The Wealth of Nations

Overview

The Wealth of Nations runs to about a thousand pages in five books, and it was ten years in the writing. Smith was a professor of moral philosophy at Glasgow who had already published a book on ethics, and the habits of the lecture hall show: he defines a term, gives three examples, then follows an interesting example for forty pages. Some of those digressions, on the price of silver over four centuries, on the herring bounty, on universities, are longer than most eighteenth-century books.

The argument moves outward. Book I asks how the annual produce of a nation is created and how it gets divided up. Book II asks where the capital that employs labour comes from and what makes it grow. Book III asks why Europe developed in the order it did. Book IV takes apart the system of trade policy Smith found in place, which he calls the mercantile system. Book V asks what a government should do and how it should pay for it.

Behind all five sits one idea: that wealth is not a stock of gold in a treasury but a flow of goods produced by labour, and that anything which raises the productivity of labour makes a nation richer. Everything Smith attacks, he attacks for blocking that flow.

The argument

The division of labour comes first. A workman making pins alone might manage twenty a day; eighteen specialists, each doing one operation, make thousands each. Specialisation raises output because it saves time, builds skill, and prompts the invention of machines. But specialisation depends on exchange, since a man who does one thing must buy everything else, and exchange depends on the size of the market. Hence Smith’s interest in roads, canals and navigable rivers, and his hostility to anything that narrows a market.

From there he needs a theory of price. He distinguishes the market price, set by supply and demand at any moment, from the natural price, the level that just covers the wages, profit and rent involved in bringing a good to market. Market prices oscillate around natural prices as capital moves toward whatever is currently paying well. The three kinds of income, wages to labourers, profit to those who advance capital, rent to landlords, are the whole of a nation’s revenue, and how they move relative to each other is how Smith reads the health of an economy.

Book II adds time. Capital is accumulated stock, saved out of revenue and used to set labour to work, and a country grows by saving and investing rather than by spending. Book III shows that Europe’s actual path was distorted: the collapse of Rome put land in the hands of great families who had no interest in improving it, and the recovery came from towns that had won charters and could trade.

Book IV is the polemic, and the best writing in the book. Duties, drawbacks, bounties, colonial monopolies and the whole apparatus of protection are examined one by one, and each turns out to enrich a particular interest at the expense of consumers, who are numerous and unorganised. Smith’s argument is not that self-interest is admirable. It is that merchants and manufacturers know their own interest, will pursue it through legislation if you let them, and will call the result the national interest. Left to compete, the same self-interest produces goods people want at prices they can pay.

Book V then limits the doctrine. Defence, the administration of justice, and public works and institutions that are useful but unprofitable are the sovereign’s business. So is education, at least in part, because a society of specialists needs citizens who can still judge. Smith taxes with a light hand but he does tax, and he ends on the mechanics of public debt, which he expects governments to abuse.

How to read it

Nobody reads all of it on a first pass, and courses do not expect you to. Read Book I chapters 1 to 11 in outline, with close attention to chapters 1 through 3, 7, 8 and 10. Read Book II chapter 3 on accumulation. Skip most of Book III unless the course wants economic history. In Book IV read chapters 1, 2, 3 and the opening of 7 on colonies. In Book V read chapter 1 parts 1 to 3, especially the pages on schooling.

Skip the long digression on the value of silver in Book I. Come back to it only if you care how Smith handled data.

Watch for the two Smiths that later readers separated. One supplies slogans for free markets. The other says that labour is the real measure of value, that masters combine against workmen as a matter of course, and that the interest of the dealer is never the same as the interest of the public. Both are on the page. He had also written The Theory of Moral Sentiments, where sympathy rather than interest holds society together, and he never repudiated it.

The Glasgow text in the Liberty Fund paperbacks is the scholarly standard and costs very little. Any complete edition will do; avoid heavily cut abridgements unless the syllabus names one, because the qualifications are where Smith is most interesting.

Questions it raises

• If the division of labour makes a nation rich and its workmen narrow, has Smith identified a gain or a trade?
• The invisible hand appears once, in a specific argument. What does Smith actually claim it does, and what has been claimed for it since?
• Smith says labour is the real measure of exchangeable value. Can that be squared with his account of price set by supply and demand?
• He distrusts merchants and still wants their liberty. Is that consistent?
• Which of the sovereign’s duties in Book V could be left to private hands, on Smith’s own principles?
• Does his account of wages explain why the greater part of society stays poor in a growing economy?