History of Economic Thought: Adam Smith and the Wealth of Nations - Book Report/Review Example

History of Economic Thought: Adam Smith and the wealth of nations Adam Smith and the wealth of nations “Two hundred years after the publication of his magnum opus, Adam Smith remains a towering figure in the gallery of the great economists -a name for all to conjure with, the author of the most famous unread book in our profession” (Heilbroner, 1976, p.6). Adam Smith is considered as the father of modern economics even though many prominent economists such as John Maynard Keynes contributed heavily to the development of modern economic thoughts. Adam Smith was not only an economist but also a moral philosopher. His best known classic works were: The Theory of Moral Sentiments (1759), and An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Adam Smith’s book; An Inquiry into the Nature and Causes of the Wealth of Nations is believed to be a fundamental work in classical economics. This book explains many economic phenomena such as division of labor, productivity and free markets. “Smith’s radical insight was that a nation’s wealth is really the stream of goods and services that it creates. Today, we would call it gross national product. And the way to maximize it, he argued, was not to restrict the nation’s productive capacity, but to set it free” (The Wealth of Nations, 2014). This paper explains the history of economic thought the wealth of nations and the contributions made by Adam Smith towards it. History of the economic thought; the wealth of nations Until the publication of the book An Inquiry into the Nature and Causes of the Wealth of Nations in 1776, the wealth of nations was a controversial topic. Different economists and scholars have given different interpretations definitions to the economic phenomenon; the wealth of nations. Adam Smith was the first economist who was able to define the term wealth of nations properly. Adam Smith was able to define the wealth of a nation in terms of economic phenomena such as division of labor, use of money, real and nominal price of commodities, market price of commodities, labor wages, division of stock, education, human capital, learning by doing, increasing returns to scale, technological change, externalities, institutional factors such as global free-competitive market economy, the role of government etc (UÇAK, 2013, p.29). According to Rosenberg (1993), the division of labor refers to the specific tasks and roles performed by different individuals. In other words, it is difficult for employees to perform all the tasks equally well. It is important to allocate a work to a particular employee only if the employee is skilled in that work. According to Adam Smith, Smith (N.d., p.9), “whatever be the actual state of the skill, dexterity, and judgment, with which labour is applied in any nation, the abundance or scantiness of its annual supply must depend, during the continuance of that state, upon the proportion between the number of those who are annually employed in useful labour, and that of those who are not so employed”. According to Adam Smith, it is possible for a nation to produce many workers; however, it is difficult for a nation to produce useful and productive workers. The productivity and the utility of a worker can be better exploited only when a nation is able to place him in the suitable professions. For example, there is no point in asking computer professional to increase his productivity after appointing him in the sales or finance department. At the same time, it is logical to ask him to improve his productivity after placing him in the computer department. “The number of useful and productive labourers, it will hereafter appear, is everywhere in proportion to the quantity of capital stock which is employed in setting them to work, and to the particular way in which it is so employed” (Smith, N.d., p.9). Use of money is another factor which determines the wealth of a nation. If the nation is able to use the money effectively, it may develop properly. There are many nations in this world which use more money in the defense sector and less money in the constructive and infrastructure development sectors. Such nations may not develop properly. Pakistan is an example for this phenomenon. Pakistan’s current spending in the defense sector is much more than that in the infrastructure development sectors. As a result of that Pakistan is currently struggling to develop properly. Adam Smith has formed economic dimension of the Industrial Revolution and also transformed economics into the identity of a social science. As if the wealth of nations, namely the welfare increase became the top goal two and a half centuries ago, it is the top goal today and in the future as well. So understanding Smiths works well carries importance in fighting against poverty in the world. According to Smith, in the basis of the welfare increases (wealth of nations) are labour and cooperation (Kucukaksoy, 2011, p.108) “It is generally recognized that Smith regarded real money as consisting of gold and silver coins, the value of which was determined by its cost of production”(Gherity, 1994, p.423). It should be noted that gold prices are increasing rapidly at present all over the world. At the same time, all the major currencies are facing severe devaluation. For example, India is one of the rapidly emerging countries in the world. Until four or five years before, one American dollar was equal to 40 Indian rupees. At present, one American dollar is equivalent to around 60 Indian rupees. In other words, Indian rupee is facing severe devaluation even though country’s economic growth is phenomenal. “Paper money was a useful device that could be substituted for a part of the nations stock of gold and silver, which latter could then be exchanged abroad for real capital goods, thus increasing the nations productive capacity” (Gherity, 1994, p.423). In the 90’s India was forced to sell out some of its gold stock to escape from financial crisis. Indian money faced severe devaluation in the 90’s whereas the gold prices remain attractive in the global market during this period. “Since paper money is not accepted abroad, any excess money balances that result from the issue of paper money will lead to the export of an equal quantity of gold and silver” (Gherity, 1994, p.423). Paper money is useful only in the local or domestic market whereas gold and silver are acceptable in all global markets. In other words, keeping the wealth of a nation in gold and silver would help that nation to overcome monitory problems during difficult times. Adam Smith has realised this fact very well and he asked the nations to stock their wealth more in gold and silver rather than on papers. Adam Smith argued that the countries should encourage exports and discourage imports as much as possible to maximize its metal wealth such as gold and silver. It should be noted that the metal wealth will be increased when a country is able to earn gold and silver through exports. At the same time gold and silver wealth will be decreased when a country increases its imports since the payment for the imported items are usually made through metal money rather than paper money. Adam smith was definitely a much better monetary economist than he is usually given credit for. It is argued that he believed the general price level to be determined by the cost of production of gold relative of that of goods, and that so long as bank money was convertible into specie, the general price level would therefore not vary; that his analysis of the influence of the creation of bank money on the balance of payments must be seen against the background of this theory of the general price level, as must his adherence to the Real Bills Doctrine; and that his analysis of the replacement of specie with paper money makes his banking theory an integral part of his theory of economic growth (Laidler, 1981, p.185). Real value and nominal value of commodities may change based on the fluctuations in the market. For example, purchasing power of the consumers, supply and demand in the market are some of the economic phenomena which determines the prices of a commodity in the market. Moreover, labor wages is another factor which determines the competitive power of a nation. For example, China is a country in which manpower cost is extremely low. As a result of that China is able to sell products at cheaper rates in the global market. American and European made products are currently struggling to compete with Chinese made products in the global market. It should be noted that bulk production and cheap labor helped China to become the most rapidly emerging nation at present. “The policy of some nations has given extraordinary encouragement to the industry of the country; that of others to the industry of towns. Scarce any nation has dealt equally and impartially with every sort of industry”(Smith, N.d., p.9). Some nations give more importance to the development of a particular region. For example, China’s eastern regions are much more developed than its western regions. Deng Xiao Peng has given more importance to the development of Eastern China. He argued that the western China should be given priority in infrastructure development only after the development of the eastern China. This policy has created a lot of problems in China even though the country is developing rapidly now. Moreover, China’s rural areas are underdeveloped compared to the urban areas. On the other hand, America is a country which has given importance to the development of the country as a whole. As a result of that the signs of development are visible in every part of America irrespective of rural or urban areas. Adam Smith argued that a country should concentrate more on the development of the country as a whole. Conclusions Adam Smith was able to construct an economic framework for the development of nations. He has identified many economic parameters which may affect the wealth and development of a nation in one way or another. Some of these parameters which have the potential to affect the wealth of a nation are; division of labor, use of money, real and nominal price of commodities, market price of commodities, labor wages, division of stock, education, human capital, learning by doing, increasing returns to scale, technological change, externalities, institutional factors such as global free-competitive market economy, the role of government etc. References Gherity, J. A. (1994). The Evolution of Adam Smiths Theory of Banking. History of Political Economy. Fall94, Vol. 26 Issue 3, p423-441. Heilbroner, R. L. (1976). Homage to Adam Smith. Challenge. Mar/Apr76, Vol. 19 Issue 1, p6.  Kucukaksoy, I. (2011). Adam Smiths conceptual contributions to international economics: Based on the Wealth of Nations. Business & Economic Horizons. Jan2011, Vol. 4 Issue 1, p108-119. Laidler, D. (1981). Adam Smith as a monetary economist. Canadian Journal of Economics. May81, Vol. 14 Issue 2, p185-200.  Rosenberg, N. (1993). Exploring the Black Box: Technology, economics and history. Cambridge University Press. Smith, A. (N.d.). An inquiry into the nature and causes of The wealth of Nations. Retrieved from http://www2.hn.psu.edu/faculty/jmanis/adam-smith/wealth-nations.pdf The Wealth of Nations, (2014) Retrieved from http://www.adamsmith.org/wealth-of-nations UÇAK, A. (2013). The Sentiments Of Adam Smith Relating To Economic Growth As An Inspirer To Modern Growth Theories. Journal of Social Science. Jun2013, Vol. 15 Issue 1, p29-48.  Read More