Adam Smith and the Wealth of Nations: Key Concepts

Adam Smith: A Key Theorist of Economic Liberalism

The Wealth of Nations was a milestone in the history of political economy. It is an investigation into the nature and cause of the wealth of nations.

Smith believed that private enterprise should act freely. Free competition leads to low prices, high technology innovations, and thus lowers the cost of production and helps overcome competitors.

Smith, instead of focusing on agricultural productivity problems, takes productive activity, understood as "work aided by capital," as the central economic concern.

According to Smith, the proportion by which the product of this work is divided among a greater or lesser number of consumers is what makes a nation more or less rich.

The Division of Labor

The effectiveness of work in nations stems essentially from the division of labor. Smith defended the specialization of labor, using the manufacture of pins as an example.

This division of labor depends on two conditions: the extent of the market and the availability of capital.

To produce in abundance, it is necessary to consider the market. The policy most favorable to the expansion of markets is the freedom of trade.

The "Invisible Hand"

In his harmonic vision of the real world, Smith believed that free competition would act, and an "invisible hand" would lead society to perfection. Thus, the price of goods would fall, and wages would rise.

With the price system determining the quantities to be produced and sold, economic balance is automatically generated.

The price corresponding to equilibrium means the quantity demanded by the public corresponds to the amounts offered by companies. There is no excess of unsold goods or shortages.

The market operates as if there were an invisible hand regulating the balance between the amounts offered and demanded.

The Role of the State

Smith advocated deregulation, stating that the state's role should be restricted to three main functions: to defend the nation, promote justice and security, and achieve social works.

State intervention in the economy tended to misallocate capital and barely contributed to lower social welfare.

Smith based his description of the economic order on the laws governing the formation, accumulation, distribution, and consumption of wealth, and this polynomial was the basis of the classical concept of the economy.

Mercantilism

Mercantilism refers to a set of economic practices and ideas developed in Europe between the fifteenth and eighteenth centuries.

It was the economic policy adopted in Europe during the former regime, characterized by government intervention with the main objective of achieving maximum economic development through the accumulation of wealth.

Major Features of the Mercantilist Economic System:

• Metal: Gold and silver were considered the metals that made a nation very rich, and the exploitation of conquered territories was encouraged. The Spanish explored tonnes of gold from the indigenous peoples of America.
• Industrialization: The government encouraged the development of industries in their territories. Export manufacturing ensured good profits.
• Protectionism Customs: Kings raised taxes to encourage the domestic industry and prevent currency outflow to other cities.
• Colonial Pact: The European colonies ought to trade only with their metropolis, ensuring they buy cheap and sell dear.

Mercantilism helped the major European nations to form their own economies, but it was against the formation of the national economy in the colonies. It complicated the economic growth of certain nations and generated serious international imbalances.

A favorable balance of trade meant more money would come in than would go out, leaving the parents in good financial standing.

The Spanish Form of Mercantilism

The Spanish form of mercantilism is also called "metalism" or "Bullionism." The central concern was simply to obtain entry into the country of precious metals through international trade or exploitation of gold mines in America.

Mercantilism was dominated by commercial capital. The main flaw of mercantilism was to have given excessive value to precious metals in the design of wealth.

However, its contribution was crucial to extending commercial relations from the regional to the international sphere. It was a transitional stage between feudalism and modern capitalism.