Adam Smith and The Wealth of Nations

The American Declaration of Independence was not the only revolutionary treatise produced in 1776. Adam Smith's remarkable book on market economics, An Inquiry into the Nature and Causes of the Wealth of Nations (commonly known as The Wealth of Nations) also was published in that year, at a time when the vital role of free trade and competition as stimulants to economic progress was scarcely understood.

Governments extensively practiced the granting of monopolies to protect their own manufacturers and farmers against any outside competition. Laws forbade the use of new, laborsaving machinery. A wide-ranging social philosopher and economic scholar, Smith elaborately analyzed how economic systems function and established that free trade and competition would spur economic growth, reduce poverty, and precipitate the development of society. At a time when poverty was accepted as the natural and inevitable lot of most people, Smith argued that "no society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable."

The basic doctrine of The Wealth of Nations is that labor is the only source of a nation's wealth, as well as the primary source of value and meaning in human life. Smith advocated division of labor in the productive process, which, he believed, would have the dual benefits of improving the condition of the individual laborer and of increasing wealth for the nation as a whole. He stressed the importance of individual enterprise and warned against unnecessary intervention by the state in matters pertaining to commerce. The less government interferes with economic life, he insisted, the more prosperous the nation will be. People are driven by self-interest, and when they are free to pursue their own prosperity within the restraints of a market economy, financial self-interest will inevitably lead to increased national wealth.

Although Smith recognized that some tariffs were necessary, he opposed restrictions on international trade: "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."

Trade barriers force a nation to produce within its borders all the goods required for consumption therein---a waste of resources, Smith maintained, when goods can be purchased more cheaply elsewhere. To illustrate this point, he cited the example of wine:

By means of glasses, hotbeds, and hotwalls, very good grapes can be raised in Scotland, and very good wine too can be made of them at about thirty times the expense for which at least equally good can be brought from foreign countries. Would it be a reasonable law to prohibit the importation of all foreign wines, merely to encourage the making of claret and burgundy in Scotland?

Nations, like individuals, Smith argued, should do what they are able to do well; producers and consumers alike profit from such division of labor. He also favored the independence of British colonies, particularly America, suggesting that England would prosper more from trade with its former possessions than from control of their markets.

Smith's work laid the intellectual foundation for the era of economic expansion that dominated the 19th and 20th centuries. The book that was published more than 225 years ago is still cited in support of arguments for an unregulated economy and free trade, including, in recent years, in the context of debates over the North American Free Trade Agreement and the General Agreement on Tariffs and Trade.