Imagine being called the wrong name for 250 years. Basically the same thing that happened with Adam Smith’s paper. Everyone calls it “wealth of nations”, and, indeed, it is a reasonable abbreviation for those in the know or just for convenience. But for politicians and pundits, it turns rigorous intellectual research into a bumper sticker that misrepresents the actual content of the book.
This book was first published on March 9, 1776. Later that year, “a group of farmers” in the British American colonies came up with an idea of their own that fundamentally changed the world. It’s worth asking a simple question: “What did Smith actually write?”
The official title is “An Inquiry into the Nature and Causes of the Wealth of Nations.” Although it’s just a tidbit, the distinction between formal titles and abbreviations is more important than people realize.
First, let’s look at the word “inquiry”. Contrary to what many claim, Smith did not declare that markets and capitalism work in The Wealth of Nations. He was asking a genuine question. Why are some countries rich and others poor? Why are some countries becoming richer while others are stagnant or in decline? In fact, all of economics is fundamentally concerned with these questions, even if indirectly. Nobel Prize winner Bob Lucas once said: [economic development]it’s hard to think of anything else. ” This concern is also why Adam Smith is (correctly) called the “Father of Economics.”
Another example is the choice of the word “nature” in the title. Smith also asks the question, “What is wealth?”
Before Adam Smith, most people and governments believed that wealth was measured in money. After all, if having more money makes households richer, it stands to reason that having more money also makes countries richer. The goal is now clear. The idea is to fill the national treasury with gold (i.e. money), encourage exports so that other countries have to send gold to pay for their exports, and restrict imports so that other countries don’t have to send gold. This was the common sense of “mercantilism,” but it is nothing but the fallacy of composition.
Smith wisely pointed out the problems with the mercantilist understanding of wealth. Wealth is not about how much money you have. Wealth is access to goods and services that people want or need. It’s about the food we can buy and the coats we can wear. Money is only useful if you can exchange it with others for what you need. If Robinson Crusoe had washed ashore with $1 trillion in coins in his pocket, he would not have had such an easy life on his island.
After Smith reveals what wealth is (and is not), we are ready to understand its “causes”. If wealth is about access to goods and services, what increases wealth? Smith spells it out in the first chapter of this book: the division of labor. The pin factory that Smith uses to illustrate this is not just a glamorous example, it shows how wealth can be created by ordinary people doing specialized work. If we interrupt that process, value is destroyed rather than created.
But what causes the division of labor? For Smith, it’s easy. It’s an exchange. The voluntary, mutually beneficial, free interactions that occur when people are left to pursue their own interests. And in the right institutional environment, the interactions people have can be, to borrow his famous phrase, “guided by an invisible hand” toward the betterment of society, even if none of those engaging in such interactions intend to pursue the outcome.
“Inquiry into the nature and causes of national wealth” is a research program, not a slogan. Smith never declared that markets work. He investigates the conditions under which they occur (and do not occur). In the process, I provided one of the most important arguments in intellectual history. That is, wealth cannot be confiscated, commanded, or hoarded. Given the right institutional setting, it is produced by ordinary people engaging in normal transactions with each other and collectively building things that central planners cannot design or understand.
After 2500 years, its research program remains active. Many people, including policymakers, still confuse money with wealth, mistake the Treasury and the stock market for the economy, and believe that prosperity is created by restricting competition and rewarding favored industries. Smith diagnosed the problem with these beliefs in 1776.
Today, the need to read (and reread) Smith is greater than ever. Let’s start with the title.
