Adam Smith Publishes The Wealth of Nations

Date March 9, 1776

The Wealth of Nations marked the culmination of Enlightenment political economy and the advent of modern economics. It became one of the most influential works on capitalism, being used variously as a practical guide, a theoretical description, a defense, and a critique of industrialization and the market.

Locale London, England

Key Figures

• Adam Smith (1723-1790), Scottish economist and philosopher
• Francis Hutcheson (1694-1746), Scottish philosopher
• William Pitt the Younger (1759-1806), prime minister of Great Britain, 1783-1801, 1804-1806
• François Quesnay (1694-1774), French economist

Summary of Event

Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations (1776; commonly known as The Wealth of Nations) exerted greater influence in the systematization and development of economic theory than any other single work. In this volume, as in his lectures, Smith extracted economic theory from the broad field of moral philosophy and offered a comprehensive theory of economic value and of the operation of the market system. Although Smith was clearly dependent on others for many of the insights in The Wealth of Nations, the importance of his work has led many to call him the father of political economy.

Smith was reared by his widowed mother in the Scottish village of Kirkcaldy in Fifeshire and attended the University of Glasgow, where he studied moral philosophy under Professor Francis Hutcheson, who taught an optimistic natural philosophy. He subsequently studied classics at Oxford and lectured on rhetoric and belles lettres in Edinburgh. In 1751, he became professor of logic at Glasgow University, and he was made professor of moral philosophy in the following year. In 1759, he published his The Theory of Moral Sentiments, in which he emphasized that mutual regard—sympathy—binds the members of society together in a Providential harmony. The pursuit of esteem was an important part of an individual’s status; as Smith would argue in The Wealth of Nations, the economy was one of the major realms where esteem and status were realized and discovered.

In 1763, Smith resigned his position to become tutor to the young duke of Buccleuch, and with his pupil he traveled on the Continent for two years. In France, he met Anne-Robert-Jacques Turgot and François Quesnay, whose economic ideas impressed him. Smith returned to Kirkcaldy in 1766 and spent most of the following decade there writing The Wealth of Nations. He subsequently received a post as customs commissioner in Edinburgh and died there in 1790.

The Wealth of Nations reveals Smith as widely read in the political and economic theory of the seventeenth and eighteenth centuries, and as indebted to many individuals and schools of thought for his insights. Yet Smith also shows that he is more than a mere systematizer or popularizer of the ideas of others. The Wealth of Nations breaks new ground, and its comprehensiveness is far superior to many of its nineteenth century successors as well as its physiocratic and other predecessors.

Smith’s work commences with a discussion of the importance of labor as the source of the annual wealth of a nation, and the division of labor as a means for increasing its productivity and the nation’s wealth. Division of labor results in exchanges, which leads Smith into a discussion of money as the medium of exchange, and to problems of value, where he sharply distinguishes between value in exchange and value in use. Accepting labor as a measure of value, Smith defines prices in terms of component costs of production including wages, profit, and rent. Natural price is the long-run, competitive, equilibrium price determined by the cost of production, while market price is a short-run price determined by supply and demand. Smith points out the self-regulating nature of the market system and insists that artificial regulations of a legislative or monopolistic type are unnecessary and unwise. He then considers wages, profits, and rent and the effects of economic progress on these three types of income.

In the second book of The Wealth of Nations, Smith turns to a consideration of the nature, accumulation, and employment of capital. Here he explains the importance of banking and paper money, and distinguishes productive from unproductive labor. In his distinction he recognizes the productive quality of nonagricultural labor and thus moves beyond the position of the Physiocrats. He defines saving as investment and relates private saving to the national welfare, thus providing encouragement for thrift and capital investment. Smith traces a natural course of development in all nations whereby the capital of the society is first directed to agriculture, then to manufacturing, and finally to foreign commerce, unless interrupted by legislation or other unwise interference.

In the third book, Smith reveals his historical account of the progress of wealth in different nations. This served the purpose of explaining the transition from agricultural to commercial societies, and of the historical basis of his later critique of mercantilism. In the fourth book of his study, Smith offers a critique of the mercantile system and of the agricultural system of the Physiocrats. Smith’s major attack on mercantilism is directed against restrictive monopolistic regulations and practices that interfere with the free operation of the natural laws of the market. He argues for free trade domestically and internationally, and urges the abolition of duties, bounties, and the monopolistic privileges of chartered companies. Smith was not, however, a doctrinaire opponent of all economic restrictions. He grants the appropriateness of certain exceptions, as well as the wisdom of moving gradually in the adoption of a free trade policy. He insists that as individuals pursue their own best interest, they unknowingly but effectively promote the best interest of society.

Smith considers the economic functions of the state in the fifth book of The Wealth of Nations. He recognizes three duties of the state according to his system of natural liberty: defense against foreign states, protection of every citizen against every other citizen, and the building and maintenance of public works and institutions that are advantageous to society but unprofitable as public investments. He also recognizes the necessity for restraint in situations where the exercise of natural liberty by a few individuals might endanger the security of the whole society. Thus, while Smith generally encourages the free economic action of individuals under the impulse of self-interest, he is not an advocate of an unqualified laissez-faire doctrine.

As a moral philosopher, Smith recognized in issues such as the division of labor and the pursuit of self-interest particular challenges to civic morality. Smith was particularly concerned that the laboring poor have the education and moral instruction necessary to retain their psychological independence and wholeness in the face of pursuit of self-interest upon their part and that of their employers. Commerce and liberty had in Britain enjoyed a general mutually rewarding relationship. Yet Smith was concerned that commerce created increasingly complex social relationships that could endanger civic liberty; therefore, the statesman must carefully monitor commercial progress with an eye to legislation that will protect liberty.

Significance

The economic system of natural liberty advocated in The Wealth of Nations had many prominent advocates in the eighteenth and nineteenth centuries. A notable disciple of Adam Smith was the British prime ministerWilliam Pitt the Younger, who sought to introduce free trade principles in British economic policy. The Manchester School later depended on Smith’s theories in its legislative proposals. The Wealth of Nations had advocates outside Britain as well; Smith even influenced opponents of capitalism such as Karl Marx. Smith’s greatest achievements in The Wealth of Nations were his successful definition of a science of economics, his explanation of wealth, and his emphasis on the division of labor. From his work, readers were able to see clearly the operation of the market as a self-regulating system.

Bibliography

Campbell, R. H., and A. S. Skinner. “General Introduction.” In An Inquiry into the Nature and Causes of the Wealth of Nations, by Adam Smith. New York: Oxford University Press, 1979. This scholarly edition of The Wealth of Nations provides a very useful outline of Smith’s major work and of his earlier works as well.

Dougherty, Peter J. Who’s Afraid of Adam Smith? How the Market Got Its Soul. New York: J. Wiley, 2002. Analyzes two of Smith’s books: The Wealth of Nations, with its ideas about the free market, and the more obscure A Theory of Moral Sentiments, expressing Smith’s belief that free markets can flourish only in societies with social capital and strong institutions of civil society.

Fleischaker, Samuel. On Adam Smith’s “Wealth of Nations”: A Philosophical Companion. Princeton, N.J.: Princeton University Press, 2004. Fleischaker explains Smith’s economic ideas within the context of Smith’s moral theory and philosophies of science and social science. He also relates Smith’s ideas to the thoughts of his contemporaries, including David Hume and Francis Hutcheson.

Heilbroner, Robert L. The Worldly Philosophers: The Lives, Times, and Ideas of the Great Economic Thinkers. New York: Simon & Schuster, 1953. Still a very useful and readable introduction to the history of the discipline of economics, in which Smith plays a formative role.

Hont, Istvan, and Michael Ignatieff, eds. Wealth and Virtue: The Shaping of Political Economy in the Scottish Enlightenment. New York: Cambridge University Press, 1983. This collection of essays offers compelling accounts of the historical background of Smith’s political-economic thought.

Raphael, D. D. Adam Smith. New York: Oxford University Press, 1985. A short, clear work by an expert, with a good introduction to Smith’s writings.

Ross, Ian Simpson. The Life of Adam Smith. New York: Oxford University Press, 1995. A comprehensive and scholarly biography of Smith.

Skinner, Andrew S., and Thomas Wilson, eds. Essays on Adam Smith. Oxford, England: Clarendon Press, 1975. A full and wide-ranging set of scholarly essays on Smith in his capacities as moral philosopher and political economist.