An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith (1723-90) was published on 9 March 1776. It met with instant success. Scholars were all praise for it but thought such a long and complex work would not be popular. But they were all pleasantly surprised when the first edition was sold out in six months. The book was published a few weeks after Edward Gibbon’s (1734-94) first volume of his magnum opus The Decline and Fall of the Roman Empire (February 1776) but it sold more copies.
The reason was provided by Gibbon himself as it contained “the most profound ideas expressed in the most perspicuous language.” David Hume (1711-76), Smith’s friend, complimented him stating “Well done! Splendid.” The popularity of The Wealth of Nations was such that a revised version appeared in 1778, an expanded edition in 1784 and two reprints in 1786 and 1789. In between, the book was translated into Danish, French, German and Italian. Its popularity continues even now and shall do so in the distant future.
Conventionally historians have seen Smith as a central figure in the unfolding of classical economics systematically integrating the various strands of English, French and Scottish economic thought that developed in the late seventeenth and eighteenth centuries, whose conclusions and key concerns were further delineated by Thomas Robert Malthus (1766-1834) and David Ricardo (1771-1823) thus cementing the foundations of classical political economy. It would not be an exaggeration to say that modern economics as a discipline begins with Smith though there were many eminent economists before him. In the seventeenth and eighteenth centuries subjects like value of money and international trade were theorized.
A systematic theory of mercantilism that espoused governmental control of foreign trade existed in the writings of Thomas Mun (1571-1641) and Sir James Stuart (1712-80). The physiocrats in France, particularly Francois Quesnay (1694-1774) upheld a policy of free trade. But unlike the French models, the Wealth of Nations” according to Raphael “is much more comprehensive in scope and more detailed in its factual data.” The book is comparable to Charles Darwin’s (1809-82) Origins of Species (1859) for combining systematic theory with abundant graphic empirical data but unlike Darwin, Smith did not emphasize on a single explanatory principle. He was critical of mercantilism, analyzed the working of the modern economic system and recommended free trade and laissez faire for proper economic management.
The most significant fact of modern economic organization is division of labour which is the starting point of economic growth and affluence. Smith began his book with it to underline the enormous difference in productivity between the manufacture of a pin by one person without special machines in contrast to ten persons sharing 18 simple operations which produce 50,000 pins a day. Another example of division of labour is a coat worn by an ordinary worker. It emerges from a combined work of a shepherd, a wool-sorter, a wool-comber, a dyer, a spinner, a weaver, merchants, and sailors. Division of labour applies in the production of shoes, food, furniture, utensils, and the like.
According to Smith, division of labour and mutual dependence are the result of economic rationality of self-interest. He observed “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.” Smith was not the first to highlight the usefulness and importance of division of labour. That credit goes to Plato (428/7-347 BC). Smith took note of the continuous process of technological advancements, development of new specialized skills, new tools, and new machines through concentration upon a single job or function but also pointed to the emergence of innovations from common workers to make their work easier.
Division of labour and mutual dependence are intrinsically linked to the size of the market and the continued economic growth made possible by ever-widening markets which is one of the main reasons for Smith’s advocacy of free trade. Smith however was equally conscious of the evils of division of labour as it leads to stupidity, monotony, and ignorance. Since paid jobs were available even to small children, when they grew up, they spent their leisure time in “drunkenness and riot” which would be dealt with by state funded elementary education. He was as much a champion of public education as Plato. Smith was categorical that “no society can surely be flourishing and happy, of which the far greater part of the members is poor and miserable.”
Smith was of the view that self-interest is an essential motive that encompasses all factors of production, distribution, and accumulation of capital. Mutual dependence flows from self-interest and not planning. An individual neither intends to promote public interest nor is he aware of it. He “intends only his own gain, and his is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.” Smith did not invent the phrase ‘invisible hand’ but popularised it. He acquired his belief in the natural running of human affairs from the Stoics’ idea of natural harmony, whom he admired deeply in his youth and whose ideas he integrated with his belief in empiricism.
He was a thinker who began with facts and then produced a hypothesis to explain it. He was fascinated by his observation of the market that produced automatic reactions to changes in cost, supply and demand and reaching an equilibrium. He was reminded of the system of mechanics and the unplanned beneficial effects when market prices gravitated towards natural prices. Smith implicitly challenged Jean Jacques Rousseau’s (1712-78) contention that acquisition of property caused inequality. In a passage in The Theory of Moral Sentiments (1759) Smith pointed out that self-interest helped to distribute wealth more widely to approach equality and that all occupations, if different degrees of reward were balanced against different degrees of toil and trouble, would yield an equal amount of welfare.
Smith also had in his mind the view proposed by Bernard Mandeville (1670-1733) in The Fable of the Bees: or Private Vices, Public Benefits (1714) that vices of luxury, pride, and frivolity contributed to public benefits by dispersing employment and increasing trade. Smith stated that the poor got from the ‘luxury and caprice’ of the ‘proud’ landlord those necessities of life which they could not expect from ‘his humanity or his justice.’ ‘Humanity and benevolence maximized the happiness of others; justice distributed it equitably.’ For many decades, scholars have debated the key Adam Smith problem ~ how to reconcile the plank of sympathy of the Moral Sentiments with the doctrine of self interest in The Wealth of Nations.
It is undeniable that social solidarity emanating from these two works have different dimensions. Sympathy and imagination are different from the laws of division of labour and the market. But this difference does not mean that they are inconsistent as economic transactions based on contracts have both an economic and ethical dimension. Smith’s economics focused on the social effects of self-interested behaviour conditioned by the market and his ethics emphasized on social solidarity made possible by sympathy and individual’s desire for esteem. Smith’s importance according to Heilbroner is the discovery “in the mechanism of the market (of) a self-regulating system for orderly provisioning.” Inequality for Smith was not a serious problem as division of labour would increase “the universal opulence which extends itself to the lowest ranks of the people.” Similarly, accumulation is better than unproductive charity.
Such observations by Smith have led Heilbroner to comment that “The Wealth of Nations is a programme for action, not a blueprint for utopia.” One of the paradoxes of The Wealth of Nations is that though it championed laissez faire and limited government, it supported many government programmes which included universal public education, public health measures against contagious diseases, and safety regulations for labour protecting them against fraudulent payments by employers.
Smith was conscious of the need of governmental action in key areas by six principles which were (1) moderate taxes as incentive to growth, with taxation following the four principles of fairness, certainty, convenience, and efficiency; (2) finance of public works should mostly come from those who benefit out of them, (3) private organizations (not monopolies) should be given public responsibilities, (4) faltering programmes should be abandoned, (5) programmes benefiting a locality or province should be administered by local authorities both for efficiency and accountability and (6) the accountability of the market should be followed in government as well. Smith’s entire edifice stands on the firm conviction that market alone can be the arbiter and motivator for a continuous growth-oriented society of mutual dependence.
But in propounding his theory he is not merely a spokesman of free enterprise and minimal government but rather a skilled craftsman who dissects the entire relationship of state and civil society in its proper economic context. Wolin salutes Smith’s work as a landmark in the history of liberal individualism. Smith’s analysis replaces polity with economy and society. It is a masterpiece and its immense historic significance is because of its thrust on common sense, and practical suggestions.
It is amazing that an author of the pre-industrial revolution who called England a nation of shopkeepers correctly assessed both the dynamics of the modern economic system and motivation. In 1975 Margaret Thatcher linked the publication of The Wealth of Nations with the American Declaration of Independence and credited Smith for accelerating the end of feudalism and releasing the inherent power of private initiative and enterprise that made possible the creation of wealth on an unprecedented scale. Modern economics begins with him; without Smith there would not be a Karl Heinrich Marx (1818-83).
(The writers are retired Professors of Political Science, University of Delhi)