The wealth of nations adams smith

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In 1778, Smith moved to Edinburgh to accept an
appointment as Commissioner of Customs for
Scotland.
He died on July 17, 1790, leaving instructions to
burn his unfinished manuscripts. One exception
was the Essays on Philosophical Subjects, which was
published posthumously in 1795. This work
contains a number of Smith’s important articles
on science, the arts, and metaphysics.

“For me perhaps the most compelling reason why The
Wealth of Nations is still relevant today is that to read it is to
invite inspiration – a precious commodity in any age.”
George Osborne, MP

This edition, based on the classic Cannan version of the text, includes a foreword
by George Osborne MP and an introduction by Jonathan B. Wight, University
of Richmond, which aims to place the work in a business context. Wight also
provides an invaluable ‘Notable Quotes’ section where he extracts and
categorises some of the most famous and pertinent sections of Smith’s work.
This classic work is as essential today as it was when it first written.

www.harriman-house.com/wealthofnations

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Harriman House Publishing

Notable quotes

On the division of labour:
“The greatest improvement in the
productive powers of labour, and the greater
part of the skill, dexterity, and judgment with
which it is any where directed, or applied,
seem to have been the effects of the division
of labour.”
On the role of profit:
“It is the stock that is employed for the sake
of profit, which puts into motion the greater
part of the useful labour of every society.
The plans and projects of the employers of
stock regulate and direct all the most
important operations of labour, and profit is
the end proposed by all those plans and
projects.”

Wealth Nations

The

of

Adam Smith

On international trade:
“It is the maxim of every prudent master of
a family, never to attempt to make at home
what it will cost him more to make than to
buy.... What is prudence in the conduct of
every private family, can scarce be folly in
that of a great kingdom.”

Adam Smith

In 1767, Smith received a life pension from the
Duke and returned to Kirkcaldy. Inspired by the
French reformers he had met, Smith began to
develop his Glasgow economics lectures into a
book on commerce. Intellectuals greeted the book
with acclaim, but British legislators were not
swayed. The Wealth of Nations did give comfort to
the colonial revolutionaries, however, as attested
by the number of America’s founding fathers who
bought it for their libraries.

Smith wrote, "It is the industry which is carried on for the benefit of the rich and
the powerful that is principally encouraged by our mercantile system. That which
is carried on for the benefit of the poor and the indigent is too often either
neglected or oppressed."

of

While modern readers may know of Adam Smith
because of The Wealth of Nations, his early renown
during his life came from The Theory of Moral
Sentiments (1759), a book that addresses the ethical
foundations of human society. Based on the
reputation of this work, Smith was offered a
position as tutor to the stepson of Lord Charles
Townshend, the Duke of Buccleuch. This
afforded him the opportunity to travel to Europe
for several years, where he met the leaders of the
Enlightenment movement.

Smith's message was that economic exploitation, through the monopoly trade of
empire, stifled wealth-creation in both home and foreign lands. Moreover,
protectionism preserved the status quo, and privileged a few elites at the expense
of long run growth.

Wealth Nations

Adam Smith was born in June 1723 in Kirkcaldy,
Scotland. He studied at the University of
Glasgow, graduating in 1740 and then went on to
Balliol College, Oxford. In 1751, Smith was
elected a professor at the University of Glasgow,
and the following year accepted its Chair of
Moral Philosophy. Smith’s course included
lectures on natural religion, ethics, jurisprudence,
and political economy (the latter providing the
future foundation for The Wealth of Nations).

The Wealth of Nations is a treasured classic of political economy. First published in
March of 1776, Adam Smith wrote the book to influence a special audience –
the British Parliament – and its arguments in the early spring of that year pressed
for peace and cooperation with Britain's colonies rather than war.

The

Adam Smith

Harriman House

ISBN 9781905641260

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An Inquiry into
the Nature and Causes of

The Wealth of Nations
BY

ADAM SMITH


HARRIMAN HOUSE LTD
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Petersfield

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GU32 2EW
Tel: +44 (0)1730 233870
Fax: +44 (0)1730 233880

Originally published in 1776.
This edition published by Harriman House, 2007
© Harriman House Ltd.
ISBN: 1-9056-4126-5

ISBN 13: 978-1905641-26-0

British Library Cataloguing in Publication Data

A CIP catalogue record for this book can be obtained from the British Library.
All rights reserved; no part of this publication may be reproduced, stored
in a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise without the prior written

permission of the Publisher. This book may not be lent, resold, hired out or
otherwise disposed of by way of trade in any form of binding or cover other than
that in which it is published without the prior written consent of the Publisher.
Printed and bound in Great Britain by the CPI Group ‘Bath Press’,

No responsibility for loss occasioned to any person or corporate body
acting or refraining to act as a result of reading material in this book can
be accepted by the Publisher or by the Author.


Contents

Foreword by George Osborne, MP

ix

Editor’s Introduction by Jonathan B.Wight, University of Richmond

xi

Notes on the Text

xix

Notable Quotes from The Wealth of Nations

xxi

Introduction and Plan of the Work

xxxix

Contents to The Wealth of Nations
Book I
Of the Causes of Improvement in the Productive Powers of Labour, and of
the Order According to Which its Produce is Naturally Distributed Among
the Different Ranks of the People.
CHAPTER I
Of the Division of Labour

3
CHAPTER II

Of the Principle which goves Occasion to the Division of Labour

9

CHAPTER III
That the Division of labour is Limited by the Extent of the Market

12

CHAPTER IV
Of the Origin and Use of Money

15
CHAPTER V

Of the Real and Nominal Price of Commodities, or of their Price in Labour,
and their Price in Money

20

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The Wealth of Nations

CHAPTER VI
Of the Component parts of the Price of Commodities

31

CHAPTER VII
Of the Natural and Market Price of Commodities

36

CHAPTER VIII
Of the Wages of Labour

43
CHAPTER IX

Of the Profits of Stock

58
CHAPTER X

Of Wages and Profit in the Different Employments of Labour and Stock

65

PART I – Inequalities arising from the nature of the employments themselves

65

PART II – Inequalities occasioned by the Policy of Europe

78

CHAPTER XI
Of the Rent of Land

94

PART I – Of the Produce of Land which always affords Rent

95

PART II – Of the Produce of Land, which sometimes does,
and sometimes does not, afford Rent

105

PART III – Of the variations in the Proportion between the respective Values
of that sort of Produce which always affords Rent, and of that which sometimes
does, and sometimes does not, afford Rent

114

FIRST PERIOD

115

SECOND PERIOD

124

THIRD PERIOD

125

CONCLUSION of the CHAPTER

161

PRICES OF WHEAT

163

iv


Contents

Book II
Of the Nature, Accululation, and Employment of Stock
Introduction

175
CHAPTER I

Of the Division of Stock

177
CHAPTER II

Of Money, Considered as a Particular Branch of theGeneral Stock
of the Society, or of the Expense of Maintaining the National Capital

182

CHAPTER III
Of the Accumulation of Capital, or of Productive and
Unproductive Labour

212

CHAPTER IV
Of Stock Lent at Interest

225
CHAPTER V

Of the Different Employment of Capitals

231

Book III

Of the Different Progress of Opulence in Different Nations
CHAPTER I
Of the Natural Progress of Opulence

245
CHAPTER II

Of the Discouragement of Agriculture in the Ancient State of Europe,
after the Fall of the Roman Empire

249

CHAPTER III
Of the Rise and Progress of Cities and Towns, after the Fall of
the Roman Empire

257

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The Wealth of Nations

CHAPTER IV
How the Commerce of the Towns Contributed to the
Improvement of the country

264

Book IV

Of Systems of Political Economy
Introduction

275
CHAPTER I

Of the Principle of the Commercial or Mercantile System

276

CHAPTER II
Of Restraints upon the Importation from Foreign Countries of such
Goods can be Produced at Home

291

CHAPTER III
Of the extraordinary Restraints upon the Importation of Goods of
almost all Kinds, from those Countries with which the Balance is
supposed to be Disadvantageous

304

PART I – Of the Unreasonableness of those Restraints, even upon the
Principles of the Commercial System

304

PART II – Of the Unreasonableness of those extraordinary
Restraints, upon other Principles

314

CHAPTER IV
Of Drawbacks

322
CHAPTER V

Of Bounties

326
CHAPTER VI

Of Treaties of Commerce

351

PART. I

352

PART. II

352

PART. III

352

vi


Contents

CHAPTER VII
Of Colonies

359

PART I – Of the Motives for Establishing New Colonies

359

PART II – Causes of the Prosperity of New Colonies

365

PART III – Of the Advantages which Europe has derived From
the Discovery of America, and from that of a Passage to the East
Indies by the Cape of Good Hope

381

CHAPTER VIII
Conclusion of the Mercantile System

415
CHAPTER IX

Of the Agricultural Systems, or of those Systems of Political Economy
which Represent the Produce of Land, as either the Sole or the Principle
Source of the Revenue and Wealth of Every Country

428

Appendix to Book IV

445

Book V
Of the Revenue of the Sovereign or Commonwealth
CHAPTER I
Of the Expenses of the Sovereign or Commonwealth

451

PART I – Of the Expense of Defence

451

PART II – Of the Expense of Justice

462

PART III – Of the Expense of public Works and public Institutions

470

ARTICLE I – Of the public Works and Institutions for facilitating

the Commerce of the Society, And, first, of those which are necessary
for facilitating Commerce in general

471

ARTICLE II – Of the Expense of the Institution for the Education of Youth

493

ARTICLE III – Of the Expense of the Institutions for the Instruction
of People of all Ages

510

PART IV – Of the Expense of supporting the Dignity of the Sovereign

527

CONCLUSION

528

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The Wealth of Nations

CHAPTER II
Of the Sources of the General or Public Revenue of the Society

530

PART I – Of the Funds, or Sources, of Revenue, which may peculiarly
belong to the Sovereign or Commonwealth

530

PART II – Of Taxes

535

ARTICLE I – Taxes upon Rent — Taxes upon the Rent of Land

537

ARTICLE II – Taxes upon Profit, or upon the Revenue arising from Stock

550

APPENDIX TO ARTICLES I AND II – Taxes upon the Capital Value of
Lands, Houses, and Stock

558

ARTICLE III – Taxes upon the Wages of Labour

562

ARTICLE IV – Taxes which it is intended should fall indifferently
upon every different Species of Revenue

564

CHAPTER III
Of Public Debts

592

INDEX

621

viii


Foreword
What can The Wealth of Nations teach us today?

After all, it was written at the very beginning of the industrial age, in a world where
agriculture was the dominant industry and where information travelled only as quickly as
the fastest horse or the swiftest sailing boat. How, you may ask, can a work about the
economics of that age be relevant to today’s post-industrial world, where capitals flows
around the world at the touch of a button and where communication travels at the speed of
light?

Yet The Wealth of Nations tells us as much about the world we live in today as the world in
which it was written. Adam Smith’s genius was to address the eternal questions: how to
increase the wealth of nations and how to improve the prosperity of peoples all over the
world.

His answers were universal too. He recognised that it is the freedom to trade and compete
that promotes individual interests and which also generates the wealth of nations. The truth
of this insight has been borne out by over two centuries of evidence - countries that suppress
individuals’ freedoms and curtail the operation of the free market are typically much poorer
than those that have followed the advice of Adam Smith.
Adam Smith understood that in a market system, self-interest also serves the wider public
interest. Giving individuals the freedom to engage in voluntary economic interaction could
advance the wider interests of society. People work to earn money - which after all, serves
their own rational self-interest. But in a competitive market, earning money means
providing something that others value. And thus society as a whole benefits from private
enterprise. As Adam Smith memorably put it:
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. (pp. 9-10)

Even today, this advice is ignored. The response of too many to globalisation is to erect
trade barriers, pass new employment protection laws and try to shut out the market. They
should listen to the teachings of The Wealth of Nations, which show us that openness to
trade benefits all the parties involved - not just the side that currently enjoys a competitive
edge. As we fight to abolish Western agricultural subsidies, combat economic nationalism
in Europe and battle against higher taxation and regulation at home, Smith’s lucid defence
of free trade and competition are as powerful as ever.
Of course, Adam Smith was no utopian. He was keenly aware of the limitations of the
“invisible hand” – and therefore understood that effective institutional infrastructure is
required to ensure the operation of a free and fair market. Unfettered markets tended
towards monopoly, he wrote, and so proportionate government action is needed to create a
clear and stable framework that enables free competition to take place. Getting that balance

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The Wealth of Nations

right remains as important in the age of the software giants as it was in the age of the cotton
kings.

For me, however, perhaps the most compelling reason why The Wealth of Nations is still
relevant today is that to read it is to invite inspiration – a precious commodity in any age.
Inspiration to continue Adam Smith's battle for free and open markets.

Inspiration to develop solutions and policies that increase individual freedoms.

And inspiration to implement policies that increase the wealth of nations and peoples the
world over.
George Osborne, MP

x


Introduction
The Wealth of Nations is a treasured classic of political economy. First published in March
of 1776, Adam Smith wrote the book to influence a special audience—the British
Parliament—and its arguments in the early spring of that year pressed for peace and cooperation with Britain’s colonies rather than war. Smith’s message was that economic
exploitation, through the monopoly trade of empire, stifled wealth-creation in both home
and foreign lands. Moreover, protectionism preserved the status quo, and privileged a few
elites at the expense of long run growth. Smith wrote, “It is the industry which is carried on
for the benefit of the rich and the powerful that is principally encouraged by our mercantile
system. That which is carried on for the benefit of the poor and the indigent is too often
either neglected or oppressed.”
Smith was a Scottish reformer whose sympathies lay with downtrodden working people.
The Wealth of Nations was a polemic on the basic rights of human beings to improve their

material lives in ways that promoted freedom and dignity. Smith wrote:
To prohibit a great people, however, from making all that they can of every
part of their own produce, or from employing their stock and industry in the
way that they judge most advantageous to themselves, is a manifest violation of the most sacred rights of mankind. (p. 372)
Smith had an inspired vision: that allowing the common person the freedom to express himself through market activities would unleash a creativity and ingenuity that would stun the
legislators. Indeed, various countries have tried this experiment, notably China. While millions of peasants starved to death in the misnamed “Great Leap Forward” of central planning in the early 1960s, the loosening of state controls after 1978 triggered a surge of output in small private plots. Likewise in India after liberal reforms began in 1991, output and
wealth-creation soared. More mundanely, the freedom to create and trade via the internet
has generated a flood of start-up businesses, non-profit organizations, and blogs for people
seeking merely to express themselves.

Yet we should quickly (and wisely) note that wealth creation is not Smith’s only, or even
ultimate, objective. Humans—in Smith’s mind—are not the grubby creatures of homo economicus often depicted in economics textbooks. Rather, humans make complex choices
within social groups. A community of people pursuing their own good must grapple with
the meaning of justice; they must promote institutions of self control so their self interest
does not degenerate into selfishness. In his writings, Smith develops at length his conception of how ethical deliberation arises in a good society.
Readers of this book may be surprised to discover that Smith anticipated and shared many
concerns about capitalism (although his term for it was “commercial society”). He worried
about the power that big corporations could have in conspiring to create cartels. He noted

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The Wealth of Nations

that investments vital to the public interest might not be undertaken if profit were the only
motive. He did not think the market system was perfect; it needed reasonable regulation to
ensure the public safety and well being. Nevertheless, Smith defended markets because he
thought they were generally the most reliable mechanism for lifting people out of poverty.
Thus, he levelled some of his harshest criticisms at employers whose constant aim seemed
to be to depress the wages of workers. By contrast, Smith advocated paying workers higher

wages to promote better health and productivity, and he also supported a system of joint
public-private education to prevent repetitive labour from degrading workers’ human capital.

While Smith was cynical about the motives for state intervention, he acknowledged a legitimate role for government when private interests diverged significantly from the public’s
interest. Generally, however, Smith believed that a “great society” would flourish best in a
“system of natural liberty” in which government focused on executing three duties of great
importance—namely, providing for the national defence, establishing a fair system of justice, and carrying out public works.
Some current critics of globalisation claim that exploitation lies at the heart of exchange
between rich and poor countries. The Wealth of Nations attacks colonialism and mercantilism on these grounds. Smith presents a vision of economic development from the bottomup, with competitive markets providing the means by which the working poor around the
world can improve their skills and living standards. To Smith, concern for people on the low
rung of the economic ladder requires not platitudes and handouts, but pragmatic action to
break down local systems of exploitation that arise from monopoly. Giving people the
opportunity to succeed develops self respect rather than numbing dependency.
We turn to a discussion of Smith’s life, his other major works, some key concepts, and the
contents of the book.

Life and works

Adam Smith was born in June 1723 in the fishing village of Kirkcaldy, Scotland, a few
months after his father’s death. His widowed mother raised him alone and saw that he
received an excellent primary education. He pursued further studies at the University of
Glasgow, graduating in 1740 under the tutelage of the noted moral philosopher Frances
Hutchinson. Preparing for a life in the ministry, Smith travelled to Balliol College, Oxford,
to start the period that would rank as the lowest point of his life. Not only were Scots discriminated against in England during this time of rising political and religious passions, but
Smith’s tutors were narrow-minded and lazy. Smith later castigated Oxford and its faculty
(see the Notable Quotes appendix).

After completing his degree, Smith abandoned the ministry and returned to live with his
mother in Kirkcaldy. He continued his studies and after a few years made his way to nearby
Edinburgh where his entrepreneurial spirit manifested itself in a series of public lectures on

rhetoric and other topics for fee. Smith enjoyed a growing reputation that led to his friendship with David Hume, who became his closest friend. In 1751 Smith was elected professor of Logic and Rhetoric at the University of Glasgow, and the following year he accepted

xii


Introduction

its Chair of Moral Philosophy. Smith’s course in moral philosophy included lectures on natural religion, ethics, jurisprudence, and political economy (the latter providing the future
foundation for The Wealth of Nations). Smith rose to the rank of vice-rector (or provost).
These thirteen years as an academic were to be the happiest and most productive of his life.
While modern readers may know of Adam Smith because of The Wealth of Nations, his
early renown during his life came from The Theory of Moral Sentiments (1759), a book that
addresses the ethical foundations of human society. The work provides the core of Smith’s
moral philosophy, and its understanding is essential for discerning some of Smith’s economic ideas. The book sold well, leading Hume to quip that this “melancholy” news could
only mean the book must be of dubious quality! Based on the reputation of this work, Smith
was offered a position as tutor to the stepson of Lord Charles Townshend, the Duke of
Buccleuch. This afforded Smith the opportunity to travel to Europe for several years, where
he met Voltaire, Francois Quesnay, and other leaders of the Enlightenment movement.

In 1767 Smith received a life pension from the Duke and returned to his mother’s home in
Kirkcaldy. Inspired by the French reformers he had met, Smith began to develop his
Glasgow economics lectures into a book on commerce. This was a slow and painful process,
marred by melancholia, hypochondria, and a perfectionist streak that delayed publication.
When the book finally appeared in 1776 it came too late to play a decisive role in the tumultuous events leading to war in the American colonies. Intellectuals greeted the book with
acclaim, but British legislators were not swayed. The Wealth of Nations did give comfort to
the colonial revolutionaries, however, as attested by the number of America’s founding
fathers who bought it for their libraries.
Smith had come to London to be closer to his publisher and to Parliament, but returned to
Scotland and entered temporary retirement. He began work on a book about the arts, and
planned another on jurisprudence. In 1778 Smith moved to Edinburgh to accept an appointment as Commissioner of Customs for Scotland. There is some irony in this as Smith—a

proponent of limited government—became a bureaucrat responsible for collecting taxes for
the state. This is less inconsistent than it might appear. Smith didn’t take the position for
power or money (he still had his large pension and he generously gave away much of what
he did make). But he knew that government must raise revenue to pay for legitimate services. Smith was ardent in fulfilling his duties, going so far as to burn some of his wardrobe
items when he belatedly realized they had been smuggled into the country. The idealist for
free trade was an even greater proponent of duty and justice.
Smith also made time to issue revised editions of The Theory of Moral Sentiments and The
Wealth of Nations. He died July 17, 1790, leaving instructions to burn his unfinished manuscripts. One exception was the Essays on Philosophical Subjects, which was published
posthumously in 1795. This work contains a number of Smith’s important articles on science, the arts, and metaphysics. It also contains a contemporaneous biography of Smith by
his friend, Dugald Stewart.
We now turn to Smith’s account of morals and their relation to markets.

xiii


The Wealth of Nations

Smith’s moral philosophy

The Theory of Moral Sentiments, Smith’s first book, is an account of how humans are
adapted by nature to live in society, and how an individual comes to develop a moral conscience—requisite for society to function in reasonable harmony. Smith’s thesis is that natural instincts guide action, even if we are not fully conscious of them. Smith writes:
Thus self-preservation, and the propagation of the species, are the great
ends which Nature seems to have proposed in the formation of all animals…. But though we are in this manner endowed with a very strong desire
of those ends, it has not been intrusted to the slow and uncertain determinations of our reason, to find out the proper means of bringing them about.
Nature has directed us to the greater part of these by original and immediate instincts. Hunger, thirst, the passion which unites the two sexes, the love
of pleasure, and the dread of pain, prompt us to apply those means for their
own sakes, and without any consideration of their tendency to those beneficent ends which the great Director of nature intended to produce by them.
(Oxford University Press, 1976, p. 77)
Smith identified three main instincts that spur behaviour: the instinct to promote our own
wellbeing, the instinct to promote the wellbeing of others, and the instinct to cause harm to

others. Our moral conscience passes judgment on these urges. A properly-socialised person
comes to see himself as no better than any other person; he comes to hear the rebuking voice
of an “impartial spectator” if he improperly places his own interests ahead of others. In The
Wealth of Nations Smith focuses on the virtuous aspects of properly attending to our own
instinct for self-betterment, but it would be incorrect to assume that we can ignore the other
instincts in the economic realm. This is because all the instincts serve the interests of society. The institution of justice, for example, arises out of our instinct to seek revenge against
people who have wronged us. When the instinct for our self conflicts with the positive and
negative instincts for others, Smith’s moral sentiments model advises that we must learn self
control to adjudicate action.
To summarize, Smith felt that hidden forces called instincts were the impetus for much
human behaviour. He labels these invisible instincts the “call,” the “power” and the “passions” of nature. At various places he calls them the “invisible hand,” a topic to which we
now turn.

The invisible hand

One of Smith’s main contributions to economic theory is the concept of the invisible hand.
He borrowed the phrase from Shakespeare, Daniel Defoe, and others, but used the term
sparingly—once in Moral Sentiments, once in Wealth of Nations, and once in an earlier
essay. However, the idea behind the invisible hand appears throughout his works, namely,
that there are hidden forces at work in human society (just as gravity and electricity work
invisibly in the material world). These natural instincts, Smith posits, spur us to create order
and progress in our communities, even though we are largely unconscious of the motives

xiv


Introduction

for it. We can witness an analogy in wildlife, in which birds construct a nest and fortify it,
without having made a logical or reasoned decision to do so. As noted, the human instincts

are not simply for self interest, but also for the wider aims of sociability and justice that are
necessary for us to live peacefully in society.

When the instincts work compatibly with human institutions, society progresses. For example, the most famous use of the term “invisible hand” occurs in The Wealth of Nations, in a
chapter where Smith grapples with the issue of whether restraints on trade would harmonise
private interests with the public interest. Smith’s analysis is that no intervention is desirable
because business traders have a preference to keep their capital at work in the home country anyway. This is because, in the domestic business environment, a merchant “can know
better the character and situation of the persons whom he trusts, and if he should happen to
be deceived, he knows better the laws of the country from which he must seek redress.”
Hence, merchants will put capital to work in their home market for uses that produce the
largest value and return. Thus, when every entrepreneur pursues his own self interest in this
circumstance, the result is favourable for Britain’s economic growth because capital stays
in the country and generates the greatest number of jobs and security:
By preferring the support of domestic to that of foreign industry, [the merchant] 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. (p. 293)
Smith argued that in this situation society could progress by removing government barriers
and allowing economic actors the freedom to pursue their instincts for self betterment,
secure in the belief that this would generally advance society’s goal of economic growth. It
is important to remember that the environmental determinants Smith cited, which gave rise
to this outcome, were the existence of social capital (trust), competitive markets, and a
workable system of justice.

However, institutions can become outmoded and vested interests can stand in the way of
development. Smith provided the example of primogeniture in feudal society, which initially served to protect the community’s power and security, but which outlived its usefulness by concentrating land in unproductive hands. Primogeniture penalises the industrious
in favour of the lethargic because the instinct for progress is weakest among people who
don’t need to work to succeed. Hence, to Smith, “[N]othing can be more contrary to the real
interest of a numerous family than a right which, in order to enrich one, beggars all the rest
of the children.” (p. 250)

Throughout The Wealth of Nations Smith similarly castigates the institution of mercantilism, which promotes the businessperson’s instincts to monopolise markets, thereby damaging society’s interests. In another case, in The Theory of Moral Sentiments, Smith lambastes
dictators for unleashing their unchecked instincts on humanity, a situation made possible by
the institution of autocratic rule. In all these cases the natural instincts that are the invisible
hand do not produce beneficial results because institutional circumstances do not harmonise
private interests and incentives with the public interest.

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The Wealth of Nations

This discussion should make clear that to Smith the invisible hand means human instincts,
which at times will work harmoniously to produce progress in the right institutional setting.
When Smith argued that self interest gives rise to unintended benefits to society, it was in
the context of competitive markets, property rights, social capital, and basic institutions of
justice. The invisible hand does not mean greed or selfishness, which were behaviours
Smith denounced. Nor does the invisible hand mean market efficiency (a modern view).
The invisible hand is at work in any institutional setting, even one of central planning (in
which people instinctively compete for resources in an inefficient, and likely unfair,
process). The human instincts that comprise the invisible hand can be a destructive force in
the wrong institutional setting, and must be controlled by a decentralizing power, such as
democracy or economic competition. To some readers of Adam Smith, the invisible hand
also requires a Benevolent Deity, whose spontaneous order unfolds over time.

Modern revival

In the present era a renaissance of interest in Adam Smith is underway. The reasons for this
are complex, encompassing new scholarship and changing political and economic scenes.
The Wealth of Nations, once considered outdated during the rise of communism, has

regained its luminary status—and rightly so. Central to its resurgence is the notion that
Smith’s insights into economic systems and the forces of globalisation are highly relevant
for our times. Prosperity through markets is an idea that lights the way to lift billions of people out of poverty. Yet we must acknowledge that Smith’s appeal for market access for the
world’s poor remains an unfinished reform effort in many places.

As a technical economist Smith’s contributions have been superseded by the advance of
economic science. His systematic approach remains the cornerstone of the discipline, but
some of his notions are quaintly outmoded, even as they appeared advanced in his own day.
For example, Smith criticised the physiocratic view that agriculture was the only source of
wealth, noting that manufacturing could certainly also produce value—yet he continued to
classify service workers (such as physicians, musicians, and soldiers) as “unproductive”
because they produced nothing tangible! Smith’s model of prices was ingenious and complex, entailing a “natural” price toward which market values always headed, allowing for
the dynamic entry or exit of labour and capital from alternative endeavours. Yet Smith’s
labour theory of value could not explain the great divergence between the use value of a
product and its exchange value (a controversy known as the “diamond-water paradox”—
resolved a century after Smith’s death by marginal utility theory). Smith’s classical view
also envisioned full employment as a natural feature of long run equilibrium, and thus
seemed irrelevant during the great labour upheavals of the 1930s. Finally, Smith’s model of
economic development, based on division of labour, trade, and capital accumulation, failed
to consider the critical contribution of technological innovation.
From history’s vantage, these technical failings are more than compensated for by the great
system of thought that Smith bequeathed us. His analytical approach attempts to reveal the
connecting principles of nature and to demonstrate the hidden interdependence among economic variables. Discovering and highlighting the unintended consequences and foolishness of human policies is a particular strength of Smith’s treatment, painted on a rich historical and institutional canvas.
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Introduction

More than anything, Smith is remembered for articulating a manifesto in support of the
“natural system of liberty,” in which prudence, equality, and justice find expression in markets. Smith appeals to us as a hard-headed economist who values the sacred rights of working people over elite special interests. Yet Smith is an idealist rather than an ideologue, pragmatically arguing that reasonable systems that work tolerably well are preferred to perfect,

but unattainable, arrangements. Smith is optimistic that, over the long haul, our invisible
instincts for order and progress can overcome innumerable obstacles—many self inflicted.
He asserts:
The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle,
that it is alone, and without any assistance, not only capable of carrying on
the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its
operations… (p. 349)
Finally, and importantly, Smith reminds us that an economic process operates within a
moral framework. It is not a mechanical engine but a social organism. Virtue requires balancing the sometimes opposing instincts for self and others—and developing the self control that is usually preferable to state control.

Smith’s brilliant rhetoric, combined with stoical common sense, inspire us to think critically
about our economic systems and the interests they serve. Readers are encouraged to peruse
the “Notable Quotes” section after this introduction to experience the potency of Smith’s
language on a variety of issues. The Wealth of Nations is a sumptuous feast of political economy. Bon appetite.
Jonathan B. Wight

University of Richmond

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Notes on the Text
The first edition of The Wealth of Nations was published in 1776, followed by new editions
in 1778, 1784, 1786, and 1789, which contained additions and corrections. The present edition is reproduced from the Edwin Cannan text of 1904 (London: Methuen and Co., Ltd.).
Cannan’s manuscript was based on the 5th edition of 1789, the last one Smith himself
edited. Cannan corrected spelling errors but maintained historic spellings as they existed in
Smith’s manuscript, including inconsistencies. Cannan also added editorial footnotes which
are dropped in this edition. Cannan’s edition is available for searching online at the Liberty
Fund (www.econlib.org).

Outline of topics

Smith provided his own “Introduction and Plan of the Work” (see pages xxxix-xi). Briefly,
there are five major topics in Wealth of Nations, each comprising a book. The subjects are:
Book I – Production and distribution (11 chapters, 169 pages)

This book develops the broad outline of economic topics—production, value, and distribution—that is now standard in the field. The opening section covers Smith’s rationale for free
trade, namely that trade improves the productive powers of workers by allowing the division of labour through specialization. But money is needed to overcome the inefficiency of
barter, thus Smith also analyses the prices under which exchange takes place. Wages, profits, and rents are the components of price and distribution that Smith examines.
Book II – Capital accumulation (5 chapters, 67 pages)

The division of labour also cannot be accomplished unless there is sufficient capital to support it. Hence economic growth depends upon capital accumulation. This short book examines how interest rates rise and fall, how the market allocates capital among different uses
and how capital gradually accumulates.
Book III – The history of progress in nations (4 chapters, 28 pages)

Smith begins this brief history with a chapter entitled, “On the Natural Progress of
Opulence,” which expresses the idea that progress is a natural feature of human history—
from hunting and gathering, to shepherding, to agriculture, and finally commerce.
Unfortunately, human institutions can either promote or inhibit this natural tendency for
progress. Smith gives various historical examples and devotes attention to the important
role of towns in contributing to the development of agriculture.
Book IV – Political economy (9 chapters, 173 pages)

This book examines that “branch of the science of a statesman or legislator,” namely the formation of public policies. Smith begins by dispelling the myth of mercantilism that the wealth
of a nation is determined by its hoard of gold and silver. He goes on to analyse and discredit
various protectionist policies that restrain trade. This section discusses the invisible hand.
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