Legacy and Impact of Smith's Work

In seventeen seventy six, a work was published that challenged an empire, questioned old systems of power, and helped reshape the modern world wasn't the Declaration of Iependence. It was a dense, ambitious book about trade, labor, money, and prosperity that changed how people understood nations and the concept of wealth itself It attacked mercantilism, defended markets, and introduced ideas that are still debated two hundred and fifty years later Learn more about Adam Smith and the Wealth of Nations on this episode of Everything Everywhere Daily. This episode is sponsored by MintMobile. There are things in life that you do not want to be transparent, like your swimsuit or your search history. But when it comes to your wireless bill, transparency is everything. That's why MintMobile's wireless plans have no gimmicks and no gotches. Just high speed data and reliable coverage on the TMobile five G network. All plans are fifteen dollars a month, even the unlimited plan. 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That's QuInCE dot com slash daily for free shipping and three hundred and sixty five day returns. Qince d. com slash daily One of the most important and misunderstood books ever written was Adam Smith's an Inquiry into the nature and causes of the wealth of Nations, usually just shortened to the Wealth of Nations, which was published in seventeen seventy six When I was a freshman in college, I took a course called Smith and Marks, in which we read the original texts of each author. And it was an interesting course because the vast majority of economic students never read the original text The wealth of nations is not an easy read. Depending on the version, there are close to a thousand pages Even the audio book is over thirty six hours long Moreover, it was written in eighteenth century English, which is not incomprehensible, but isn't as easy to read as modern prose Smith's book is often called the foundounding work of modern economics. It's not a textbook in the modern sense It's a sprawling work of moral philosophy, history, public policy, economic theory, political criticism, and practical advice Smith wasn't just asking how do people get rich? he was asking something larger. Why are some nations poor and others prosperous? And what political and economic arrangements allow ordinary people to live better lives To understand the wealth of nations, you first have to understand Adam Smith. Born in seventeen twenty three in Kirkaotie, Scotland, Smith studied social philosophy at the University of Glasgow and later at Oxford He entered the University of Glasgow at the age of fourteen and studied under Francis Hutchinson, the moral philosopher, who instilled in him a lifelong passion for reason, liberty, and the nature of human society Oxford, by contrast, he found intellectually deadening So much so that he later wrote in the book that at Oxford, most of the professors had for many years, given up even the pretense of teaching After holding the Chair of Logic at the University of Glasgow for only one year, Smith was appointed to the Chair of Moral phhilosophy He wrote the book, The Theory of Moral Sentiments first published in seventeen fifty nine while he was holding this position That earlier book is essential because the Wealth of Nations is often mistakenly read as a standalone economic treatise, when in fact, it's the second half of a larger philosophical project about human nature, morality, and social order Smith himself reportedly considered the theory of moral sentiments to be his superior work The immediate circumstances that gave birth to the wealth of nations began with a fortuitous offer. After reading the theory of Moral sentiments, politician Charles Townsend hired Smith to tutor his stepson, the seventeen year old Duke of Baklu during a grand tour of Europe Smith educated the Duke and prepared him for polite society during three years in Toulus, Paris, and Geneva But their trip was cut short before they could reach Italy or Germany Smith was born in France, so he began writing the book that would eventually become the wealth of Nations Since the brother of the young Duke fell deadly ill, the grandour was cut short, and Smith and his peopleup returned to Scotland Smith received a very generous pension as compensation for his tutoring services, as well as a lifelong friendship with the Duke and his family Smith remained in France from early seventeen sixty four until late seventeen sixty six, spending most of his time in Toulouse, but for some months in Paris, where he encountered several of France's leading thinkers A group known as the phhysiocrats, particularly Francois Canay, were France's leading economic thought leaders, and their ideas about productive versus unproductive labor and the natural order of economies left a deep impression on Smith Smith moved back to Kirkudi and spent the next decade living on his pension from the Duke, while caring for his elderly mother, leading various intellectual societies and writing The Wealth of Nations, which he finally published in seventeen seventy six It was, as he later described it in a letter, a very violent attack upon the whole commercial system of Great Britain. The dominant economic doctrine of Smith's era was mercantialism, the theory that a nation's wealth consisted in its stock of gold and silver, and that the proper role of government was to maximize exports and minimize imports, accumulating precious metals while protecting domestic industries through tariffs, monopolies, and colonial exploitation Mercantialism will be the subject of a future episode Smith did not believe the amount of a nation's gold or silver was an accurate measure of its prosperity, since these commodities fluctuated in value over time. It's a fallacy, he argued, to confuse money with wealth, since the former is only the means by which the latter is distributed. Smith believed that real wealth is measured by examining the quote annual produce of the land and labor of society This was a radical reorientation Wealth, according to Smith, was not a static hoe, but a dynamic ongoing process of production and exchange. The book is organized into five major sections, ranging from the theory of labor and prices, to money and capital, to the history of economic thought, to a devastating attack on mercantialist policy, and finally to a theory of government revenue and public institutions He can't cover everything, so I'll briefly describe his major arguments that he has become famous for The most famous early argument in the book concerns the division of labor. Smith begins with the example of a pin factory One worker alone might barely make a few pins a day. But if the work is divided into many small tasks, one person drawing out the wire, another straightening it, another cutting it, another sharpening the point, another attaching the head, production rises enormously Smith's point is not merely that factories are efficient. His deeper claim is that prosperity depends on specialization When people specialize, they become more skilled, they save time, and they invent or improve tools. He wrote, quote, The greatest improvements in the productive powers of labor seem to have been the efforts of the division of laborote But Smith also saw a dark side. Extreme specialization could make workers mentally narrow and dependent. In Book five, he argued that public education was needed partially because repetitive industrial labor could dull the mind This is one of the ways in which the popular version of Smith is incomplete. He praised productivity, but he was not blind to its human causes A corollary to specialization is the concept of open and free exchange. Smith believed that the division of labor depends on exchange. People can specialize because they can trade what they produce for what others produce For example, the butcher doesn't need to grow his own wheat, brew his own beer, or sew his own clothes. He can specialize because society is built on exchange. And this leads to one of Smith's most quoted lines. Qe It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. Eote. And This is often misunderstood as a celebration of selfishness, and it's not. Smith is making a narrower and more powerful point. In commercial society, people can serve one another without intending to be charitable A baker doesn't need to love you to make good bread. He just needs customers. You don't need to love the baker to buy his bread. You just need something to eat. Exchange allows strangers to cooperate peacefully through mutual benefit Smith also analyzed three great forms of income wages, profits, and rent. Workers earn wages, owners of stock, meaning capital earn profit, and landowners earned rent. He did not assume that these groups had identical interests. In fact, what most people don't realize is that he was suspicious of merchants and manufacturers when they sought political favors He warned that business peopleople often try to restrict competition. His famous line on this is very blunt and direct, quote People of the same trade seldom meet together, but the conversation ends in a conspiracy against the public or in some contrivance to raise prices Equote. Smith's concern for ordinary workers is one of the most underappreciated parts of the book He did not think national wealth meant much if the mass of people remained poor. He wrote quote, No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. He also saw rising wages as a sign of national health. Qote, the liberal reward of labor, he argued, was both an effect and a symptom of increasing national wealth Perhaps the most spectacular misreading of Adam Smith concerns the Invisible Hand The Invisible Hand is explicitly mentioned only once in the Wealth of Nations, in a specialized chapter not about free trade, but about capital investment, addressing the concern that international merchants might invest abroad His point is that by pursuing their own gain, the merchant may unintentionally promote the nation's productive activity. Smith writes that such a person is quote, led by an invisible hand to promote an end which was no part of his intention.ot. Smith's actual point in the full context of the book is subtle. Under certain conditions, self interested behavior can produce socially beneficial results without central direction The keywords are under certain conditions, and those conditions include competition, justice, secure property, honest dealings, and a functioning legal order The argument he made that was the most relevant and controversial at the time of publication was his attack on mercantilism and colonialism Book four stands as one of the most powerful eighteenth century critiques of colonialism Smith argued that Britain's mercantila system, which aimed to monopolize trade with the American colonies and drain them of raw materials, was highly detrimental to both the American colonies and Britain itself The fact that the book was published in the exact same year as the American Declaration of Independence became relevant as the war and the debate over the colonies dragged on in Britain. Smith believed the colonial mercantilist approach ultimately distorted commerce and investment in economically irrational ways, favoring a narrow class of manufacturers and merchants. Smith argued that the real measure of wealth isn't gold, but consumption and living standards. He writes, quote Consumption is the sole end and purpose of all production E quote. The interest of producers should only be considered insofar as they serve the consumers. And that was a radical idea. Much government policy then and now is written as if producers are the nation. Smith flipped the perspective, The economy ultimately exists to serve consumers, which means everyone The legacy of the wealth of Nations is enormous. It helped create the discipline of political economy, which later became economics. It influenced classical economists such as David Ricardo, Thomas Mallis, John Stewart Mill, and Carl Marks Even thinkers who disagreed with Smith often worked in the world that he helped define In policy, Smith's arguments strengthened the case against mercantialism and monopoly His ideas help shape nineteenth century movements towards freer trade, especially in Britain. The repeal of the corn laws in eighteen forty six, although it occurred long after Smith's death was part of a broader intellectual movement that owed much to Adam Smith's attack on restrictions, which only protected producers But the real power of the wealth of nations is that it moved the study of wealth away from kings, their treasuries, and trade balances towards labor, productivity, exchange and ordinary standards of living Smith didn't believe that commercial society was perfect, but he did believe it was powerful, morally complicated, and capable of lifting large numbers of people protected from monopoly, corruption and bad policy. The wealth of nations, in a very real sense, marked the creation of modern economics It isn't that every argument that Smith made is still embraced by economists, so much as he changed the framework and language of what is being discussed