The Wealth of Nations Summary

Adam Smith

The Wealth of Nations

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The Wealth of Nations Summary

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The Wealth of Nations is a seminal work of economic theory by the Scottish economist Adam Smith. It was published in 1776 and is one of the first treatises outlining the role and purpose of the free market.

Smith begins the book by telling us that his goal is to lay out why some nations are wealthier than other nations; it is not that other countries work harder or have better resources. For Adam Smith, the answer is free trade. Smith walks us through the foundation of money and the ways that money makes trade easier. With the barter system, we must wait to trade things that other people want; money removes that obstacle. This system works well, and the fewer regulations there are to impede this free trade system, the smoother the system is.

One of the central tenets of the treatise is a concept Smith calls “the invisible hand.” He suggests that the system of pricing and valuation reacts both directly and indirectly with governing bodies and these elements of the market interact. Buying and selling happen naturally and continue until the governing body steps in to regulate this system. When governments step out of regulation, the people who create products will always work to make the biggest profit. This spells success all around, because when business owners have the long view in mind, they will put out their best work. He gives the example of a butcher. If the butcher sells bad cuts of meat, his customers will not come back. He might make a profit in the short term, but in the long term, it is better to sell a good product for a price people are willing to pay.

Continuing with the invisible hand of the market ensures a prosperous system that works for the good of the majority. Smith acknowledges that some will become super rich, and some will stay poor, but for him, this is a logical price to pay for a thriving economic system. In order for freedom to prevail, and for the majority to pursue their happiness and goals, the system must allow for some measures of inequality.

Smith wrote The Wealth of Nations in response to the prevailing economic theory of the time, mercantilism. Mercantilism stated that the economic system is a collection of winners and losers. For one country to get rich, it is necessary that another country be poor. Resources are limited and it is right and just to benefit your own country at the expense of another. This theory meant that countries tried hard to bring money and resources within their borders, but blocked free exchange so that money stayed inside. Countries would levy large tariffs on goods coming from outside countries, sometimes at the expense of their own long-term good.

Smith argues that free trade allows countries to import goods that are highly expensive to produce within their borders and export goods that are cheap to produce. Opening borders is better in the long term because the long-term cost of production is lower. We harm our own economic system by not allowing our people access to these better, cheaper products, and by disengaging with trade relationships that will ultimately benefit our economy.

He closes the book with a discussion about a few systems that should fall outside the realm of the free market. He mentions that institutions such as public schools and the police should be government run and regulated because their purpose is not profit but the public good. Smith believes in taxes and government institutions precisely for this reason. For the sake of public good, these kinds of public institutions should be under the jurisdiction of the government.

A major theme of the book is the concept of wealth building. Smith outlines the components of what he believes makes a successful economy. Those governments keep their hand off the market, which allows the consumers and producers to make the best decisions they can about goods. When the government tries to regulate the system, it removes producers from the responsibility of pursuing what is in their highest good. This, in turn, robs the economy of quality goods and ultimately stability.

Competition is the basis of Smith’s system. What drives producers to create products to the best of their ability is the competition of the market. This is a good thing even across borders. When countries close down competition, either through regulation or restricting trade, the invisible hand of the system is not free to balance itself.

Smith gives an example of wine in Scotland to illustrate this point. Scotland is ill-equipped to produce wine, and so limiting French wine imports ignores the positivity of competition and wastes the public’s money in the long run. Allowing French wine to be in competition with Scottish wine produces a better product and helps the Scottish economy eliminate the waste of attempting to produce something it cannot.

Many people view Smith’s book as a representation of the birth of free-market economics. While it is not without fault, modern free market economists point to its basic principles as a starting point for refining free market capitalism in modern day terms.