![[Adam Smith.jpg]] In The Wealth of Nations (1776), Adam Smith sought to critique and ultimately replace the prevailing economic system of mercantilism, which dominated European thought and policy from the 16th to the 18th century. # Questions The statement, "The country with the largest profits are the first to fall," is a paraphrase of a sentiment expressed by Adam Smith in The Wealth of Nations, where he noted that the rate of profit is "always highest in the countries which are going fastest to ruin". He believed that excessive profits signal economic distress and a concentration of wealth driven by profit-seekers who have rigged the system through legislation, rather than genuine economic prosperity. Smith's Theory on Profits - **Pathology of High Profits:** Smith saw high profits as an unhealthy economic state, not a sign of success.  [Contrary to popular and academic belief, Adam Smith did not accept inequality as a necessary trade-off for a more prosperous economy](https://blogs.lse.ac.uk/politicsandpolicy/adam-smith-and-inequality/#:~:text=The%20key%20principles%20of%20Smith's,through%20legislation%20do%20concentrations%20occur.) - **Contrast with Ricardian Economics:** Unlike David Ricardo, who believed profit rates declined with the general prosperity of society, Smith argued that profit rates were naturally low in rich, stable countries and high in poor, or rapidly expanding (and thus unstable) ones.  - **Consequences of Wealth Concentration:** When profit-seekers are able to manipulate the economic system, they can create wealth concentration, which Smith viewed as a symptom of a system "going fast to ruin".  In Essence Smith's observation suggests that a country with extremely high profits is likely experiencing economic imbalance and a system that is not functioning for the broader population's benefit. Instead of being a marker of success, it's a warning sign that wealth is being concentrated and the economy is heading toward decline, often due to regulatory capture and other forms of economic manipulation. ## What is Mercantilism? Mercantilism was an economic system that emphasised the accumulation of wealth—particularly gold and silver—by nations. Its main features included: • A focus on a favourable balance of trade (exporting more than importing). • Heavy [[Government]] intervention in the [[Economics|Economy]], including tariffs, [[Monopolies]], and subsidies to domestic industries. • The [[Belief]] that wealth was finite, meaning one nation’s gain was another’s loss. • Colonisation and exploitation of overseas territories to extract resources and markets for goods. ## Smith’s Critique of Mercantilism Adam Smith argued that mercantilism was fundamentally flawed for several reasons: ### 1. Zero-sum thinking: Mercantilism assumed that wealth was fixed, but Smith believed wealth could grow through [[Productivity|productive]] activity. ### 2. Interventionist policies: Smith criticised government interference, such as [[Monopolies]] and tariffs, which distorted markets and limited competition. ### 3. Neglect of the consumer: Mercantilism prioritised the interests of producers and the state over consumers, leading to inefficiencies and higher prices. ## Smith’s Alternative: Classical Economic Theory In The Wealth of Nations, Smith introduced a new system based on the principles of free markets and capitalism. His key ideas included: • Division of Labour: [[Discipline|Productivity]] could increase dramatically through specialisation. • Invisible Hand: Markets, if left largely to themselves, would allocate resources efficiently through individuals pursuing their own self-interest. • Free Trade: Trade between nations should be unrestricted, as it benefits all parties through comparative advantage. • Minimal Government: Smith advocated for limited government intervention, focusing on essential functions like defence, justice, and public works. Smith’s ideas laid the foundation for modern [[Economics]] and replaced mercantilism with classical liberalism in economic thought, promoting ideas of free markets and individual enterprise. His work marked the beginning of the transition to what would become capitalist systems in the 19th century. --- Don’t these 2 paragraphs contraction each other!? Taken from 2 separate websites after I googled Adam Smith and [[GDP]].. ## Contradictory web search on GDP & Adam Smith >How do we measure economic growth? In the eighteenth century, well before the birth of [[Gross Domestic Product]] commonly used today, looking at the sign of the balance of trade was a way to take the pulse of a nation's economy. Adam Smith rejects this measure and instead suggests that we should look at population growth. Nations that are able to produce enough to support the life of a growing population have growing economies, nations with constant population have stagnant economies, and nations that face a declining population have contracting economies. Thus, population for Adam Smith is a proxy for our [[Gross Domestic Product]], indicating the changes in production in a country over time. >The ideas in _The Wealth of Nations_ provided the genesis for the concept of [gross domestic product (GDP)](https://www.investopedia.com/terms/g/gdp.asp) and transformed the importing and exporting business. Before the publication of _The Wealth of Nations_, countries declared their wealth based on the value of their gold and silver deposits. >However, Smith was highly critical of mercantilism; he argued that countries should be evaluated based on their levels of production and commerce. This concept was the basis for creating the GDP metric for measuring a nation's prosperity. https://www.investopedia.com/updates/adam-smith-economics/#:~:text=Gross%20Domestic%20Product%20(GDP),-The%20ideas%20in&text=However%2C%20Smith%20was%20highly%20critical,for%20measuring%20a%20nation%27s%20prosperity. ## GDP isn’t a very good measure of how we’re doing That GDP isn't a very good measure of how we're doing has been known since the concept was first pushed by [[Simon Kuznets]] coming on a century ago. It only includes monetised transactions, includes government at what it costs rather than the value it adds, doesn't discuss the distribution of income or consumption, only the gross amount and so on and on. It has its merits, in that it is also reasonably easy to calculate, something that isn't true of all of the potentially better alternatives. The really important thing to understand though is that it is not actually a measure of how well we're doing. It's a proxy for how well we're doing. And unfortunately it is becoming an ever less accurate proxy, as this new paper details http://www.voxeu.org/article/digitally-disrupted-gdp: https://www.adamsmith.org/blog/economics/gdp-is-becoming-an-ever-worse-measure-of-how-were-doing His ideas on [[Morality]] - Certainly, Lord Thomas. Adam Smith was a renowned Scottish economist and philosopher known for his pioneering work in the field of economics. He is often considered the father of modern economics. Smith introduced the concept of the "impartial spectator" as part of his moral [[Philosophy]], particularly in his book "The Theory of Moral Sentiments." This idea, sometimes referred to as the "internal witness," suggests that individuals have an innate moral sense that allows them to judge their own actions and behaviour as if they were an impartial and objective observer. It's a significant aspect of Smith's moral theory, emphasising the importance of conscience and self-reflection in determining what is morally right and just. # Fiduciary Duty Adam Smith’s work in The Wealth of Nations presents several ideas that can be seen as antithetical to the modern interpretation of fiduciary duty. While fiduciary duty focuses narrowly on maximizing shareholder profits, Smith’s views encompass broader ethical and societal responsibilities: 1. The Invisible Hand and Social Good: Smith argued that individuals pursuing their own self-interest could, through the “invisible hand,” unintentionally benefit [[Society]]. However, he also emphasized the importance of moral constraints: “By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” While fiduciary duty centers on profits, Smith acknowledged the unintended social benefits but also warned that self-interest should not override the common good. 2. Concern for the Common Good: Smith was wary of unchecked profit-seeking behavior, particularly when it concentrated wealth or harmed others. He cautioned, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.” This critique of monopolistic practices highlights his belief that prioritizing shareholder profits at the expense of society can lead to economic harm—contrary to fiduciary duty’s profit-maximization focus. 3. Ethical Responsibilities of Business Owners: Smith believed that businesses have obligations beyond profit. He noted, “No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable.” This speaks to a broader responsibility toward workers and society, which fiduciary duty, with its emphasis on shareholder returns, often neglects. Smith’s call for ethical behaviour, concern for the common good, and the moral limitations of profit-seeking suggest a more balanced approach to business than the narrow focus of fiduciary duty. His views highlight the potential dangers of prioritising profits over social and [[Ecology|environmental]] equity. `Concepts:` `Knowledge Base:` [[Capitalism]] [[Economics]]