Two documents issued in 1776 were to have a major and lasting impact upon the world. One was the American Declaration of Independence, and the other, published on March 9th of that year, was “An Enquiry into the Nature and Causes of the Wealth of Nations,” by Adam Smith. Normally shortened to “The Wealth of Nations,” it was the book that began the modern study of economics.
Before Smith’s book many people thought (and some still do) that nations became rich by exporting, and by selling more abroad than they bought from abroad. Mercantilism taught that this accumulation of balances was the cause of wealth, and that it was in a nation’s interest to practise protectionism, to give its own goods preference by subsidies and by tariff barriers against foreign goods.
One of Smith’s many insights was that nations become rich by specialization, trade and exchange. Yes, we could grow grapes on Ben Nevis, “by means of glasses, hotbeds, and hotwalls,” and we could make wine from them, at 30 times the cost of an equivalent French wine. But why should we? Let the French specialize, buy their wine at 1 unit, and keep the other 29 units in our pocket. It makes us richer. Tariffs make us poorer by causing us to pay more for our goods.
Smith also observed that people do not need to be good in order to benefit others. Their regard for themselves leads them to make and sell us goods that enrich our lives.
“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”
We could all produce our own meat, beer and bread, but we do better if we buy from those who specialize, and make ourselves richer by accessing their specialist skills.
Smith’s pin factory employs 10 men who produce 48,000 pins per day, each specializing in one of the processes involved in pin making. If ten workers did every step themselves, they could each produce perhaps 10 or 20 pins per day. Specialization makes each worker 240 times as productive, and makes pins cheaper for those who buy them. The same process in other industries increases productivity and powers prices.
“The Wealth of Nations” was timely, coming in the early stages of Britain’s Industrial Revolution. Its ideas influenced legislators, and persuaded them to lower tariffs and trade more freely. This has created unparalleled and unprecedented wealth, wealth that has funded medicine, sanitation, and more abundant food, giving us longer life-spans and an improved quality of life. Yes, it was indeed a book that changed the world.