Is The Wealth of Nations outdated? This is the first reaction of many people, after all, it was completed in 1776.
Many people majoring in economics know that Western economics can be divided into microeconomics and macroeconomics according to different research objects. Macroeconomics is based on microeconomics, and the research of microeconomics is based on the assumption of economic man and perfectly competitive market, which is the core economic thought of Smith.
Therefore, The Wealth of Nations can be said to be the cornerstone of modern economics.
Some people believe that America's success stems from two things: the Declaration of Independence and the Wealth of Nations, both of which were published in the same year. They are considered America's "Declaration of Industrial Freedom" and have made an indelible contribution to America's economic and technological development.
Let’s talk about Smith himself first. His father died before Smith was born and he never married. He had strong analytical and extraordinary comprehensive abilities.
In November 1766, he began a six-year research project to write The Wealth of Nations. In 1773, the preliminary draft of The Wealth of Nations was completed. Out of a rigorous academic attitude, Smith spent another three years revising it. Finally, this masterpiece that took him nine years to complete was published on March 9, 1776.
Smith spent his entire life in his study, writing many books, but few of them were published. In order not to mislead future generations, he decided in his will to let his friends burn his manuscripts. Adam Smith was such a rigorous scholar, worthy of eternal respect from mankind.
Next, let’s take a look at the ideas in the book. The most important idea is:
Self-interested behavior improves the welfare of the entire society under the guidance of the "invisible hand"
The country should implement a laissez-faire economic policy so that each factor of production can play its maximum effect.
1. Self-interest is the basic motivation for people to engage in economic activities
Self-interest is the driving force of individual behavior. Everyone wants to gain more wealth with the least possible sacrifice.
Special Note:
The selfishness here refers to economic activities, and does not include love, marriage, children, family, studying, etc. Otherwise, it would be seriously inconsistent with the real society.
When Smith was alive, he was a professor of both moral philosophy and economics. His "economic man" was a person with flesh and blood, pursuing private interests, and being bound by morals.
2. On Division of Labor
The division of labor originally arose from this human tendency to exchange, and it enables the same number of workers to complete a much greater amount of work than before the division of labor.
Without the division of labor and cooperation among millions of workers, even an ordinary person in a civilized society would not be able to obtain the necessities of life to meet his minimum living standard.
The degree of sophistication of the division of labor is determined by the size of the market.
3. On price
Smith created the concept of "natural price", which refers to the price composed of rent, wages, and profits, that is, the price consistent with the production cost of the commodity.
The market price refers to the actual selling price of a commodity. The market price usually fluctuates around the natural price and is affected by market supply and demand.
Smith's research on natural prices and market prices laid the foundation for the price theory of modern economics.
4. Introduction to Physiocracy
The Physiocrats, represented by French economist Quesnay, only regarded agriculture as "productive" on the grounds that land was the only source of wealth, industry only processed the raw materials of agricultural production and only changed the form of material wealth, and commerce only engaged in circulation. None of them could increase the amount of material wealth and therefore all belonged to the category of "unproductive".
This view is certainly biased, so physiocracy only has the support of a few people.
5. Introduction to Mercantilism (Trade Protectionism)
Mercantilism believes that only foreign trade is the real source of national wealth, and the principle of foreign trade should be "buy less and sell more."
Mercantilism regards international trade as a zero-sum game, believing that what one country gains will inevitably be lost by another country. Countries will try every means to expand exports, restrict imports, exchange foreign currencies, and expand their own currencies. They strive to protect their own economic interests in international exchanges and are always committed to maximizing national interests.
Countries often retaliate against each other in this way.
6. Criticism of Physiocratism, Mercantilism and Trade Monopoly (Important)
Although Smith also opposed the views of the Physiocrats, his criticism of mercantilism took up eight times as much space as that of the Physiocrats.
Smith refuted the mercantilism's one-sided emphasis on the importance of the state's large reserves of gold coins, and also denied the physiocracy's view of land as the only source of all social wealth.
He believes that trade protectionism leads to a reduction in the country's total income, protects the interests of producers and harms the interests of consumers, and protects one industry and harms other industries.
Monopoly trade protects the interests of a small class but harms the interests of the majority.
If a product is more expensive to produce than to buy from others, then it should not be produced by oneself, but should be exchanged. The same should be true between countries. Different countries have different natural conditions and geographical factors, as well as acquired favorable conditions, which provide the basis for international division of labor.
Unrestricted trade between two places under natural and normal circumstances will inevitably benefit both places, although the degree of benefit may not be the same.
Smith advocated that the state should allow every law-abiding person to obtain benefits in his or her own way and participate in social competition in a completely free manner.
He believes that free trade has the following benefits:
Trade makes everyone better off; the larger economic pie can be used to improve everyone’s situation, allowing all countries to achieve greater prosperity.
Trade allows individuals/countries to specialize in what they do best and to have access to a wider variety of goods and services.
Free competition will inevitably lead to a drop in commodity prices, thus benefiting ordinary people.
7. How does the market economy (invisible hand) automatically adjust? (Important)
Personal interests and the pursuit of wealth usually lead them to invest capital in industries that are most beneficial to society.
But if this natural tendency causes them to invest too much capital in this industry, then the profits of this industry will definitely decline, and the profits of various other industries will definitely increase.
This will immediately lead them to change this unreasonable distribution. Without the intervention of the law, personal interests and the pursuit of wealth will lead people to distribute the capital of society to all different industries in the country as much as possible according to the most reasonable proportion for social interests.
8. Research on national wealth
The annual product of national labor depends on labor productivity and the proportion of the population producing.
To judge the true wealth of a nation, we should not look at its total income but at its net income.
Labor can compare the value of different commodities at any time and place. It is the only measure of the true value of commodities. Labor is the real price of commodities, and money is only the nominal price of commodities.
Labor that is invested in the object of labor and can increase its value is called productive labor; if it cannot increase value, it is called unproductive labor.
Investing in productive labor is more conducive to capital accumulation and the growth of national wealth, such as agriculture, manufacturing, international trade, fixed assets, and durable goods.
Tip: Smith's theory of focusing on production and savings was later criticized by many people. They believed that:
In order for production to continue, a country that already has huge production capacity must maintain a group of non-productive consumers to provide sufficient effective demand; unproductive labor can also be useful.
9. On Taxation
Four principles of taxation:
1. Fairness: citizens must pay taxes in proportion to their income.
2. The taxes that citizens should pay must be determined and cannot be changed at will. This includes the amount, date, and method of tax payment.
According to the experience of many countries, if taxes are unequal, the harm to the people will be less, but if taxes are uncertain, the harm to the people will be very great.
3. Convenience. The payment date and method of various taxes should be based on the greatest convenience of taxpayers.
4. The collection of all taxes must ensure that the amount of taxes paid by the people is equal to the amount of taxes on national revenue.
Maintaining national security, judicial administration, and national education is in the interests of all people, so their costs should be shared by all people. Transportation ensures the smooth flow of trade, and its beneficiaries are merchants and consumers, so its costs are paid by commercial profits, that is, tolls or customs duties.
10. Obligations of the Monarch/State
Smith believed that the monarch/state had only three obligations:
1. To protect the country from being invaded by other independent countries.
2. Establish a strict and fair judicial administrative agency to protect everyone in society from being bullied or persecuted as much as possible.
3. Build and maintain certain public utilities and facilities
Of course, no work is perfect. Some chapters in The Wealth of Nations contain a large amount of contemporary factual discussions and off-topic material, which makes some parts somewhat redundant and difficult for contemporary readers to read. However, this does not affect people's understanding of Smith's economic thoughts, nor does it affect the fact that The Wealth of Nations is a book that has influenced the course of the world.
