Unravel the profound insights of Adam Smith's magnum opus, "The Wealth of Nations". Delve into the birth of modern economics, the invisible hand theory, and the principles that shaped the free-market economy, all through the lens of this seminal work.
The Wealth of Nations was first published in 1776
Adam Smith wrote the book to describe the industrialized capitalist system that was upending the mercantilist system.
- Our individual need to fulfill self-interest results in societal benefit, in what is known as his “invisible hand”.
- This, combined with the division of labor in an economy, results in a web of mutual interdepencies that promotes stability and prosperity through the market mechanism.
Solid Currency and Free-Market Economy
Smith proposed a solid currency twinned with free-market principles
- By backing currency with hard metals, Smith hoped to curtail the government’s ability to depreciate currency by circulating more of it to pay for wars or other wasteful expenditures.
- With hard currency acting as a check on spending, Smith wanted the government to keep taxes low and allow free trade across borders by eliminating tariffs.
What was not in “The Wealth of Nations”?
It lacks proper explanations for pricing or a theory of value, and Smith failed to see the importance of the entrepreneur in breaking up inefficiencies and creating new markets.
- Free-market capitalism gets stronger with each reformulation, whether prompted by an addition from a friend or an attack from a foe
Bottom Line
Adam Smith, the champion of the free market, spent the last years of his life as the Commissioner of Customs, meaning he was responsible for enforcing all tariffs
- The free market he envisioned, though not yet fully realized, may have done more to raise the global standard of living than any single idea in history
Enlightened Self-Interest
Smith believed the practice of enlightened self-interest was natural for the majority of people
- He thought the ability to think long-term would curb most businesses from abusing customers
- Thift and savings were important virtues, especially when savings were used to invest
Primary Thesis
Smith believed humans ultimately promote public interest through their everyday economic choices
- The market emerged from an increasing division of labor, both within production processes and throughout society that created a series of mutual inter-dependencies, promoting social welfare through individual profit motives
- This free-market force became known as the invisible hand, but it needed support to bring about its magic
Limited Government
Smith saw the responsibilities of the government as being limited to the defense of the nation, universal education, public works, and the enforcement of legal rights.
- The government would step in when people acted on their short-term interests and make and enforce laws against robbery, fraud, and other similar crimes.
Smith’s Theories Overthrow Mercantilism
Smith used the example of making wine in Scotland
- He pointed out that good grapes could be grown in Scotland in hothouses, but the extra costs of heating would make Scottish wine 30 times more expensive than French wine
- Far better, he reasoned, would be to trade something Scotland had an abundance of such as wool, in return for French wine
The Invisible Hand
Adam Smith called the invisible hand the sum of many phenomena that occur when consumers and producers engage in commerce
- The invisible hand theorem suggests that the means of production and distribution should be privately owned and that if trade occurs unfettered by regulation, in turn, society will flourish organically
- These arguments are naturally competitive with the concept and function of government
Government Response to the Invisible Hand
The absence of market mechanisms frustrates government planning
- When people and businesses individually make decisions based on their willingness to pay money for a good or service, that information is captured dynamically in the price mechanism
- This allocates resources automatically toward the most valued ends, but when governments interfere with this process, unwanted shortages and surpluses occur
