Demystifying Adam Smith’s “Wealth of Nations”

Over 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.