Restrictions on international trade inevitably make both sides poorer. Countries should do what they are best at, and trade their products. There is no point trying to grow grapes in Scotland, when they grow so plentifully in France. Just as individuals gain from specialisation, says Smith, so do nations. Governments should aim to allow people to build up capital in the confidence that they will enjoy its fruits, and should be aware that their own taxation and spending will eat into the nation’s productive capital. But capital can be lost, through mistakes, or theft, or profligate government spending.
Thanks to this growth of capital, prosperity becomes an expanding pie: everyone becomes richer. The more we invest, the more efficient our production becomes. By saving some of what we produce instead of immediately consuming it, we can invest in new, dedicated, labour-saving equipment. Smith goes on to say that building up capital is an essential condition for economic progress. But the best interests of ordinary people are served if policymakers avoid such interventions and promote open competition. Often, employers try to rig markets in their own interests, and call on governments to help them. How far and how fast the benefit spreads depends on how wide and efficient is the market. Then they exchange those specialist products, spreading the benefits of specialisation across the whole population. And they can employ labour-saving machinery to boost production. By specialising, people can use their talents, or acquire skill. Using the example of a pin factory, Smith shows how specialisation can boost human productivity enormously. The Wealth Of Nations begins with Smith explaining production and exchange, and their contribution to national income. It should keep the market economy open and free, and not act in ways that distort it. Its core functions are maintaining defence, keeping order, building infrastructure and promoting education.
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The poor suffer most from this, facing higher costs for the necessities that they rely on.Ī further theme of The Wealth Of Nations is that competition and free exchange are under threat from the monopolies, tax preferences, controls, and other privileges that producers extract from the government authorities.įor all these reasons, Smith believes that government itself must be limited.
When governments grant subsidies or monopolies to favoured producers, or shelter them behind tariff walls, they can charge higher prices. Industry thus remains focused on the nation’s most important needs, without the need for central direction.īut the system is automatic only when there is free trade and competition. Where there is a glut, prices and profits are low, producers switch their capital and enterprise elsewhere. Where things are scarce, people are prepared to pay more for them: there is more profit in supplying them, so producers invest more capital to produce them. The countries that prosper are those that grow their capital, manage it well, and protect it.Ī fourth theme is that this system is automatic. But if people are going to build up their capital, they must be confident that it will be secure from theft. The more that is invested in better productive processes, the more wealth will be created in the future. Smith’s third theme is that a country’s future income depends upon this capital accumulation. This leaves producers with a surplus that they can exchange with others, or use to invest in new and even more efficient labour-saving machinery. Huge efficiencies can be gained by breaking production down into many small tasks, each undertaken by specialist hands. And the way to maximise it, he argued, was not to restrict the nation’s productive capacity, but to set it free.Īnother central theme is that this productive capacity rests on the division of labour and the accumulation of capital that it makes possible. Today, we would call it gross national product. Smith’s radical insight was that a nation’s wealth is really the stream of goods and services that it creates. The prevailing view was that gold and silver was wealth, and that countries should boost exports and resist imports in order to maximize this metal wealth. The first theme in The Wealth of Nations is that regulations on commerce are ill-founded and counter-productive.
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The Wealth of Nations Eamonn Butler's Condensed Wealth of Nations is available to download here.
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