1.1.2 A literary perspective

An Inquiry into the Nature and Causes of the Wealth of Nations is considered as the beginning of economics as a science. It can’t be doubted that this is true. It is more plausible to assume that Adam Smith wrote down the current ideas of his time. However, perhaps he is the first to present all these ideas in a single book.

We can find discussed in this book, all the issues which were until our days, at the centre of public debate. They are the role of competition in market economies, the function of prices, the function of money, the distribution of the national income, the effects of customer duties and taxes, the relevance of saving etc.

We find in this book well described the pillars of the market economy as well as the fundamental errors we see until our days in any newspaper. Perhaps it is not the best summary of the classic theory, some mistakes have already been corrected by Jean-Baptiste Say, but in any case, it is the book that established itself.

It belongs to the kind of books everbody knows, but only very few people have actually read. Something that happens very often and in this case, it is not even a big tragedy. More tragical is the case of the General Theory of Employment, Interest and Money of Keynes.

Keynesian theory is at the centre of public debate, but there is a big gap between the perception of the Keynesian theory in public debate and what Keynes had actually said. There is a little essay downloadable from the entry page of this website about the Keynesian theory.

It is equally stunning, on this earth, there are many remarkable phenomena, that Wealth of Nations is very famous and Principles of Economics of Alfred Marshall completely unknown, although the last one is actually the founder of economics as a science. It can eve be said that microeconomics, as we found it today in modern textbooks, is a simplified version of Principles of Economics.

Advice: We will use very often the word neoclassic, albeit this term, used very often in public discussion, doesn't make any sense. The term suggests that authors nowadays considered belonging to the neoclassic group, Vilfredo Pareto, Carl Menger or Léon Walras have something in common that allows to put all of them in the same group. Thats's not true. Actually, they have nothing in common as we will see later on when we discuss these authors in detail.

An evaluation of the book is difficult. The book is a description of the economy from the perspective of a single market player and based on personal experiences. Personal experience, for instance, shows us that competition is a good thing because we see all day that prices are lower, and the quality is better if the intensity of competition is high enough. We like competition as consumers, and we hate it as suppliers, but the fact that we hate is as suppliers and producers will not induce us to wish the abolition of competition in general. It only induces us to prefer the abolition of competition in the sector of the economy we are working in, but not in the sectors we are concerned as consumers.

However, personal experiences can as well be misleading. Everybody, for instance, believes that it is possible to transfer consumption to the future by saving.The more we save today, the more we can spend in the future. For the individual market player, this is correct without any doubt. From a macroeconomic view, this is not as obvious. If everybody saves, demand will decrease. If demand decreases, investors will not invest. If investors don't invest, there is no use for the savings. We will return on the topic exhaustively when discussing interest rates, see interest rates.

Common sense can produce as well an infinite number of contradictions, and there are many contradictions in Wealth of Nations, something that explains why Marxism as well as the oppositor neo-liberalism argues with concepts we found in Wealth of Nations although these concepts are incompatible, and both refers to Adam Smith.

The idea for instance that only Labour, considered as a homogeneous productive factor generates capital leads, with a detour by David Ricardo, to Marxism. The distinction between market price and natural price underlines the importance of the demand and the function of prices as signals of scarcity, one pillar of market economies.

The two concepts, the concept of labour as the only determinant factor for the value of an item and the concept of natural price/market price, where the value of an item depends implicitly in part from the demand, are incompatible with each other. If the value of an item depends exclusively on the work incorporated in this item, as assumed by Karl Marx, the market price can never differ from the natural price.

Actually, the concept of the market price/natural price is correct, and the idea of the labour incorporated is wrong. In a market economy, it is irrelevant how much work is incorporated in an item if people are not willing to pay for it.

Besides these big contradictions, there are a lot of little ones. One error that can be found still today in any textbook is the idea that the productive factor, labour, capital and land are homogeneous. This is incompatible with the concept of prices as signals of scarcity. If labour is an homogeneous factor, it is paid the same price everywhere. That would mean, that there is no incentive for people to qualify themselves. If they all get the same wage, nobody will undergo training.

Adam Smith describes with a lot of examples that there are different kind of labours, but that is incompatible with the idea that labour is a homogeneous factor. (Karl Marx realised the problem, but his solution is weird. He takes qualified work as a multiplied work by a factor X.)

To put it short and in contrary to the General Theory of Employment, Interest and Money of Keynes, a book that must be read if someone studies economics, Wealth of Nations is a book that can be read and is easy to read.

We find in Wealth of Nations a lot of funny remarks and we can learn that sometimes there is not such a big difference between 1776, the time when the book was first published and our present time. Perhaps, these kind of remarks converted Wealth of Nations to the most famous book about economics.

The endowments of schools and colleges have necessarily diminished, more or less, the necessity of application in the teachers. Their subsistence, so far as it arises from their salaries, is evidently derived from a fund, altogether independent of their success and reputation in their particular professions. In some universities, the salary makes but a part, and frequently but a small part, of the emoluments of the teacher, of which the greater part arises from the honoraries or fees of his pupils. The necessity of application, though always more or less diminished, is not, in this case, entirely taken away. Reputation in his profession is still of some importance to him, and he still has some dependency upon the affection, gratitude, and favourable report of those who have attended upon his instructions; and these favourable sentiments he is likely to gain in no way so well as by deserving them, that is, by the abilities and diligence with which he discharges every part of his duty. In other universities, the teacher is prohibited from receiving any honorary or fee from his pupils, and his salary constitutes the whole of the revenue which he derives from his office. His interest is, in this case, set as directly in opposition to his duty as it is possible to set it. It is the interest of every man to live as much at his ease as he can; and if his emoluments are to be precisely the same, whether he does or does not perform some very laborious duty, it is certainly his interest, at least as interest is vulgarly understood, either to neglect it altogether, or, if he is subject to some authority which will not suffer him to do this, to perform it in as careless and slovenly a manner as that authority will permit. If he is naturally active and a lover of labour, it is his interest to employ that activity in any way from which he can derive some advantage, rather than in the performance of his duty, from which he can derive none. If the authority to which he is subject resides in the body corporate, the college, or university, of which he himself is a member, and in which the greater part of the other members are, like himself, persons who either are, or ought to be teachers, they are likely to make a common cause, to be all very indulgent to one another, and every man to consent that his neighbour may neglect his duty, provided he himself is allowed to neglect his own. In the university of Oxford, the greater part of the public professors have, for these many years, given up altogether even the pretence of teaching.

Wealth of Nations, Book V, ART. II. — Of the Expense of the Institution for the Education of Youth

There is no doubt about that. If someone is paid independtly from his performance, he will do only the absolute minimum. This is even a rational behaviour. If a system gives wrong incentives, in other words incentives where the personal interest doesn't agree with the general interest, we will get undesired results.

The emoluments of offices are not, like those of trades and professions, regulated by the free competition of the market, and do not, therefore, always bear a just proportion to what the nature of the employment requires. They are, perhaps, in most countries, higher than it requires; the persons who have the administration of government being generally disposed to regard both themselves and their immediate dependents, rather more than enough.

It can't be said therefore that the book is not entertaining. We learn that a lot of things haven't changed in the last 250 years. The reader can learn that many errors are systemic errors.

Systemic error, in the context of the economy, means that people adapt their behaviour to given parameters. In a market economy, for instance, companies are obliged to offer the best products at the lowest price. That is good for the consumers and stressing for the companies. This is a correct incentive from a systemic point of view.

In the case of the academic economists, we have an incentive which leads to unwanted results. In order to get tenure, academic economists have to write a lot of never talked about discussion papers in scientific journals. In other words, he doesn't get tenure because of his didactical skills or because he teaches relevant things allowing his students to find a job. All that is entirely irrelevant. He gets tenure if he writes a lot of discussion papers, which are only read by people who have to write discussion papers themselves.

This is a general problem. Every kind of governmental subsidised research centres are more interested in publications in scientific journals than in transforming their discoveries in innovations and marketable products.

There are a lot of false incentives. A lawyer, for instance, is better off if he loses a process in the first instance because this improves his chances to get to the second one. Due to the fact that his fees are completely independent of his performance or the result of the process, he has a strong incentive to do absolutely nothing beyond what is absolutely necessary. We have the strange kind of situation that the more incompetent and lazy a lawyer is, the more money he earns. This is obviously a systemic error, and we find this kind of error everywhere the clear control through the market mechanisms are inexistent.

The problem is more complicated. However, Neoliberalism proposes that everything should be organised by the market and what cannot be organised through the market shouldn't be organised at all. The problem is that there are things that can't be organised through the market but must be organised. We will return to the topic when talking about Friedrich Hayek and Milton Friedman.

Adam Smith addresses the problem but doesn't resolve it. He affirms that governmental activities can never be controlled. This is the central message of the Neoliberalism, see governmental activieties. This is something the author doesn't believe, see preliminaries.

If market mechanisms should control everything, there is no need for a democratic decision making. For neoliberals and Austrians democracy is the domination of minorities by majorities. They, therefore, prefer, that explains their sympathy for Pinochet, that a dictator as a guarantor for a free market economy who impedes any kind of democratic decision making is better than a democracy.

If there is nothing left that should be decided on the market, there is no need for a democratic decision making.

The second problem is that from a practical point of view, it must be sure that a free market economy without any kind of governmental intervention doesn't lead to the dominance of a minority over a majority. If this is the case, the system would be very unstable because the only way to dominate the majority would be by force. Experience shows that controlling the majority by force is much more expensive than a compromise.

We don't know what Adam Smith assumes. Perhaps, he assumes that everybody will read his book and accept that in the long run, a free market economy without government intervention is the best system for all and that everybody will accept it in the hope that things will improve in the long run. However, this is not very plausible, because Adam Smith himself describes, at least in some paragraphs, that the workers will live eternally in misery. In the theory of David Ricardo that becomes even a law.

The only useful aim of a book about economics is to inform a wider public about economic issues enabling it to make a more conscious decision in a democratic decision process, see preliminaries.

Wealth of Nations addresses directly a wider public. That what it distinguish it from the thousands and thousands of books that follows, which are "pure science". Pure science doesn't exist. Pure science is commonly called hobby or pastime.

With his own money someone can do whatever he wants, but if the taxpayer pays, the utility must be clear. Concerning economics, pure science means that they have little to say about reality. The incompetence to do something relevant is interpreted as pure science, what sounds much better.

We find a lot of funny and interesting things in this book, but in part, it is a little bit long-wided and boring. There are many pages that can be skipped. A lot of the excursion into history have little to do with the topic. The first chapter of the fifth book, for instance, deals with governmental expenditures, but in fact, it is a discourse about the tatars, the Arabs, the Romans and the Greeks. All these nations were hunters and warriors at the same time and, therefore, it was not necessary, following the logic of Adam Smith, to finance a standing army. (We don't discuss about the fact that this was not even true.)

It can be considered this way; it can be regarded as another way. The difference between the armies we have nowadays and these armies is that in those times, the Warriors prefinanced the war and were compensated, in case of success, by the possibility to plunder the conquered nation. The author would say that even in those times that was stupid because all the gold and silver they plundered was useless if nobody produces something that could be bought with this gold and silver. The only effect was, as in the case of Spain in the 17th-century inflation.

Besides that, there are many paragraphs, all the paragraphs which reduce men to purely economic factors, who are somehow disturbing.

Upon the sober and industrious poor, taxes upon such commodities act as sumptuary laws, and dispose them either to moderate, or to refrain altogether from the use of superfluities which they can no longer easily afford. Their ability to bring up families, in consequence of this forced frugality, instead of being diminished, is frequently, perhaps, increased by the tax. It is the sober and industrious poor who generally bring up the most numerous families, and who principally supply the demand for useful labour. All the poor, indeed, are not sober and industrious; and the dissolute and disorderly might continue to indulge themselves in the use of such commodities, after this rise of price, in the same manner as before, without regarding the distress which this indulgence might bring upon their families. Such disorderly persons, however, seldom rear up numerous families, their children generally perishing from neglect, mismanagement, and the scantiness or unwholesomeness of their food. If by the strength of their constitution, they survive the hardships to which the bad conduct of their parents exposes them, yet the example of that bad conduct commonly corrupts their morals; so that, instead of being useful to society by their industry, they become public nuisances by their vices and disorders.

Book V, Taxes upon Consumable Commodities.

The author would say that this way to consider the world, that reduces men to pure economic factors, is a kind of barbarity which confuses the instrument with the goal. The economy is a means, not a goal. We will see this more clearly in the chapter about David Ricardo. In the Ricardian logic, the economy must grow in order to organise the maximum of misery for the maximum of people. Economic growth, actually a means, became a goal. That is, by the way, one reason we have inserted two philosophical chapters in this manual, the chapter about Theodor Adorno and Ernst Bloch. On the contrary of what we learn in economic textbooks, that means and goals are two completely different things and can be studied on its own, the truth is that this is not possible.

There is no doubt that Adam Smith wanted to sell his book, and the working poor didn't buy it, so it really didn't matter what he wrote about them. Perhaps it sold even better by showing how the working poor could be more productive and from a tax on tobacco and alcohol benefited the sovereign and the customs officer as Adam Smith himself. (Something already strange enough: The big opponent of any type of customs duty was a customer instructor earning almost 30 times more with this than a normal worker.)

The author would say that Adam Smith knew very little about the working class. Something we see easily if we study English folk songs from this time, for instance, this one: Classic Rocks: Ages of man.

The song describes the impact of a market economy on the soul of a contemporary. The truth is not necessarily in thick books. Some of these people had not even the ambition to live the life of a 'petit bourgeois', as we can see in this song: Classic Rocks: Raggle taggle gypsy.

Sometimes, Adam Smith had strange opinions about historical issues.

The contempt of risk and the presumptuous hope of success are in no period of life more active than at the age at which young people choose their professions. How little the fear of misfortune is then capable of balancing the hope of good luck, appears still more evidently in the readiness of the common people to enlist as soldiers, or to go to sea, than in the eagerness of those of better fashion to enter into what are called the liberal professions. What a common soldier may lose is obvious enough. Without regarding the danger, however, young volunteers never enlist so readily as at the beginning of a new war; and though they have scarce any chance of preferment, they figure to themselves, in their youthful fancies, a thousand occasions of acquiring honour and distinction which never occur. These romantic hopes make the whole price of their blood.

This paragraph reveals a problem we will see very often throughout this manual. The interpretation of historical facts is not really the strong point of economists. We will return to the topic when talking about Friedrich Hayek. This is perhaps because economists look at universally valid economic laws and history serve only to illustrate this law, but humanities in general and history in special is about understanding individual phenomenon as the result of casual factors: the acting personalities, the political system, history of masas and so on. In this paragraph, Adam Smith tries to illustrate something he believes being general tendencies, but he doesn't try to understand the historical context.

Adam Smith was born in 1723, the wars he knew in his lifetime were the wars of the house of the Stuarts against the followers of William of Orange-Nassau. The last pretender to the to the throne was James Francis Edward Stuart, who was definitely beaten in the battle of Culloden 1746 by the troops of George II. The reason behind these endless civil wars, this one, was only one in a large series, were religious conflicts, social unrest, a conflict between two different dynasties. The participation of the Scottish Highlanders in this conflict on the side of James Francis Edward Stuart can be explained by the suppression of the Scotish people by England. The Scotts didn't participate in this wars for amusement, as presumed by Adam Smith. Besides that for the poor people, there were little opportunities to improve their situation. In a world as it is described later by David Ricardo the difference between a life at subsistence level and to die at the battlefield was not so enormous.

For those who are interested in history. We went through English history starting from the first Tudor (Henry VIII) to the last Stuart, the mentioned above James Francis Edward Stuart by songs. The songs which are interesting in this context are Skye Boat Song and Loch Lommond.

Returning to the question if the book is worth to be read. If we skip the excursions to history, the strange annotations about social live the book is interesting.

Sometimes, Adam Smith was ahead of his time. The distinction between natural price/market price, for instance, anticipates the neoclassical idea of the total equilibrium and is even better explained.

It is often said that Wealth of Nations is contradictory, and that is true without any doubt. The assumption that the productive factors are homogeneous and that the value of the item is determined by the amount of labour incorporated in this item is not compatible with basic concepts of market economies. That explains that why Marxism as well as his opponent, neoliberalism, refers to Adam Smith.

We will discuss this contradiction throughout this manual. In this sense, Wealth of Nations is a good introduction to economic thinking, although Le Traité d'Économie Politique of Jean-Baptiste Say, is a better description of a market economy and Principles of Economics of Alfred Marshall much more precise.

return to the top of the page ...

1.1.2 A literary perspective

Wealth of Nation and the common sense