Adam Smith’s ‘Wealth of Nations’ has valuable lessons for eternity

Adam Smith was born in the tiny Scottish town of Kircaldy around 300 years ago. (Photo: iStockphoto)
Adam Smith was born in the tiny Scottish town of Kircaldy around 300 years ago. (Photo: iStockphoto)


His insights in this all-time epic on human effort, division of labour and free markets are relevant even after three centuries

Next month marks the tricentenary of a writer whose impact is felt even today. Adam Smith was born in the tiny Scottish town of Kircaldy around 300 years ago. His exact birth date is not known. Smith was baptized on 5 June 1723 in a local church. He was kidnapped by a band of gypsies when he was four but was returned to his family soon after. A biographer later noted that the absent-minded Smith would have made a poor gypsy. He died in Edinburgh in 1790.

Encapsulating the wide sweep of Smithian thinking within the narrow confines of a newspaper column is almost doomed to fail. Yet, it is worth a shot given the tricentenary year that lies ahead. This column takes up three key insights from his magnum opus that was published in 1776, An Inquiry Into The Nature And Causes Of The Wealth of Nations. Emma Rothschild and Amartya Sen have described it as the greatest book ever written on economic life.

First, prosperity emerges from human effort rather than the natural bounties of the soil or the stock of precious metals accumulated in a state treasury through trade surpluses. Human beings are unlike other animals. They have a natural inclination to trade with each other, and the institutions that promote such commercial exchange are key to the wealth of nations. The examples Smith provides in one of the most celebrated passages in his book are the butcher, the brewer and the maker, or ordinary folk rather than the feudal lords and royals who were so powerful in his times.

Second, human effort creates prosperity when people can specialize in select tasks, or what Smith called the division of labour. However, division of labour is limited by the size of the market. The scope for specialization—and hence productivity growth—is higher when you have a bigger market for your wares. Smith was thus a strong votary of free trade between people, between regions and between countries. Trade is not a zero-sum mercantilist game. It is perhaps not an accident that Smith wrote about the wealth of nations in plural rather than the wealth of a particular nation.

Third, a commercial society that is powered by human effort rather than government design brings along something more than just economic development. The Smithian vision was panoramic. “Commerce and manufactures gradually introduced order and good government, and with them, the liberty and security of individuals … who had before lived in a continual state of war with their neighbours, and on servile dependency on their superiors," Smith wrote at the very end of the third part of his magnum opus. “This … is by far the most important of all their effects".

In a series of lectures delivered in 2015, philosopher Elizabeth Anderson begins by noting that the idea of a free-market society was once the cause of egalitarians—who she defines as those who promote a society in which people interact as equals. It was this very same egalitarian vision that made Smith write about the common humanity of the street porter and the philosopher, campaign against the pernicious institution of slavery, and launch a scathing attack on what the East India Company was doing in Bengal. He described its twin roles as a merchant as well as a ruler as a “strange absurdity"—and one that meant that the East India Company would be good at neither task.

Modern economists have mathematically established that competitive markets ensure the most efficient allocation of resources (or, more specifically, Pareto optimality). The first of the two fundamental theorems of welfare economics says that this holds true under stringent conditions—complete markets, complete information, no externalities, no market power, no transaction costs. The real economy we live in has several of these frictions as core features.

Smith wrote during the dawn of the Industrial Revolution in Western Europe, so his optimism about the new society that was emerging was in stark contrast to many contemporaries who wanted to rewind back to the stability of the feudal age. He was not blind to the downsides, however. Smith wrote about the dangers of corporate collusion against consumers, the effects of the narrow division of labour on human fulfilment, the need for a government role in some activities such as education and public works, and the many drawbacks of commercial society such as the pursuit of fleeting pleasures. His point was not that commercial society was perfect, but that it was far better than all known alternatives.

Smith can be interpreted in many ways, as is the case with most great thinkers who wrote for their times but also left behind lessons for eternity. The best way to engage with any of them is to read their own words in the original, even if it is by just dipping into their books to get a feel of what they want to say. That is true with Smith as well. The Wealth of Nations is like a varied mosaic: Sharp, rambling, witty, sardonic, serious, modern, quaint—all in quick succession—but always insightful.

Niranjan Rajadhyaksha is CEO and senior fellow at Artha India Research Advisors, and a member of the academic advisory board of the Meghnad Desai Academy of Economics.

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