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Bornedal
Adam Smith calls his work The Wealth of Nations, because he wants to
introduce a new notion of national wealth. Before him a atio s wealth was
understood as its money and gold reserves. Smith understood that a atio s
wealth instead had to be measured in its overall productivity, in what we
today label its Gross National Product of GNP. A nations prosperity is not its
gold reserves, but its annual produce from land, material, and labor.

His book, The Wealth of Nations, sets about to explain how nations increase
their wealth and how we remove the barriers for increasing wealth. Adam
Smith basically wants to see nations prosper, and his book is one long advice
as to how this ultimate goal is achieved. He wants to see an increase in what
we today call the per capita gross national product, that is, the average
income per individual. In simple terms, he wants to see us all become
wealthier. “ ith s capitalism is not so much about the few becoming richer,
but about the many becoming richer. Remember here, wealth is not measured
in money terms, but in the products the average citizen can buy.

It is in pursuing this goal he introduces ideas that are, for his day and age,
completely revolutionary. He for example understands that we can increase
productivity by specialization; he realizes that both parties in an exchange
benefit from trade – the conventional wisdom was that only the seller, getting
money in his hand, benefitted; he realized that the FREE market was an A. Smith: No society can surely be
enormously efficient mechanism by which to value and price commodities, flourishing and happy, of which the far
and in the end to be for the benefit of the consumer; and as well as the free greater part of the members are poor and
market, also free trade is a mechanism that ultimately help us to become miserable. The Wealth of Nations, Book I,
wealthier. Chapter VIII, p. 96, para. 36.
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 Specialization and Division of Labor
If nations want to become wealthier, and if wealth is measured in productivity, it follows that we must want to increase
productivity to become wealthier. The basic method by which to do this is to divide labor between individuals.
In several centuries and even millennia, it had been understood that it benefits a community if workers concentrate on
what they are good at, and instead trade their goods with other workers. It is more efficient if the farmer spends his time
tending his land, crops, and livestock, instead of interrupting himself by also having to make his own tools, furniture for his
house, or clothing for his family. It is more efficient to leave the carpentry to the carpenter, and the tailoring to the tailor,
and instead meet them on the market and exchange his product for something else he needs – produced by professionals
or spe ialists . Specialization and division of labor has as such always been known. However, Smith and later Marx both
understand that the productive process can be further rationalized.
Smith famous example on the efficiency of division of labor is his pin factory. Here we are introduced to the assembly line
as a rationalization of the productive process. If one man should produce something as simple as a pin from scratch, he
could barely make one a day. But if the work process is divided into several different operations, where a number of workers
perform only one operation each; one drawing out the wire, another cutting it, a fourth pointing it, etc., one increases the
efficiency of the production process enormously.
To take an example (…) from (…) the trade of the pin-maker; a workman […] could scarce make one pin in a
day, and certainly could not make twenty. But in the way in which this business is now carried on, [ . . . ] it is
divided into a number of branches. One man draws out the wire, another straights it, a third cuts it, a fourth
points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct
operations; to put it on, is a peculiar business, (…) and the important business of making a pin is, in this
manner, divided into about eighteen distinct operations [ . . .]. I have seen a small manufactory of this kind
where ten men only were employed (…). But (…) they could [ . . .] make among them upwards of forty-eight
thousand pins in a day. [ . . . ] The division of labor, (…) so far as it can be introduced, occasions, in every art, a
proportional increase of the productive powers of labor. Selections p. 11
With the division of labor one increases the productivity, and the nation becomes wealthier in pins. It is clear too that the
factory produces a surplus far exceeding what is necessary for o e s own consumption. The over-production of pins is
meant to be exchanged on the market, where the thousands of pins can be sold to a lower price, given their low production
costs. I.e., the consumer can now afford to buy pins, and has(C)inbythis
Copyrights sense increased his wealth.
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 Looking out for the Consumer: Self-Interest and the Invisible Hand
It is a fact that we acquire most of what we need through exchange; we do not try to make everything ourselves. However,
in the exchange, the seller and buyer are equally satisfied; each of them give to the other something he values less for
something he values more. The vegetable shopkeeper sells me his potatoes because he values my money more; I value my
money less and his potatoes more. Trade on the free market is thus to the benefit of both.
Going on the market, we understand that people who possess a thing we like do not give it out from the goodness of their
heart. We are of course prepared to give them money in return. This commonsensical principle make Smith famously
declare that 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 i terest .
Whoe er offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall
have this which you want, is the meaning of every such offer. . . 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. We address
ourselves, not to their humanity but to their self-interest. Selections, p. 7
The businessman is not acting out of good intentions, but out of self-interest. This, on the other hand does not mean that
the businessmen is selfish, cynical, or cruel, that exchange is e ery ody s war against everybody. It is more a principle of
prudence and commonsense, implying that there is no higher moral principle sanctioning the business world.
However, ironically, while the business man is seeking his own interest on the market, he is led "as if by an invisible hand" to
promote the well-being of society as a whole.
He [the businessman] generally, indeed, neither intends to promote the public interest, nor knows how much
he is promoting it . . . and by directing that industry in such a manner as its produce may be of the greatest
value, he intends only his own gain, and he is in this, as in any other cases, led by an invisible hand to promote
an end which was no part of his intention. p. 7.
Although the businessman has no benevolent intentions to serve mankind, it is the competition in the marketplace that
would lead businessmen to supply the goods consumers want, to produce these goods efficiently, and to charge only what
they are worth. If the businessman does not fulfill these ideals he is quickly out of business.
So, the businessman acts out of self-i terest ; i.e., he wants your business = he wants to sell you the best product cheapest
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(otherwise he lose your business) = in this he serves the consumer, who is now able to buy the best product cheapest.
Smith before Marx suggests a so-called labor theory of value. It means that the value of a commodity tends to be
proportional to the labor imbedded in the product.
The value of any commodity, therefore, to the person who possesses it, and who means not to use or
consume it himself, but to exchange it for other commodities, is equal to the quantity of labor which it enables
him to purchase or command. Labor, therefore, is the real measure the exchangeable value of all
commodities. Selections p. 13.
The approximate price of something is determined by the toil and trouble it takes to produce it. If on average it takes
hunters two days to kill a deer, and other hunters one day to kill a beaver, then two beavers would be worth approximately
one deer. The natural price of a deer should in “ ith s example be two beavers.
One of the essential foundations for the price of a commodity is labor. But besides labor, also materials, rent, and average
profit determine a o odity s natural price; that is, the cheapest price it can be sold for without the capitalist losing
money, and which also allows him to sustain an income.
Still, a commodity also has a market price which is almost always deviating from the natural price. Sometimes the market
price is higher, sometimes lower than the natural price. This mechanism is determined by the supply and demand of the
commodity. Because of this market mechanism, a price can rise and fall above and below this natural value.
If we have two commodities, silk and wool, which at first are stabilized around a natural price where silk is worth double as
much as wool, we suppose that suddenly a change in fashion increases the demand for wool, and lessen the demand for
silk. The quantity of labor necessary for their production would be the same, but on the market the price of wool would
rise, and the price of silk fall. The profits on wool would increase, but this has as a consequence that the capitalist starts
employing more workers to produce wool, and invests more capital in his production, consequently begins to produce more
commodities until the point where the market again is saturated, and the wool-price decline to its natural level again.
Therefore a price always tends towards its natural level.
Also labor is a commodity with its natural and its market price. The natural price is the price necessary for the worker and
his family to subsist and reproduce. And as well as with other commodities, labor, besides its natural price, can have a
market price, if labor is scarce it is more expensiveCopyrights
for the capitalist, if it is plentiful, it is cheaper.
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 Value of Use, Value of Exchange, and Profit

Value of use and value of exchange are two different things. Water
has a great value of use but hardly any value of exchange, while
diamonds have little value of use but great value of exchange.
Again, the abstract principle distinguishing between the two values
is to Smith, as it is to Marx, labor. The real measure of the
exchangeable value of all commodities is the labor put into their
produ tio , said Smith. Thus, when we go out on the market to buy
a product, we are buying the labor of others imbedded in a product.
The amount of labor we can purchase gives us the real measure of
wealth, says Smith (and Marx will later repeat the idea). Money of
course gives us the nominal prices, but the reality these nominal
prices reflect is quantity of labor.
We will see that Marx introduces a third value, a so-called surplus
value. Smith talks about profit. If a person invests capital by buying Capitalism – free trade, free market, efficiency of
material and labor, it is in order to make a product and sell it with a production makes nations and peoples wealthier. It
profit. Now he risks his capital, and something must be given him in has a down side too, pollution.
return for taking this risk, namely profit, says Smith. But profit is In the 18th and 19th centuries when Smith and Marx
possible only if labor is the real value; the worker therefore adds wrote, nobody were aware of the global
value to the material during his work. Therefore, he can produce a repercussions of pollution.
surplus value, and the capitalist can earn a profit. If you do not There were no Laws against pollution in the 19th
presuppose this labor theory of value, production of surplus value is century. The present debate about climate change
not possible, profit is not possible. Labor adds value to the material, was of course unknown – also to Marx, who did not
and this value is now divided into partly reinvestment in materials, shy away from recommending measures that exploit
machinery, etc., rent to the landlord, wages to the workers, and a nature.
profit to the capitalist. Copyrights (C) by P. Bornedal
A consequence of the division of labor to which a modern
worker is exposed is something Adam Smith call the
utilatio of i d and Marx later calls alie atio . The
problem occurs when a workers whole working life is
reduced to perform a few simple operations. In this life he
never gets the opportunity to perform any intellectual
activity, but becomes more and more stupid (“ ith s
word).

The man whose whole life is spent in performing a few

simple operations, of which the effects are perhaps always
the same, or very nearly the same, has no occasion to exert
his understanding. He naturally loses, therefore, the habit
of such exertion, and generally becomes as stupid and
ignorant as it is possible for a human creature to become.
The torpor of his mind renders him not only incapable of
relishing or bearing a part in any rational conversation, but
Division of Labor by inventing the assembly-line. It increases
of conceiving any generous, noble, or tender sentiment,
productivity enormously, the society becomes wealthier,
and consequently of forming any just judgment concerning
consumers get access to commodities they beforehand could
many even of the ordinary duties of private life. Of the
not have afforded. But it also has a dark side: labor does not
great and extensive interests of his country he is altogether
require skills any longer. The worker becomes ignorant.
incapable of judging, and unless very particular pains have
Everybody are equally qualified to perform the simple task
been taken to render him otherwise, he is equally
required on the assembly line. Consequently, the capitalist
incapable of defending his country in war. Selection, p. 34
can buy labor even cheaper, because man, women, and
children are equally qualified to do the job; the market sees
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Bornedal supply of workers.
 Defense of Free Trade and Free Market
“ ith s defense of free trade and free market. He argues against protectionism and monopoly. A home-market should not
implement regulations on trade, because it is better economy to buy from a country that can produce a cheap commodity
than try to produce it by oneself expensively. One might produce vine in Scotland, but for a price several times higher than
the price one could import vine for from France.
A nation should always buy a commodity if it is cheaper than it can make it itself, and instead put its own industry to work
with something that is advantageous. In Scotland one would for example be better off using o e s industry to produce
whiskey and trade this with French vine.
If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them
with some part of the produce of our own industry, employed in a way in which we have some advantage. The
general industry of the country will not thereby be diminished. . . but only left to find out the way in which it can be
employed with the greatest advantage. Selections p. xx.
Therefore free trade, open markets, no regulations.
Smith sharply criticized the mercantilist writers of his day who advocated state intervention in international trade. He
maintained that Free Trade increases the wealth of nations, while restrictions on trade diminished wealth.

The Many Enemies of Capitalism

The principles of free market and free trade have many enemies, according to A. Smith, and not only among advocates for
state-controlled production, i.e., Communists, which were of course unknown when he wrote. Enemies of capitalism are
also found among those who rhetorically like to defend apitalis . Here are a few candidates:
• Governments implementing state controlled production as in Communism.
• Governments restricting free trade by imposing sanctions or taxes on foreign products.
• Governments subsidizing their own national industries, instead of importing from countries where products are cheaper
• Corrupt politicians colluding with business in handing out contracts for public work in return for brides or commissions.
• Monopolists and Oligarchs, fixing prices on the market, which is no longer free, as such exploiting the consumer, who pays
more for a product than its average natural price. Copyrights (C) by P. Bornedal
 S ith’s Defe se of Capitalis AGAINST Capitalists
In his work, Smith is in fact far more sympathetic to ordinary workers and small entrepreneurs, and far more critical of
capitalists and employers than is usually assumed. Smith advocates free markets and trade, and is quite aware that the
threat to free markets first and foremost comes from the capitalists. Smiths wants to spread wealth, not to accumulate it
among a small elite. When employers and capitalists and politicians meet, Smith warns that there is an almost immediate
risk that they will start a conspiracy as to how to rig prices: People of the same trade seldom meet together, even for
merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise
prices. Wealth of Nations, Book I, Ch X, II, #27.

When business people and politicians start to propose new regulations of the market, one should treat the proposals with
the utmost suspicion, Smith says:
Whe owners of capital propose a new regulation, therefore, it should be given the utmost scrutiny. It comes
from a group whose interest does not coincide with that of the public, and who can and do gain by deceiving
them. The proposal of any new law or regulation of commerce which comes from this order, ought always to be
listened to with great precaution, and ought never to be adopted till after having been long and carefully
examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order
of men, whose interest is never exactly the same with that of the public, who have generally an interest to
deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and
oppressed it. Wealth of Nations, Book I, Ch XI, Conc, #10.
Compare to the most recent statistics about the wealth distribution in the world:
The wealthiest 62 individuals owe as much as the 50% poorest of the orld s population.
The wealthiest 10% owe as much as the remaining 90% of the orld s population.
This was not what Smith understood as the meaning of ealth when he gave us advice as how one could increase the
Wealth of Nations.

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 Prof. J. Muller o A. “ ith s Wealth of Natio s

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Prof. J. Muller o A. “ ith s Wealth of Natio s,

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