The Wealth of Nations

Two views of the "Wealth of Nations"

In the Preface to his edition, Cannan shows that the major part of the "Wealth of Nations" follows Adam Smith’s earlier lectures, but that there are important additions due to his visit to France. These additions were so important for Smith that he puts them at the beginning of his work. For Cannan as a neoclassical economist they are superfluous and not the real Adam Smith: "These changes do not make so much real difference to Smith’s own work as might be supposed; the theory of distribution, though it appears in the title of Book I., is no essential part of the work and could easily be excised ... But to subsequent [classical] economics they were of fundamental importance. They settled the form of economic treatises for a century at least."[62]

The "Wealth of Nations" is therefore inhomogeneous and consists of the earlier elements of an individualistic strain in the tradition of Aristotle, Puffendorf and Hutcheson,[63] Smith’s teacher, – elements compatible with a neoclassical theory – and the classical theory Smith learned in France.

Smith’s classical message is what he states at the very beginning: the two ways to create the “Wealth of Nations”. First, make productive labour even more productive by enhancing markets to deepen the division of labour (moving the neoclassical production curve to the right); and second, use more labour productively instead of unproductively, i.e., produce more goods and services that are inputs to the next economic reproduction circle, as opposed to goods used up in final consumption. In the words of Adam Smith:

"The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes ... . [T]his produce ... bears a greater or smaller proportion to the number of those who are to consume it ... .[B]ut this proportion must in every nation be regulated by two different circumstances;
  • first, by the skill, dexterity, and judgment with which its labour is generally applied; and,
  • secondly, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed [emphasis added]."[64]

Ricardo[65] repeats this in identical terms. Smith’s and the classical macro-economical distinction between productive and unproductive labour gives no sense within neoclassical micro-economics as any labour or idleness of a Homo oeconomicus maximises his micro-economic “utility” and is therefore productive.

For neoclassical economists Smith’s central message is the Invisible hand[66] mentioned deep in the books and seen as a proto-neoclassical statement of the neoclassical General equilibrium theory:

"[E]very individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; 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 many other cases, led by an invisible hand to promote an end which was no part of his intention.”[67]

This often quoted passage describes the unintentional consequences that come from individuals' pursuit of their "own gain" and security. Smith argued people prefer local industry and are biased against international trade. Ideally, he saw economics as characterised by small local economies interacting with each other and guided by the enlightened self-interest of individuals. This was a reaction against the practices of early transnational corporations (for example: the British East India Company and Muscovy Company), which were mostly unresponsive to local affairs and stewardship of resources. Though the argument is frequently used to justify free-trade policies, The Wealth of Nations was a rebuttal to the scale and effects of chartered monopoly. By positing—now famously—that "self-interest" promotes more just societies, he was prescribing to economies already heavily tilted against individual human agency. For instance, American colonists were permitted to grow cotton but not to manufacture with it. They had to sell cotton to England for processing, then buy it back as clothing. Smith felt opposing large multinational corporations (and the governments that support them), allowed individuals to direct industry "in such a manner as its produce may be of the greatest value." This value comes from the individual's self-interest and leads to a result that is "no part of his intention."

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