The Wealth of the Nations

In 1776 a Scotsman named Adam Smith (1723- 1790) published a book called The Wealth of the Nations. The book defended the economic system of capitalism. Key concepts in Smith’s book included stocks, the basic concept of supply and demand, and the force that drove the economy known as the invisible hand. While Adam Smith’s concept of supply and demand is relevant in today’s world, his arguments about the invisible hand and the relationship between wages and stocks have not held up.

Adam Smith formulated his theory of supply and demand to explain patterns in the market. He argued, “if all other factors remain equal, the higher the price of a good, the fewer people will demand that good” (Hayes, Adam, Investopedia, 2018). In other words, the more inaccessible a certain good becomes, the more the interest in the good declines. In contrast, if another good of similar quality is less expensive, demand increases. Furthermore, Smith explained that the division of labor is also a product of supply and demand and the natural“propensity to truck, barter, and exchange one thing for another” (F, Heath, Britannica, 2019).

This is because if demand for goods climbs, an increased number of people are required to produce the goods. While some argue that competition for a certain good leads to war and destruction, Smith explained instead that it can lead to profits, and as a result wages for workers. To summarize, Smith’s concept of supply and demand predicts market behavior and is supported by the profits made by businesses.

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Adam Smith was incorrect when he stated that an active stock market would always lead to higher wages.

In The Wealth of Nations, he claimed: “that the increase of stock, which tends to raise wages, lowers profit” (Smith, Adam, Wealth of the Nations 1776). However, throughout the history of US capitalism, especially during the 2000s, “stocks were also more likely to see negative returns when wage growth is higher than average or median” (Carlson, Ben, A wealth of common sense, 2018). This finding undermines Smith’s claim, as according to the Wealth of Nations the stock market is supposed to be growing when there are high wages. Furthermore, even with the seemingly massive stock gains made today compared to the declining market in the 1970s, the average hourly wage earners who constitute about 60 percent of the workforce are only making slightly more on average than they did forty years ago (Smith, Melissa, 2017, Peoples Policy Project). In sum, workers’ salaries have not been affected by the stock market, while net gains in the stock market have been somewhat hindered by higher wages. The concept of an invisible hand was used by Adam Smith to explain why less government intervention improved the economy. He argued against government tariffs by observing that governments caused additional harm to their citizens by denying them the opportunity to trade freely with nations. Government, according to Smith, did not compensate those who were harmed by the foreign tariff while also hurting innocent others who had no role in formulating the tariff policy. In other words, Smith believed that governments’ involvement in foreign trade was not justified, as it negatively affected the financial opportunities of citizens in those foreign nations.

The idea of attacking countries for financial gain, known as mercantilism, was opposed by Smith who thought that it pressured societies to act against their interests. Smith described the invisible hand as a natural force that helped the demand and supply of goods in a free market (Smith, Adam, 1776). Against this, many modern-day scholars have attacked Smith’s idea, saying that rapid economic growth occurs not because of invisible hands nor even because of free markets, but instead because of “asymmetric information, conspicuous consumption, fashion, subjective valuing and externalities” (Nielson, Robert, 2012, The Flaw of the Invisible Hand). Companies can manipulate customers into buying their products using other methods aside from the price. Because of this, companies that know the social trends going on will have an advantage in selling goods, more often than a company with the cheapest goods. Iphones are a great example of this, as Apple managed to create the demand by releasing 9 generations of the same product, with small differences. People could probably find phones that embodied most of those features at a cheaper price but decided not to as it was a social norm to have the iPhone. This greatly exemplifies how certain corporations can manipulate the invisible hand. Smith’s ideas about the invisible hand and the relationship between stocks have been proven to be inaccurate. Scholars have demonstrated that other forces including consumption, valuing, and trends drive the economy and that the increased value of a company’s stocks does not result in a pay raise for a company’s workers. While certain theories in Smith’s Wealth of Nations do not hold up today, many share his faith in the power of the free market.

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The Wealth of the Nations. (2022, May 08). Retrieved from

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