‘The Wealth of Nations’ appeared at a time when revolutionary ideas in other areas were also developing. The invention of the steam engine, the developing factory system, the pressure for individual selfexpression in science, art, business and politics, the dissatisfaction of the rising merchants and industrialists with the traditional power of the landed aristocracy, and the signing of the Declaration of Independence gave clear evidence that the old order was disintegrating. New ways of doing things were increasing in number but no systematic analysis appeared to explain these changes.
Adam Smith’s book explained the logical basis for the wealth of a nation and the economic events of the day. But the book was also a comprehensive philosophical work that reviewed in general terms the many problems confronting human welfare.
The rising class of merchants and businessmen of the time believed that Smith was pleading on their behalf in his strong attacks on the mercantile system that had prescribed so many excessive import duties and restrictive trade practices. Smith’s book also contained pleas for the poor, downtrodden and the oppressed, especially farmers and workers.
The following statement, for instance, appeared on behalf of the working class: “Masters are always and everywhere in a sort of tacit, but constant and uniform combination not to raise the wages of labour above their actual rate.” Smith had his precious word for rural workers when he noted that “Country gentlemen and farmers are, to their great honour, of all people, the least subject to the wretched spirit of monopoly.”
The consumer was also brought into his proper place in the economic scheme of things for the first time as Smith stated: “Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the customer.” It may be noted in this connection that the general charm and graceful style of the book plus its optimistic message made ‘The Wealth of Nations’ very attractive even to the average reader.
The principles set down by Smith may be easily recognised today, but were truly revolutionary in his time. Smith argued that man’s basic and most important motivating force in all economic affairs is the drive of self-interest. Secondly, there is in nature an order of things that compounds and translates these individual self-interest strivings into a unified mass, resulting in the common social good.
Finally, from the interaction of these two principles he draws his conclusion that the best economic system can result only where it is left strictly alone. In other words, the State’s function is to preserve order, but make no intervention in the functionings of the free market.
For several hundred years before Smith, thinkers and economists thought that the source of the true wealth of a nation was its huge stock of gold and silver. Smith did not subscribe to this view. He analysed his viewpoint by using a metaphor:
“The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile either.” To Smith, the only source of wealth is the labour of its people who alone are capable of producing all required goods and services. This stream of goods and services is the “gross domestic product” (GDP) of a nation. Today GDP is widely used to determine the success of a nation’s economy.
Moreover, the primary method by which labour productivity is increased is the division of labour. According to Smith, the division of labour, tied to the principles of self-interest and laissez faire within the framework of a natural order, can lead to a higher standard of living for all. Smith believed that “labour is the real measure of the exchangeable value of all commodities.”
This idea was also used by Karl Marx to develop his theory of the exploitation of labour by the capitalist class. Smith believed that economic progress made possible by increased savings and capital accumulation would lead to higher wages for workers. But Marx differed with this idea as he thought that increasing capital accumulation meant lower wages for workers because this capital would be used to develop labour-saving devices.
In the field of public finance, Smith’s “canons of taxation” are still quoted today in economics textbooks. He believed that taxes should be equitable and their amount should be certain and known. According to him, taxes should be payable at a convenient time for the taxpayer and they should be so designed as to be economically collectible.
A key contribution of Smith’s economic doctrine is the idea that all economic activities centred on the process of exchange in the market place. Smith reinforced the idea that intervention of the state was unnecessary because self-interest would naturally move required resources where they could be most profitably employed. In spite of Smith’s towering influence on most of the economic doctrines and economists coming after him, much of his ideas are challenged or refuted by modern economists.
He was an important thinker of his time, but he could not foresee the ultimate consequences of the Industrial Revolution, labour unions, corporations, and education on subsequent economic and social developments. Alfred Marshall, an esteemed economist, strongly criticised Smith’s definition of economy.
In Smith’s theory on the Invisible Hand, “each individual in pursuing his own selfish good was led, as if by an invisible hand, to achieve the most beneficial economic outcome for all.” Many economists came down heavily on this concept including Joseph E. Stiglitz who said “the reason that the invisible hand often seems invisible is that it is often not there.”
In spite of such criticisms, Smith remains an all-time great in the field of economics and while we may call him a proponent of free market economy, he cannot be accused of being a “free market fundamentalist” given the moral dimension in his economic ideas.
Smith’s contribution is best summed up by one of his contemporaries and a distinguished statesman William Pitt (the younger). In a speech shortly after Smith’s death Pitt, stressing the importance of capital accumulation, said that “Smith’s writings and extensive knowledge of detail and depth of philosophical research will, I believe, furnish the best solution of every question connected with the history of commerce and with the system of political economy.”
(The writer, a Ph D in English, teaches the language at the Government-sponsored Sailendra Sircar Vidyalaya, Shyambazar, Kolkata’