In Adam Smith's book, The Wealth of Nations, he aims to create a new understanding of economics. Smith writes largely against the mercantile system that existed at the time of writing, which is 1776. He gives a complicated but excellent account of an economic system based in human nature and deeply rooted social dynamics. The book has fact-heavy digressions, tables, and appendices that blend hard research with broad generalities, showing his commitment to give evidence and proof with examples about the nature of economics that can still be used today.
The Wealth of Nations has five books. Books I and II focus on developing the idea of the division of labor, and describing how this division adds to the great wealth of a given society by creating enormous surpluses, which can be exchanged or traded among members or other countries. For example, countries should do what they do best. Bananas are better grown in Columbia than in the United States, so the USA should buy bananas from South America instead of trying to grow them in the USA. The US should sell cars to Columbia. The division of labor also fuels technological innovation, by giving focus to certain tasks, and allowing workers to brainstorm ways to make these tasks more efficient. Specialization brings efficiency and productivity. This, again, adds to efficiency and grows surpluses. Surpluses, Smith writes, may be either traded or re-invested. In the latter case, technologies are likely to improve, leading to even greater efficiencies.
Book III considers Great Britain (which was the economic powerhouse country at that time) in the context of the social evolution of society in general, which begins, according to Smith, with hunting and gathering societies and progresses through agricultural stages to arrive at a state of international commerce. According to Smith, the fall of Rome and the rise of feudalism slowed down this progression by creating a system of decreased efficiency.
Book IV goes on to criticize the “mercantile commerce” that characterized much of Smith's Europe. Smith's first major criticism of mercantilism is that it combines value and wealth with precious metals. According to Smith, the real measure of the wealth of a nation is the stream or production of goods and services that the nation creates. In making this point, Smith invents the idea of gross domestic product (GDP), which has become central to modern economics. The wealth of a nation is increased not by saving precious metals, but by increasing the productive capacity by expanding the market and by increasing trade.
An important theme that persists throughout the work is the idea that the economic system is automatic, and, when left with substantial freedom, can regulate itself. This is often referred to as the “invisible hand” or “free enterprise”. The ability to self-regulate and to ensure maximum efficiency, however, is threatened by monopolies, tax preferences, lobbying groups, and other “privileges” extended to certain members of the economy at the expense of others. Subsidies in the long term do not work but can work…