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Adam Smith’s 1776 Wealth of Nations is a timeless classic that back in the day, alongside The Declaration of Independence, had a lasting effect on the world. Inquiry Into the Nature of the Wealth of Nations, now commonly known as The Wealth of Nations, aimed at debunking the dominant mercantilist system. Back in the day, Smith was a visionary and an innovative thinker that predicted the world’s economic development and outlined key factors ensuring the nations’ prosperity. Smith, a Scottish philosopher by trade, saw little sense in mercantilist values, for instance, the necessity to hoard gold and tariff goods from abroad due to the finite nature of wealth. In practice, it meant that nations were stifling international trade by choosing to sell products but not buy any. This paper will discuss the critical points of Adam Smith’s work, highlights of Chapter VIII, and reasons why his thought was way ahead of his time.
The Invisible Hand
Adam Smith argues that people’s natural egotism and self-interest were the key to new financial and market opportunities constituted the free-market force, otherwise known as the invisible hand. While an average individual craves wealth and success, he or she has to consider how they could create value and market their products and services to as many people as possible. Attracting many customers takes meticulous planning and constant improvements, which, in turn, leads to the emergence of high-quality products that meet the market’s demand. On a larger scale, allowing people to sell and buy as they please and opening markets to partake in international competition results in the prosperity of the entire nation.
Elements of Prosperity
The invisible hand is not a distinct entity but a sum of events and tendencies taking place in a free market. Moreover, letting the free-market force unfold according to naturally balanced demand and supply is a significant but not the only element of wealth. Adam Smith reasoned that a nation also needed citizens’ enlightened self-interest, limited government, stable currency, and a free-market economy. According to Smith, enlightened self-interest entailed long-term planning, which allowed a producer to care about his or her customers’ needs and predict changes. At the same time, a limited government would put more effort into solidifying the currency than meddling with businesses and international trade. As of now, critics claim that to be complete, the list of elements of prosperity would have to include a decent pricing theory and a mention of entrepreneurship.
On Wages and Labor
In Chapter VIII, Smith is positive about the possibility of both grow profits and raise wages. He denies the notion that an economy is a zero-sum game in which one participant’s gains inevitably subtract from what someone else is making resulting in losses. Thus, according to Smith, masters, or how we would call them today, employers, do not profit mainly from lowering wages and owning both labor and means of production but from growing their business. The described scenario is rather ideal than common: Smith admits that in real life, workers are often neglected and mistreated by their masters. The overall tendency is that wages undergo downward pressure as masters act out of their interests. Moreover, masters are fewer in number and more able to unite forces and impose new rules on workers if they deem it necessary. Interestingly, in the present chapter, some of Smith’s ideas overlap with those of Marx. Namely, Smith reasons that workers would like to receive as much as possible for their labor whereas masters want to give as little as possible, which is reminiscent of Marx’s contending classes.
Smith’s ideas about wages and labor gave rise to so-called subsistence theories which highlight the supply aspects of the market while not paying enough attention to the demand aspects. The supply of workers is ever-increasing and is the basic force responsible for the decline in real wages. As a result, they are driven to the minimum required for subsistence, and namely, for covering such basic needs as food and accommodation. Smith argued that workers’ wages needed to be sufficient to not only live but also to bring food to the table for the entire family. As opposed to other classical economists, Smith’s views were far from pessimistic. If Smith saw wages as a means to survival, such thinkers as Ricardo and Malthus saw them as an incentive to perpetuate the competition. Even if wages were not enough to cover all expenses, the population could always adjust to the means.
It is impossible to dismiss Smith’s legacy and its impact on the modern world. Yet, a question arises as to how viable his ideas today and if they apply to the new reality of the business environment. For instance, the invisible hand and the prosperity it might bring seem utopian. Hard data shows that at any point in time, political, social, and economic power are distributed unevenly, thus, giving specific individuals more leverage and opportunities. The disadvantaged cannot be fully autonomous agents in the market and benefit from what the free market system has to offer.
Others, however, claim that the idea of the invisible hand is valid but constantly misinterpreted by those who fail to have a deeper understanding of Smith’s groundwork. The concept itself receives very little attention in the body of the book and has accompanying notes on considerations other than money that individuals have when making investments and other business decisions. Thus, Smith does not rule the human factor out of the equation and even makes a claim that stability often trumps economic profits in terms of motivation.
As for the wages and labor section of The Wealth of Nations, it appears that Smith regards workers as a homogenous human capital with transferable and, hence, subject to substitution. In reality, the job market is intrinsically diverse with specialists who are “one of a kind.” Due to such heterogeneity, masters might compete against each other as well and make adjustments to attract workers, especially with good education, outstanding skills, and work experience to match.