If you’re an American (and quite possibly if you’re not), the year 1776 is probably emblazoned as an incredibly important landmark in the history of government and political thought. My fellow Americans will immediately think of the Declaration of Independence, where a few men shockingly proclaimed that human beings didn’t need a king in order to run a nation.
These founders didn’t invent democracy, but they were the first to launch it at the nation-state level, and this experiment could hardly have had bigger repercussions.
Indeed, 1776 is a banner year for important documents in human history, but I’m not at all sure that the Declaration was the most influential or important tract to come out that year.
There’s another document that has done every bit as much to shape the world’s nations and the way its people live as the Declaration of Independence.
This other document is Adam Smith’s The Wealth of Nations.
If you’re already in on the game, you’re nodding your head by now. You get it completely: the Declaration of Independence and The Wealth of Nations have both shaped the modern world in equal measure.
If this is new to you, you’re wondering how in the world any other book could possibly compare in magnitude to the document that launched democracy worldwide, beginning with the United States, but swiftly heading across the Atlantic Ocean, culminating in the French Revolution.
Ultimately, four billion people today live under some version of democracy.
How could another book from the same century—never mind the same year—have the same type of impact?
Here’s how: in the same way that the Declaration ultimately shaped the way people ruled themselves, Wealth of Nations prescribed a method for how business would be done—both between individuals and between nations.
What was so revolutionary about the book? First, Smith used the example of a factory that makes pins (for clothing), and pointed out how one person could make a small handful of pins per day, but with the specialization of specific tasks, you could make ten or even a hundred times as many pins. This concept formed the basis for the assembly lines and mass production techniques later in the Industrial Revolution.
Second, and perhaps most importantly, Smith introduced the idea that individual people simply doing what they wanted—pursuing their own happiness in a free market—actually worked out far better than the existing system, where monopolies granted by the government reduced competition, leading to higher prices, poorer quality goods, and a lack of incentives to innovate.
Guilds acted as barriers to anyone interested in entering a trade, going further than protecting workers—their ostensible goal—and far into the territory of harmfully restricting who could enter a trade, and how they could do business. This really stifled individual ambition and entrepreneurship.
Smith also noted that if prices are allowed to fluctuate as demand rises or falls, then resources are allocated more efficiently. When the government dictated what could be produced, how it could be produced, and how much people should be paid for their labor, people were unable to respond to market signals—the needs and wants of other people.
Smith suggested that if people had the ability to choose what they did for a living, start their own businesses, and decide how to spend their own money, a powerful force would be unleashed that would ensure that a nation’s resources were allocated efficiently.
Smith called this powerful force “the invisible hand.”
Smith’s ideas ultimately unleashed the potential the potential of self-motivated individuals driven to improve their own lives. Because prices could freely adjust whenever there was a demand for something a business made or did, individuals and businesses had a rough guide toward the most productive activities, and ensured resources were used where they were most valued.
This idea extended beyond government borders, too, and into the realm of one government trading with another. Smith was adamant here: protectionism limited trade between nations, and free markets benefited both parties.
The idea of allowing markets to determine what happens in the lives of people was brand new, and it’s not without its major criticisms. Wealth inequality continues to be a major point of contention all over the world, and the monopolization Smith wanted to avoid is still a real threat.
Because everyone is interested in themselves (by design), we often miss the bigger picture, inadvertently entering into our own prisoner’s dilemma. We all live in the same world, and that world keeps getting smaller and smaller. Our actions affect other people in ways we couldn’t have imagined during Smith’s time.
1776 was a banner year for document publication, with the most important economic book ever written and a global proclamation that humans didn’t need a monarch.
Which document do you think had a bigger impact on the world we know today?
For me, the doc that had a bigger impact on the world is the short story my father wrote to convince my mother to go out with him. I'd not be here without it. But I guess that's not worth much to the rest of humanity :-P Nice article, as always :-)
Smith started the labor theory of value and Marx was at the endpoint. This is why political economy became economics when the basis of value had to be changed from labor to marginal utility. (Short Version e.g. their are arguments, equivocations, and a huge number of formulas in the longer version see also subjectivty versus objective theories of value)