The Wealth of Nations: A Revolution in Thought

Against Mercantilism

An Inquiry into the Nature and Causes of the Wealth of Nations (1776) was, at its core, an attack on mercantilism — the dominant economic theory of the era, which held that national wealth was measured by gold and silver reserves and that trade was zero-sum (one nation's gain was another's loss).

Smith argued that wealth was not gold but productive capacity — the ability of a nation's people to produce goods and services. Trade was not zero-sum but mutually beneficial: both parties gain from voluntary exchange. Government-granted monopolies, trade restrictions, and colonial exploitation enriched special interests at the expense of the general public.

This was radical. Smith was attacking the economic logic that underpinned the British Empire — and doing so just as the American colonies were declaring independence partly over mercantilist trade restrictions.

The System of Natural Liberty

Smith proposed what he called 'the obvious and simple system of natural liberty': if you remove government-imposed barriers to trade and competition, the economy will organize itself more efficiently than any planner could manage. People pursuing their own interests through market exchange will, without intending to, advance the prosperity of society as a whole.

But Smith was no libertarian by modern standards. The Wealth of Nations explicitly endorsed government provision of public goods that markets would not supply — infrastructure, education, defense, and the administration of justice. Smith also supported regulation of banking, usury limits, and progressive taxation. He was deeply suspicious of businessmen conspiring to fix prices: 'People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.'