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."
References
http://en.wikipedia.org/wiki/Adam_Smith
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