Introduction
Modern day economic theories owe its existence
largely to the classical and neo-classical economists.
Adam Smith, a neo-classical theorist, is considered
to be among these economists who laid the foundation
for modern day economics as well as social, political
and ethical aspects that relate to it. In his
famous work, The Wealth of Nations, Smith explores
the various dimensions and channels through which
nations can create wealth; he enumerates on the
importance of division of labor as well as the
key role of exchange. Even though Smith receives
much criticism for his work as limited in its
scope but it is this author's thesis that Smith's
work, The Wealth of Nations, presents a commonality
and applicability of principles that even people
of today can find in society and nations.
Background
Scotland during the early 18th century severely
lagged behind England due to the poverty stricken
economical conditions. The Scots were not only
comparatively less educated but they also did
not have a rigid political system to compete with
England. For this reason, there had been no clear
reform or policies for the development of its
people. The elite group depended on the feudal
system to fund their living and lived luxuriously
as compared to the majority working class who
could merely think of primary food stuffs as the
basis for working. Smith seeing the poverty stricken
condition of the Scots at the time thought of
the factors responsible for their poverty and
juxtaposes England as superior because of its
organized political and legal system. Furthermore,
since the Scots largely depended on agricultural
land for survival and even future economy, most
of its people were laborers and farmers working
at minimal wages or at the least for themselves.
Trade with neighboring England in 1707 had been
minimal and limited to certain agricultural commodities
such as beef which did not earn the Scottish much
revenue. (Easton 99).
At the political level, England had been expanding
its territories through colonization in an attempt
to "create wealth" for its country.
Scotland and Ireland depended on England's success
in these political endeavors however at the cost
of its own people. The Scottish especially relied
on the Union of England and Scotland in 1707 to
elevate their economical conditions (Easton. 99).
Seeing these conditions, Smith a Professor of
Logic in the University of Glasgow, developed
first lectures on natural jurisprudence and then
later draft The Theory of Moral Sentiments which
formed the basis for the publication of The Wealth
of Nations (1776). His works reflect the emergence
of a powerful English empire and the reason why
some nations such as the Scots lag despite being
England's neighbor (Easton 99).
Summary (Smith 1776)
In Book 1 of The Wealth of Nations, Smith identifies
the power of labor as the key to industrious society.
He presents the concept of division of labor whereby
labor should specialize in the process of manufacturing
so as to increase the level of production. It
is through division of labor that nations can
increase the productivity and as a result be able
to meet market demands. However, the extent of
the usefulness of division of labor is limited
to consumers. Wealth of nations can be increased
through market extension which is done through
exchange. For this purpose one must understand
the value of exchange and the value of labor.
According to Smith the value of commodities depend
on the kind of labor used in its production and
how valuable it is to the buyer. He further explains
the concept of wages; wages of labor should suffice
the level of efforts they put in the production
as well as meet their own individual needs. Similarly,
he explains the concept of profits, stocks and
rent of land as a means to increase earnings for
the owners.
In Book 2 Smith explores the nature of division
of stock and how money replaces it by means of
accumulation. He also explains the reason why
capital is costly if it is unproductive; and profitable
when it is productive through full utilization
of labor.
In Book 3 Smith expands his scope and explores
the reason why some nations has abundance in resources
while others lack; and what should be done to
balance this opulence of nations - that is through
exchange and commercial endeavors. Without commercial
activities according to Smith, nations would remain
backward because firstly they would not be able
to earn as much value of products at home as compared
to abroad where the value of the same product
fetch higher prices; Secondly, through exchange
nations progress because they find the needs of
other nations and how these can be fulfilled while
at the same time trade with exchanging nations
for commodities that are scarce at home.
To achieve successful trading relations Smith
in Book 4 outlines the necessity of political
systems. The development of policies and reforms
that promote trade helps the country to increase
exchange endeavors, and put barriers against goods
that might hinder the production at home. Similarly,
he outlines why there is a need for mercantile
system that would allow the nations to deal in
fair trade and not exploit other nations by balancing
the imports and exports. He identifies this as
the reason why England had been able to reap more
profits as compared to Scotland. At the basis
of the formation of the mercantile system is the
agricultural industry which must be organized
before it can be traded.
Lastly, in Book 5 Smith outlines the sovereignty
of those nations that forms trade alliances and
extensive market for its commodities because it
would be able to earn the most revenue for its
people.
Analysis
Smith's work as presented briefly in the above
paragraphs indicates that labor and fair wages
is the key to productivity. However, to make this
productivity valuable and a means for exchange,
nations must establish systematic political and
economical systems. His work not only identifies
the reason why England preceded and richer as
compared to Smith's Scotland but it also provides
the key to trading systems. His explanations of
the concentration of labor on the one hand and
the opulence of nations on the other hand correlates
with the political autonomy and imperialistic
leadership of Britain during the 18th and 19th
century. Not only England an organized political,
social and economical system but it also developed
a complex strategy through colonization to expand
its markets (Dwyer 190 from Skinner). In the course
of its action it had been able to earn great wealth
while other nations such as its neighbor Scotland
lagged behind. But perhaps the most important
aspect of Smith's document is the fact that he
enumerates on the formation of a capitalistic
system which he named mercantile system (Skinner
216). It proved to be the cause for the failure
and fall of the feudal system which discouraged
exchange systems. Although, The Wealth of Nations
has many loopholes in projecting perfect economical
systems but nevertheless it helps economists and
modern day readers to identify these loopholes
and resolve the problems he presented. For example
how the problem of division of labor and wage
could be resolved to better the living conditions
of the working class. At the time, this had been
important for the Scottish leaders to realize
where and how they can improve the conditions
of their people. The same principles have been
adopted by modern day political leaders such as
France and Germany where laborers are national
prerogative.
Lastly, Smith's work also outlines how concentration
one factors of production over the other, such
as labor over agriculture (land); capital over
labor or profits over labor etc. could result
in the collapse of social order and thereby the
economy.
Historians continue to use his book as a basis
for analyzing how society can form social, political
and economical systems, and to resolve problems
inherent in them.
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