THE NATURE AND CAUSES OF THE WEALTH OF NATIONS

 

📌Adam Smith separated his viewpoint from that of the Mercantilists and Physiocrats in the first sentence of "The Wealth of Nations”. Smith Criticized the Merchants, in Wealth of Nations, for their concern with the identification of gold with the wealth of a nation and the accumulation of gold. According to Adam Smith, wealth was an annual flow of goods and services, not an accumulated fund of precious metals.

 

📌Adam Smith provided insight into the relationship between exports and imports, understanding that the primary role of exports is to pay for imports and he also, implied that consumption is the purpose of economic activity. Smith emphasized labor as the source of a nation's wealth, and he differed from the physiocrats who emphasized land.

 

📌Adam Smith further proposed that the wealth of nations should be measured per capita.  For example, it is understood that England is wealthier than China today, based on the per capita income of the population of both countries. Not on total output or income.

“Wealth of Nations” book is concerned with the causes of the wealth of nations.

Causes of the Wealth of Nations

Smith said that the wealth of a nation depends on;

1. The productivity of labor and
2. The proportion of workers usefully or productively employed.

He assumed that the economy would automatically achieve full employment of its resources.

Productivity of labor:

Smith said productivity of labor is increased by specialization and division of labor. Smith illustrated the advantages economic benefits and social costs of division of labor. Division of labor reduced humans to machines bound to a production process, Smith believed that a balanced division of labor increased human welfare. Division of labor depends on the e extent of the market and the accum

Productive and unproductive labor

Accumulation of capital also determines the ratio between the number of productive laborers and unproductive laborers. According to Smith, for the economy as a whole, as the labor force involved in the production of real goods increases, so does the capital required to support the productive labor force. Therefore, the greater the accumulation of capital, the greater the total labor force involved in the production process. Furthermore, Smith said, it is better to have less government intervention, which lowers taxes on capitalists and allows them to accumulate more capital. Furthermore, a framework of free markets and private property was required for capital accumulation, and Adam Smith had no question about this.

Written by: Niluka Damayanthi Manike

Reference:

Harry Landreth, D. C. (2002). History of Economic Thought (4th ed.). Boston, Toronto: Houghton Mifflin Company.

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