The Modern Relevance of The Wealth of Nations

There are many classics in economics. If asked to name just one, economists would recommend Adam Smith’s *The Wealth of Nations*. Its full title is *An Inquiry into the Nature and Causes of the Wealth of Nations*, but it is commonly shortened to *The Wealth of Nations*. As the title suggests, this book fundamentally probes the causes of national prosperity by comparing multiple countries, and it offers solutions for the prosperity of both the nation and its people.

Adam Smith presents a way for people to live better. Through this book, readers come to understand the realities of our lives and explain their underlying principles in the language of economics. They also learn what an economic way of thinking is. As it revealed the direction of systematic economic policy for growth, it laid the groundwork for the development of capitalism.

The late 18th century, when Smith was writing this book, was a time of upheaval. Both Europe and America were stirring with change. The Industrial Revolution had begun to transform the world, and the American Revolution and the French Revolution were demanding a new order. The principles behind a world becoming more industrialized and more prosperous could not be explained by mercantilism. *The Wealth of Nations* opened up a new world by clearly explaining the principles of development in the capitalist world, and it established economics as a new academic discipline.

The book was published in 1776 and began selling from small bookstores. The first edition consisted of two thick quarto volumes and was priced at 1 pound and 16 shillings. The response was enthusiastic. A German translation appeared the same year. The following year, Adam Smith was appointed a commissioner of customs in Scotland and began to influence a range of national policies. Several revised editions were published before the fifth edition appeared in 1789.

**The “Invisible Hand” at the Center of Economic Principles**

Through *The Wealth of Nations*, Adam Smith presented a methodology for improving people’s lives. Countries that embraced his solutions early were able to leap into the ranks of advanced nations, but most did not. Even countries that achieved economic growth sometimes fell back into stagnation after distancing themselves from Smith’s economic principles. Although *The Wealth of Nations* contains a model answer for economic growth, political leaders often ignored it, leading to countless trials and errors.

Adam Smith pointed out that human beings are essentially self-interested, and that this self-interest is the driving force of social development. As the principle of the “invisible hand” operates, competition in the market becomes the energy that advances the world. As cities developed, markets expanded; as merchants came to own land, its value rose; and as manufacturing developed, individuals gradually expanded their freedom. The natural pressure of change toward prosperity asserts itself despite political pressure to preserve privilege and despite interference from government policy.

The impact of *The Wealth of Nations* on the world has been immense and astonishing. The expansion of economic power brought progress, and the level of civilization improved dramatically. No one can now seriously deny the extraordinary advance of humanity led by the Anglo-American maritime civilization. For a time, Karl Marx raised the banner of building socialism. He labeled the process of market development and the expansion of individual choice described by Adam Smith as capitalism, and called for its overthrow. But countries dreaming of socialism have now all but disappeared from the face of the earth.

Adam Smith already explained more than sufficiently the principles of development that bring progress to the world. Nevertheless, the world continues to fail by refusing to follow those principles. The principle of laissez-faire is constantly undermined by government control and intervention; the principle of limited government is distorted into the welfare state; and the principles of competition and openness, which are meant to guard against privilege, are often stained by closed, anti-globalization movements that favor vested interests. Why do these phenomena occur? Anti-capitalist thinkers look for alternatives, saying capitalism has run up against its limits, inequality has worsened, and vested interests have become too powerful. They remain trapped in Karl Marx’s snare. Economic crises and failures can be resolved only by faithfully returning to the basic principles Adam Smith presented. Yet critics often claim each one is some unprecedented new crisis and push our society into dirigisme and policy experimentation.

Not every argument in *The Wealth of Nations* is perfect. As human knowledge has expanded, it is necessary to reinterpret parts of the text. But that does not justify interpretations that overturn the principles Smith regarded as essential: division of labor, limited government, market competition, and openness. The world is currently suffering through the European fiscal crisis. At this moment, the modern meaning of this book is clear. What is needed is a renewed emphasis on the case for limited government: we must not make the mistake of expanding the size of government. Adam Smith warned long ago about government interventionism and the welfare state.

**Adam Smith, the Pioneer Who Enabled Capitalism to Flourish**

Adam Smith’s intellectual world was grounded in deep insight into human beings and society. His thought was rooted in the tradition of moral philosophy running through Hobbes, Locke, Mandeville, and Hume. His insight that “human beings are self-interested” gave economics a solid foundation. For him, self-interest was neither good nor bad; it was simply human nature. It is what drives people to strive to improve their lives.

He did not regard differences in innate ability or character as especially important. Rather, he placed greater emphasis on acquired factors such as habit, education, and occupation. He saw human beings as capable of intellectual and moral change. Accordingly, he explained that human ability is not the cause of the division of labor, but its result.

Adam Smith believed that human beings are equal, while also recognizing that differences in wealth, status, and honor exist in reality. He saw people as competing with one another to obtain them. He assigned central significance to wealth. For him, wealth was not simply a matter of holding large amounts of money; he derived the true concept of wealth from whether one could enjoy consumption that enriches life. Smith regarded products such as necessities and conveniences as true wealth. He understood industry from the standpoint of production and distribution that improve consumers’ standards of living, and he considered how these could be improved further. These ideas provided the logical basis for moving beyond the limits of mercantilism and building a capitalist economic order.

*The Wealth of Nations* also includes an explanation of capital accumulation. For Smith, capital accumulation was the process by which production expands year after year, so he warned against waste by both individuals and society. He believed waste would dissipate capital and reduce production. The process by which people move toward prosperity arises from a variety of motives. He took a critical stance toward monopoly and privilege when they obstructed those forces. In particular, he was wary of vested-interest groups and of those who exploited them politically.

He was a prophet of individual choice and the prosperity that follows from it in a free world. He found the most fundamental remedy for improving the hardships of life and presented the most efficient methodology for achieving progress. His basic philosophy was laissez-faire. He took freedom from government control and intervention as the fundamental basis. He saw government expenditure as unproductive spending and presented the night-watchman state as the most desirable model of the state.

Adam Smith was optimistic about the development of capitalism. And indeed, the world advanced, and human life overcame poverty. But history shows that there are not only periods of constant development and progress. There are also times of prolonged stagnation. In the 20th century, the socialist tide influenced by Marx pushed the world backward. Experiments in planning were repeated for decades and failed. One aftermath was an enlarged government. Government interventionism remains as a residue of socialism and continues to threaten individual freedom, choice, and social development.

If Adam Smith were reborn today, what advice would he offer in this complex world? He would likely emphasize once again that governments stepping forward claiming they will solve problems will help no one. In fact, government control and intervention amount politically to nothing more than the redistribution of wealth, and economically to the reduction and waste of accumulated capital.

Sung-no Choi, Secretary General, Center for Free Enterprise

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Original title: 국부론의 현대적 의미

Author: Sung-no Choi

Date: 2013-04-30

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=column&pn=17&idx=25571