Adam Smith: An Inquiry into the Nature and Causes of the Wealth of NationsJune 26, 2021
The main topic of this book is economic growth.
Shortly before his death, Smith had destroyed nearly all of his unpublished writings. It seems that he was working on two major theses in his last years; one about legal theory and history, and the other about science and art. Essays on Philosophical Subjects, published posthumously in 1975, probably covers part of his second dissertation.
The Wealth of Nations was an influential work in its time, as it allowed the discipline of economics to emerge and at the same time become autonomous and systematic. It can be said to be the most influential book on its subject published in the Western world. When the market came into existence in 1776, the concept of free trade was spreading in England and America; and the book became a classic declaration against mercantilism, with its theory that large bullion reserves were important to economic success. In this period, the poverty and difficult conditions that emerged after the liberation war in America gave birth to this understanding. Still, not everyone was convinced of the benefits of free trade at the time the book came on the market: the British public and parliament had long adhered to mercantilism.
The Wealth of Nations also opposed the physiocratic emphasis on the importance of land. Smith instead believed in the superiority of the workforce, arguing that the working class (en:division of labor) would be instrumental in increasing production. Nations have been so successful that this success has led to the abandonment of the old economic schools. Economists such as Thomas Malthus and David Ricardo sought to refine Smith’s theory of what is now known as classical economics, and this eventually led to the development of modern economics. Malthus developed Smith’s ideas on overpopulation. Ricardo believed in the “iron law of wages,” that overpopulation would get in the way of the subsistence minimum. Smith proposed the assumption of rising wages with increased production, which is now believed to be more accurate.
One of the main themes of The Wealth of Nations is that the free market, however complex and unregulated, is actually guided by a so-called “invisible hand” to produce the right amount and variety. Although Smith had used this symbol before in his book “The Theory of Moral Sentiments”, he first penned the idea in his essay entitled History of Astronomy. For example, when a product is under production, its price rises and this creates a profit margin, encouraging others to produce that product and finally ending the shortage. If too many producers enter the market, increased competition among producers and increased inventory, i.e. supply, cause prices to fall at the cost of production, leading to the product’s “natural price” (average market price). Even if the rate of profit resets at this average market price, incentives for the production of goods and services do not disappear because all production costs, including the labor force of the owner, are reflected in the price of the produced. If prices fall below the zero rate of profit, producers begin to withdraw from the market. As long as profit rates are above zero, producers will continue to enter the market. Smith believed that the reasons people take action are because they are selfish and greedy. As a positive result of this, it showed that competition in the free market would be beneficial to the whole public by keeping the prices down. According to him, this competition also encouraged the production of a wide variety of goods and services. Still, he argued that businessmen should be wary of and that monopolization was wrong.
With all his might, Smith was attacking outdated government restrictions that hindered industrial development. Indeed, he argued that most government interventions in the economic process, including tariffs (en:Tariff), lead to inefficiency and high prices in the long run. This “laissez-faire” theory, which advocates leaving everything to its own devices, influenced the laws passed by the government in the following years, especially in the 19th century. (Smith was not, however, opposed to the existence of government; he advocated its operation in matters outside the economic sector. For example, he was a proponent of public education for poor adults, unprofitable institutional systems for private factories, a judicial system, and a standing army.)
Smith tried to explain the economy with the existence of natural laws, with the influence of the scientific development of the period he lived in. The invisible hand is one of the most important of these studies. According to Smith, economic life is individualistic and this individualism stems from the natural structure of people. Personal interest is a driving force for economic life. By nature, one will seek to achieve the most satisfaction with the least effort. For this purpose, Smith will focus on the price mechanism that automatically realizes the equality of supply and demand. According to Smith, prices are the equilibrium element. Smith’s equilibrium price element with the market example