The Wealth of Nations, by Adam Smith

The Wealth of Nations, published in 1776, is one of the most important books in the history of economics. It is a difficult read due to the different world that existed then. For example, Smith predicts that the day will come when only fifty percent of the work force will be involved in farming to feed the population. Today, that occupation is less than three percent of the work force in the United States.

The challenge in reading this book also arises from some archaic language, the use of old units of currency, and the excessive detail in many of the examples.

However, this book includes many principles that are still applicable today:

  • The quote for which the book is best known, [Every individual] “intends only his own security; and by directing that industry in such a manner as its produce may be of greatest value, he intends not 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. … By pursuing his own interest he frequently promotes that of society more effectively than when he really intends to promote it” (572). While this is used to support economic freedom in many areas, the book treats it in the very narrow context of import restrictions, although the author does say that it applies in other cases.
  • The first chapter is an excellent study of the principles behind division of labor, and makes an excellent case for its importance in improving economic conditions.
  • Borrowing should be for business purposes as opposed to consumer goods: “If he uses [borrowed money] as stock reserved for immediate consumption, he acts the part of the prodigal, and dissipates in the maintenance of the idle what was destined for the support of the industrious. He can, in this case, neither restore the capital nor pay the interest, without either alienating or encroaching upon some other source of revenue” (447). We have seen in recent years the indication that an economy built upon consumer credit is like a house of cards.
  • Contrary to those special interests who desire laws granting protection from competition, the greatest economic value comes from free trade (808-9).
  • Government favoritism of particular industries is counterproductive in the progress of society (873).
  • Any government activity that can be handled by local government should be handled locally, to minimize abuses (927, 1030).
  • Land in private hands tends to be better cared for and improved than land owned by the government (1041).
  • There is no art which one government sooner learns of another than that of draining money from the pockets of the people” (1091).
  • Taxes should be fair, certain in amount and due date, payable at convenient times, and efficient (1043-5).

Relationship to the ComingTogether Plan: Much of the material in The Wealth of Nations is outside the scope of the ComingTogether Plan. It is about trade and business, and the government’s involvement in both. However, the last principle enumerated above certainly applies to the tax reform component of the ComingTogether Plan. Our proposal is in agreement with those traits Smith identifies as desirable:

  • Fair: The ComingTogether Plan proposes an income tax that taxes all income the same way.
  • Certain: The ComingTogether Plan proposes an income tax that is simple and straightforward to calculate, and is paid close to the time the income is earned.
  • Convenient: The ComingTogether Plan proposes abolition of estate taxes largely due to the fact that estate taxes violate the convenience principle. That tax can require the sale of the family business to provide the funds to pay the taxes. It would be far better to tax the income from the business and the income from the sale of the business when it is sold for reasons important to the owners, rather than to satisfy government requirements.
  • Efficient: The ComingTogether Plan proposes tax simplification to reduce the costs associated with supporting the government. In the United States, we have reached the point where approximately one percent of our GDP is spent on tax compliance over and above the taxes themselves. That is an unacceptable waste of resources.

In addition to wise taxation principles, and a strong free market bias, it should be noted that Smith does include numerous specifics describing where government involvement can be helpful, particularly in government aid to the poor. The ComingTogether Plan would be in general agreement on this.

The Wealth of Nations would be important for the serious student of economics to understand economic history up to the eighteenth century and the roots of many modern economic principles. For the casual observer of economics and government, however, Smith’s lengthy opus — with its sweeping scope and scholarly tone — may be more daunting than rewarding.

Smith, Adam, and Edwin Cannan. The Wealth of Nations: Adam Smith; Ed., with Notes and Marginal Summary, by Edwin Cannan. New York, NY: Bantam Dell, 2003. Print.

4 Responses to “The Wealth of Nations, by Adam Smith”

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  4. Jonathon says:

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