Happy birthday, Wealth of Nations!

Today — as you will note from The Times Court Circular, no less — is the anniversary of the 1776 publication of Adam Smith’s The Wealth of Nations. It is, as Leo Rosten wrote of it, a “clumsy sprawling, elephantine book”. It’s over-packed with facts, a tenth of it (70 pages!) is a “digression” on the price of silver, its range is vast and its pace is glacial.

And yet, it is one of humanity’s most towering achievements. Today’s anniversary marks the day when modern economics was born.

Remember that when Smith was writing, economic life was nothing like today. There were different weights, measures and even currencies in circulation in different parts of the country. Lending money at more than the approved rate was a criminal offence, even if borrowers were willing. Business was regarded as vulgar and driven by greed. Guilds of manufacturers limited entry to their professions and petitioned the monarch for monopolies and other privileges. Not wealth, but poverty, was regarded as the natural state of most of the nation. Countries subsidised their exports and put tariffs on imports in order to boost their accumulation of gold and silver.

It was into this world that Smith threw The Wealth of Nations. It’s a grand academic treatise, of course. But it was also a polemic. It debunked this trading mercantilism. It argued that regulations and taxes were very convenient instruments which business people could use — and, with the agreement of governments, did use — to keep out competition and keep prices high. But the best arrangement for the great bulk of the population, the working poor, said Smith, would be to sweep all that away and rely on the ”system of natural liberty”.

Just open The Wealth of Nations and stare at the first three paragraphs. He opens by saying that the wealth of a nation is — not the gold and silver in its coffers, but — the productive capacity of its people. Astonishing! In his first sentence, he’s identified GDP, the measure we still use to judge countries’ wealth today. A few lines later he points out that this measure depends of course on how many people there are. That’s it — he’s got the idea of GDP per capita. Then he points out that it also depends on how many people are working and how many are too young or too old to work and suchlike. So that’s the idea of productivity. And we’re not even off the first page yet.

Smith goes on to explain how both sides benefit from trade, not just sellers. That was pretty radical too. The sellers get cash, but the buyers get goods that they value more than the price. What makes a country rich is not the gold in its vaults, but its vibrant trade and commerce. Wealth came from liberating commerce, not restricting it.

The division of labour made free commerce even more productive. Specialist producers can be thousands of times more productive than amateurs. They can produce more than they need, selling their surpluses to buy capital equipment that makes them more productive still. They do this for their own ends, but their actions benefit everyone:

“Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”

This commerce automatically steers resources to where they are needed. Where things are scarce, consumers will pay more, so suppliers produce more. When there is a glut, prices fall and producers switch their effort into more profitable lines. 

So there you have it. The book that changed our view of economic life in a fundamental and surprisingly modern way. Happy birthday, Wealth of Nations!