What Charles Darwin’s Origin of the Species was to science, Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations was to economics. Published this week (March 9) in 1776, The Wealth of Nations explained, and justified, the capitalist economic system under which we still operate today.
Smith’s two most famous theories describe how “the division of labor” and “the invisible hand of the market” contribute to a nation’s wealth. Smith uses a pin factory to explain the division of labor, in which “One man draws out the wire, another straightens it, a third cuts it, a fourth points it …” and so on. Thus making a pin is divided by many distinct operations, which might produce, Smith theorizes, 48,000 pins a day, meaning that if 10 men work in the operation, each man might be said to have made 4,800 pins that day. Had each man tried to make pins by himself, Smith writes, he might not have produced a single pin.
Thus dividing the labor multiplies the capacity to produce things, which makes diversification more likely, which results in many different trades and industries. That, in turn, leads to “exchanging,” in which, for example, pin makers trade excess pins for other goods that they need but can’t themselves produce.
This exchange mechanism, Smith explains, is a function of the value of goods and services, which itself is determined by the amount of labor that went into those goods and services — and by their availability. “The market price for every particular commodity is regulated by the proportion between the quantity that is actually brought to market and the demand of those who are willing to pay the natural price of the commodity,” he writes. In other words, supply and demand.
As for the now famous “invisible hand” theory, Smith posits that when someone produces a product, “he intends only his own gain,” and neither knows nor cares whether he is also promoting the public interest. And yet that is exactly what he does. He is “led by an invisible hand to promote an end which was no part of his intention” — a societal benefit. Thus the wealth of nations is enhanced when individuals pursue their own wealth.
Ironically, while this latter theory has been used to justify unbridled capitalism, Smith often criticized the rich and powerful, noting their propensity to engage in “a conspiracy against the public.” And Smith usually sided with labor against management.
Yes, Smith was a brilliant economist, but he had also taught and written about moral philosophy. Thus, while he wrote the book that helped make capitalism the most widespread economic theory in history, he deeply distrusted its most successful practitioners.