Don't be misled by the invisible hand
This book is so widely cited and interpreted contrary to the author's original thought, that every economist should read it completely to avoid being misled by such incorrect interpretations.
First, let us take the "invisible hand" metaphor. When I have studied economy in the University, I was taught that almost the entire book is devoted to the "invisible hand" which means "self-corrective markets", "liberalism", "Laissez-faire" and "state non-intervention". After reading this book, I have found out that Adam Smith did use the term "invisible hand" only once in the entire book, in the discussion of domestic versus foreign trade.
To illustrate the point, let me quote the text where term "invisible hand" is used: "First, every individual endeavours to employ his capital as near home as he can, and consequently as much as he can in the support of domestic industry, provided always that he can thereby obtain the ordinary, or not a great deal less than the ordinary profits of stock. Thus, upon equal, or nearly equal profits, every wholesale merchant naturally prefers the home trade to the foreign trade of consumption, and the foreign trade of consumption to the carrying trade. In the home trade, his capital is never so long out of his sight as it frequently is in the foreign trade of consumption. [...]Secondly, every individual who employs his capital in the support of domestic industry, necessarily endeavours so to direct that industry, that its produce may be of the greatest possible value. [...]As every individual, therefore, endeavours as much as he can, both to employ his capital in the support of domestic industry, and so to direct that industry that its produce maybe of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it."
After reading this book, I have found out that Adam Smith was influenced by French Physiocrats. The Physiocrats saw the true wealth of a nation as determined by the surplus of agricultural production over and above that needed to support agriculture (by feeding farm labourers and so forth). Other forms of economic activity, such as manufacturing, were viewed as taking this surplus agricultural production and transforming it into new products, by using the surplus agricultural production to feed the workers who produced the extra goods. While these manufacturers and other non agricultural workers may be useful, they were seen as 'sterile' in that their income derives ultimately not from their own work, but from the surplus production of the agricultural sector.
I have found out that this book is not about "invisible hand" or "Laissez-faire". It is quite a complete study that covers almost every basic aspect of the economy, and remains an effective introduction to economics to this day.
This book is so often mischaracterized and politicized that I suggest you to read it completely by yourself. This is a must read for every economist. You can get an audio version of this book to avoid lengthy read.
Prosperity or poverty. Smith vs Marx
Adam Smith like Marx sees changes in the economic system as a logical, inevitable sequence of events. For example the power of the landed aristocracy declined as a consequence of the increasing importance of the towns. Good government was a result of this decline as people that had worked on the estates in conditions close to slavery moved to cities where they had considerable freedom. The difference between Marx and Smith is that Smith considered all of these changes leading to steady improvements whereas Marx considered the results of capitalism and industrialisation and urbanisation disastrous. Marx living about one hundred years later than Smith. The system had not produced wealth for all as Smith foresaw. Smith believed that if governments would refrain from interfering in the economy prosperity would increase for all. Marx considered that a revolution whereby the capitalist class would be eliminated and private property is abolished a necessary consequence of the exploitation of the workers. Smith believed the opposite in that private property was the main driving force for progress. Their analysis of the historical development looking at it now shows many serious mistakes. However many more of the ideas of Adam Smith are still valid in hindsight than those of Marx. Somewhat surprising both being persons with interest in morality do not ascribe any importance to that subject. Both are imprisoned by the concept that "mechanical" or systemic changes in society can explain changes in the economic system. Many economists to day still fall in the same trap. They do not believe that moral standards can play an important role in the development of economic system. They therefore typically reject new developments such as "socially responsible investing ". Like "Capital" of Marx, the "Wealth of Nations" presents many interesting facts about for example the near slavery conditions in the large agricultural estates throughout Europe. This information is a good antidote to the romantics that believe conditions in the countryside in the past were very pleasant. The Wealth of Nations is lucidly written and shows quite clearly the dependence of wealthy creation on essential but minimal government.
A Winner!
This book is a classic of economic thought!
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