade their labor, and the goods they produce, without interference. Smith, exhibiting a deftness and skill that justifies his reputation as a master rhetorician, next argues that what is true for individuals is equally true for nations:

"This great increase of the quantity of work, which, in consequence of the division of labour, the same number of people are capable of performing, is owing to three different circumstances; first, to the increase of dexterity in every particular workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another; and lastly, to the invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many" (Smith, 1981).

How does Smith explain the human propensity to trade? The impactful opening chapter of Wealth of Nations, "Of the Division of Labor," is followed by Smith's attempt to explain that the division of labor is not inconsistent with human nature:

"It is the great multiplication of the productions of all the different arts, in consequence of the division of labour, which occasions, in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people" (Smith, 1776).

He argues that the division of labor, identified as the source of opulence, cannot, at least not with his own understanding and/or interpretation of human nature, be a result of prudence or calculation but rather one of an evolutionary outcome:

"This division of labor, from which so much advantages are derived, is not originally the effect of any human wisdom, which foresees and intends the general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another" (Smith, 1776, p. 25).

He ceases at this point to further explore the "propensity to truck, barter, and exchange," with the exception of momentarily observing that the inclination may not be so much an instinct as the materialization of more universal human ability or modus operandi (Smith, 1776, p. 25).

Notably, his theory of the division of labor fails to consider the new industrial revolution and is instead-based entirely on human labor:

"The liberal reward of labour [sic], therefore, as it is the affect of increasing wealth, so it is the cause of increasing population. To complain of it, is to lament over the necessary effect and cause of the greatest public prosperity" (Smith, 1776, pg. 97).

His most famous example is that of the pin makers, in which he explains how one man completing each and every one of the processes involved in constructing a pin by himself can produce a maximum of ten pins a day, while ten men cooperating and specializing in a single part of the process can produce 48,000 pins a day. From this, Smith concludes "a great plenty diffuses itself through all the different ranks of the society" (Smith, 1776).

The advantage of specialization is made clear, but, as is characteristic of Smith, he is acutely aware of disadvantages, as well -- he points out that the workers in time became bored and lost the feeling of connection to their work, a problem that Karl Marx dealt with nearly a century later. While his theories on specialization, self-interest, national wealth, and market forces have generally been accepted, those on real price as determined by the labor it takes to produce or procure an item and rent based on use and reasonable profit can easily be considered confused.

Wealth of Nations also has a polemical aim that is a pressing one, particularly in view of the then-current hostilities between Britain and its American colonies, whose trade restrictions Smith ultimately deemed "hurtful to the general interest of society" (Smith, 1776). Smith expands:

"There may be good policy in retaliations of this kind, when there is a probability that they will procure the repeal of the high duties or prohibitions complained of. The recovery of a great foreign market will generally more than compensate the transitory inconveniency of paying dearer during a short time for some sorts of goods. To judge whether such retaliations are likely to produce such an effect, does not, perhaps, belong so much to the science of a legislator, whose deliberations ought to be governed by general principles which are always the same, as to the skill of that insidious and crafty animal, vulgarly called a statesman or politician, whose councils are directed by the momentary fluctuations of affairs. When there is no probability that any such repeal can be procured, it seems a bad method of compensating the injury done to certain classes of our people, to do another injury ourselves, not only to those classes, but to almost all the other classes of them" (Smith, 1776).

According to Smith, interference in trade among countries is as harmful as interference in domestic trade. It infringes on individual liberty, and works against what Smith deems "universal opulence." Producers may command fortification from competitors at both home and abroad, but this security is bought at others' expense:

"As a rich man is likely to be a better customer to the industrious people in his neighborhood than a poor, so is likewise a rich nation. [Trade restrictions], by aiming at the impoverishment of all our neighbors, tend to render that very commerce insignificant and contemptible" (Smith, 1776, p. 496).

Hence the conclusion should be one of liberal trade, since "if [justice] is removed, the great, the immense fabric of human society, that fabric which to raise and support seems in this world if I may say so has the peculiar and darling care of Nature, must in a moment crumble into atoms" (Smith, 1759, p. 86).

Nationwide improvement is therefore most precisely calculated in the cost of primary foodstuffs, which Smith frequently underscored in the Wealth of Nations, and, at least in the case of Britain, means the cost of corn (Smith, 1776). Even though farming production was not disposed to the same division of labor as was more industrialized production, it was proficient in making noteworthy progress. At least in Smith's accepted wisdom, rural and more general societal progress were not so reliant upon the validation of holdings through enclosure as they were to the protection provided to the men farming the terrain. Smith argued that the unwavering laws and governmental leadership of Britain were "so favourable [sic] to the yeomanry, have perhaps contributed more to the present grandeur of England than all their boasted regulations of commerce taken together" (Smith, 1776).

Wealth of Nations is animated to a striking, even, arguably, to an alarming degree with concern for the welfare of the common laborer. Adam Smith tirelessly and fervently deplores the idleness and cupidity of the rich, namely those whose remorseless seeking after preference weighs on society collectively:

"Among civilized and thriving nations, on the contrary, though a great number of people do no labor at all, many of whom consume the produce of ten times, frequently of a hundred times more labour than the greater part of those who work; yet the produce of the whole labour of the society is so great, that all are often abundantly supplied, and 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" (Smith, 1776, pg. 2).

Smith favors the marketplace in no small part because of those that it places on the mighty and, conversely, despises the most strenuously those economic regulations that allow the nation's most powerful, prominent, and influential to escape those very restraints. In the universal opulence he seeks, the crucial word is "universal" (Smith. 1981).

Despite his endless strictures concerning the dangers of governments acting in league with producers, Smith proposes an enormous extension of the role of the state, all in an effort to further the latter goal. Smith emphasizes, for instance, the demoralizing effects of the division of labor on workers. How then to combine division of labor, necessary if prosperity is to be widespread, with a worthwhile mental life for laborers? Adam Smith's answer is radical in the extreme: universal education, at public expense. The ultimate price of discharging such a responsibility could be seemingly infinite -- possibly sufficient to match, one day, the significant price of national defense. The issue of governments' abuse of taxation to fund militarization is another point of contention:

"In great empires the people who live in the capital, and in the provinces remote from the scene of action, feel, many of them scarce any inconveniency from the war; but enjoy, at their ease, the amusement of reading in the newspapers the exploits of their own fleets and armies. To them this amusement compensates the small difference between the taxes which they pay on account of the war, and those which they had been accustomed to pay in time of peace. They are commonly dissatisfied with the return of peace, which puts an end to their amusement, and to a thousand visionary hopes of conquest and national glory, from a longer continuance of the war" (Smith, 1776).

In fact, Smith envisages a wide, expanding range of government expenditures. All are provoked either by particular breakdowns of the marketplace to meet society's wants or else by the strength of economic fairness that so permeates this labor. Consequently, Smith, envisaging that the costs of defending both will rise as the economy grows more prosperous, emphasizes the rule of law and security of property. Why will the costs rise? In part, it is due to the fact that as the nation's wealth grows, so, too, will "avarice and ambition in the rich," who will increasingly seek to add to their wealth by force or stealth, rather than legitimately through market exchange (Smith, 1776).