Book Review: Wealth of Nations
Does Adam Smith's magnum opus live up to its legendary reputation?
Smith has a reputation as the Father of Economics and also as a hero to the right. However, only one of these assertions is true. Within its 900 pages Smith covers a massive range of topics, most of which were previously misunderstood, which makes him the person who properly established economics as an academic discipline.
Although Smith does suggest individuals acting in their self interest will benefit society as a whole he does advocate aspects of government intervention and believed in fair taxes. Smith has definitely been misrepresented and shouldn't be owned by the right as he currently is.
The full name of the book is An Inquiry into the Nature and Causes of the Wealth of Nations which, as the title suggests, means Smith is looking at the cause of prosperity. It is not laissez-faire policies which Smith says are the most important, but instead the division of labour. He sees the division of labour as responsible for innovation and productivity gains. In the past workers would have produced themselves all that they needed, however, once workers specialise they can produce more output. Money is needed to allow this trade to happen because those workers need to obtain the goods they are no longer producing themselves. This allows different types of employments to develop and as everybody specialises, output and the economy grows. A more wealthy nation is achieved.
The Wealth of Nations is made of five books. Book One is a good introduction into Adam Smith and is more manageable in length. You will find most of the basic economic concepts and those that Adam Smith is famous for are written about within the first section of the book. Other sections cover smaller topics in more detail. The book opens with the theory of the division of labour and then goes on to talk about value and price. Smith thought value reflected the labour involved in production while price reflected the three components of rent, profits and wages. He said the advantages and disadvantages of employing stock in a certain industry must be equal or it would be crowded or neglected. One of Smith's interesting insights concerned the superior powers Smith believed capitalists had over workers. He also acknowledged that "equality as a whole makes society happier". Smith looked in depth at wages, rent and profits and what determines each of them. Significantly, Smith disapproved of landlords and believed they contributed nothing to a nation because they only dealt with unproductive assets.
Smith was not afraid to challenge conventional wisdom at the time. For example, he believed the price of gold did not determine the wealth of a nation, instead the price was based on supply and demand and it is the factors of production which determine the wealth of a nation. His views of slavery and mercantilism were also fairly radical for the time although they would eventually become conventional wisdom.
Book Two looks more at the nature of capital. Smith relates this to the division of labour. Smith says stock is needed if people specialise in different employments in order to sustain themselves if there is a problem. Therefore, more specialisation and greater progress leads to an accumulation of capital. Adam Smith supported frugality as a source of increasing capital and opposed prodigality. One of Smith's most interesting insights is to suggest that those who spend on durables add more to the wealth of society. By suggesting this Smith is implying that the poor contribute more to the wealth of nations because they do not spend their money on frivolous trinkets which contribute nothing to the productive capacity of the economy. Smith may also surprise readers by proposing interest rate controls, which even the most socialist of economist may oppose now. Finally, he comments on physiocracy by noting how he believes agriculture is the most efficient type of industry because it creates value from nature rather than just transforming it.
Book Three is, by far, the smallest of the five books. It examines the nature of towns and country estates. Smith believed towns to be the product of economic growth because they deal only with luxuries which are only bought in a prosperous society. He also noted the convenience of towns in terms of density of consumers and producers and the security they provide. Finally, Smith examine the nature of large country estates and the law of primogeniture.
The first three books are mostly a description of economies, but it is in the fourth book where Smith becomes prescriptive. Smith targets the mercantilist system which dominated up to that point. Mercantilism aims to grow only a country's gold reserves by increasing imports and reducing exports. Smith disagrees with this and advocates free trade because he believes this allocates resources to where they are most efficiently employed. Here we find Smith's first and only reference to 'the invisible hand'. Smith believed trade barriers such as the Corn Laws only served to benefit wealthy landowners and not a nation as a whole. Smith saw no reason for Scotland to produce wine when another country could produce for it thirty times less. He believed we should buy the cheapest goods we can regardless of where they are from because the wealth of a nation depends on its resources, not its gold reserves. Smith looks at four protectionist policies: drawbacks, bounties, colonies and treaties of commerce.
The final book is perhaps the most interesting because it concerns the role of the government which is perhaps the aspect most confused by people who have not read the Wealth of Nations. It should also be remembered that it was written 250 years ago when the government had an almost completely different role. It would be unsurprising for Smith to want to limit the influence of policy makers with little expertise and selfish influences. Smith was very clear in his prescriptions of the functions of government which were defence, justice, education, public works and maintenance of a monarchy. For justice, Smith says it is vital to allow economic forces to operate. For public works, Smith recognised the free rider problem and favoured government intervention in this scenario but favoured a toll system. Smith is known for often digressing which is certainly true in this section as he gives a detailed description of philosophy and the role of religion which he believed should not interfere in society. The second half describes the different means of taxation. Smith lists a set of requirements for taxation and most interestingly advocated fair taxation in proportion to ability to pay. They should also be certain, cheap to collect and convenient. Smith acknowledged some taxes were not as bad as others such as a property tax or a tax on landlords.
Overall, Smith definitely deserves his legendary reputation because he revolutionised how people look at their lives and society. Within this tome Smith seems to cover all aspects of society although he is well known for only a few theories. Part of Smith's magnificence also comes from how his theories have stood the test of time for so long. Smith also has an elegant writing style which has created some of the best economic quotations although Smith can take detours into long prose on individual topics. After reading, the reader will feel they can experience what the economy and society of the past was like, but Smith also examines events from further in the past in depth. Anybody who really wants to understand economic history should read Smith for the ultimate insight. Although The Wealth of Nations is long it is a must read for any serious economist.
If anybody wants a summary of the Wealth of Nations please have a look at my summary at the link below. It includes all the main points in the book yet it will save you many, many hours. https://www.tes.com/teaching-resource/wealth-of-nations-book-summary-12031574