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Robert Dimand: The 250-year-old book that's bigger than Harry Potter

Adam Smith's The Wealth of Nations remains a pleasure to read

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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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Even after 250 years, Adam Smith’s The Wealth of Nations is still a source of instruction, inspiration and, exceptionally for an economics book, pleasure. Many others had written about topics now considered economic, and some of Smith’s French contemporaries called themselves “les Économistes.” Notably, Bernard Mandeville argued that private vices such as greed and vanity could lead people to act in ways beneficial to others, and Smith’s friend and mentor, the philosopher David Hume, wrote brilliant essays on how the automatic adjustment of markets would frustrate mercantilist schemes for a trade surplus. But Smith pulled these strands together in a systematic political economy which he gave a new focus on the standard of living, the proportion of “the necessaries and conveniences of life which (a country) annually consumes … to the number of those who are to consume it.”

Robert Dimand: The 250-year-old book that's bigger than Harry Potter Back to video

Smith’s identification of the wealth of a nation with the standard of living of its people now seems obvious, but it set Smith sharply apart from the then-prevailing schools of economic thought. The writers lumped together by Smith as proponents of “the mercantile system of political economy” urged governments to use tariffs, subsidies and colonial expansion to achieve a trade surplus and an inflow of gold and silver, with a country gaining what another country lost. To the extent that they cared about the standard of living of most people, the mercantilists wanted wages to be low so that workers would have to supply more labour. Their critics, the French Physiocrats (or Économistes), advocated free trade in grain and sought to increase the net surplus from agriculture (a surplus excluding wages, treated just as a cost). But they viewed artisans in manufacturing as unproductive and inevitably poor, with the value of their product only equal to the value of the food and raw materials they consumed.

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In contrast, Smith saw the possibility of high and rising real wages in growing economies driven by capital accumulation and the steadily improving “skill, dexterity and judgement” of labour. Two things were needed to achieve this desirable situation. Specialization, the division of labour, would enable workers to become skilled and adept and would lead them to think of labour-saving innovations. Second, with government performing a limited list of important functions, the “simple and obvious system of natural liberty” would provide an environment in which people would save, and their savings would flow into productive investment, creating demand for labour. Free to seek the best return on their capital or labour, people would be guided by price and wage signals “as if by an invisible hand” to produce the goods and services that others wanted and were willing to pay for. Smith only used the term “invisible hand” twice, and only once in The Wealth of Nations, but it has become central to the trained intuition of economists.

Smith presented his analysis as uncontroversial common sense, winning the acceptance of his readers before letting them realize that they had just rejected widely held views. Without directly mentioning the Physiocratic claim that manufacturing is unproductive, Smith used the “trifling” example of a pin factory to show how productive a group of workers could be if each specialized in a particular task — and teased the Physiocrats by taking the details of the pin factory from the French encyclopedia to which leading Physiocrats had contributed. Having persuaded readers that the division of labor is the key to high productivity, Smith argued that the division of labour is limited by the extent of the market.

He attributed the poverty of valleys in Highland Scotland to their isolation with markets too small for someone to specialize, and become skilled and dexterous, as a full-time carpenter or blacksmith. He celebrated reductions in transport costs for creating wealth by allowing for larger market areas with more possibility of specialization, and then let readers realize that mercantilist tariffs were nothing other than self-inflicted wealth-destroying increases in transport costs. People and countries prosper by specializing in doing something well and exchanging their products for the products of other people and countries. Smith’s vivid and forceful explanation of why trade is good remains pertinent at a time when the president of the world’s largest economy, about to attend a G-7 meeting, writes himself a reminder that “Trade is Bad.”

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Smith saw that, under the security provided by the rule of law, self-interest could produce desirable results: we do not owe our dinner to the benevolence of the butcher, the baker and the brewer but to their concern for their own gain. The legitimate role of government was limited to enabling this outcome by providing security against domestic violence by the rule of law and against external violence by national defense, and by providing certain public works beneficial to society but not to an individual entrepreneur.

Even after a quarter of a millennium of economic analysis and debate, The Wealth of Nations still has a message that is relevant and well worth reading. Not only is it worth reading but, exceptionally for a book by an economist, it is readable, to the point where, a few years ago, a new Chinese translation topped the Hong Kong bestseller list, ahead of Harry Potter.

Robert Dimand is professor of economics at Brock University

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