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Donald Boudreaux: Wealth has causes, poverty doesn't

Adam Smith showed that when people have greater access to good and services, nations become wealthier

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Monday, March 9, marks 250 years since the publication of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations. National Post has asked experts and Smith admirers to reflect on the meaning of this seminal work.

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On March 9, 1776, Adam Smith’s Wealth of Nations first hit the booksellers. In the 250 years since, there’s never been presented a clearer or more compelling case for free markets — those commercial arrangements that naturally arise when all people are free to spend their incomes in whatever peaceful ways they choose, and to have a go at earning those incomes in whatever peaceful ways they desire.

Donald Boudreaux: Wealth has causes, poverty doesn't Back to video

Smith’s case for free markets was startlingly modern and liberal. Nearly all of history was dominated by hierarchies, with nobles, gentry, and guild members enjoying protected status. While these privileged few were supported by the masses, they were shielded from having to compete with the masses for prestige and resources. Activities that threatened to upset this arrangement were severely restricted. Economic change was suppressed and, with it, economic growth. For the high and mighty it was a great gig. Not so for the masses.

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But first in 17th-century Holland and then even more so in 18th-century Britain, the gig began to be up. Merchants found more freedom to innovate, including the freedom to apply enlightenment science to manufacturing and transportation. Guilds lost much of their monopoly power. For the first time in history the living standards of the masses began rising without retreating.

Significantly, the masses’ swelling wealth wasn’t extracted from the accumulated wealth of the rich. Although the rich began losing privilege and station, their absolute standard of living wasn’t reduced. Almost everyone in Britain grew richer. The wealth of the nation rose.

Taking notice of this novel phenomenon, Adam Smith, a professor of moral philosophy, set himself to this task of exploring and explaining it. The result is a masterpiece. And a handy guide to Smith’s explanation is his book’s seldom mentioned full title: An Inquiry Into the Nature and Causes of the Wealth of Nations.

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The opening words of this title announce Smith’s humility. His book is an inquiry, not the final word. It’s an initial contribution to an intellectual exploration. Smith wrote not as a prophet dispensing dogma, but as a companion surveying with his readers new economic terrain. “Come along with me,” he invites us, “as I inquire into these fascinating topics.”

That inquiry is, first, into wealth’s nature. What is wealth? In the mid-18th century, the widespread belief, embraced tenaciously by mercantilists, was that wealth is money. A nation that accumulated precious metals (the main monies of the day) grew wealthier; a nation that lost precious metals became poorer. End of story.

Smith disagreed. People can’t eat, clothe, or treat their illnesses with money. Wealth, he explained, is what money can buy — food, clothing, shelter, health care, education, and all other real goods and services that raise people’s living standards. A nation is wealthier the greater is the access of people — especially the masses — not to money as such, but to goods and services.

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Smith then inquired into wealth’s causes. He didn’t inquire into the causes of poverty. Smith understood that that poverty is humanity’s default mode. Nearly all people before Smith’s time — and still most people during his time — were mired in poverty. Poverty is simply the condition we suffer when wealth isn’t created. Wealth, not poverty, demands explanation because wealth, not poverty, has causes.

For Smith, the principal cause of wealth is the division of labor — specialization. The more each worker and firm specializes, the more productive they are. The jack of all trades, mastering none, produces relatively little of each output. But let each of those trades become the task of specialized workers or firms, and the resulting mastery raises the output of all the trades. The economic pie grows, with more output available per person.

Specialization, in turn, is determined by what Smith called “the extent of the market.” The larger the number of buyers, the greater the opportunity to specialize. This is why, for example, there are pediatric gastroenterologists and other highly specialized physicians in Toronto but not in Tisdale, Sask.

Smith’s recognition that larger markets promote greater specialization is a chief reason he supported free trade. The freer is trade, the more we import and, hence, the more of our currency is earned by foreigners. Foreigners then buy more of our exports. With this expansion in the size of the market served by our producers, they are encouraged to further specialize. Just as importantly, free trade exerts competitive discipline on domestic producers, putting downward pressure on the prices that we as consumers pay.

Smith’s case for free trade flows naturally from his broader case for free markets. This case rests squarely on his recognition that the amount of detailed knowledge that must be accessed and acted on for a modern economy to succeed is far greater than even a committee of geniuses can muster. No passage in Wealth of Nations better summarizes the book’s full message than does this one:

“The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate whatever, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”

We today would be full of folly and presumption to ignore these wise words.

Donald J. Boudreaux is Professor of Economics at George Mason University in Virginia, and a Senior Fellow at George Mason’s Mercatus Center. 

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