Adam Smith: How Nations Build Wealth Using International Trade

Adam Smith: A Wealth of Wisdom

Moral philosopher and economist Adam Smith authored influential theories of classical economics, yet some of his explanations are foreshadowed by earlier writers, such as Thomas Mun and Anne Robert Jacques Turgot.

In his prominent work, An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Scott explains in depth how nations build wealth through international trade. Scott argues that strong economies thrive from consumption, rather than production, and that it is important to refrain from too much regulation on this trade, as too much could create domestic monopolies that hurt society. However, Scott was not the first economist to advocate for international trade as a means of national wealth creation. Thomas Mun also claimed one must accumulate gold by expanding international trade volume, as there was no other means to treasure. Mun advocated mercantilism through common port facilities, where there should be more exports than imports to guard a nation’s wealth. Smith refutes this, claiming that these trade barriers hurt your nation by denying it access to better goods abroad, and that open trade is the true answer.

Pioneering what would be known as the “classical period” of economics, Smith introduces the concept of the “invisible hand”, explaining that economies can regulate themselves when left free through open trade, as self-interest benefit society as a whole. Smith also asserts that the wealthiest countries are those that have mastered division of labor. He explains that having workers perform a specific step in the pin-making process is much more effective and productive than a worker making a whole pin. Smith cautions that there is a limit to division of labor and specialization, being the “extent” of the market. Exchange can only happen with goods and services people want, evidenced by the forces of supply and demand.

This leads Smith to discuss the natural price of a product, which is always determined by supply and demand. These will always control costs, and Smith also elaborates that many factors may shift a price greater or lower than its natural price, but it will always hug a natural price. This is foreshadowed by Anne Robert Jacques Turgot’s theory of an equilibrium price that is balanced between supply and demand. This also applies to labor: Smith explains that as a business’s demand for labor increases, they increase their wages to attract labor fast when they need it. This again is foreshadowed by Turgot, as he claimed the the goal of both parties is to maximize benefit and minimize cost in the transaction, as any price will be based on the parties’ level of need rather than a true price.

Although Smith’s The Wealth of Nations is fundamental in its own right, early economists such as Mun and Turgot planted several seeds that Smith watered into lasting influences of classical economics.