“The Wealth of Nations,” A. Smith (1776)

(This website does claim to be “a summary of recent economics research”, but the present will have to be put on hiatus for the next week. I’m currently at the Duke Summer Institute on the History of Economics here in lovely Denver, Colorado, so forthcoming will be a few brief notes on the big guns following Smith – I don’t really see much before Smith that is recognizable as modern economics, so apologies to Quesnay, Thomas Aquinas, and the rest.)

The Wealth of Nations is a 1200-page brick of a book that, presumably, all economists have claimed to read. The book isn’t read because it’s good economics, of course. Many commentators have noted that little of the book is original, aside from the strong emphasis on the aggregation of self-interested motives into socially beneficial policies. The rationale for why trade occurs at all, that people have an innate “propensity to truck, barter and exchange”, is as a bit silly; Menger pointed out that if this were the motivation for trade, rather than a desire to improve one’s allocation according to one’s subjective preferences, then people would just keep trading the same two objects back and forth. Trade is motivated in terms of absolute advantage, rather than comparative advantage. There is nothing resembling a model, or resembling the type of formalist deductive logic that would dominate economics.

That said, the book is also clearly identifiable as modern “science”: there is no recourse to God as an explanation for the course of human events (or at least not much – there are historians who write that the “invisible hand” explicitly refers to God). And links of Smith to the Labor Theory of Value are unfair: his theory of value is based on cost of production, which is actually accurate in long-term competitive general equilibrium, where the supply side determines price and the demand side determines only quantity sold.

The most interesting aspect of Smith, though, concerns growth. I’ve heard Wealth of Nations referred to as a book about growth in the modern sense – it is called “The Wealth of Nations,” after all. But it seems clear to me that Smith is really referring only to allocative efficiency. That is, he sees that division of labor in the pin factory can make England relatively rich, and that policy B can impoverish you, and that policy C can enrich you, and so on. But it looks like he has in mind a model where England can move from the set of poor nations to the set of rich nations, and vice versa. It does not look like he is imagining a world where England gets richer and richer and richer every generation, exponentially. And why would he have this idea? The early industrial revolution, and of course the rest of human history before the industrial revolution, was simply not a period where countries became richer generation by generation.

Surely someone has done this already, but I don’t have a citation: the history of the “idea of growth” would make a fantastic book. Aside from secularism, which really enters human intellectual history slowly over many centuries, the idea that the future will be spectacularly rich compared to the present is the most important idea in the history of humanity. Think of the implications for ethics, for government policy, for social science, for social relations! It’s quite clear that by, for example, John Stuart Mill, the idea that humanity is on a course toward unending growth was not unknown. But how did this come about? How did the idea spread? How did it impact society? What of the frequent claims of its imminent demise, from Luddites through “ecological economists” and sustainability worrywarts of the present? This is a history I would love to read.

http://oll.libertyfund.org/index.php?…..3Ftitle=220&Itemid=99999999 (Liberty Fund has nice PDF and html copies of The Wealth of Nations free of charge on their website, linked here)

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8 thoughts on ““The Wealth of Nations,” A. Smith (1776)

  1. Heya!

    So, there are actually a bunch of related works on ideas of development, growth and progress. My dissertation will touch on this issue – I’m going to be looking at how growth gets defined in terms of real gdp per capita in the 2nd half of the 20th cenutry, leading to modern development economics.

    A cite you might really enjoy is “Knowledge and the Wealth of Nations” by David Warsh. Warsh is a journalist who has covered the economics profession for a couple decades; the book is a history of the connection between growth, technology and increasing returns from Smith through Romer 1990 (who is a bit too much the hero of the story). It was still a great read, at least from this non-economist’s perspective.

    More critical work on development focuses on the modern period. “Mandarins of the Future” by Nils Gilman is an excellent book on the modernization theories of the 1950s-1970s, which were super influential across sociology, polisci, econ, anthro and psych. “Encountering Development” by Arturo Escobar is the classic critique of development that (shamefully) I haven’t read yet. There are a few others like it, but most focus on the 20th century as far as I know. Last, I haven’t read it yet, but Nisbet has a book called “History of the Idea of Progress” which I think might be just what you are looking for… I’ll let you know when I finally get a chance to look at it in detail!

    Dan

  2. afinetheorem says:

    Great….that Nisbet book in particular sounds right up my alley, though “progress” as in “social conditions/human morality/etc. will improve year upon year” isn’t quite the same as “growth” as in “the economic standard of living will improve year upon year”, though of course there is a relation.

    And David Warsh is the best. Do you read his weekly essays on his website? He’s unquestionably the best writer doing work on the econ profession out there, and I don’t just say that because of my obvious Boston bias.

  3. I do read Warsh’s essays; he is great. I actually read his book back when I was still studying immigration from Mexico and Central America to the US. The book was one of the things that got me interested in studying economists professionally.

  4. claymmm says:

    Really, scare quotes around ecological economists? How many people do you think Earth can support? 50 billion? 100 billion? Or do you think there’s some magical free lunch?

  5. afinetheorem says:

    The quotes are more to delineate the field of ecological economics vis-a-vis standard econ, rather than some sort of sarcasm. That said, there is clearly a large body of people, many of whom are associated with EE, that think the carrying capacity of Earth is 7 billion, not 50 or 100 or whatever. There were similar groups who thought the same of 3 billion, and 1 billion, and so on.

    I think those types of claims are just ridiculous on face, but I’m more than willing to hear an argument to the contrary. That is, mainstream economics would say, how many people can the Earth support at a standard of living for each person equivalent to some level of utility (ignoring cardinality of utility problems here), not “are there enough resources to maintain current levels of consumption using current technology and current production functions for X number of people.” The simple analogy always given is the “No one is worried in 2011 that we may run out of whale oil for our streetlamps…we still will have light.” The only real binding constraints, as far as I can see, are energy and (related) food production. Food production, even using only existing technology in a reasonably sustainable way, can support far more people than currently live on the planet Earth. The amount of harvestable, completely sustainable energy (wind and solar and tides and the rest) is also orders of magntiude beyond what we now use. More technology to increase the productivity in those sectors (i.e., electric distribution with less leakage) is surely forthcoming in the next few decades. I don’t see neoMalthusianism as worth worrying about.

  6. It has been a long time ago since I read the Wealth of Nations. But I would try a few comments anyway:

    1. Smith’s value theory is circular. Do not know how you can think of it as accurate.
    2. It was not clear to me which concept of long-term equilibrium you were referring to, the classics or something more modern. Long term would be for the classics, in modern parlance, more like an attractor. The idea of natural price, as a long-term trend has no relation with modern intertemporal equilibrium.
    3. My impression is that the deepening or widening of the division of labor and market expansion would involve increasing economic growth. That’s at least what I have in my memory

  7. In relation to the earth’s capacity to support 7 billion people… Do you really think that is possible to extend the standard of living of the average American to 7 billion people? Do you really believe that we can have 4 billion of automotive vehicles in the world, four billion computers, four billion people bathing in the jacuzzi, 4 billion people traveling by plane etc.. etc.. etc..?

    Of course, prices have to go up to force an allocation of resources compatible with the earth and therefore allow only the wealthy to squander the planet’s natural resources.

    The ability of economists to believe that there isn’t an ecological problem and believe in the magic of technology to solve all our problems is amazing.

    And to avoid misunderstanding, when I speaking in the capacity of the earth, it is clear that I do that in a qualitative sense, ie the ability to preserve the global temperature, acceptable pollution levels without inducing disease respitatórias, without destroying the soil …

    • afinetheorem says:

      Hey Manoel,

      About Smith, I think the circular theory of value you mean is his theory referring to primitive society; the later theory of value essentially is that the value of a good is equal to its cost of production, more or less. As for division of labor, my reading is that division of labor can only move a society without such division to a higher level of income with such division, but that once the optimal production function, as it were, is found, there is no further growth.

      As for the ecological problem, I completely agree with you: 4 billion cars and plane trips and whatever is not ecologically sustainable. But the level of utility associated with the current consumption habits of the first world absolutely is sustainable on a global basis. This is what I mean by the whale example: we no longer use whale fat to provide light at night, but instead get the same utility from other production processes that aren’t bumping into resource constraints in the same way. No economist believes we can simply replicate modern consumption habits among a much larger population, but that doesn’t mean the economy can’t continue to “grow” and do so rapidly!

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