Book Summary of

The Wealth of Nations

By Adam Smith
In the first sentence of "Wealth of Nations, Smith explained his conception of the nature of
the wealth of nations. In so doing, he separated his views from those of the mercantilists.
The annual labour of every nation is the fund which originally supplies it with all the
necessaries and conveniences of life which it annually consumes, and which consists always
either in the immediate produce of that labour, or in what is purchased with that produce from
other nations.

In a number of places throughout Wealth of Nations, Smith berated the mercantilists for their
concern with the accumulation of bullion and identifica­tion of bullion with the wealth of a
nation. Smith believed, in fact, that most mercantilists were confused on this issue. For him,
wealth was an annual flow of goods and services, not an accumulated fund of precious
metals. He also revealed an understanding of a link between exports and imports, perceiving
that a fundamental role of exports is to pay for imports. Furthermore, in his opening sentence
he implied that the end purpose of economic activity is consumption, a position he developed
more fully later in the book. This further distinguishes his economics from that of the
mercantilists, who regarded production as an end in itself. Finally, in emphasizing labor as
the source of the wealth of a nation, he differed from the physiocrats, who stressed land.

Smith went on to suggest that the wealth of nations be measured in per capita terms. Today
when it is said, for example, that England is wealthier than China, it is understood that the
comparison is based not on the total output or income of the two countries but on the per
capita income of the population. In essence, Smith's view has been carried forward to the
present. In the same paragraph in which Smith stated that consumption is "the sole end and
purpose of all production," he rebuked the. Mercantilists because in their system "the interest
of the consumer is almost constantly sacrificed to that of the producer" and because they
made "production, and not consumption . .. the ultimate end and object of all industry and
commerce."

So much for the nature of the wealth of nations. The rest of Smith's book is concerned with
the causes of the wealth of nations, directly or indirectly—some­times very indirectly. Book I
deals with value theory, the division of labor, and the distribution of income; Book II with
capital as a cause of the wealth of nations. Book III studies the economic history of several
nations in order to illustrate the theories presented earlier. Book IV is a history of economic
thought and practice that examines mercantilism and physiocracy. Book V covers what today
would be called public finance.

Causes of the Wealth of Nations

Smith held that the wealth of a nation, what we today call the income of a nation, depends
upon (1) the productivity of labor and (2) the proportion of laborers who are usefully or
productively employed. Because he assumed that the economy will automatically achieve full
employment of its resources, he exam­ined only those forces that determine the capacity of
the nation to produce goods and services.
1. Productivity of labor. What determines the productivity of the labor force? In Book
I, Smith stated that the productivity of labor depends upon the division of labor. It is
an observed fact that specialization and division of labor increase the productivity of
labor. This had been recognized long before the publication of Wealth of Nations, but
no writer emphasized the principle as Smith did. In our modern economy—even in
the academic world—division of labor is widely practiced, with notable influence on
productivity. Smith illustrated the advan­tages of specialization and division of labor
by borrowing from past literature an example that measured output per worker in a
factory producing straight pins. When each worker performs every operation required
to produce a pin, output per worker is very low; but if the production process is
divided into a number of separate operations, with each worker specializing in one of
these operations, a large increase in output per worker occurs. In Smith's example,
when the process is divided into eighteen distinct operations, output per worker
increases from twenty pins per day to forty-eight hundred.

It is interesting that although Smith recognized the economic benefits of

specialization and division of labor, he also perceived some serious social costs. One
social disadvantage of the division of labor is that workers are given repetitious tasks
that soon become monotonous. Human beings become ma­chines tied to a production
process and are dehumanized by the simple, repeti­tive, boring tasks they perform.
But Smith had no doubt that human welfare is, on balance, increased by the division
of labor.

2. The division of labor, in turn, depends upon what Smith called the extent of the
market and the accumulation of capital. The larger the market, the greater the volume
that can be sold and the greater the opportunity for division of labor. A limited
market, on the other hand, permits only limited division of labor. The division of
labor is limited by the accumulation of capital because the production process is time-
consuming: there is a time lag between the beginning of produc­tion and the final sale
of the finished product.

In a simple economy in which each household produces all of its own consumption
needs and the division of labor is slight, very little capital is required to maintain
(feed, clothe, house) the laborers during the production process. As the division of
labor is increased, laborers no longer produce goods for their own consumption, and a
stock of consumer goods must exist to maintain the laborers during the time-
consuming production process. This stock of goods comes from saving and is, in this
context, what Smith called capital. A major function of the capitalist is to provide the
means for bridging the gap between the time when production begins and the time
when the final product is sold. Thus, the extent to which production processes
requiring division of labor may be used is limited by the amount of capital
accumulation available. Smith therefore concluded: "As the accumulation of stock
must, in the nature of things, be previous to the division of labour, so labour can be
more and more subdivided in proportion only as stock is previously more and more
accumulated."

3. Productive and unproductive labor. The accumulation of capital, according to

Smith, also determines the ratio between the number of laborers who are productively
employed and those who are not so employed. Smith's attempt to distinguish between
productive and unproductive labor became confused and reflected normative or value
judgments on his part. However, it manifests an awareness of the problem of
economic growth. Labor employed in producing a vendible commodity is productive
labor, Smith held, whereas labor employed in producing a service is unproductive. As
an advocate of the changing social and economic order, he postulated that the
activities of the capitalists, which resulted in an increased output of real goods, were
beneficial to economic growth and development, whereas the expenditures of the
landowners for servants and other intangible goods were wasteful. "A man grows rich
by employing a multitude of manufacturers: he grows poor by maintaining a
multitude of menial servants."10 According to Smith, what is true of the individual is
true for the nation; thus, for the economy as a whole, the larger the share of the labor
force involved in producing tangible real goods, the greater the wealth of the nation.
Capital is required to support the productive labor force; therefore, the greater the
capital accumulation, the larger the proportion of the total labor force involved in
productive labor. "Capitals are increased by parsimony, and diminished by prodigality
and misconduct."

This distinction between productive and unproductive labor also affected Smith's
view of the role of the government in the economy. Just as the expendi­tures of the
landowning class for servants and other forms of unproductive labor are detrimental
to economic development, so is some part of government expenditures. "The
sovereign, for example, with all the officers both of justice and war who serve under
him, the whole army and navy, are unproductive labourers."12 Smith insisted that the
highest rates of economic growth would be achieved by distributing large incomes to
the capitalists, who save and invest, and low incomes to the landlords, who spend for
menial servants and "who leave nothing behind them in return for their
consumption."13 Furthermore, because economic growth is inhibited by government
spending for unproductive labor, it is better to have less government and,
consequently, lower taxes on the capitalists so that they may accumulate more capital