The wealth of nations is an extensive and systematic examination of the economic forces in Europe that brought forth capitalism in the eighteenth century. Smith’s essential goal in The Wealth of Nations was to define the ways and approaches of creating national riches and to emphasize the conditions for a quick economic development.
Division of Labor
Smith’s essential goal in The Wealth of Nations was to define the ways and approaches of creating national riches and to emphasize the conditions for a quick economic development. Economic growth is understood by Smith to have two proximate causes: division of labor and capital accumulation. These two factors, in turn, are seen as derivative from underlying propensities of human nature, which are treated as parameters for the purposes of the political economy (Alastair, 65-76).This assertion is true because accumulation of capital leads to more investments, which lead to production of more goods and services and hence increase the GDP of a country
Smith description that labor as an invariable standard of value seems irrational (Ashraf et al. 7-9). He espoused that laborers are paid at the real price of commodities. Adam Smith turned from the worker’s view of labor to the employer’s view. Smith considered the general level of natural real wages in an economy as being determined by the balance of bargaining power in the labor contract, with that balance favoring the employers (Raphael, 23-35). He additionally supposed that the balance is a negative function of labor demand and supply. His view implies that labor market tightness is a positive function of the balance between the rate of capital accumulation and growth of labor demand. This assumption opens up the prospect, which Smith predicts and especially underwrites that competitive liberal capitalism, with high rates of capital accumulation, will convey high (and rising) real wages (Coarse,56-73). This idea is practically not true because there are large multinational companies with high and rising capital and yet the real wages that they offer their employees remain stagnant. Further, although equal quantities of labor are always of equal value to the worker, they may appear to be greater or sometimes of smaller value to the employer (Gino 22). Therefore, the assumptions made by Adam do not occur. In reality, variations take place in the value of commodities. The real price of labor consists of the necessaries and conveniences of life (Buchanan 40-41).
The Measure of Wealth
Smith espoused that the wealth of a country should not be measured by the accumulation of precious metals within its boundaries, rather, it should be in terms of the value of goods and services that it offers. This ideology by Smith is true. GDP is the current world system measurement of wealth, which is a measure of the value of goods or services that a country produces in a year. In addition, it is through the exchange of goods and services that countries get wealth. This phenomenon can be seen by a comparison of the poor mineral-rich African countries with rich countries that do not have minerals, such as Singapore
It follows from Smith’s investigation that producers’ with the aim of ensuring that they make maximum profits focus on the manufacture of goods that have the highest demand. In this way, Smith saw self-interest as the essential inspiration of economic agents in a capitalist society (Lynn, 55). This assumption is true since it illustrates that producers are motivated in making maximum profit. Therefore, in order to increase their profits, capitalists produce goods and services at a level equal to the quantity demanded. When market supply is in balance with effectual demand, the natural price will prevail in the market (Diamond 616-617). However, Smith would have used this ideology to understand the need for government regulation due to a market imbalance that may occur in uncontrolled trade. Specifically, this trade may lead to the emergence of monopolies through tactics like undercutting prices or owning strategic raw materials.
Government and Trade
Smith reasoned that the government is to be largely limited to establishing the legal framework within which private individuals may peacefully pursue their material advancement. Therefore, its endeavor to disturb this natural mechanism in the form of confinements on free trade, through taxes and other forms of market interferences should be abolished (Fontela,12). Smith argued that setting prohibitions on the importation of foreign goods that were produced by the home country created a monopoly of the home market by local producers (Shaikh and Ertuğrul 52). Therefore, these rules benefited producers of these products without necessarily adding value to the households of the home country (Smith and Raphael 45). This argument is true and has been supported by some scholars, arguing that tariffs create dead weight losses where consumers pay more for a good that they could have paid less if free trade was allowed (O’Rourke 44).
Despite the aforementioned, government interruptions are necessary because nations do not necessarily have similar terms of trade. Moreover, other countries have different costs of production. Therefore, these protections help in controlling disruptive activities such as dumping (Gancia and Fabrizio 570-601). Smith’s argument is not superior since countries differ in their resource endowments and hence big economies are likely to benefit much. As a result, it is not realistically possible for governments to adopt these policies since tariffs and taxes are necessary to enhance fair trade and discourage activities such as dumping. Government interference with the economy has demonstrated some positive gains in reviving trade. Prior to the Great Depression of the 1930’s it was widely believed the market is self-regulating (Farmer, 1252-1256). In fact, it is only through government interventions using Keynesian economic models that economies recovered. A similar case was observed in the 2007-2008 financial crisis (Levtin and Watcher, 2010). After the housing crisis, most countries used a mixture of monetarist and Keynesian economic models to reorganize and to jump-start their economies. These cases of financial crisis show that the economy is not self-balancing.
Ultimately, despite the many shortcomings that Adam Smith may have faced during the writing of the Wealth of Nations, he was able to deduce many economic phenomena’s that are still relevant today. Specifically, he was able to highlight the need for open market trade, measurement of wealth, and the need for minimal government interference. In fact, he has contributed to many economic concepts held today, which makes him a great contributor to modern economic concepts.
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