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The Wealth of Nations, Adam Smith’s most famous economic treatise, is his comprehensive work. If you leave the market alone will it do good? Or will it do evil? Adam Smith started this debate.

Creation of Wealth

Adam Smith was a Scottish country gentleman in an age and social circle where it was fashionable to be an intellectual. His intellectual inquiries were broad and well honed at the best universities. He became best known for his moral writings. His essay on moral sentiments was his famous work in which he championed an idea that humans derive great personal enjoyment by seeing the well being of other humans. Which is ironic because when he began writing economic essays, he became most famous for championing self-interested behavior.

Adam Smith’s The Wealth of Nations was actually published in five volumes in 1776, which was a very important year in world history. He published at the height of revolutionary fervor, not just in Europe, but of course in the American colonies in the nation that would eventually become the United States. A lot of the great philosophers of Adam Smith’s day were writing about the rights of man and about the forms and nature of legitimate government and how to do government well.

Instead of talking about the nature of legitimate government he gravitated toward what we have come to call economy today, changes in the way that people were making a living and how wealth was being created.

It was an age of great change in production. Manufacturing was beginning, capitalization was beginning, and for the first time in world history people were using banks and stock sales to amass large amounts of capital, which allowed them to create incredibly large, multinational enterprises. Colonialism figured in as those large enterprises used raw resources from colonies in what became a global trade. Things were progressing on a scale that was vastly greater economically than they had ever been in human history. Instead of writing about what makes government good, Smith wrote about what makes economy good for people.

The Invisible Hand

The idea that Smith is most famous for is the idea of the invisible hand of the market. He was a champion of what we have come to call today the free market. People should be able to trade their goods with one another however they see fit. You should just let them go. If government had a role in the market, it was simply to guarantee the enforcement of economic contracts. If I say I’m going to pay you for the widgets that you produce then somebody needs to enforce the payment. His theory,which was almost a moral theory of the market, was that if all the various economic players—the laborers, the producers, the manufacturers, the farmers—pursued their maximum economic self-interest and maximum profit, then the overall market would rationalize.

It would become an efficient market that created more and more wealth, and all society would be better off. This benefit of the market was like an invisible hand, doing good things even when you couldn’t see it. The invisible hand of the free market depended on specialization in labor. Adam Smith's famous example involved the pin factory. He said that one worker who set out in the morning to produce a pin all by himself would be lucky to produce one pin in the course of a day. But in contrast to that, imagine a pin factory where some workers work with the iron ore, some with the production of the pin themselves, with sharpening other people wok on selling it. If you each specialize in a task, you could producer thousands of pins in the course of a day and if you boosted productivity, you boosted wealth. The market itself would determine what it paid. If your trade was in demand, you would be paid more. If your trade was not in demand you would be paid less, and in this way, market mechanisms chose what labor was valuable and what was inefficient in productivity. Why would the market pay someone for labor that it did not need? That would decrease productivity in society and hurt everyone.

In his day, he wrote against the colonial mercantilism that he saw around him in which colonial populations were forced to buy expensive goods by the colonial power. Anytime the government foisted goods on a people, decided how the market would behave, or protected trade from foreign competition, you were hurting society. Government should leave the market alone because it takes care of itself with the invisible hand.

The Free Market

The Wealth of Nations was published 1776. In 1778, Adam Smith would leave academia and take a job as head custom official in Britain. He was against protective tariffs, and then got a high paying government job enforcing government tariffs. The guy was a high-minded moral gentleman who was not afraid of sacrificing his scruples in order to take a lucrative government post. He wouldn’t be the first; he’s not going to be the last. He was immediately well known in his day as a moral philosopher and a philosopher of generosity. It would take people a while to understand the importance of his thinking in economy, because he was essentially inventing economic analysis. But his legacy in economic thinking through the centuries cannot be overstated.

Anytime you read about the free market, you can thank Adam Smith. If Smith walked into today’s world and grappled with some of the great economic labor issues of the day like outsourcing productivity, or manufacturing our services to cheaper countries where wages were less, he would agree. You should get the work done as cheaply as you can no matter what because that would boost productivity and that would generate more wealth for your society.

The invisible hand of the free market became an idea that remains influential today in international trade talks or labor disputes. He invented the idea of economic market analysis and Adam Smith more than any other individual in history and should be considered the father of economics.