WEALTH OF NATIONS

WEALTH OF NATIONS

WRITTEN BY

Adam Smith

An Inquiry into the Nature and Causes of the Wealth of Nations

An Inquiry into the Nature and Causes of the Wealth of Nations

• Generally referred as The Wealth of Nations,

• Magnum Opus of the Scottish economist and moral philosopher

•  Adam Smith.

• First published in 9TH March 1776,

• Offers one of the world's first collected descriptions of

• What builds nations'

wealth• Today a fundamental work

in classical economics.

• The Wealth of Nations represented a land mark in the field of economics,

• Similar to • Sir Isaac Newton's • “Principia

Mathematica ” for physics,

• or Charles Darwin's • “On the Origin

Species ”• for biology.

• Smith fervently explain that• Individuals are fully

capable of• Setting and regulating

prices for their own goods and services.

• He argued passionately in favour of free trade

• The Wealth of Nations provided the

• description of the • workings of a market economy

Book I:Book I:

Of the Causes of Improvement in the productive Powers of Labour

1. Of the Division of Labour

1. Of the Division of Labour

:•  Division of labour has caused a

greater increase in production than any other factor.

• This diversification is greatest for nations with more industry and improvement

• Agriculture is less docile than industry to division of labour;

• So rich nations are not so far ahead of poor nations in agriculture as in industry.

2. Of the Principle which gives Occasion to the Division of Labour:

2. Of the Principle which gives Occasion to the Division of Labour:

• Division of labour arises not from innate wisdom,

• but from humans' propensity to barter.

• The apparent difference in natural talents between people is a result of specialisation, rather than any innate cause.

That the Division of Labour is Limited by the Extent of the Market:

• Limited opportunity for exchange discourages division of labour.

• Since "water-carriage" extends the market,

• Division of labour, comes earliest to cities near waterways.

3. Of the Origin and Use of Money 

3. Of the Origin and Use of Money 

• With division of labour, the produce of one's own labour can fill only a small part of one's needs.

• Different commodities have served as a common medium of exchange, but all nations have finally settled on metals, which are durable and divisible, for this purpose.

• The quantity of real metal in coins has diminished.

4. Of the Real and Nominal Price of Commodities,

or

5. of their Price in Labour, and their Price in Money

The real price of every thing,"

costs to the man who wants to acquire

- is the trouble of acquiring it.

worth to the man who has acquired it, and who wants to dispose of it, or exchange it for something else,

-is trouble which it can save to himself, and which it can impose upon other people.

That this is really the foundation of the exchangeable value of all things,

excepting those which cannot be increased by human industry,

- is a doctrine of the utmost importance in political economy

• The value of any commodity …

• is equal to the quantity of labour

• which it enables him to purchase or command.

• Labour, therefore, is the real measure of the exchangeable value of all commodities.

6. Of the Natural and Market Price of Commodities

6. Of the Natural and Market Price of Commodities

• "When the quantity of any commodity which is brought to market falls short of the effectual demand,

• all those who are willing to pay... • cannot be supplied with the

quantity which they want... • Some of them will be willing to

give more.• market price will rise...• When the quantity brought to

market exceeds the effectual demand,

• it cannot be all sold to those who are willing to

• The market price will sink

7. Of the Wages of Labour

• When labourers bid against• one another for limited

opportunities for employment, • the wages of labour

collectively fall,• whereas when employers

compete against one another for limited supplies of labour,

• the wages of labour collectively rise.

• However, this process of competition is often circumvented by combinations

• among labourers • and among masters.• When labourers combine

and no longer bid against one another,

• their wages rise, • whereas when masters

combine, wages fall. • In Smith's era,

organised labour was dealt with very harshly by the law.

Book II:Book II:

Of the Nature, Accumulation, and

Employment of Stock

8. of the Accumulation of Capital,

or of Productive and

Unproductive Labour

8. of the Accumulation of Capital,

or of Productive and

Unproductive Labour

• "One sort of labour adds to the value of the subject upon which it is bestowed:- productive;

• there is another which has no such effect –

• unproductive labour. • Thus the labour of a

manufacturer adds, generally, • to the value of the

materials which he works upon,

• that of his own maintenance, and of his master's profit.

• The labour of a menial servant,

• adds to the value of nothing.

Book IV:Book IV:

Of Systems of political Economy

9. Of the Principle of the Commercial or

10. Mercantile System:

•  synthesis of the emerging economic thinking of Smith's time.

• Two major tenets of mercantilism:

• Protectionist  tariffs • serve the economic

interests of a nation • large reserves of gold

bullion or other precious metals

• are necessary for a country's economic success.

11. Of the Motives for establishing new Colonies

11. Of the Motives for establishing new Colonies

12.Causes of Prosperity of new Colonies

12.Causes of Prosperity of new Colonies

13.Conclusion of the Mercantile System

13.Conclusion of the Mercantile System

•  Smith's argument about the international political economy opposed the idea of Mercantilism.

• While the Mercantile System encouraged each country to hoard gold,

• while trying to grasp hegemony,

• Smith argued that free trade eventually makes all actors better off.

• This argument is the modern

'Free Trade' argument.

14.Of the Agricultural Systems

14.Of the Agricultural Systems

•  That system which represents the produce of land

• as the sole source of the revenue and wealth of every country has,

• so far as by that time, • never been adopted by any

nation,

Conclusion Conclusion

•  Smith’s classical message is what he states at the very beginning:

• the two ways to create the

“Wealth of Nations”. • First, make productive

labour even more productive by enhancing markets to deepen the division of labour

• and second, • use more labour

productively instead of unproductively,

• i.e., produce more goods and services that are inputs to the next economic reproduction circle,

• as opposed to goods used up in final consumption

• In the words of Adam Smith

• The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes … .

• For neoclassical economists Smith’s central message is

• Invisible hand•  OR self-regulating

behavior of the marketplace