The Wealth of Nations. The Theory of Moral Sentiments

Adam Smith was a Scottish economist, philosopher, author, and public intellectual, born in Kirkcaldy, Fife, Scotland. He studied at University of Glasgow, Balliol College, and Oxford, and lectured at the Philosophical Society of Edinburgh and Glasgow University. His principal writings are The Theory of Moral Sentiments and The Wealth of Nations. The Theory of Moral Sentiments is a work on moral philosophy, while The Wealth of Nations is a pioneering, revolutionary work on economics.

The Wealth of Nations—first published in 1776, during the Scottish Enlightenment and Agricultural Revolution—is Smith’s seminal work, in which he analyzes what constitutes the wealth of a country and reasons why certain nations obtain more per capita wealth than others. It is one of the most important books written because it introduced new economic principles—principles that continue to govern the world today. In The Wealth of Nations, Smith responds to societal conditions at the outset of the Industrial Revolution and argues against the then-prevailing economic philosophy of mercantilism. He instead advocates a laissez-faire economic system. In making his arguments, he introduces now-familiar concepts of gross domestic product as a measure of national wealth, specialization and division of labor, mutual gain from trade, and the efficiency of markets (also known as the concept of the invisible hand).

The Wealth of Nations is divided into five books. In Book 1, Smith establishes his basic theories that become the groundwork for his later analysis. Smith introduces the concepts of price, stock, and division of labor. He also introduces his assertion that a nation’s wealth is not comprised of money, but rather that money is a method of storing and exchanging wealth, which is actually comprised of commodities and labor. Smith divides price into three components: wages paid for labor, profits of stock, and rent paid to landlords. The component of any price not paid to workers or landlords is deemed profit.

In Book 2, Smith discusses “stock.” He defines stock as the assets used in a commercial endeavor. Smith bifurcates stock into capital and revenue, and asserts that it is better for societies to maintain a greater share of stock as capital investment, as opposed to spending it on economically-unproductive endeavors. Smith then differentiates between what he calls home trade, foreign trade of consumption, and the carrying trade. Smith reasons that the home trade, that of domestic commerce, is the most beneficial to a country’s economy because money and goods can be exchanged more frequently, creating more wealth than the carrying trade, which Smith defines as foreign trade.

In Book 3, Smith recounts the economic history of the Roman Empire and all societies since its fall. He concludes from this history that a natural economic model, in which agriculture is the predominant economic activity, followed by manufacturing, then trade, is to be preferred.

In Book 4, Smith argues against mercantilism, the predominant economic system of Smith’s era. Mercantilism is a sort of economic nationalism in which the objective is to build a wealthy and powerful state by restraining imports and encouraging exports. The practical goal of mercantilism was to bring as much gold and silver into one’s country as possible while maintaining domestic employment. Smith concludes that the mercantile system costs the home country more than it brings back in revenue, and that the system and colonies should be abandoned in favor of domestic trade, which produces more wealth.

In Book 5, Smith argues that certain costs of governance are necessary and unavoidable, and therefore should be paid via taxation. However, he also offers a warning that Britain’s national debt at the time was spiraling out of control. He proposes either a commodity tax or abandoning Britain’s American colonies, which had been a continual drain on Britain’s resources.