The Wealth of Nations

Adam Smith’s Thoughts in The Wealth of Nations

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An Inquiry into the Nature and Causes of the Wealth of Nations , one of Adam Smith’s masterpieces which until now has become the foundation of modern economics, contains the concepts of Smith’s thoughts for many years.

In this article we will note the important points presented in the book.

Please note that  The Wealth of Nations  consists of five broad topics, which are further divided into chapters.

It should also be remembered that this book was published in the 18th century, where the economy, science, and technology were not as advanced as they are today, so some of the explanations are no longer relevant for today.

Smith stated many things in the book, including those  related to the factors of production , namely labor, land, and capital; with  an emphasis on the labor element .

He also touched on  regulations in economic activity, taxation, international trade, and public policy .

Smith also spoke about the importance of  freedom and justice as the foundation for the welfare of the country .

First, Smith asserts that  economic efficiency can be achieved through the division of labor (tasks) for labor ; In this case, task specialization greatly determines the level of time and cost efficiency, which in turn affects the final product.

If the workforce is specialized according to expertise, they will do the same task from time to time, so the task will be completed quickly. This also guarantees the quality of the product being worked on.

In addition, the more efficient the time required, the products with competitive prices will be produced.

In essence,  the efficiency generated by a specialized workforce is the source of the country’s success in achieving prosperity .

Furthermore,  trade between individuals  (note: at that time trade was commonly carried out by barter) was basically  carried out freely, according to each other’s interests .

For example: farmers sell their crops, then buy chicken meat; on the other hand there are traders who sell chicken meat, then buy rice. In this case, all transactions occur because of individual interests.

However, it must be remembered  that individual interests are not related to greed or egoism  (remember that Smith bases economic activity on aspects of ethics and morality (reread the previous article).

However, real trading is certainly not as simple as the above example; Therefore , a better method is used, namely using  a transaction medium called money . This money  has an exchange rate that is  agreed by each party.

Then  how to measure the exchange rate of each traded product?  Namely  by measuring the value (power) used by labor  in the production process.

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So it can be said that  the value of labor is an important factor in the economy , while money is only a tool to measure that value.

The value of the workforce varies, depending on several factors, such as the level of difficulty of the job, the level of education and skills of the workforce, the risk of the job, and so on. This value is  represented by wages ( wages ) .

In its development, not only labor is used in the production process, there are other factors involved, namely  capital ( capital )  and  land ( land ) ; so the production value must be calculated from each element used.

The completion of the production process is marked by the creation of a product that has a selling price. The selling price of the product which is calculated from the accumulation of production factors is called  the natural price .

Meanwhile, the real price of the product in the market is called  the market price , which is the base price plus the determined profit .

The more special or special a product, generally requires a larger capital to make it (reflected in the higher product price). This accumulation of capital  is what  drives economic growth .

The picture is as follows: an increase in capital creates a specialized product, which then creates a surplus. The surplus is used for investment, by creating other specialized products, then resulting in an increase in capital, so continuously continuously.

In terms of labor, Smith grouped it into  productive and non-productive labor ; the difference lies in the final product ( output ).

Productive labor produces  marketable output  for some period of time . Examples of productive labor are spinning factory workers and food factory workers.

Meanwhile  , non-productive labor produces  output  that is only consumed or utilized immediately , for example restaurant waiters, actors, and dancers.

In terms of national income, the more consumption of non-productive labor, the less income and capital accumulated for investment, so the smaller the added value for national income.

Smith also revealed, when someone wants to increase production capacity, usually he will borrow capital (debt) to other people. This capital loan is carried out in the hope of obtaining greater profits from the increase in production capacity.

So it can be said that  debt is one of the important elements in calculating national income .

When a debt transaction occurs, the lender and the borrower agree on certain clauses, including the sharing of  profits called interest .

If one day it is found that there are more lenders, then various options are available for borrowers. This prompts lenders to lower loan interest. In other words,  the more loan capital available, the lower the loan interest .

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Higher capital growth , followed by lower costs, will  encourage increased industrial productivity . As a result,  more and more workers are absorbed , so  the more competitive wages are received by workers .

Furthermore, Smith asserts that  economics is closely related to how to generate wealth for society and provide income for the state .

He put forward two systems to achieve this, namely  the mercantilist system ( merchantile system )  and  the agricultural system ( agricultural system ) .

The mercantilist system held that prosperity was obtained through the possession of money, gold, and silver . The more these elements are owned, the more prosperous the society and the state.

Meanwhile,  the agricultural system states that agricultural products are the main source of income and welfare of the country .

In the agricultural system there are three social groups that contribute to state income, namely landowners, farmers and workers, as well as traders and manufacturers.

Smith further stated that  the main task of the state is to protect people from violence and harm . The state must also  protect the economic interests of the  people, including overcoming the problem of economic and social inequality.

In addition, the state must  facilitate the needs of the community through public policies , for example in the education sector.

One way is through  the imposition of taxes . In this case, the community must contribute according to the proportion, by setting aside a portion of the income to be given to the state.

The money collected will be used in the administration of the state, as well as to ensure good governance in society.

These are some of Adam Smith’s main thoughts as stated in  The Wealth of Nations . Actually there are many more views of Smith that need to be explored and studied; Of course, it is the duty of all learners to find this, for the sake of the development of science. *

Reference:

  1. Butler, Eamonn. (2012). The Condensed Wealth of Nations and The Incredibly Condensed Theory of Moral Sentiments, CIS Occasional Paper 126.
  2. Smith, Adam. (1776). An Inquiry into the Nature and Causes of the Wealth of Nations, London.

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Economics Student of Universitas Gadjah Mada, Indonesia.