Adam Smith

Adam Smith’s work – An Inquiry into the Nature and Causes of the Wealth of Nations – was revolutionary, especially when considering the fact that it was written in the age when the predominant economic thinking was Mercantilism. Mercantilism is an economic policy designed to maximize exports and minimize imports through tariffs. Unsurprisingly, this caused trade wars as nations retaliated with higher tariffs upon each other and disrupting international trade. Smith’s work gave the world an alternative; one that he believes will bring prosperity to the people. Marking a shift in economic thinking to what we now call ‘classical economics.’ Here are some of Adam Smith’s most well-known contributions to economic thinking.

Monopolies have a long history; from Rome to the Han dynasty. the practice of sovereignty giving the privilege or permission to a small group of the elite to control key industries - e.g. salt production - is commonplace. Most of the time these rights to produce monopolized goods are distributed as a reward for loyal supporters who profited from setting high prices on key products. The practice continued well into Smith’s time in the form of chartered companies, of which he has this to say:

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

Smith argues that people should have the freedom to produce and exchange goods as they pleased in a free market that is unhindered by external taxation and exposed to competition on both domestic and foreign markets. For Smith, this would enable individuals to pursue their self-interest which would result in societal benefit by way of the ‘invisible hand’ or as we now call it market forces. This does not mean, however, that Smith believes that the government has no role to play in the market. He maintains that governments should do what they can to ensure the functioning of a free market by doing 3 functions:

- Protect national security

- Enforce the law

- Engage in public works (public goods).

The ‘invisible hand’ can take care of the rest such as shortage or excess demand. The market will adjust and everything will be sorted out, automatically, without the influence of government directives or mandates.

Imagine for a moment you are a baker but not the only baker in town. You would want to profit more than the other bakers so you negotiate with a supplier that sells cheaper wheat. This gives consumers a lower price. Eventually, this would lead to the most utility for everyone except for your competitor. The consumers whose self-interest is to buy bread at a lower cost or with higher quality will get the product, and you, the humble baker will have your profit increased.

For most of the history of civilization, much of the population is concentrated on activities such as farming that is directly related to survival. To do otherwise would be unthinkable; how would anyone be certain that there will be food? And Smith spent his entire life advocating for this cause. He maintained that there should be a ‘division of labor,’ which is now called specialization in the production of all goods and services. For instance, by dividing the worker’s time into standardized and repeatable tasks, markets can now produce more goods, as compared to when a craftsman created a good from the beginning to the end.

The increased efficiency has resulted in a surplus of goods and services produced. This relates to Smith’s conception of wealth. His radical insight was that a nation's wealth is the stream of goods and services that it creates. This wealth can be grown by investing the surplus or profit gained back to the businesses, which would continue to result in an even more efficient way to produce goods, resulting in more capital accumulation, and thus generating more wealth.

Adam Smith’s legacy is undeniable. He made economics a distinct science and shaped the way the modern global economy functions. Mercantilism, in different forms, persisted well into the contemporary world. The problem with the arguments of free-trade is that it is a theory of static equilibrium. The first successful trader in any free world has the most advantage. We never see ‘poor’ nations advocating it. Instead, it is always the ‘rich’ nations. Ironically, many ‘rich’ nations today got there by practicing protectionism which prepares its national industry to face global competition. The list includes Germany, Japan, the United States, and the most recent example, China. Regardless, Adam Smith’s idea led to the immense wealth creation we see today. Ushering a period where many of us, even those in ‘poor’ nations, live better lives than monarchs ever could have imagined centuries ago.

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About the Author

Yap Per Hung

Yap Per Hung is a year 2 Economics student who is currently serving as the president of the Nottingham Economics Society. He believes in doing the public good and will most likely enter the civil service.