1776
Adam Smith’s The Wealth of Nations is widely regarded as the book that laid the foundations of modern economics. It introduced the concept of the ‘invisible hand’ of competition and the free market, which, Smith contended, would transform the self-seeking acts of the individual so that they eventually worked for the common good. It is an idea that was adopted enthusiastically by the laissez-faire economists of the 19th century, and to this day lies behind the tax-cutting policies of many centre-right governments.
Smith’s book, properly titled An Inquiry into the Nature and Causes of the Wealth of Nations, appeared in 1776. It is composed partly of history, partly of philosophy and partly of the new science of economics – then called ‘political economy’. Smith, a Scottish intellectual, describes a four-stage development of human society, from the prehistoric hunting era through nomadic agriculture and farming in a feudal society to his own world, which, at least in its ideal form, he sees as one of commerce, trade and cooperation. In this modern world, he argues, the free exercise of the will of the individual will eventually lead to an orderly and productive society. Other chapters deal with the origin of money; the price of commodities; wages, profits and rents; and the use of capital. The three main economic themes that Smith presents in studying contemporary society are the division of labour, the pursuit of self-interest and freedom of trade.
He explains his theory of the division of labour by taking the example of a pin-making factory. One man working alone, he says, might struggle to produce a single pin a day – but with the work divided among ten different workers, each of whom is responsible for a single stage of the process, the factory could produce 48,000 pins a day, or 4800 for each worker. Such specialization, he argues, makes the worker more efficient. There is no time lost in moving from job to job, and the development of new machinery is encouraged, further improving productivity.
In another part of the book, Smith makes the famous observation: ‘It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest.’ Although they are working in order to make money for themselves, they are also producing something that other people value, he reasons, and thus benefiting society at large. The market, he says, has its own self-correcting mechanism – ‘an invisible hand’.
He also argues strongly against the then prevalent doctrine of mercantilism – the attempt by government to maintain a trade surplus in the expectation that it will lead to prosperity. Such a policy encourages monopolies and the protection of national trading interests, but the true benefit of trade, Smith says, is in opening up new markets for surplus goods, while at the same time providing other goods more cheaply from abroad than they could be produced at home.
A common view in the early 18th century was that wealth was essentially made up of land and gold, and that the landowning aristocracy was wealthy because God willed it so. The poor, similarly, owed their plight to the divine will. The Wealth of Nations was an intellectual challenge to this self-serving prejudice, but it was the Industrial Revolution, with its rapid transition from an agricultural economy to one based on capitalism and urban development, that demonstrated that it was nonsense. The Industrial Revolution, just beginning when Smith published his great work, radically and permanently changed society, as people flooded from the rural areas into the towns.
The changes were caused partly by technological advances, such as Smith’s imaginary pin-making machine, the real-life spinning jenny (1767) and James Watt’s steam engine (1769), and these inventions made manufacturing more efficient and more profitable. With the growth of empire, there was also a huge expansion in markets and a flood of cheap raw materials.
New wealth was created year by year in the smoking mill-towns of the North of England, supported by the rapidly developing capitalist economic system that Smith described. For many workers, the immediate result was squalor, poverty and misery; but the new developments helped to encourage the growth of a new middle class. Britain was the self-proclaimed ‘workshop of the world’ for the next hundred years.
The Wealth of Nations appeared at a time of great social and economic change in the Western world. Four months after its publication, the American Declaration of Independence marked the start of a revolution against taxation and the birth of a new nation dedicated to the political idea of individual freedom.
It also started one of the greatest economic and political arguments of the last 200 years, an argument that continues to this day. How much can or should democratic governments interfere in the actions of their citizens? Should they tax incomes and profits in order to provide services for their electorates? Should they seek to protect the poor and vulnerable from suffering? Should they plan the economy and encourage particular forms of economic activity that they believe will promote growth and prosperity? Or should they leave people to make their own way, with a minimum of interference or taxation from the state?
The impact of Smith’s book on the study of economics has been compared with that of Isaac Newton’s Principia on physics. Whether economists accept it or fight against it, the free-market capitalist model has proved to be one of the most important propositions in the whole of economic thought. In the 19th century a diverse range of economists and political philosophers, such as David Ricardo (1772–1823), Thomas Malthus (1766–1834) and John Stuart Mill (1806–73), drew on Smith’s work, refining it so that it became the basis for ‘classical economics’ as an explanation of economic growth and development. Karl Marx (1818–83) took Smith’s basic ideas and argued that the working of the market was ultimately unfair to workers. In the 20th century, J.M. Keynes (1883–1946) also reacted against Smith’s ideas, but right-wing economists, including Milton Friedman (1912–2006) and Friedrich Hayek (1899–1992), built on his free-market economic model. Politicians such as Margaret Thatcher and Ronald Reagan in the 1980s paid lip-service to Adam Smith in their political pursuit of free-market policies, and modern international trade negotiations remain committed, at least in theory, to Smith’s belief in free trade.
But Smith was not just a proponent of unrestrained self-interest, and The Wealth of Nations is only part of his wider thinking in the field of social philosophy. In his earlier The Theory of Moral Sentiments he tried to explain why, despite the natural instinct to act in accordance with self-interest, individuals are still capable of making disinterested moral judgements about their own and others’ behaviour. Where, he asked, did a sense of right and wrong come from? His argument was that self-interest was controlled by the ability to reason and feel sympathy for other people. Using the same image that he later famously employed in The Wealth of Nations, he said that despite their ‘natural selfishness’, people were ‘led by an invisible hand to … advance the interest of the society’.
But it is back to The Wealth of Nations that much of today’s political thinking can be traced. Smith’s conclusions, written more than two centuries ago – when neither ‘economics’ nor ‘capitalism’ were words that anyone would have understood – may have been developed, adapted and refined, but they remain at the heart of mainstream politics in the 21st century.