Wealth of Nations – definition and meaning
An Inquiry into the Nature and Causes of the Wealth of Nations, usually referred to by its shortened title – The Wealth of Nations – is a magnus opus of Adam Smith (1723-1790), a Scottish economist, philosopher and author.
Smith is best known for two works: 1. The Wealth of Nations. 2. The Theory of Moral Sentiments.
** Magunus opus (Latin) is a masterpiece; a creation that has been given a great deal of critical praise, one that is considered the greatest work of an individual’s career.
Smith laid the foundations of what we call today classical free market economic theory. He is known as the ‘Father of modern economics’.
The Wealth of Nations was published at the beginning of the Industrial Revolution. Great Britain was undergoing a fundamental economic and societal change.
The Wealth of Nations influences policymakers today
The Wealth of Nationals is a total of five books that were published in 1776. The work focuses on the state of economics during the industrial revolution, and even today has a great influence on the economic policies of the world’s advanced economies (rich countries) and many other nations across the world.
The five books offer one of the first collected descriptions of what build’s a country’s wealth. It is a fundamental work today in classical economics.
In his work, Smith wrote extensively about the importance of free markets, productivity, and the division of labor.
According to the Oxford Learner’s Dictionary, The Wealth of Nations is:
“An important work of economic and social theory by Adam Smith, published in 1776.In it he analysed the relationship between work and the production of a nation’s wealth.”
“His conclusion was that the best economic situation results from encouraging free enterprise (= an economic system in which there is open competition in business and trade, and no government control).”
The Online Library of Liberty writes: “One of the most famous stories in economics is Adam Smith’s story of the pin-maker. It has been repeated endlessly by other economists as it encapsulates quite nicely one of the key insights of economic analysis, namely the benefits of the division of labor.” (Image: adapted from oil.libertyfund.org)
The Wealth of Nations – Theme 1
The first theme in Smith’s great work is that regulations in commerce are counter-productive and ill-founded.
The view at the time was that silver and gold were wealth, and that nations should increase exports and hold down imports in order to maximize this gold/silver wealth.
Smith insisted that a country’s wealth comes from the goods and services that it creates – we call this GNP (gross national product) today.
To maximize wealth it is necessary to set productive capacity free, wrote Smith, rather than to restrict it.
The Wealth of Nations – Theme 2
Productive capacity relies on the division of labor and the accumulation of capital that makes it all possible.
If production can be broken down into several small tasks, efficiency will improve considerably. Producers are then left with a surplus, which they are able to exchange with others, or use to invest in new machinery, which will boost productivity still further.
The Wealth of Nations – Theme 3
A nation’s future income depends on how much capital it can accumulate. The more a country invests in improving productive processes, the more wealth it will be able to create in the future.
However, people will only accumulate their capital if they are sure that it will not be stolen. Nations that thrive and prosper are those that accumulate their capital, manage it well, and make sure it is protected.
The Wealth of Nations – Theme 4
According to Smith, the whole system functions automatically. When there is a shortage of something, consumers are willing to pay more for it; producers make a profit in selling them and invest their surplus in boosting production capacity.
When there is excess supply, prices decline as do profits, and producers invest their money elsewhere.
In this way, industry balances itself; it remains focused on the economy’s most vital needs. There is no need for central control or direction.
Smith also warned that free exchange and competition are under threat from controls, tax preferences, monopolies, subsidies, and other favors and privileges that producers try to obtain from public authorities.
Regarding this warning, the Adam Smith Institute writes:
“For all these reasons, Smith believes that government itself must be limited. Its core functions are maintaining defence, keeping order, building infrastructure and promoting education. It should keep the market economy open and free, and not act in ways that distort it.”
According to WhiteHouse.gov: “Thomas Jefferson, a spokesman for democracy, was an American Founding Father, the principal author of the Declaration of Independence (1776), and the third President of the United States (1801–1809).” (Image: adapted from WhiteHouse.gov)
The ‘invisible hand’
This ability to self-regulate is often referred to as the ‘invisible hand’. It is an important theme that persists throughout Smith’s work.
The invisible hand refers to the self-regulating force of a free market. When there is not enough of something, supply of that item will gradually increase, while a glut will eventually lead to a decline in production. The invisible hand is better at balancing the economy than central control.
The Wealth of Nations was the product of nearly two decades of notes, an observation of conservations among economists during the Scottish Enlightenment and the Scottish Agricultural Revolution, and societal conditions during the initial stages of the Industrial Revolution.
It took Smith several years to write all the five books. It was a treatise which aimed to offer a practical application for reformed economic theory to replace the physiocratic and **mercantilist economic theories that were rapidly becoming less relevant in a time of innovation and industrial progress.
** Mercantilists believed that global wealth was fixed, so that a nation could only become wealthier at the expense of others.