Demystifying Adam Smith’s “Wealth of Nations”
Posted: June 29, 2011 Filed under: Basics and Definitions, Economic Thought, Economists | Tags: Adam Smith, Fordism, ueful labour, Wealth of Nations 3 CommentsOver 200 years ago, Adam Smith published a bulky volume with a bulky title: “An inquiry into the nature and causes of Wealth of Nations”. This mega book elevated Mr. Smith to the status of the “Father” of Economics, as he had laboriously described almost everything that could concern thinkers and decisionmakers in the area of economics in his time. It is true that modern day economists have several new musings that Smith never envisaged, but let’s not allow this fact (or is it an assumption?) to distract us from celebrating our Big Daddy. At least, yet.
This post is first in a series dedicated to the monumental work of Adam Smith, where we will be analysing every word (well, almost) that Smith wrote in Wealth of Nations and other books. The wonderful thing about Smith’s work is the fact that it provides a starting point for several schools of economic thought. Today, we’ll just focus on the contradictory theoretical offshoots that Wealth of Nations pools together.
Smith sets the ground for economic analysis by providing a somewhat vague definition of what we might like to refer as GDP in modern times. He calls it Annual Labour: “The fund which supplies all necessaries and conveniences of life which is annually consumed.” Smith equates this to the product of the same labour, and to the produce of other countries that own country’s produce can purchase.
What is remarkable is the fact that even though the technical definition used in national income accounts may have changed, we still apply the same concept. Smith’s definition essentially excludes any work that is not bought/sold by equating Annual labour to “produce purchased from other nations”. Today, nations are still looking for an effective way to include the services that are not bought/sold in marketplaces in GDP, such as services provided by housewives within the family, vegetables grown in backyards that are consumed instead of sold, etc. Though we today recognise that Smith omitted a few useful things from his definition, we are pretty much at the same place where we were 200 years ago when it comes to including the same in our account books.
Smith also mentions that this Annual Labour will be proportionate to the number of consumers in a nation. Further, this proportion is dependent on the “skill, dexterity and judgement” of the labourers, and on the proportion of people who are employed in “useful labour” to those who are not. Smith attaches greater importance to “skill, dexterity and judgement”. This forms the basis of his huge discourse on division of labour. The noticeable aspect here is that his concept of Division of Labour was later popularised in a new avatar by Henry Ford with some added components. It led to the development of concepts of “Fordism” or “Americanism” and also “Consumerism”. The other determinant of Annual labour, namely proportion of “useful labour”, perhaps a term that Smith used repeatedly but loosely to refer to any activity that generates useful products or services, was stressed upon by Karl Marx. Marx chose to attach a strong but different definition to the term “useful labour”. His description of “useful labour” focused on specialised skills, but contrary to Smith’s focus, he relegates them as unimportant for analytical purposes, and pays attention to the homogeneous component of labour instead. The root of a much debated divide in economic thought emerges right on the first page of Smith’s masterpiece.
Coming up soon: Smith’s description of “savage” nations- the origin of the concept of development and underdevelopment.
In the meanwhile, share your views on Smith’s work and Fordism with us, or ask us if you have any queries.
MisChief Economist 
When I was in 11th, my economics teacher was talking to us about how great Adam Smith was and what all he has done for economics. And yeah he was one genius, did a lot things.
Its a great starting post and I expect more form the ones coming up.
Great to see that you have started off with a series! The best way to keep readers hooked 😉 Good going.
The problem is that he originated nothing that was true, and that whatever he originated was wrong; that, even in an age that had fewer citations or footnotes than our own, Adam Smith was a shameless plagiarist, acknowledging little or nothing and stealing large chunks, for example, from Cantillon. Far worse was Smith’s complete failure to cite or acknowledge his beloved mentor Francis Hutcheson, from whom he derived most of his ideas as well as the organization of his economic and moral philosophy lectures. Smith indeed wrote in a private letter to the University of Glasgow of the ‘never-to-be-forgotten Dr. Hutcheson,’ but apparently amnesia conveniently struck Adam Smith when it came time to writing the Wealth of Nations for the general public.
Adam Smith did not found the science of economics, but he did indeed create the paradigm of the British classical school, and it is often useful for the creator of a paradigm to be inchoate and confused, thereby leaving room for disciples who will attempt to clarify and systematize the contributions of the Master. Until the 1950s, economists, at least those in the Anglo-American tradition, revered Smith as the founder, and saw the later development of economics as a movement linearly upward into the light, with Smith succeeded by Ricardo and Mill, and then, after a bit of diversion created by the Austrians in the 1870s, Alfred Marshall establishing neoclassical economics as a neo-Ricardian and hence neo-Smithian discipline. In a sense, John Maynard Keynes, Marshall ‘s student at Cambridge , thought that he was only filling in the gaps in the Ricardian-Marshallian heritage.
– Murray Rothbard