| The Wealth of Nations | |
|---|---|
| Author(s) | Adam Smith |
| Country | United Kingdom (Scotland) |
| Genre(s) | Economics |
| Publisher | W. Strahan and T. Cadell, London |
| Publication date | 1776 |
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith. First published in 1776, it is a reflection on economics at the beginning of the Industrial Revolution and argues that free market economies are more productive and beneficial to their societies. The book is a fundamental work in classical economics.
Contents |
The Wealth of Nations was first published on 9 March 1776, during the British Agricultural Revolution. It influenced a number of authors and economists, as well as governments and organizations. For example, Alexander Hamilton was influenced in part by The Wealth of Nations to write his Report on Manufactures, in which he argued against many of Smith's policies. Interestingly, Hamilton based much of this report on the ideas of Jean-Baptiste Colbert, and it was, in part, to Colbert's ideas that Smith responded to with The Wealth of Nations.
Many other authors were influenced by the book and used it as a starting point in their own work, including Jean-Baptiste Say, David Ricardo, Thomas Malthus and, later, Ludwig von Mises. The Russian national poet Aleksandr Pushkin refers to The Wealth of Nations in his 1833 verse-novel Eugene Onegin.
Irrespective of historical influence, however, The Wealth of Nations represented a clear shift in the field of economics, similar to Sir Isaac Newton's Principia Mathematica for physics, Antoine Lavoisier's Traité Élémentaire de Chimie for chemistry, or Charles Darwin's On the Origin of Species for biology.
Five editions of The Wealth of Nations were published during Smith's lifetime: in 1776, 1778, 1784, 1786, and 1789. Numerous editions appeared after Smith's death in 1790. To better understand the evolution of the work under Smith's hand, a team led by Edwin Cannan collated the first five editions. The differences were published along with an edited sixth edition in 1904.[1] They found minor but numerous differences (including the addition of many footnotes) between the first and the second editions, both of which were published in two volumes. The differences between the second and third editions, however, are major: In 1784, Smith annexed these first two editions with the publication of Additions and Corrections to the First and Second Editions of Dr. Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations, and he also had published the three-volume third edition of the Wealth of Nations, which incorporated Additions and Corrections and, for the first time, an index. Among other things, the Additions and Corrections included entirely new sections. The fourth edition, published in 1786, had only slight differences from the third edition, and Smith himself says in the Advertisement at the beginning of the book, "I have made no alterations of any kind." Finally, Cannan notes only trivial differences between the fourth and fifth editions — a set of misprints being removed from the fourth and a different set of misprints being introduced.
Modern commentary on the work may suffer from anachronism— the imposition of modern context on a 250-year-old work.
The book is written in English of the late 18th century, so there are some points to consider:
Of the Division of Labour: Division of labour has caused a greater increase in production than any other factor. This diversification is greatest for nations with more industry and improvement, and is responsible for "universal opulence" in those countries. Agriculture is less amenable than industry to division of labour; hence, rich nations are not so far ahead of poor nations in agriculture as in industry.
Of the Principle which gives Occasion to the Division of Labour: Division of labor arises not from innate wisdom, but from humans' propensity to barter. The apparent difference in natural talents between people is a result of specialization, rather than any innate cause.
That the Division of Labour is Limited by the Extent of the Market: Limited opportunity for exchange discourages division of labor. Because "water-carriage" extends the market, division of labor, with its improvements, comes earliest to cities near waterways. Civilization began around the highly navigable Mediterranean Sea...
Of the Origin and Use of Money: With division of labor, the produce of one's own labor can fill only a small part of one's needs. Different commodities have served as a common medium of exchange, but all nations have finally settled on metals, which are durable and divisible, for this purpose. Before coinage, people had to weigh and assay with each exchange, or risk "the grossest frauds and impositions." Thus nations began stamping metal, on one side only, to ascertain purity, or on all sides, to stipulate purity and amount. The quantity of real metal in coins has diminished, due to the "avarice and injustice of princes and sovereign states," enabling them to pay their debts in appearance only, and to the defraudment of creditors.
Of the Real and Nominal Price of Commodities, or of their Price in Labour, and their Price in Money: In the first two passages Smith gives two conflicting definitions of the relative value of a commodity. Ricardo responded to one of Smith's inconsistencies in the Preface of his "Principles":
Adam Smith defines the value of commodities by the labour embedded and also by the labour a good commands. Ricardo agrees with the first definition:
"The real price of every thing," says Adam Smith,[3] "What every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it, or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. That this is really the foundation of the exchangeable value of all things, excepting those which cannot be increased by human industry, is a doctrine of the utmost importance in political economy."[4]
For Ricardo, the value of reproducible commodities and services reflects the relative difficulties of production counted in labour units: direct labour plus the dated labour of the past embedded in inputs (capital) and corrected by interests. This differs from Smith's[3] second definition of value:
Ricardo[5] disagrees:
Smith's second definition pleases neoclassical economists, who determine value by the utility that a commodity provides a person rather than cost of production as do classical economists.
Of the Component Parts of the Price of Commodities: Smith argues that the price of any product reflects wages, rent of land and "...profit of stock," which compensates the capitalist for risking his resources.
Of the Natural and Market Price of Commodities:
"When the quantity of any commodity which is brought to market falls short of the effectual demand, all those who are willing to pay... cannot be supplied with the quantity which they want... Some of them will be willing to give more. A competition will begin among them, and the market price will rise... When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid in order to bring it thither... The market price will sink..."[6]
To paraphrase Smith, and the first part of this Chapter, when demand exceeds supply, the price goes up. When the supply exceeds demand, the price goes down.
He then goes on to comment on the different avenues that people can take to generate a larger profit than normal. Some of those include: finding a commodity that few others have that allows for a high profit, and being able to keep that secret; Finding a way to produce a unique commodity (The dyer who discovers a unique dye). He also states that the former usually has a short lifespan of high profitability, and the latter has a longer. He also notes that a monopoly is essentially the same as the dyers trade secret, and can thus lead to high profitability for a long time by keeping the supply below the effectual demand.
"A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly understocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate. The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion, indeed, but for any considerable time together. The one is upon every occasion the highest which can be squeezed out of the buyers, or which, it is supposed, they will consent to give: the other is the lowest which the sellers can commonly afford to take, and at the same time continue their business."[7]
Of the Wages of Labour: In this section, Smith describes how the wages of labour are dictated primarily by the competition among labourers and masters. When labourers bid against one another for limited opportunities for employment, the wages of labour collectively fall, whereas when employers compete against one another for limited supplies of labour, the wages of labour collectively rise. However, this process of competition is often circumvented by combinations among labourers and among masters. When labourers combine and no longer bid against one another, their wages rise, whereas when masters combine, wages fall. In Smith's day, it should be noted, organized labour was dealt with very harshly by the law.
Smith himself wrote about the "severity" of such laws against worker actions, and made a point to contrast the "clamour" of the "masters" against workers associations, while associations and collusions of the masters "are never heard by the people" though such actions are "always" and "everywhere" taking place:
"We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject. Masters are always and everywhere in a sort of tacit, but constant and uniform, combination, not to raise the wages of labour above their actual rate [...] Masters, too, sometimes enter into particular combinations to sink the wages of labour even below this rate. These are always conducted with the utmost silence and secrecy till the moment of execution; and when the workmen yield, as they sometimes do without resistance, though severely felt by them, they are never heard of by other people". In contrast, when workers combine, "the masters [...] never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combination of servants, labourers, and journeymen."[8]
In societies where the amount of labour exceeds the amount of revenue available for waged labour, competition among workers is greater than the competition among employers, and wages fall. Inversely, where revenue is abundant, labour wages rise. Smith argues that, therefore, labour wages only rise as a result of greater revenue disposed to pay for labour. Smith thought labour the same as any other commodity in this respect:
"the demand for men, like that for any other commodity, necessarily regulates the production of men; quickens it when it goes on too slowly, and stops it when it advances too fast. It is this demand which regulates and determines the state of propagation in all the different countries of the world, in North America, in Europe, and in China; which renders it rapidly progressive in the first, slow and gradual in the second, and altogether stationary in the last."[9]
However, the amount of revenue must increase constantly in proportion to the amount of labour for wages to remain high. Smith illustrates this by juxtaposing England with the North American colonies. In England, there is more revenue than in the colonies, but wages are lower, because more workers flock to new employment opportunities caused by the large amount of revenue— so workers eventually compete against each other as much as they did before. By contrast, as capital continues to flow to the colonial economies at least at the same rate that population increases to "fill out" this excess capital, wages there stay higher than in England.
Smith was highly concerned about the problems of poverty. He writes:
"poverty, though it does not prevent the generation, is extremely unfavourable to the rearing of children [...] It is not uncommon [...] in the Highlands of Scotland for a mother who has borne twenty children not to have two alive [...] In some places one half the children born die before they are four years of age; in many places before they are seven; and in almost all places before they are nine or ten. This great mortality, however, will every where be found chiefly among the children of the common people, who cannot afford to tend them with the same care as those of better station."[10]
The only way to determine whether a man is rich or poor is to examine the amount of labour he can afford to purchase. "Labour is the real exchange for commodities".
Smith also describes the relation of cheap years and the production of manufactures versus the production in dear years. He argues that while some examples, such as the linen production in France, show a correlation, another example in Scotland shows the opposite. He concludes that there are too many variables to make any statement about this.
Of the Profits of Stock: In this chapter, Smith uses interest rates as an indicator of the profits of stock. This is because interest can only be paid with the profits of stock, and so creditors will be able to raise rates in proportion to the increase or decrease of the profits of their debtors.
Smith argues that the profits of stock are inversely proportional to the wages of labor, because as more money is spent compensating labor, there is less remaining for personal profit. It follows that, in societies where competition among laborers is greatest relative to competition among employers, profits will be much higher. Smith illustrates this by comparing interest rates in England and Scotland. In England, government laws against usury had kept maximum interest rates very low, but even the maximum rate was believed to be higher than the rate at which money was usually loaned. In Scotland, however, interest rates are much higher. This is the result of a greater proportion of capitalists in England, which offsets some competition among laborers and raises wages.
However, Smith notes that, curiously, interest rates in the colonies are also remarkably high (recall that, in the previous chapter, Smith described how wages in the colonies are higher than in England). Smith attributes this to the fact that, when an empire takes control of a colony, prices for a huge abundance of land and resources are extremely cheap. This allows capitalists to increase his profit, but simultaneously draws many capitalists to the colonies, increasing the wages of labor. As this is done, however, the profits of stock in the mother country rise (or at least cease to fall), as much of it has already flocked offshore.
Of Wages and Profit in the Different Employments of Labour and Stock: Smith repeatedly attacks groups of politically aligned individuals who attempt to use their collective influence to manipulate the government into doing their bidding. At the time, these were referred to as "factions," but are now more commonly called "special interests," a term that can comprise international bankers, corporate conglomerations, outright oligopolies, trade unions and other groups. Indeed, Smith had a particular distrust of the tradesman class. He felt that the members of this class, especially acting together within the guilds they want to form, could constitute a power block and manipulate the state into regulating for special interests against the general interest:
"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."[11]
Smith also argues against government subsidies of certain trades, because this will draw many more people to the trade than what would otherwise be normal, collectively lowering their wages.
Chapter 10, part ii, motivates an understanding of the idea of feudalism.
Of the Rent of the Land: Rent, considered as the price paid for the use of land, is naturally the highest the tenant can afford in the actual circumstances of the land. In adjusting lease terms, the landlord endeavours to leave him no greater share of the produce than what is sufficient to keep up the stock from which he furnishes the seed, pays the labour, and purchases and maintains the cattle and other instruments of husbandry, together with the ordinary profits of farming stock in the neighbourhood. This is evidently the smallest share with which the tenant can content himself without being a loser, and the landlord seldom means to leave him any more. Whatever part of the produce, or, what is the same thing, whatever part of its price, is over and above this share, he naturally endeavours to reserve to himself as the rent of his land, which is evidently the highest the tenant can afford to pay in the actual circumstances of the land. Sometimes, indeed, the liberality, more frequently the ignorance, of the landlord, makes him accept of somewhat less than this portion; and sometimes too, though more rarely, the ignorance of the tenant makes him undertake to pay somewhat more, or to content himself with somewhat less, than the ordinary profits of farming stock in the neighbourhood. This portion, however, may still be considered as the natural rent of land, or the rent for which it is naturally meant that land should for the most part be let.
Of the Division of Stock:
II.1.1
Of Money Considered as a particular Branch of the General Stock of the Society:
Of the Accumulation of Capital, or of Productive and Unproductive Labour:
Of Stock Lent at Interest:
Of the Natural Progress of Opulence:
Of the Discouragement of Agriculture: Chapter 2's long title is "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: Smith often harshly criticised those who act purely out of self-interest and greed, and warns that,
Smith vigorously attacked the antiquated government restrictions he thought hindered 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 for poor adults, a judiciary, and a standing army—institutional systems not directly profitable for private industries.
Of the Principle of the Commercial or Mercantile System: The book has sometimes been described as a critique of mercantilism and a synthesis of the emerging economic thinking of Smith's time. Specifically, The Wealth of Nations attacks, inter alia, two major tenets of mercantilism:
Of Restraints upon the Importation: Chapter 2's full title is "Of Restraints upon the Importation from Foreign Countries of such Goods as can be Produced at Home". The "Invisible Hand" is a frequently referenced theme from the book, although it is specifically mentioned only once.
"As every individual, therefore, endeavors 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 revenue of the 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 the society more effectually than when he really intends to promote it." (Book 4, Chapter 2)
Of the extraordinary Restraints: Chapter 3's long title is "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".
Of Drawbacks: Merchants and manufacturers are not contented with the monopoly of the home market, but desire likewise the most extensive foreign sale for their goods. Their country has no jurisdiction in foreign nations, and therefore can seldom procure them any monopoly there. They are generally obliged, therefore, to content themselves with petitioning for certain encouragements to exportation.
Of these encouragements what are called Drawbacks seem to be the most reasonable. To allow the merchant to draw back upon exportation, either the whole or a part of whatever excise or inland duty is imposed upon domestic industry, can never occasion the exportation of a greater quantity of goods than what would have been exported had no duty been imposed. Such encouragements do not tend to turn towards any particular employment a greater share of the capital of the country than what would go to that employment of its own accord, but only to hinder the duty from driving away any part of that shares to other employments.
Of Bounties: Bounties upon exportation are, in Great Britain, frequently petitioned for, and sometimes granted to the produce of particular branches of domestic industry. By means of them our merchants and manufacturers, it is pretended, will be enabled to sell their goods as cheap, or cheaper than their rivals in the foreign market. A greater quantity, it is said, will thus be exported, and the balance of trade consequently turned more in favour of our own country. We cannot give our workmen a monopoly in the foreign as we have done in the home market. We cannot force foreigners to buy their goods as we have done our own countrymen. The next best expedient, it has been thought, therefore, is to pay them for buying. It is in this manner that the mercantile system proposes to enrich the whole country, and to put money into all our pockets by means of the balance of trade
Of Treaties of Commerce:
Of Colonies:
Of the Motives for establishing new Colonies:
Causes of Prosperity of new Colonies:
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: Smith's argument about the international political economy opposed the idea of Mercantilism. While the Mercantile System encouraged each country to hoard gold, while trying to grasp hegemony, Smith argued that free trade eventually makes all actors better off. This argument is the modern 'Free Trade' argument.
Of the Agricultural Systems: Chapter 9's long title is "Of the Agricultural Systems, or of those Systems of Political Economy, which Represent the Produce of Land, as either the Sole or the Principal, Source of the Revenue and Wealth of Every Country".
Smith postulated four "maxims" of taxation: proportionality, transparency, convenience, and efficiency. Some economists interpret Smith's opposition to taxes on transfers of money, such as the Stamp Act, as opposition to capital gains taxes, which did not exist in the 18th century.[12] Other economists credit Smith as one of the first to advocate a progressive tax.[13][14] 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."
Of the Expenses of the Sovereign or Commonwealth: Smith uses this chapter to comment on the concept of taxation and expenditure by the state. On taxation Smith wrote,
"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."
Smith advocates a tax naturally attached to the "abilities" and habits of each echelon of society.
For the lower echelon, Smith recognized the intellectually erosive effect that the otherwise beneficial division of labour can have on workers, what Marx, though he mainly opposes Smith, later named "alienation,"; therefore, Smith warns of the consequence of government failing to fulfill its proper role, which is to preserve against the innate tendency of human society to fall apart.
..."the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same, has no occasion to exert his understanding or to exercise his invention in finding out expedients for removing difficulties which never occur. He naturally loses, therefore, the habit of such exertion, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble, or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life... But in every improved and civilized society this is the state into which the laboring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it."[15]
Under Smith's model, government involvement in any area other than those stated above negatively impacts economic growth. This is because economic growth is determined by the needs of a free market and the entrepreneurial nature of private persons. A shortage of a product makes its price rise, and so stimulates producers to produce more and attracts new people to that line of production. An excess supply of a product (more of the product than people are willing to buy) drives prices down, and producers refocus energy and money to other areas where there is a need.[16]
Of the Sources of the General or Public Revenue of the Society: In his discussion of taxes in Book Five, Smith wrote:
"The necessaries of life occasion the great expense of the poor. They find it difficult to get food, and the greater part of their little revenue is spent in getting it. The luxuries and vanities of life occasion the principal expense of the rich, and a magnificent house embellishes and sets off to the best advantage all the other luxuries and vanities which they possess. A tax upon house-rents, therefore, would in general fall heaviest upon the rich; and in this sort of inequality there would not, perhaps, be anything very unreasonable. It is not very unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion."[17]
Of War and Public Debts:
"...when war comes [politicians] are both unwilling and unable to increase their [tax] revenue in proportion to the increase of their expense. They are unwilling for fear of offending the people, who, by so great and so sudden an increase of taxes, would soon be disgusted with the war [...] The facility of borrowing delivers them from the embarrassment [...] By means of borrowing they are enabled, with a very moderate increase of taxes, to raise, from year to year, money sufficient for carrying on the war, and by the practice of perpetually funding they are enabled, with the smallest possible increase of taxes [to pay the interest on the debt], to raise annually the largest possible sum of money [to fund the war]. ...The return of peace, indeed, seldom relieves them from the greater part of the taxes imposed during the war. These are mortgaged for the interest of the debt contracted in order to carry it on."[18]
Smith then goes on to say that even if money was set aside from future revenues to pay for the debts of war, it seldom actually gets used to pay down the debt. Politicians are inclined to spend the money on some other scheme that will win the favor of their constituents. Hence, interest payments rise and war debts continue to grow larger, well beyond the end of the war.
Summing up, if governments can borrow without check, then they are more likely to wage war without check, and the costs of the war spending will burden future generations, since war debts are almost never repaid by the generations that incurred them.
The first edition of the book sold out in six months.[19] The printer William Strahan wrote on 12 April 1776 that David Hume had said that The Wealth of Nations required too much thought to be as popular as Edward Gibbon's The History of the Decline and Fall of the Roman Empire. Strahan also wrote: "What you say of Mr. Gibbon's and Dr. Smith's book is exactly just. The former is the most popular work; but the sale of the latter, though not near so rapid, has been more than I could have expected from a work that requires much thought and reflection (qualities that do not abound among modern readers) to peruse to any purpose".[20] Gibbon wrote to Adam Ferguson on 1 April: "What an excellent work is that with which our common friend Mr. Adam Smith has enriched the public! An extensive science in a single book, and the most profound ideas expressed in the most perspicuous language".[21] The review of the book in the Annual Register was probably written by Whig MP Edmund Burke.[22]
Smith's biographer John Rae contends that The Wealth of Nations shaped government policy soon after it was published. In 1777 the Prime Minister, Lord North, in the first budget after the book was published, got the idea for two new taxes from the book: one on man-servants and the other on property sold at auction. The budget of 1778 introduced the inhabited house duty and the malt tax, both recommended by Smith. In 1779 Smith was consulted by politicians Henry Dundas and Lord Carlisle on the subject of giving Ireland free trade.[23]
The Wealth of Nations was first mentioned in Parliament by the Whig leader Charles James Fox on 11 November 1783: "There was a maxim laid down in an excellent book upon the Wealth of Nations which had been ridiculed for its simplicity, but which was indisputable as to its truth. In that book it was stated that the only way to become rich was to manage matters so as to make one's income exceed one's expenses. This maxim applied equally to an individual and to a nation. The proper line of conduct therefore was by a well-directed economy to retrench every current expense, and to make as large a saving during the peace as possible".[24] However Fox once told Charles Butler sometime after 1785 that he had never read the book and that "There is something in all these subjects which passes my comprehension; something so wide that I could never embrace them myself nor find any one who did".[25] In 1796 when Fox was dining with Lord Lauderdale, Lauderdale remarked that we knew nothing of political economy before Adam Smith wrote. "Pooh," replied Fox, "your Adam Smiths are nothing, but" (he added, turning to the company) "that is his love; we must spare him there". Lauderdale replied: "I think he is everything", to which Fox rejoined: "That is a great proof of your affection".[25] Fox also found Adam Smith "tedious" and believed that one half of The Wealth of Nations could be "omitted with much benefit to the subject".[26]
In an editorial of The Times on 3 August 1787, it was stated: "It is astonishing to consider, how few merchants are acquainted with Smith's Wealth of Nations, or Anderson's History of Commerce, which are certainly books that should be perused by every man who makes trade his pursuit".[27]
The Wealth of Nations was next mentioned in Parliament by Robert Thornton MP in 1787 to support the Commercial Treaty with France. In the same year George Dempster MP referenced it in the debate on the proposal to farm the post-horse duties and in 1788 by a Mr. Hussy on the Wool Exportation Bill.[24] In 1791 the English radical Thomas Paine wrote in his Rights of Man that "Had Mr. Burke possessed talents similar to the author ‘On the Wealth of Nations,’ he would have comprehended all the parts which enter into, and, by assemblage, form a constitution".[28] The Prime Minister, William Pitt, praised Smith in the House of Commons on 17 February 1792: "...an author of our own times now unfortunately no more (I mean the author of a celebrated treatise on the Wealth of Nations), whose extensive knowledge of detail, and depth of philosophical research will, I believe, furnish the best solution to every question connected with the history of commerce, or with the systems of political economy".[29] In the same year it was quoted by Samuel Whitbread MP and Fox (on the division of labour) in the debate on the armament against Russia and also by William Wilberforce in introducing his Bill against the slave trade. It was not mentioned in the House of Lords until 1793, by Lord Lansdowne and Lord Loughbourough. Lansdowne said: "With respect to French principles, as they had been denominated, those principles had been exported from us to France, and could not be said to have originated among the population of the latter country. The new principles of government founded on the abolition of the old feudal system were originally propagated among us by the Dean of Gloucester, Mr. Tucker, and had since been more generally inculcated by Dr. Smith in his work on the Wealth of Nations, which had been recommended as a book necessary for the information of youth by Mr. Dugald Stewart in his Elements of the Philosophy of the Human Mind". Loughborough replied that "in the works of Dean Tucker, Adam Smith, and Mr. Stewart, to which allusion had been made, no doctrines inimical to the principles of civil government, the morals or religion of mankind, were contained, and therefore to trace the errors of the French to these causes was manifestly fallacious".[30] On 16 May 1797 Pitt said in the debate on the suspension of cash payments by the Bank of England that Smith was "that great author" but his arguments "though always ingenious" were "sometimes injudicious".[31]
Sir John Mitford, the Solicitor-General, said on 22 December 1798 in speaking on cross-bills (a bill of exchange given in consideration of another bill) that Smith "in his Wealth of Nations, explains the nature and pernicious consequences of this practice with his usual perspicuity and philosophical accuracy".[32] On 5 December 1800 Lord Warwick said in a debate on the price of corn that:
There was hardly any kind of property on which the law did not impose some restraints and regulations with regard to the sale of them, except that of provisions. This was probably done on the principles laid down by a celebrated and able writer, Doctor Adam Smith, who had maintained that every thing ought to be left to its own level. He knew something of that Gentleman, whose heart he knew was as sound as his head; and he was sure that had he lived to this day and beheld the novel state of wretchedness to which the country was now reduced—a state, which as the like had never occurred before, could never have entered into his mind; that Great Man would have reason to blush for some of the doctrines he had laid down. He would now have abundant opportunities of observing that all those artificial means of enhancing the price of provisions, which he had considered as no way mischievous, were practised at this time to a most alarming extent. He would see the Farmer keeping up his produce while the poor were labouring under all the miseries of want, and he would see Forestallers, Regraters, and all kinds of Middle-men making large profits upon it.[33]
Lord Grenville replied that "he must remind him, that so far from there having been any difference in the state of the Country when that great man lived, and the present times, his book was first published at a period, previous to which there had been two or three seasons of great dearth and distress; and during those seasons there were speculators without number, who raised an unfounded and unjust clamour against Forestallers and Regraters, and who proposed that a certain price should be fixed on every article: but all their plans were wisely rejected, and the Treatise on the Wealth of Nations, which came forward soon after, pointed out in the clearest light how absurd and futile they must have been".[33]
In 1800 the Anti-Jacobin Review criticised The Wealth of Nations and Robert Southey in 1812 in the Quarterly Review condemned The Wealth of Nations as a "tedious and hard-hearted book".[34]
In 1803 The Times argued against war with Spain: "She is our best customer; and by the gentle and peaceable stream of commerce, the treasures of the new world flow with greater certainty into English reservoirs, than it could do by the most successful warfare. They come in this way to support our manufactures, to encourage industry, to feed our poor, to pay taxes, to reward ingenuity, to diffuse riches among all classes of people. But for the full understanding of this beneficial circulation of wealth, we must refer to Dr. Adam Smith's incomparable Treatise on the Wealth of Nations".[35] In 1810 a correspondent writing under the pseudonym of Publicola included at the head of his letter Smith's line that "Exclusive Companies are nuisances in every respect" and called him "that learned writer".[36] In 1821 The Times quoted Smith's opinion that the interests of corn dealers and the people were the same.[37]
In 1826 the English radical William Cobbett criticised in his Rural Rides the political economists' hostility to the Poor Law: "Well, amidst all this suffering, there is one good thing; the Scotch political economy is blown to the devil, and the Edinburgh Review and Adam Smith along with it".[38]
The Radical MP Richard Cobden as a young man studied The Wealth of Nations; his copy is still in the library of his home at Dunford House and there are lively marginal notes on the places where Smith condemns British colonial policy. There are none on the passage about the invisible hand.[39] Cobden campaigned for free trade in his agitation against the Corn Laws. On 13 October 1843 Cobden quoted (accurately) Smith's protest against the "plain violation of the most sacred property" of every man derived from his labour.[40] On 8 May 1844 he cited Smith's opposition to slave labour[41] and on 3 July 1844 claimed that Smith had been misrepresentated by protectionists as a monopolist.[42] On 8 October 1849 Cobden claimed that he had "gone through the length and breadth of this country, with Adam Smith in my hand, to advocate the principles of Free Trade." He also said he had tried "to popularise to the people of this country, and of the Continent, those arguments with which Adam Smith, David Hume, Ricardo, and every man who has written on this subject, have demonstrated the funding system to be injurious to mankind, and unjust in principle".[43] Cobden believed it to be morally wrong to lend money to be spent on war. When The Times claimed the political economists were against Cobden on this, Cobden wrote on 16 October 1849: "I can quote Adam Smith whose authority is without appeal now in intellectual circles, it gives one the basis of science upon which to raise appeals to the moral feelings".[44] When in 1850 the Russian government attempted to raise a loan, ostensibly for the construction of a railway from St. Petersburg to Moscow, but actually to cover the deficit brought about by its war against Hungary, Cobden said on 18 January: "I take my stand on one of the strongest grounds in stating that Adam Smith and other great authorities on political economy are opposed to the very principle of such loans".[45] In 1863, during Cobden's dispute with The Times over its claims that his fellow Radical John Bright wanted to divide the land of the rich amongst the poor, Cobden read to a friend the passage in the Wealth of Nations which criticised primogeniture and entail. Cobden said that if Bright had been as plain-speaking as Smith, "how he would have been branded as an incendiary and Socialist".[46] On 23 November 1864 Cobden proclaimed: "If I were five-and-twenty or thirty, instead of, unhappily, twice that number of years, I would take Adam Smith in hand—I would not go beyond him, I would have no politics in it—I would take Adam Smith in hand, and I would have a League for free trade in Land just as we had a League for free trade in Corn. You will find just the same authority in Adam Smith for the one as for the other; and if it were only taken up as it must be taken up to succeed, not as a political, revolutionary, Radical, Chartist notion, but taken up on politico-economic grounds, the agitation would be certain to succeed".[47]
The Liberal statesman William Ewart Gladstone chaired the meeting of the Political Economy Club to celebrate the centenary of the publication of The Wealth of Nations.[48]
The Liberal historian Lord Acton believed that The Wealth of Nations gave a "scientific backbone to liberal sentiment"[49] and that it was the "classic English philosophy of history".[50]
James Madison, in a speech given in Congress on 2 February 1791, cited The Wealth of Nations in opposing a national bank: "The principal disadvantages consisted in, 1st. banishing the precious metals, by substituting another medium to perform their office: This effect was inevitable. It was admitted by the most enlightened patrons of banks, particularly by Smith on the Wealth of Nations".[51] Thomas Jefferson, writing to John Norvell on 14 June 1807, claimed that on "the subjects of money & commerce, Smith's Wealth of Nations is the best book to be read, unless Say's Political Economy can be had, which treats the same subject on the same principles, but in a shorter compass & more lucid manner".[52]
In the Preface to his edition, Cannan shows that the major part of the "Wealth of Nations" follows Adam Smith’s earlier lectures, but that there are important additions due to his visit to France. These additions were so important for Smith that he puts them at the beginning of his work. For Cannan as a neoclassic economist they are superfluous and not the real Adam Smith: "These changes do not make so much real difference to Smith’s own work as might be supposed; the theory of distribution, though it appears in the title of Book I., is no essential part of the work and could easily be excised … But to subsequent [classical] economics they were of fundamental importance. They settled the form of economic treatises for a century at least."[53]
The "Wealth of Nations" is therefore inhomogeneous and consists of the earlier elements of an individualistic strain in the tradition of Aristotle, Puffendorf and Hutcheson,[54] Smith’s teacher, – elements compatible with a neoclassical theory – and the classical theory Smith learned in France.
Smith’s classical message is what he states at the very beginning: the two ways to create the “Wealth of Nations”. First, make productive labour even more productive by enhancing markets to deepen the division of labour (moving the neoclassical production curve to the right); and second, use more labour productively instead of unproductively, i.e., produce more goods and services that are inputs to the next economic reproduction circle, as opposed to goods used up in final consumption. In the words of Adam Smith:
Ricardo[56] repeats this in identical terms. Smith’s and the classical macro-economical distinction between productive and unproductive labour gives no sense within neoclassical micro-economics as any labour or idleness of a Homo oeconomicus maximises his micro-economic “utility” and is therefore productive.
For neoclassical economists Smith’s central message is the Invisible hand[57] mentioned deep in the books and seen as a proto-neoclassical statement of the neoclassical General equilibrium theory:
This often quoted passage describes the unintentional consequences that come from individuals' pursuit of their "own gain" and security. Smith argued people prefer local industry and are biased against international trade. Ideally, he saw economics as characterized by small local economies interacting with each other and guided by the enlightened self-interest of individuals. This was a reaction against the practices of early transnational corporations (for example: the British East India Company and Muscovy Company), which were mostly unresponsive to local affairs and stewardship of resources. Though the argument is frequently, and incorrectly, used to justify free-trade policies, The Wealth of Nations was a rebuttal to the scale and effects of chartered monopoly. By positing—now famously—that "self-interest" promotes more just societies, he was prescribing to economies already heavily tilted against individual human agency. For instance, American colonists were permitted to grow cotton but not to manufacture with it. They had to sell cotton to England for processing, then buy it back as clothing. Smith felt opposing large multinational corporations (and the governments that support them), allowed individuals to direct industry "in such a manner as its produce may be of the greatest value." This value comes from the individual's self-interest and leads to a result that is "no part of his intention."
Murray Rothbard wrote:
[I]t is not just that Smith's Wealth of Nations has had a terribly overblown reputation from his day to ours. The problem is that the Wealth of Nations was somehow able to blind all men, economists and laymen alike, to the very knowledge that other economists, let alone better ones, had existed and written before 1776. The Wealth of Nations exerted such a colossal impact on the world that all knowledge of previous economists was blotted out, hence Smith's reputation as Founding Father. The historical problem is this: how could this phenomenon have taken place with a book so derivative, so deeply flawed, so much less worthy than its predecessors? The answer is surely not any lucidity or clarity of style or thought. For the much-revered Wealth of Nations is a huge, sprawling, inchoate, confused tome, rife with vagueness, ambiguity and deep inner contradictions. There is of course an advantage, in the history of social thought, to a work being huge, sprawling, ambivalent and confused. There is sociological advantage to vagueness and obscurity. The bemused German Smithian, Christian J. Kraus, once referred to the Wealth of Nations as the 'Bible' of political economy. In a sense, Professor Kraus spoke wiser than he knew. For, in one way, the Wealth of Nations is like the Bible; it is possible to derive varying and contradictory interpretations from various – or even the same – parts of the book.[59]
George Stigler attributes to Smith "the most important substantive proposition in all of economics" and foundation of resource-allocation theory. It is that, under competition, owners of resources (labor, land, and capital) will use them most profitably, resulting in an equal rate of return in equilibrium for all uses (adjusted for apparent differences arising from such factors as training, trust, hardship, and unemployment).[60] He also describes Smith's theorem that "the division of labor is limited by the extent of the market" as the "core of a theory of the functions of firm and industry" and a "fundamental principle of economic organization."[61]
Paul Samuelson finds in Smith's pluralist use of supply and demand—as applied to wages, rents, and profit—a valid and valuable anticipation of the general equilibrium modeling of Walras a century later. Moreover, Smith's allowance for wage increases in the short and intermediate term from capital accumulation and invention added a realism missed later by Malthus, Ricardo, and Marx in their propounding a rigid subsistence-wage theory of labour supply.[62]
Mark Blaug argues that it was Smith's achievement to shift the burden of proof against those maintaining that the pursuit of self-interest does not achieve social good. But he notes Smith's relevant attention to definite institutional arrangements and process as disciplining self-interest to widen the scope of the market, accumulate capital, and grow income.[63]