COMMENTARY: The economist who changed the world

In many regards, Adam Smith’s The Wealth of Nations and its impact on the world economy is a triumph of reason over myopic intuition    Adam Smith stands out among the many economists that over the centuries led the development of economic analysis because his epic book, An Inquiry into the Nature and Causes of the Wealth of Nations, changed the course of history. It took great conviction that his reasoning was sound for him to publicly stand against the prevailing wisdom in the 1770s that a country’s wealth, and consequently its political power, was not measured by the stock of gold it held but instead by the amount of goods and services it could produce.
   When he wrote the book in the 18th century it was common practice to restrict trade and the movement of resources, raw materials and labor, so that cities, states and countries could impose regulations, taxes and tariffs to prevent the outflow of gold which was used as a means of storing wealth. Organizations of various sorts, such as guilds, to prevent competition were permitted to shield enterprises that generated the inflow of precious metals such as gold. Even the use of labor-saving technologies was restricted. 
   The objective of these policies was to protect profits. While these policies may have protected profits in the short run, they didn’t allow for the highest amount of profits, and therefore the highest amount of production, to be earned. Adam Smith claimed that the pursuit of higher profits by competing for more business would lead to higher levels of production and consumption in the economy. To compete for more business companies needed to have access to markets where they could sell their goods and to be able to attract the best workers and required amounts of raw materials from anywhere. The crux of the argument was that resources would be attracted by higher prices that only the most efficient, and therefore profitable, enterprises could pay. 
   He argued that unrestricted private sector activity in any region, be it a city, a state, a country or internationally would maximize the amount of goods and services that could be produced and consumed. Economies could focus on producing goods and services where they were more efficient and exchanging them for ones where they were less efficient. This is the basis of the argument that free trade among regions allows for the highest level of goods and services to be produced and consumed.
   It was this argument that led to the formation of the General Agreement on Trade and Tariffs (GATT) by 23 nations in 1947, which eventually became the World Trade Organization (WTO) and now has 164 member countries. Sadly, it took over a century and a half and a deep economic contraction due to restrictive policies, such as the Smoot Hawley Act, to motivate countries to form the GATT. 
   History has proven Adam Smith right. Since the GATT was signed, world trade and Gross Domestic Product, the measure of an economy’s production and consumption, has grown exponentially and much faster than the population. Income per capita in the world has increased and the share of the population living in poverty has declined.
   There are many factors underlying the growth of the world economy. These include technological advances that allow more output to be produced for a given level of inputs such as labor, healthcare advances and improved agricultural practices, and of course the reduction of restrictions on trade between countries. It can be argued that Adam Smith’s ideas regarding the importance of free trade was extended to the movement of ideas and know-how that underlies technological, healthcare and agricultural advances. 
   It is impossible to heap enough praise on Adam Smith for the efforts he made to enlighten the world about the perils of protectionist policies. In many regards The Wealth of Nations and its impact on the world economy is a triumph of reason over myopic intuition. While his analysis has been refined by many great thinkers over the 240 years since he published his thesis, the underlying framework has proven true over time.