HIST363: Global Perspectives on Industrialization

Shortly before his death Smith had nearly all his manuscripts destroyed. He only preserved those works that, in his view, made a significant contribution to human knowledge. In his last years he seemed to have been planning two major treatises, one on the theory and history of law and one on the sciences and arts. The posthumously published Essays on Philosophical Subjects probably contain parts of what would have been the latter treatise.

The Wealth of Nations was influential since it did so much to create the field of economics and develop it into an autonomous systematic discipline. In the Western world, it is arguably the most influential book on the subject ever published. When the book, which has become a classic manifesto against mercantilism (the theory that large reserves of bullion are essential for economic success), appeared in 1776, there was a strong sentiment for free trade in both Britain and America. This new feeling had been born out of the economic hardships and poverty caused by the war. However, at the time of publication, not everybody was immediately convinced of the advantages of free trade: The British public and Parliament still clung to mercantilism for many years to come.

The Wealth of Nations also rejects the Physiocratic school's emphasis on the importance of land; instead, Smith believed labor was tantamount, and that a division of labor would affect a great increase in production. Wealth of Nations was so successful, in fact, that it led to the abandonment of earlier economic schools, and later economists, such as Thomas Malthus and David Ricardo, focused on refining Smith's theory into what is now known as classical economics (from which modern economics evolved). Malthus expanded Smith's ruminations on overpopulation, while Ricardo believed in the "iron law of wages" - that overpopulation would prevent wages from topping the subsistence level. Smith postulated an increase of wages with an increase in production, a view considered more accurate today.

One of the main points of The Wealth of Nations is that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by what Smith refers to a few times in Wealth of Nations as the "invisible hand" - which is more of an economic law than a mysterious force. If a product shortage occurs, for instance, its price rises, creating a profit margin that creates an incentive for others to enter production, eventually curing the shortage. If too many producers enter the market, the increased competition among manufacturers and increased supply would lower the price of the product to its production cost, the "natural price". Even as profits are zeroed out at the "natural price," there would be incentives to produce goods and services, as all costs of production, including compensation for the owner's labor, are also built into the price of the goods. If prices dipped below a zero profit, producers would drop out of the market; if they were above a zero profit, producers would enter the market. Smith believed that while human motives are often selfish and greedy, the competition in the free market is a check on selfishness that benefits society as a whole by keeping prices low, while still building in an incentive for a wide variety of goods and services. Nevertheless, he was wary of the greed and argued against the formation of monopolies, where greed is unchecked by market forces.

Smith vigorously attacked the antiquated government restrictions which he thought were hindering industrial expansion, impeding market forces. He attacked most forms of government interference in the economic process, including tariffs, arguing that this creates inefficiency and higher prices in the long run. This theory, referred to as laissez-faire, influenced government legislation later, especially during the nineteenth century. Smith criticized a number of practices that later became associated with laissez-faire capitalism, and as such are often wrongly attributed to him, such as the power and influence of Big Business and the emphasis on capital at the expense of labor".