The Wealth of Nations Themes

In his lengthy 1776 treatise The Wealth of Nations, which is often considered the foundational text of modern economics, Scottish moral philosopher Adam Smith offers an integrated theory of how people collectively organize their labor and consumption, why some countries have grown rich while others struggle, and what governments can do to help their people advance towards “universal opulence.” But Smith’s wide-ranging, influential analysis all rests on a simple principle that he lays out…

Adam Smith emphasizes that all wealth comes from a very simple process: people invest their capital stock and earn profit on it. Indeed, large-scale economic activity is impossible unless people accumulate and invest capital, and a nation’s total wealth is really just the capital stock that it has accumulated over time. Smith’s analysis of capital investment shows that economies actually grow fastest when free markets enable the most trade to take place at the ordinary…

Adam Smith considers a wide variety of economic reforms in The Wealth of Nations, but he defends none as forcefully as international free trade. He dedicates Book IV to explaining the fatal flaw in the mercantile system, the dominant theory of political economy in 18th-century Europe: it mistakes gold and silver for true wealth. The mercantile system asks countries to focus on achieving a favorable balance of trade, or exporting more than…

When Adam Smith wrote The Wealth of Nations in the late 18th century, money had long been the “universal instrument of commerce,” but few understood how it actually worked. As with the mercantile system, Smith argues, European bankers and governments made the critical error of focusing too much on gold and silver. Rather than using the varied financial tools at their disposal, they tried to preserve the value of precious metals. For instance, European…