Book Review: The Wealth of Nations by

Adam Smith
By Tom Butler-Bowdon 20 Apr, 2008

By identifying economics as a field of study in its own right, Adam Smith’s An Inquiry into the
Nature and Causes of the Wealth of Nations established a new discipline. It was the first book on
economics really to catch the public’s attention, and is as much as anything else a great work of
literature. Smith’s informal style, and his fearlessness in criticising the folly of rulers and the
corrupting effects of vested interests, made him into a popular figure.

The effect of self-interest

Smith argues that it does not actually matter if societies are mainly driven by self-interest, since
the overall effect is good. The ‘invisible hand’ of the free market makes sure that individuals
acting to their own highest benefit end up elevating the whole. This is not an excuse to act
greedily or unjustly. It simply means that a person’s honest labours to progress in life for the
sake of himself or his family will lead to a good use of resources. A society allowed to act in this
way will inevitably make the most of what it has, and over time grow prosperous. It underlined
his philosophy of self-reliance: that we are more likely to help others, and be in a position to help
them, when we have our own needs covered.

Wealth through specialisation

Smith believed that how wealthy a country becomes depends more than anything on the
organisation of its labour force, specifically, as he put it, the ‘skill, dexterity, and judgment with
which its labour is generally applied’. It also rested on the proportion of the population engaged
in useful work.

He comments that in rich countries, even though many people do not work, society as a whole
abundantly supplies most people’s needs. This is because rich countries characteristically have a
much greater ‘division of labour’ than poor ones. There is great efficiency in dividing up tasks
according to the ability of people best able to do them, and time is saved in not changing from
one task to another.

But it is not just in physical production that the principle of the division of labour applies. In
advanced societies, Smith writes, the creation of new ideas becomes the ‘trade’ of a whole group
of people, co-existing beside the more mundane jobs. With such specialisation, ‘each individual
becomes more expert in his own peculiar branch, more work is done upon the whole, and the
quantity of science is considerably increased by it’. In a well-governed society, the division of
labour leads to ‘universal opulence’, allowing every workers to cover their needs.

What determines value

According to Smith, value is the amount of labour that has gone into something’s creation,
saving the buyer having to go through the same labour, that sets its value. People become rich by
providing something of extremely high utility that saves.

How nations grow rich

Smith provides a simple recipe for how countries can become wealthy, which begins with their
citizens being good savers. These savings are then invested toward productive ends.

In Smith’s time this wealth formula of savings–investment–employment was not at all the
prevailing view of how nations could grow rich. The mercantilist view held that the economic
object of a nation was to build up its store of gold, silver, and other precious metals, either
through trade or war. Smith’s recipe, in contrast, seemed rather middle class and modest.

The other avenue by which countries could grow rich is trade. Countries who trade will always
be richer than those who do not, since the trading country is able to buy raw materials that it does
not have itself and turn them into manufactured goods, which are much more valuable than raw
commodities and which it can then sell at great profit to other countries. Medieval European
cities such as Florence amassed huge riches not by doing business simply with the countryside
surrounding them, but with ‘the most remote corners of the globe’.

What not to do: Looting, wars, and luxuries

If a person spends their money on luxuries instead of building up capital, the day of financial
reckoning will come. Likewise, Smith writes, a sovereign who spends huge sums on palaces, the
pageantry of court, and unnecessary wars is looking for trouble.

Equally bad is the nation that believes it can get rich by looting other countries for all they are
worth. Instead of plundering in search of fantastic gains, a country is better off slowly
developing its own resources, and using trade to sell its surpluses and bring it what it needs to
make high-value products.

Natural liberty

In Smith’s time legions of officials ensured that every possible penny could be extracted by the
state through various taxes, customs, excises, and arbitrary rules. The Wealth of Nations was a
success because it pointed instead to the principle of natural liberty, which assumed that people
should be free to follow their economic interests with minimum government interference.

Smith insisted there were only three areas where government should have a role:

 Protecting a society from invasion.

 Protecting citizens ‘from the injustice or oppression of every other member of it’ with a
corresponding judicial system.
 Building and maintaining public works and institutions that are too expensive for a single
individual to undertake, but would benefit society greatly as a whole.
All these things should be paid for through taxes. However, when something benefits only a
section of society, this should be paid for either privately, or by a tax on the users. Though Smith
advocated the creation of a basic schooling system, he suggested that those who benefited the
most from education should also be willing to pay for it.

Final comments

At first glance, rulers no doubt thought that the title of the book referred to the wealth of states,
when in fact Smith used the term ‘nation’ to mean the people of those countries. The smartest
governments did not put faith in themselves to create prosperity, he believed, but in the ingenuity
of their citizens.

The simplicity and common sense of Smith’s delineation of government’s role has largely stood
the test of time. Today, governments may grow large and bloated, moving into areas that are not
really their business, but in time this inevitably makes the public poorer overall. Smith warns that
such investment tends to corrupt the natural tendency of a society to allocate resources in
the best way.

In A Similar Vein

Milton Friedman: Capitalism and Freedom

Ayn Rand: Capitalism

Max Weber: The Protestant Ethic

Adam Smith

Smith was born in 1723 in Kirkcaldy, Scotland. At 15 Smith went to Glasgow University to
study moral philosophy, and then on to Oxford University. In 1748 he began giving public
lectures in Edinburgh, and in 1751 was appointed to a chair of logic, later moral philosophy, at
Glasgow University. He resigned his post in 1763 to become the private tutor to a young Scottish
nobleman, the Duke of Buccleuch. The pair travelled around Europe and met intellectuals
including Turgot, Helvetius, and Quesnay. On returning to Scotland, Smith spent most of the
following decade writing The Wealth of Nations. Following in his father’s footsteps, in 1778 he
was appointed commissioner of customs in Edinburgh. He died in 1790, and never married.