Question

According to Smith, what effect does the number of people participating in the economy have on society’s wealth? Why?

Answer 1

Smith published his most important work, "An Inquiry into the Nature and Causes of the Wealth of Nations" (shortened to "The Wealth of Nations") in 1776 .In "The Wealth of Nations," Smith popularized many of the ideas that form the basis for classical economics.

Smith's work discusses the evolution of human society from a hunter stage without property rights or fixed residences to nomadic agriculture with shifting residences. The next stage is a feudal society where laws and property rights are established to protect privileged classes. Finally, there is modern society, characterized by laissez-faire or free markets where new institutions are established to conduct market transactions.

The ideas promoted by the "The Wealth of Nations" generated international attention and were a motivating factor in the evolution from land-based wealth to wealth created by assembly-line production methods made possible by the division of labor. Smith used the example of the labor required to make a pin to illustrate the effectiveness of this method. If one person were to undertake the 18 steps required to complete the tasks, they could only make a handful of pins per week. However, if the 18 tasks were completed in assembly-line fashion by 10 individuals, production would jump to thousands of pins per week. Smith argues that the division of labor and resulting specialization produces prosperity.

The ideas in "The Wealth of Nations," provided the genesis for the concept of gross domestic product (GDP) and transformed the importing and exporting business. Prior to the publication of the "The Wealth of Nations," countries declared their wealth based on the value of their gold and silver deposits. However, Smith was highly critical of mercantilism; he argued that countries should be evaluated based on their levels of production and commerce. This concept was the basis for the creation of the GDP metric for measuring a nation's prosperity.

At the time that "The Wealth of Nations" was published, many countries were hesitant to trade with other countries. Smith argued that a free exchange should be created because both countries are better off from the exchange. As a result of this shift in attitudes toward trading, there was an increase in imports and exports. Smith also argued for legislation that would make trading as easy as possible.