Adam Smith’s The Wealth of Nations: A Modern-day Interpretation

Title:Adam Smith’s The Wealth of Nations: A Modern-day Interpretation
Editors:Karen McCreadie
Publisher:Infinite Ideas

Adam Smith’s The Wealth of Nations: A Modern-day Interpretation by Karen McCreadie is a short but incisive attempt to explain the relevance of economic concepts identified and explained by Adam Smith almost two and half centuries ago. Adam Smith’s “The Wealth of Nations” was the first comprehensive treatment of political economy. Karen McCreadie illustrates the timeless nature of Smith’s insights by bringing them to life through 21st century examples.

The idea of division of labour has resulted in enormous increase in productivity, especially in manufacturing industries. The idea which Adam Smith put forward from keenly observing operations in a pins making factory during the early years of industrial revolution has withstood the test of time and is still prominently visible in the productivity explosion in knowledge economies of 21st century. However, it is pertinent to point out that the idea of division of labour was discussed by Ibn-e-Khudun, a great Muslim sociologist and historian many centuries earlier than Adam Smith.

Smith’s second major idea of efficient allocative prowess of market forces also has had success against outright command economies in Western economic history. Given the pre-requisite conditions, market mechanism has proven to allocate resources much better than through government intervention in private goods and services.

The adoption of market principles by countries like China and Russia in the 1980s and 1990s respectively vindicate Adam Smith and his fervour for market mechanism. Adam Smith writes that the baker’s bread is obtained by the society at a cheaper cost not because the baker is benevolent, but because making and selling that bread enables the baker to purchase things in which he himself is not good at producing at a lower cost.

However, the baker himself does not exist out of nowhere. His ability to bake is also not naturally existing or gifted. It requires learning and that learning of arts and skills has an opportunity cost, both explicit and implicit. The explicit cost is the cost of education which can be very high in professions like engineering and medicine. The implicit cost is the time lost in earning which is not available for wage based work.

Indeed, the empirical evidence from Africa, South Asia and Latin America highlights that poverty and hunger along with infant mortality results in loss of human lives and the diminishing capability to work in others who survive. What if a person does not possess any skills which the firms in the labour market demand? That is where; the role of public support programs and social support institutions becomes vital.

Adam Smith pays little emphasis on the role of ethics in economic organization. Colonization, slavery, decimation of traditional societies and native population seem to have been overlooked by the great author. What if the poor people cannot afford food even if they principally produce it from their own hard work, toil and labour? Food and Agriculture Organization estimates that food per capita availability has increased since the 1970s, but still a billion people suffer from hunger. That is where; the distributional apathy of unfettered market mechanism becomes all the more prominent.

Following the idol of self-pursuit and greed in basic necessities has inevitably resulted in few countries dumping their crops as waste to keep prices high. It is striking, but perhaps inevitable that such an ethically neutral approach results in pharmaceutical companies complaining about lower prices in essential medicines or the bottling companies of essential water arguing for complete privatization. Does animal instincts of pleasure-pain, greed and self-interest the only driving force behind economic actions?

The under-provision of public goods, negative externality costs, over-exploitation of common property resources and increased use of environmental resources beyond their regeneration capacity are inevitable results of this uni-centric approach.

In the aftermath of financial crisis of 2007-09, the hugely expensive bailouts from public money highlight the incentive and agency problem where greed can undermine the need for shared responsibility and socially desirable choices and outcomes. Unfettered market mechanism has also come short in arresting the rising income and wealth inequalities. Wealth inequality partly results from and is worsened by the institution of usury and no broad based wealth tax. Islamic economic framework suggests a broad based wealth levy in the form of Zakat and prohibits Riba. This ensures that wealth accumulation can only result from labour income or putting wealth as equity investments in entrepreneurial projects. This can ensure a-cyclical redistribution without putting liquidity out of equity financial investments. Hence, these principles and institutions can enable to fill the ethical void towards a more equitable world and enable us to have shared prosperity.

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