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Revolution or Renaissance

D. Paul Schafer

Part I - The age of economics

1. Origins of the Economic Age

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The task is far from simple, yet understanding ourselves and the world we have created—and which in turn creates us—is perhaps the single most important task facing mankind today.
—Edward Hall (1976), p. 195

1If the origins of the economic age can be traced back to a single year, surely that would be 1776. In that three events occurred that were destined to year year, have a profound effect on the human condition for centuries to come.

2The first event was the signing of the American Declaration of Independence. It transformed the way people, countries and the world viewed government, governments, freedom, democracy, politics, and the political process. It also set the stage for the development of the United States as the most powerful nation on Earth, a nation that many would say is the epitome of the economic age. The second event was the first use of James Watt’s steam engine in the blast furnaces and manufacturing ventures of John Wilkinson and Matthew Boulton in Britain. This opened the doors to a profusion of technological inventions and innovations in science, industry, agriculture, and transportation that had a profound effect on the world situation, largely by making it possible to shift from dependence on animal power to dependence on machine power. The third event was the publication of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations. It opened the doors to new ways of thinking about and looking at wealth. With this came new attitudes to the nature, creation, and significance of wealth, as well as the way wealth could be used to increase people’s standards of living, make improvements in society, and increase the power and prestige of countries in the world.

3As important as the signing of the American Declaration of Independence and the introduction of Watt’s steam engine were in contributing to the origins of the economic age—and there is no intention of downplaying or diminishing their importance here—it is the publication of The Wealth of Nations that was by far the most powerful of these three events. Anyone who doubts this need only reflect on the impact that books such as Darwin’s On the Origins of Species or Marx and Engels’s The Communist Manifesto have had on the human condition to realize what a powerful effect a book can have on the world. Those who doubt the ability of a scholar such as Adam Smith to have a profound effect on the world situation need only reflect on the following statement by John Maynard Keynes, one of the twentieth century’s most respected economists (1936, p. 383):

the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.
Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.

4What makes The Wealth of Nations and Adam Smith’s theories so powerful is the fact that they paved the way for the economic age we are living in today. It is an age predicated on such fundamental forces as economics, economies, economic growth, production, consumption, specialization, competition, profit maximization, capitalism, trade, materialism, and the marketplace. If we are to understand the impact that Smith and his book have had on people and countries in every part of the world, and on the world as a whole, since 1776, we must examine the subject matter of this seminal publication and the thoughts of this remarkable individual in depth. Contained here are the keys that are necessary to understand the origins of the economic age and the nature of the present world system.

The Wealth of Nations

5Of course people had been concerned with wealth for hundreds of years before Adam Smith’s arrival on the scene. Military campaigns were organized to acquire it, geographical expeditions were mounted to discover it, political leaders were obsessed with it, and countries were invaded, conquered and colonized to procure it. Think, for example, of all the geographical explorations mounted in the fifteenth, sixteenth and seventeenth centuries to enhance the flow of gold, silver, and other precious metals into Europe, as Spain, Portugal, Britain, France, the Netherlands and other countries endeavoured to find trade routes to East Asia to capture the wealth of the Orient and the spice and silk trades. The whole world was being turned topsy-turvy in an effort to discover and acquire wealth.

6Even immediately before Smith’s time, politicians, practitioners, planners, and countries were preoccupied with wealth, especially national wealth. In Europe an elaborate system called mercantilism was created to show how wealth in general, and national wealth in particular, could be increased most effectively (see, for example, the studies of mercantilism by Heckscher and by Wilson). Mercantilism, created at a time when there was a great deal of rivalry and warfare between nation states, was developed most fully and successfully in Britain. It was based on the conviction that wealth and power could be enhanced most effectively through an elaborate system of domestic development, international relations, colonialism, and the maintenance of a favourable balance of trade. The object was always to ensure that more gold, silver, and other precious metals flowed into a nation state than out of it, since this would tip the balance of trade, and hence the balance of power and wealth, in that state’s favour.

7This was particularly important when rivalry and warfare between nations were viewed as a “zero sum game,” with one nation’s loss being another nation’s gain. Thomas Mun, who, along with Edward Misselden, Sir William Petty, Sir Josiah Child, Sir Francis Bacon and others, laid the theoretical and practical foundations for the mercantilist system, wrote (as cited by Spiegel, p. 108): “The ordinary means to increase our wealth and treasure is by foreign trade, wherein we must ever observe this rule: to sell more to strangers yearly than we consume of theirs in value.” According to mercantilist theory, this was best achieved by such measures as increasing exports and decreasing imports; imposing rigid state control of industry, commerce, and manufacturing; granting monopolistic privileges to manufacturers under royal charters; and, especially, having the government intervene in the economy through regulation of production, promotion of international trade, the levying of duties on imports, the signing of treaties with well-defined objectives with other countries, providing exclusive trading privileges to specific companies, and exploiting the resources of other nations.

8In France, a different system, physiocracy, was devised to show how France could increase its wealth, power, and prestige in the world (see works by Meek and Turgot). It was called physiocracy because it was based on the idea that there is a natural order in the world, an order best realized through domestic rather than international development. This was largely because the French believed in the supremacy of the natural world, which accounts for the prominent role that agriculture has always played in the economic and cultural life of France. Victor Mirabeau, François Quesnay, Anne-Robert-Jacques Turgot and other physiocrats were appalled by the idea that one nation’s wealth, power, and prestige in the world might be achieved at the expense of other nations. According to the physiocrats, wealth was created in agriculture rather than in manufacturing or commerce. This was because seeds and livestock could be multiplied many times over when cultivated and mated. Moreover, the physiocrats believed that a produit net, a surplus of production over consumption, could be realized in agriculture but not in manufacturing or commerce. This led the physiocratic thinkers to devise an elaborate tableau économique to show how wealth was created in agriculture and then circulated throughout the entire economy, much as blood flows through the human body.

9Adam Smith admired many aspects of physiocracy. What particularly attracted him were the quest to find scientific and empirical laws capable of explaining economic behaviour; the tableau économique, which shed light on the circulatory nature of the economy; the idea of the produit net, which showed how a surplus of production over consumption could be created, resulting in capital accumulation; and, especially, the idea that minimal government involvement in the economic and the social affairs of nations, expressed in such physiocratic slogans as laissez faire, laissez passer (roughly, “leave things alone and let everything happen of its own accord”), was the best way to create and increase wealth.

10Unlike the physiocrats, Smith believed that the origins of wealth lay largely in manufacturing and commerce, not in agriculture. This was due to the fact that productivity in manufacturing and commerce could be increased many times more than in agriculture. It should be remembered that Smith was writing at a time when Britain and France were still largely agricultural and agrarian in nature, although Britain was standing on the cusp of an industrial revolution about to assume gigantic proportions. In fact, a number of writers have contended that Britain had already achieved one industrial revolution when Smith arrived on the scene, and was about to realize another (see Nef). The major reason given for this was that Britain placed a much higher priority on commerce and manufacturing, whereas France placed a much higher priority on agriculture.

11While Smith was attracted to many aspects of physiocracy, he was strongly opposed to mercantilism, for two reasons. First, he objected to the idea that wealth is synonymous with gold, silver, and other precious metals. Smith defined wealth in terms of “the necessaries and conveniences of life”: if they were decreasing, or if they were increasing at a slower rate than the population was declining, then wealth was declining and people were becoming worse off, regardless of the flow of precious metals into or out of the country. Second, Smith was convinced that the key to the creation and augmentation of wealth lay in minimum rather than maximum state intervention in the economy. This led Smith to conclude that economic and political liberalism was a prerequisite for creating and increasing the wealth of nations, and therefore also their power and prestige in the world.

12The combined effect of these two objections led Smith to create an elaborate economic system to show how wealth could be created and enhanced most effectively. The key elements in this system were as follows: making the economy the centrepiece of society, and the principal preoccupation of public and private policy- and decision-making; the recognition of labour as the principal source of all value and wealth; the promotion of “the division of labour,” or labour specialization, as the key to the creation and augmentation of wealth; the expansion of the size of the market to facilitate the division of labour; the assertion of the importance of “productive” as opposed to “unproductive” labour; the use of the market as the main vehicle for discharging economic functions; facilitating as much capital accumulation, international trade, and colonial development as possible; relying on “enlightened self-interest’ on the part of individuals and institutions; and depending on an “invisible hand” to guide the economy and society more generally. If nations wanted to increase wealth, enhance the standard of living of their citizens, make improvements in society, and play powerful roles in the world, they should commit themselves to these essentials and build an economic system equal to the task.

13In order for Smith’s system to function effectively the economy had to be made the principal preoccupation of policy-making. This, in his view, was the key to increasing the “necessaries and conveniences of life,” and making improvements in society. If the economy was expanding, particularly at a faster rate than the population, then people would become better off because the “necessaries and conveniences of life” would be increasing per capita. However, if the economy was contracting, people would become worse off, again per capita. (The only exception to this general rule was when a population was decreasing at a faster rate than the “necessaries and conveniences of life” were. In this case, people would be better off, but only slightly.)

14Given the importance of expanding the “necessaries and conveniences of life,” it was natural for Smith to ask who was primarily responsible for this expansion. Smith’s unqualified answer was labour. In his view it is labour, more than any other factor or factors in society, that is responsible for creating wealth. This is how The Wealth of Nations begins (p. 104):

The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniences of life which it annually consumes, and which consists always either in the immediate produce of that labour, or in what is purchased with that produce from other nations. According, therefore, as this produce, or what is purchased with it, bears a greater or smaller proportion to the number of those who are to consume it, the nation will be better or worse supplied with all the necessaries and conveniences for which it has occasion.
But this proportion must in every nation be regulated by two different circumstances; first, by the skill, dexterity and judgement with which its labour is generally applied; and, secondly, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed. Whatever be the soil, climate, or extent of territory of any particular nation, the abundance or scantiness of its annual supply must, in that particular situation, depend upon those two circumstances.

15Given the importance of labour to the functioning of Smith’s entire economic system, it was necessary for Smith to deal with labour in abstract, theoretical terms as well as in specific, practical terms. In order to do this Smith evolved a version of the labour theory of value that was to dominate economic thinking for more than one hundred years following the publication of The Wealth of Nations. It is a theory based on the conviction that there are really two types of value. First, there is “value in use” (or use value). This type of value results when people use the things that they produce or that are provided for them by nature. Second, there is “value in exchange” (or exchange value). This type of value results when people exchange things with other people in a marketplace. There is a significant difference between the two, according to Smith (pp. 131-32):

The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.

16Smith’s distinction between the two kinds of value may be further illustrated in our own time with his example of water: as water becomes scarce and there is more demand for it, its exchange value increases correspondingly, and there is considerable evidence to suggest that the exchange value of water will be very high in the future.

17While use value is important, it is exchange value that is by far the more important of the two as far as the economic system is concerned. This is because the large majority of people are unable to make the things they need and must therefore engage in exchange in a marketplace. According to Smith, enlightened self-interest, not benevolence or compassion, lies at the heart of this process. In one of the most telling passages in The Wealth of Nations Smith states (p. 119): “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.”

18If enlightened self-interest, exchange value, and labour are the key ingredients in Smith’s economic system, it is essential to understand how they function within it. In order to do this it is necessary to deal with Smith’s convictions concerning labour in general and the division of labour in particular, since the creation and augmentation of wealth are largely a function of labour, and especially of labour specialization, or the division of labour.

19The division of labour occurs when labourers specialize in one or two production functions, rather than generalizing across many production functions. Smith uses the example of the pin factory to drive this point home with startling clarity and conviction (p. 110):

I have seen a small manufactory of this kind where ten men only were employed, and where some of them consequently performed two or three distinct operations... they could, when they exerted themselves, make among them about twelve pounds of pins in a day. There are in a pound upwards of four thousand pins of a middling size. Those ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand, eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they could certainly not each of them have made twenty, perhaps not one pin in a day; that is, certainly, not the two hundred and fortieth, perhaps not the four thousand, eight hundredth part of what they are at present capable of performing, in consequence of a proper division and combination of their different operations.

20If the division of labour is of vital importance in the creation and augmentation of wealth, because people can increase their output substantially when they specialize, what is it that limits specialization? According to Smith, it is “the size of the market.” The larger the market, the more specialization is possible; the smaller the market, the less specialization is possible. The solution, therefore, is to expand the size of the market as fully and rapidly as possible, in order to realize as much specialization or division of labour as possible.

21This cannot be accomplished, in Smith’s view, when there is a great deal of state intervention in the economy. It can only be accomplished when there is as little state intervention as possible, since this allows the economy to be as free as possible from restrictions and constraints. It is clear from this why Smith was so opposed to mercantilism. Whereas the mercantilists advocated state control of the economy and a great deal of intervention in the marketplace, Smith advocated freedom from the state. This was best accomplished, according to Smith, by pursuing a policy of economic and political liberalism, allowing “an invisible hand” to govern the actions of individuals, institutions, the economy, and society generally. It is this “invisible hand” that causes individual and societal interests to converge rather than conflict. This is because, according to Smith, there is a “natural order in the world” that brings this about, even if individuals, institutions, and society as a whole are totally unaware of it. As Smith contends (quoted by Wesley Mitchell, Vol. 1, p. 52):

As every individual, therefore, endeavours as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value, every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry, he intends only his own security, and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good. It is an affectation, indeed, not very common among merchants, and very few words need be employed in dissuading them from it.

22Smith’s notion of the harmonious convergence of individual, institutional and societal interests caused him to believe fervently in political and economic liberalism (quoted by Wesley Mitchell, Vol. 1, p. 53):

the individual would get on best if he was left alone by the government. But the income of the nation as a whole is nothing but the sum of the incomes of the individuals who comprise the nation; therefore, the policy which is most advantageous to individuals must be one which is best for nations. This is the fundamental argument for laissez faire.

23This belief in laissez faire caused Smith to conclude that there is a self-regulating mechanism at work in the economy that causes everything to work out for the best in the end. When labour and capital are free to move wherever and whenever their interests are best served, and when the economy is left free to make the adjustments that must be made as the supply and demand for products and factors of production change, an equilibrium is achieved that is in the best interests of individuals, institutions, and society as a whole. It was this belief that came to dominate economic thinking until well into the twentieth century, when John Maynard Keynes arrived on the scene to challenge it, although many would contend that it has returned today.

24If laissez faire, labour specialization, market expansion, enlightened self-interest, an invisible hand, and the self-regulation mechanism play crucial roles in Smith’s view of the creation and augmentation of wealth, so too does capital accumulation. This results when wealth produced in a given period is not entirely consumed. This yields a surplus of production over consumption in one period that can be ploughed back into further expansion, and the production of more “necessaries and conveniences of life,” in the following period. Naturally, the larger the surplus, the greater the potential for capital accumulation, and therefore the greater the possibility of economic growth. The accumulation of capital therefore plays a crucial role in Smith’s system because it provides the wherewithal that is needed to increase wealth.

25This, in the main, is Smith’s theory of production. However, Smith also had a theory of distribution. It is necessary to examine this theory, since, as Karl Marx pointed out in the nineteenth century, the creation and augmentation of wealth are affected not only by the production of wealth, but also by the distribution and use of wealth by the various classes and interest groups in society. If wealth is squandered rather than used productively, production can be affected adversely rather than favourably.

26In order to show how wealth is distributed Smith divided society into three classes. First, there were the labourers. These were the people who worked on the farms and in the factories that were beginning to evolve in Smith’s day. They received wages for their work. Second, there were the capitalists. They owned the machinery, equipment, and capital used in production, and received profits. Third, there were the landlords. They owned the land used in production, and received rents for its use. In most societies, and particularly in economically advanced societies, these three classes contribute their factors of production in varying proportions to create wealth. According to Smith, the wages, profits, and rents that they receive in return vary depending on many factors, including the productivity of labour, the suitability of land, the size and character of the stock of capital, the growth of the population, the extent of the market, the division of labour, the dexterity and skill of workers, and so forth.

27Generally speaking, Smith believed that wages, profits, and rents would all rise as wealth increased and economic growth took place. This would mean that all classes would be better off. Labourers in particular would be better off because their wages would increase as wealth increased, thereby giving them more purchasing power. The one exception to this rule for Smith was when labourers increased the size of their families more quickly than their wages increased. In this case wages might remain constant or even fall somewhat, despite the fact that wealth was increasing for society as a whole. Rents would also increase as wealth increased, according to Smith, since more land would be brought into cultivation as population increased and landlords would be able to charge higher rents, both for the use of their existing land and for the use of the new land they brought into cultivation. Profits would also increase as wealth increased, although not as fast as wages and certainly not as fast as rents. This was because competition among producers would tend to drive profits and profit margins down rather than up.

28It is this optimistic view of distribution, particularly when it is combined with the optimistic view of production, which explains the enormous popularity of The Wealth of Nations and Adam Smith’s theories, which has lasted ever since they were first propounded. Everybody gains, in Smith’s system, as wealth increases. Standards of living improve for labourers, capitalists, and landlords alike as the size of markets expands, the productivity of labour increases, more specialization and division of labour takes place, and capital accumulates.

29Nevertheless, according to Smith there are a number of exceptions to this general rule. One, as we have seen, is when a population is growing at a faster rate than wealth is being created. Another is when more wealth is withdrawn from the income stream through squandering and frivolous expenditure than is returned to the income stream through capital accumulation and reinvestment in production. Smith thought that landlords might be particularly guilty of this, since most of their land was inherited and they were able to “reap where they had not sowed.” Yet another exception, as we have also seen, is when the state interferes with the free functioning of the economy.

30A final exception, and an exception that worried Smith a great deal, is when there is too much “unproductive labour” in society. Before we can determine what “unproductive labour” means, it is necessary to examine what Smith meant by “productive labour.” According to Smith, labour is productive when one or both of two conditions prevail: either a tangible product or material commodity of lasting value is produced, or a surplus of production over consumption exists and can be reinvested in production and capital accumulation. Labour is “unproductive” when either or both of these conditions do not prevail. Smith illustrates what he means by “unproductive labour” with the example of the menial servant. Whereas a labourer in manufacturing adds to the value of the materials on which he or she works, because a tangible product is produced or a surplus of production over consumption is created, the menial servant adds to the value of nothing, since he or she produces neither a product nor a surplus. This led Smith to conclude (p. 430) that “A man grows rich by employing a multitude of manufacturers: he grows poor by maintaining a multitude of menial servants.” The reason for this is clear. The menial labourer must be paid for his or her labour and receive wages, despite the fact that there is no real contribution to production and nothing of lasting value is created. (Note that it was not until systems of national accounts came into existence that services and service providers were recognized as making important contributions to the economy.)

31This distinction between “productive” and “unproductive” labour led Smith to differentiate between labourers who are productive and labourers who are not. Included in the latter category, in Smith’s view, were the sovereign and all the officers of justice and war who serve the sovereign, and thus the whole of the army and the navy, as well as (p. 431) “some of the gravest and most important, and some of the most frivolous professions: churchmen, lawyers, physicians, men of letters of all kinds; players, buffoons, musicians, opera-singers, operadancers, etc.” Their services, however honourable or useful they might be, produce nothing for which an equal quantity of service can be purchased or commanded in a market, yet they are (p. 430) “the servants of the public, and are maintained by a part of the annual produce of the industry of other people.”

32Given his views on “unproductive labour,” it is easy to see why Smith was so concerned about increases in the number of people he deemed “unproductive,” as opposed to “productive,” as well as the ratio between them: by acting as a drain on the economy, unproductive labourers take wealth out of the system without providing anything of equal or lasting value in return. While these views are discounted today by economists, they were exceedingly popular in Smith’s lifetime, had a profound effect on economic theory and practice during the hundred years or so following his death, and linger on in the minds of many people throughout the world.

33There is one final aspect of Smith’s system that must be examined if justice is to be done to it. This is the problem of determining when increases in wealth are “real” and when they are “illusionary.” It is impossible to determine this without examining Smith’s theory of prices, since prices in general, and changes in prices in particular, have to be taken into account in determining actual increases and decreases in wealth. Smith tried to get at the problem of prices by making a fundamental distinction between the “natural prices” of commodities and the “market prices” of commodities.

34For Smith, the natural price of a commodity is determined by the amounts of labour, capital, and land embodied in it. When the price is neither more nor less than what is sufficient to pay “the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market according to their “natural” rates, the commodity is sold for what may be called its “natural” price.” (Barber, p. 33).

35The commodity is then sold for what it is worth, or for what it really costs the person who brings it to market. Smith’s preoccupation with the “natural” prices of commodities can be traced back to the medieval Scholastics, and their concern with “the just price,” the price that reflects the actual amounts of land, labour, and capital that go into production and therefore determine the “real value” of commodities. This was also a fundamental concern for Smith, given his preoccupation with exchange value, the role that labour and labourers play in wealth creation, and, especially, the need to ascertain the “real” value or worth of everything. This is not surprising in view of the fact that Smith was primarily a philosopher (as well as what we now call an economist), and his other major book was The Theory of Moral Sentiments, which reveals a strong background and interest in ethics, morality, and determining the intrinsic worth of everything that is produced and consumed in society.

36In contrast to the “natural” prices of commodities, the market prices of commodities are those that people actually pay for them in the market. According to Smith, these can vary from the “natural” prices according to a variety of institutional and non-institutional factors, including charging what the market will bear, and deliberately withholding a product from the market in order to drive its price up and receive a profit that is higher than the cost of producing it.

37In retrospect, it is easy to see why Smith was so concerned with differentiating between market prices and “natural” prices. On the one hand, he was anxious to get at the “real” value or worth of everything, as opposed to its monetary value or worth. This necessitated lifting the veil of superficial changes in prices in order to get at real changes in prices. On the other hand, he was interested in determining whether wealth was increasing or decreasing from one year to the next, in real terms as opposed to monetary terms. This could only be ascertained when adjustments were made for changes in the price level and the purchasing power of money, since this was the only way to determine whether people were better off or worse off in real terms as opposed to monetary terms.

38With this examination of real and monetary changes in prices and wealth, our examination of Smith’s economic system is complete. The two main features of the system that account for its lasting power and popularity are its comprehensive character and its optimistic nature. It stands as a vivid exemplar of Victor Hugos statement that “greater than the tread of mighty armies is an idea whose time has come.” The world was ready for Adam Smith and The Wealth of Nations, which is why Max Lerner concluded, in his introduction to a modern edition of the book (p. v), that:

Like all great books, The Wealth of Nations is the outpouring not only of a great mind, but of a whole epoch. The man who wrote it had learning, wisdom, a talent for words; but equally important was the fact that he stood with these gifts at the dawn of a new science and the opening of a new era in Europe.

39While Smith made many original contributions to the origins of the economic age, these contributions should be seen in their context rather than in isolation from it. Many of the ideas and theories contained in The Wealth of Nations were already popular in Smith’s day, or even earlier, including the circulatory and interdependent nature of the economy, the perceived need for minimal rather than maximal involvement of the state in the economy, the desire to find laws capable of explaining economic behaviour, and the importance of “enlightened self-interest” in driving people, institutions, economies, and societies. One only has to read the works of other economic, political and philosophical scholars—such as Mun, Bacon, Petty, Child, Locke, Cantillon, Quesnay or Turgot, or Smith’s fellow Scots David Hume and James Steuart, or Smith’s own teacher, Francis Hutcheson—to realize that many of the ideas contained in The Wealth of Nations were of concern to many others besides Smith.

40Moreover, many of the issues that have preoccupied economists, governments, and countries since Smith’s day—such as short-term and long-term fluctuations in economic activity, gluts in markets, the possibilities of overproduction and underconsumption, business cycles, the role of entrepreneurs and technology in economic development, and particularly the demand side of the economy, the marketplace and price determination—were left largely unexamined or unattended by Smith. Indeed, if The Wealth of Nations is deficient in one very important respect, it is in Smith’s failure to give the demand side of the economy, including the determination of prices, the same attention as the supply side.

41Despite this, The Wealth of Nations had an extremely powerful impact on the origins and evolution of the economic age. Five factors account for this impact. First, Smith was concerned with a very practical problem, namely, how to create and increase wealth, enhance peoples standards of living, and make improvements in society. It was this concern that prompted Smith to write the book in the first place, as well as to develop an elaborate theoretical and practical system to show how these aims could be realized in fact.

42Second, Smith was concerned with the wealth and well-being of all people and classes in society, and not just the rich and privileged. A great deal of attention is directed in The Wealth of Nations to determining how the labouring class can profit from the creation and augmentation of wealth through higher standards of living and increases in the purchasing power of money, thereby putting Smith in the vanguard of all those who have been concerned about the development of an economic system that is egalitarian and inclusive, rather than elitist and exclusive. This fact is often ignored or downplayed by people who view Smith as the main architect of the current world system, contemporary capitalism, and the main forms of conservatism.

43Third, Smith was able to pull together all the diverse threads and arguments that were needed to make a coherent, comprehensive and compelling case, primarily because he had a very eclectic mind. There is something for everyone in The Wealth of Nations and Smith’s economic system. What counts is the design, development, scope, subject matter, and spirit of the system as a whole, rather than its individual parts. This is why Smith has done more than any other economist or social thinker to shape the way of life of the economic age we live in today.

44Fourth, Smith was an optimist rather than a pessimist. He was excited about the possibility of increasing wealth for all people and classes, as well as making improvements in society. While this could not be achieved without losses and gains, Smith believed that the long-term prospects for social improvements and higher living standards for everyone were very favourable. This helps to account for the popularity of The Wealth of Nations in Smith’s own day, as well as its ability to withstand the test of time.

45Finally, Smith’s thoughts and writings on the subject that we now call economics, and on the functioning of economies, societies, and countries, make a great deal of sense. His thoughts are logical, straightforward, practical, wellordered, and very relevant to people and countries in every part of the world. This helps to explain why Lerner calls Smith “a gentle sage with dynamite flowing from his pen.” It certainly explains why Smith and The Wealth of Nations deserve a prominent place at the forefront of the economic age.

The Industrial Revolution

46While the publication of The Wealth of Nations was by far the most important event in laying the theoretical and practical foundations for the economic age, other developments were taking place in Britain and elsewhere in Europe that were also destined to play seminal roles. One of the most powerful of these developments was the industrial revolution.

47While there is a great deal of controversy over when the industrial revolution actually began, there is no controversy over the fact that Britain and other parts of western Europe experienced an industrial revolution in the eighteenth and nineteenth centuries. Most authors place the dates for this revolution between 1750 and 1850, although, as indicated earlier, the prominent economic historian John Nef argued that Britain experienced two industrial revolutions rather than one, the first occurring between 1540 and 1640.

48Despite this, in 1776, when The Wealth of Nations was published, Britain was still a largely agricultural country, more than fifty percent of the working population being engaged in farming, fishing, and forestry. Nevertheless, there were signs that an industrial revolution was rapidly evolving and was about to assume gigantic proportions. As evidence of this, by 1850 Britain was primarily industrial rather than agricultural in character, with more than half the labour force working in manufacturing and less than a quarter working in agriculture.

49The story of how this industrial revolution occurred is a fascinating one that has filled numerous books (see, for example, those by Mantoux, the older Arnold Toynbee, Hartwell, E. R. Chamberlin, and, most recently, Ashton and Hudson). In the first place, there were phenomenal changes taking place in farming, such as the enclosure movement, the introduction of new methods and techniques, and, strange as it may sound, the introduction of the turnip. These changes, and particularly the introduction of the turnip, made it possible to increase the fertility of the soil, rotate crops more effectively, increase yields and productivity substantially, bring much additional land into cultivation, release people to work in manufacturing, and make the transition from an agrarian society to an industrial society. These changes were matched by corresponding advances in manufacturing, finance, commercial development, and international trade. By the time Adam Smith arrived on the scene capital goods and raw materials were circulating throughout Britain and the rest of western Europe, and, indeed, throughout the world, in volumes and at speeds hitherto unknown in history.

50An extensive battery of colonies existed by this time in North and South America, the Caribbean, Asia, Africa, and the Middle East. These colonies provided resources, raw materials, and markets for Britain and most other European countries. New ways of financing, marketing, and commercial development were also evolving rapidly, as were new modes of transportation. The movement of goods by horse and cart along mostly unpaved roads was giving way to the movement of goods by ship, canal boat, and, eventually, the train. In addition, there was a dramatic increase in population. After several hundred years of more or less constant or nominal population growth, the population of Britain, as of most other European countries, swelled considerably between 1750 and 1850. For example, the population of England and Wales was roughly seven million in 1770, but by 1850 it had increased to roughly eighteen million.

51These changes were so phenomenal in size, scope, significance and influence that such terms as “the agricultural revolution,” “the commercial revolution,” “the transportation revolution” and “the population revolution” have been used to describe them. Despite this, it is the broader and older term, “the industrial revolution,” that is usually used to convey the fact that something far more fundamental was occurring in Britain and elsewhere in Europe at this time, subsuming all the other changes, and a great deal else, in its gargantuan grip. What was at the root of these changes was the colossal transformation of industrial production.

52Improvements in technology were at the centre of these developments. Among the most important of these improvements were such major inventions as the spinning jenny (James Hargreaves), the steam engine (James Watt), the cotton gin (Eli Whitney), the sewing machine (Elias Howe), the seed drill (Jethro Tull), the steam-driven pump (Thomas Newcomen), the puddling and rolling process (Henry Cort), the flying shuttle (John Kay), the water frame (Richard Arkwright), the spinning mule (Samuel Crompton), and the cokeblasting process (Abraham Darby). Many of these inventions, which were spurred on by the escalating demand for industrial products, appeared between 1700 and 1800, and particularly between 1750 and 1800. Interestingly, they were made by practitioners working in factories and workshops, rather than by scientists and researchers working in laboratories.

53These inventions, and particularly the way they clustered together to reinforce one another and trigger other inventions, were so crucial to the realization of the industrial revolution that the prominent Austrian economist Joseph Schumpeter saw them as being the principal reason for the industrial revolution in the first place. Just what a prominent role they played in spawning the industrial revolution can be confirmed by the fact that the number of patents assigned in Britain increased from fewer than 100 in each ten years up to 1760, to several hundred in each of the 1760s, the 1770s, and the 1780s, and then to several thousand in each of the 1820s, the 1830s, and the 1840s (Dean, p. 128). As Dr Samuel Johnson put it, “The age is running mad after innovation.”

54Many of these inventions occurred first in the cotton textile industry and the iron industry, so much so that these acted as the spearheads of the industrial revolution in Britain, triggering the developments that were needed in other areas to bring the industrial revolution to fruition. Of the two, it is the cotton textile industry that is generally credited with paving the way for the industrial revolution, for two reasons. First, British landlords, financiers, and businessmen had surplus capital, and were looking for a product and an industry where they could invest this capital to dramatically increase their material and monetary wealth. Second, Britain’s rapidly expanding population needed clothing that was cheap, strong, and durable enough to cope with the vicissitudes of Britain's difficult climate and geography. This was not provided by woollen clothing, since it was too soft, inconsistent, and prone to unravelling and wearing out.

55Unlike wool, for which a domestic supply of raw materials was readily available since Britain possessed a munificent supply of sheep, cotton had to be imported into Britain because a domestic supply did not exist. This meant that the inventions and innovations of Kay, Crompton, Hargreaves, Whitney, Arkwright, and others were necessary if cotton production and a cotton textile industry were to prove viable in Britain. That the British proved more than equal to the challenge is confirmed by the fact that Mahatma Gandhi used cotton and the need for “homespun,” rather than dependence on imports from Britain, as his principal device for challenging British rule in India. Despite the fact that Britain needed to import raw materials from abroad, the British were so adept at building up the domestic cotton textile industry that they rapidly captured the world market for cotton products. This produced huge profits for British financiers, industrialists, and capitalists, while simultaneously making other countries and other people heavily dependent on British cotton, British clothing, and the British economy generally.

56While the cotton textile industry is usually credited as the industry that spearheaded the industrial revolution, the iron industry was not far behind. Unlike cotton, where Britain did not have a large domestic supply of raw materials, Britain had all the ingredients that were needed to develop a strong and viable domestic iron industry. It had good supplies of coal, coke, and iron ore, as well as a relatively effective system of transportation. It also had the financial resources and commercial acumen to make a domestic iron industry feasible. All that was needed were inventions such as the steam engine, casting, forging, rolling, and the like to produce a continuous supply of finished products. Once these were provided by Watt, Wilkinson, Cort, the Darby family, and others, commercial and financial success was a certainty. What made the iron industry such a key industry in powering the industrial revolution was the fact that there were strong backward and forward linkages between the iron industry and other industries. In order for the iron industry to develop properly numerous raw materials were required. This necessitated backward linkages with the coke, coal and iron ore industries, as well as with transportation, communications, and mining. Once this was achieved and it proved possible to produce high-quality products, iron was in great demand in Britain and elsewhere in Europe for the construction of boats, ships, canals, railroads, and a host of manufactured products. This created a whole series of forward linkages with the consumer industries that acted as the real spur to the British economy.

57Just as it is generally agreed that the cotton textile and iron industries spearheaded the industrial revolution, so it is generally agreed that the industrial revolution started in Britain, and spread to other parts of Europe, and to the United States, later on. There are many reasons why the industrial revolution occurred in Britain first. There was, as we have seen, the rapid increase in population, which brought with it significant increases in the demand for all types of consumer goods and durables. Then there was urbanization, which brought with it substantial investment in buildings, lighting, water supplies, sanitation, and street paving. There were also all the improvements that took place in Britain’s transportation and communications industries, especially roads, turnpikes, bridges, canals, ocean travel, and railroads. In addition, Britain in general and London in particular were rapidly becoming the financial and commercial centre of the world, with a growing number of banks, financiers, and businessmen ready to supply the capital that was needed to finance economic growth. There were also excellent supplies of such resources as coal, coke, and iron ore, as well as a commercial and political climate highly conducive to industrialization. By the time the industrial revolution was in full swing, in the early part of the nineteenth century, Britain was no longer “a nation of shopkeepers,” but rather “the workshop of the world.” At least, that was the way it appeared to most authors, raconteurs, and historians writing at the time.

58It is impossible to complete this portrait of the industrial revolution in Britain without commenting on the impact that it made on British social life. While output per capita increased in Britain roughly two and a half times between 1750 and 1850, it would be a mistake to conclude that this increase was equally shared by all classes and segments of society. Alongside the portrait of a rapidly expanding economy, with phenomenal increases in production, productivity, industrialization, specialization, technology, and economic growth, must be placed a portrait of squalor, misery, shanty towns, unequal distribution of income and wealth, and high unemployment. Much of this was brought on by developments in technology and the factory system of production, which deprived people of their former jobs, their sources of livelihood, their basic ability to make ends meet. It also produced a large class in society that was at the mercy of powerful producers and had little to sell but its labour, thereby giving rise to a number of social activists and authors, such as Karl Marx, Friedrich Engels, Robert Owen, the Luddites, Charles Dickens, and, later, Sydney and Beatrice Webb, who were quick to point out the shortcomings of the industrial revolution. What they had to say about its social effects filled numerous books, and had a profound effect on economic, social and political thinking in Britain, the rest of Europe, the United States, and elsewhere in the world in the years after 1850.

59Next to The Wealth of Nations, the industrial revolution had the most powerful effect on the origins of the economic age. It is not difficult to see why. The industrial revolution gave life in Britain and several other European countries a much greater material density and materialistic orientation. Previously, most products had been light and perishable, and technology had been largely non-mechanical in character. This all changed with the industrial revolution. Technology became mechanical and mechanistic in nature, and more and more products became permanent and heavy in character. This was primarily due to developments in the iron and related industries, the factory system of production, the construction of boats, canals, railroads, roads, and other modes of transportation, and the phenomenal increase in the production of manufactured goods. While The Wealth of Nations provided the theoretical and practical foundations for the economic age, the industrial revolution provided the physical and material foundations for it. It did so by yielding phenomenal increases in the output of products that were heavy, physical and substantial in nature, as well as giving everything a concrete, quantitative, tangible and material significance. This was to become a key characteristic of the economic age in the nineteenth and twentieth centuries.

Religion and the Rise of Capitalism

60The industrial revolution was out in the open for all to see, as the new machines, factories, equipment, consumer goods, steam engines, spinning jennies, hand pumps, flying shuttles, canals, railroads, iron-processing ventures, and manufactured products powered its headlong development. People could also see the shanty towns, the smoke stacks, the poor housing, and the soot and smog that were the inevitable consequences. This makes it comparatively easy to make the case that there was an intimate connection between the industrial revolution and the origins of the economic age, since there is a great deal of visual evidence and factual documentation to support this interpretation of events.

61Such is not the case with the relationship between religion and the rise of capitalism, another key factor in accounting for the origins of the economic age. Nevertheless, there was an intimate connection between religion, the rise of capitalism, and the origins of the economic age, even if it was far less visible to the naked eye and there is far less visual or factual evidence to support this contention. Religious and capitalistic changes going on in Britain and elsewhere in Europe at the time progressively loosened and weakened the bonds between church and state, and moved people in a secular rather than a sacred direction.

62One of the first scholars to analyze the complex connection between religion and capitalism was the German sociologist Max Weber. In his landmark publication, The Protestant Ethic and the Spirit of Capitalism Weber contended that it was the emergence of Protestantism in general, and “the Protestant ethic” in particular, that gave rise to the capitalistic spirit of production, distribution, consumption, and profit that was rapidly emerging in Britain and other parts of the world at the time of the industrial revolution.

63It is important to emphasize that it was not capitalism per se that Weber linked to the Protestant ethic, but rather “the spirit of capitalism.” There is a fundamental difference between the two. Capitalism itself is as old as civilization, if what is meant by capitalism is the creation of capital, the amassing of fortunes, the production of products, and the earning of profits through speculation, money-lending, commercial activities, and the like. However, capitalism as a rational system of production, distribution, and consumption, involving the systemic organization and utilization of labour, the creation of capital machinery and equipment, the development of factories, the turning out of a constant supply of products, and, especially, the desire to produce a continuous flow of profits in order to earn even greater profits in the future, was something new.

64It was this latter notion of capitalism, and particularly the “spirit of capitalism” that he saw as underlying it, that Weber had in mind. In asserting this connection, Weber contended that it was Protestantism rather the Catholicism that gave rise to “the spirit of capitalism” because Protestantism saw the relationship between God, the church, and the individual in a new light. This was particularly true of Protestant sects such as Calvinism, which extolled the idea of a “calling,” of justifying one’s existence before God through hard work and excellence in a specific trade or profession. This, according to Weber, resulted in substantial increases in production and productivity because people were anxious to work as hard as possible and produce as much as possible in order to make a success of their calling, justify themselves before God, and gain admission to the Kingdom of Heaven. However, this was not the end of the matter for Weber. It was also necessary for people to abstain from consumption, particularly excessive consumption, if they wanted to justify their existence. In Weber’s view, it was the combination of hard work and production, on the one hand, with frugality, thrift, and abstinence, on the other hand, that gave rise to the “spirit of capitalism,” and the development of the capitalistic system of production, distribution, and consumption. This was because savings were created that could be ploughed back into more production, more profit generation, and more capital accumulation. John Wesley, one of the founders of Methodism, perhaps said it best when he wrote (quoted by Weber, p. 175; Weber’s emphasis):

religion must necessarily produce both industry and frugality, and these cannot but produce riches... We ought not to prevent people from being diligent and frugal; we must exhort all Christians to gain all they can, and to save all they can; that is, in effect, to grow rich.

65Wesley quickly added that it was also necessary for Christians to donate as much as possible to the church and to good causes, because this was imperative in order to grow in grace and lay up a treasure in Heaven.

66For Weber, the person who best epitomized the “Protestant ethic” and the “spirit of capitalism” was Benjamin Franklin, who indeed advocated industry, effort, and honesty combined with parsimony, thrift, saving, and investment. It was Franklin who coined such aphorisms (quoted by Weber, pp. 48-50; Weber’s emphases again) as “time is money,” “credit is money,” “money is of the prolific, generating nature,” “Money can beget money, and its offspring can beget more,” and “He that loses five shillings, not only loses that sum, but all the advantage that might be made by turning it in dealing, which by the time that a young man becomes old, will amount to a considerable sum of money.”

67If Franklin best epitomized the type of individual Weber had in mind when he wrote of the Protestant ethic and the spirit of capitalism, the Protestant countries of northern Europe best epitomized the types of countries Weber had in mind when he made this claim. According to Weber, it was not coincidental that capitalism manifested itself as a system much earlier and more fully in Britain, Belgium, the Netherlands, Sweden, and northern Germany than in France, Spain, Portugal, Italy or southern Germany. Protestantism had progressed much further in the former countries, as had capitalism, and the rational and systematic approach to capitalistic development. According to Weber, Protestants tended to move out of handicrafts and into skilled trades, becoming artisans and manufacturers, whereas Catholics tended to remain in the handicrafts and become masters. The latter were a throwback to the medieval guild system of production, whereas the former were the forerunners of the capitalistic system of production.

68It was not long before Weber's theories were being hotly contested as the subject of vigorous debate in the first few decades of the twentieth century (see Tawney, Robertson, Fanfani, and Samuelsson). While most authors and scholars tended to side with Weber, albeit with certain reservations and qualifications, there were several who strongly opposed his views. Talcott Parsons, Eli F. Heckscher, Arthur Lewis, and Gunnar Myrdal, among others, tended to side with Weber, even if they disagreed with specific elements in his theory. Generally speaking, so did the British economic historians William Ashley and R. H. Tawney, and the German economic historian Werner Sombart, although Tawney argued that the prime factor was capitalism, not religion, while Sombart argued that Catholicism as well as Protestantism had fostered a strong capitalistic outlook. However, historians such as Lujo Brentano, H.M. Robertson and Amintore Fanfani disagreed. Brentano argued that many Catholic families were involved in the systematic development of capitalism and exuded the capitalist spirit, not only in Spain, Portugal, and Italy, but also in such northern cities as Amsterdam, Breslau (now Wroclaw), Mannheim, Augsburg, or Frankfurt am Main, where Catholic families established banking firms and mercantile houses, and were actively engaged in trade with the colonies. Robertson contended that capitalism and the capitalist spirit existed long before the Reformation. He emphasized that the Italian merchant cities of Venice, Genoa, and Pisa were extremely capitalistic in their commercial operations and trading policies, and were prominent long before Protestantism appeared. He also believed that the idea of “a calling” was not unique to Protestantism in general, or Calvinism or Methodism in particular, but was very much in evidence within Catholicism as well. Fanfani argued that religion was of only minor importance compared to geographical discoveries and the expansion of trade in explaining the rise and spirit of capitalism.

69Despite these arguments, Weber’s theory concerning the intimate connection between the Protestant ethic and the “spirit of capitalism” has shown a remarkable capacity to endure since it was originally propounded in 1905. Regardless of which side of the controversy one comes down on, one thing is clear. There was a strong connection between religion and the rise of capitalism, a connection that was so strong that it must also be regarded as a key factor in accounting for the origins of the economic age. This is especially true for capitalism as a system, as it has played a pivotal role in driving the development of many countries and the economic age over the past two hundred years and more.

Genesis of the World System

70While many other factors contributed to the origins of the economic age, it is clear in retrospect that The Wealth of Nations, the industrial revolution, and the interplay of religion and the rise of capitalism contributed the most to setting the economic age in motion, and thus to laying the foundations for the present world system. Of these factors, it is undoubtedly The Wealth of Nations that played the quintessential role. In his book Adam Smith focused on the one thing that countries, governments, and people have been increasingly concerned with, and particularly over the past fifty years, namely, the production, distribution, and consumption of material and monetary wealth.

71This concern has given rise to the development of the modern world system. It is a system based primarily on economics, economies, and economic growth in general, and specialization, capitalism, capital accumulation, profit maximization, technological development, competition, consumption, international trade, the market, and materialism in particular. This is generally deemed to be the most efficient and effective way to create and augment wealth, increase the supply of goods and services, and make improvements in society. The genesis of this system can be traced back directly to The Wealth of Nations. When one looks at the world system today, it is not very different from the one that Smith envisaged, despite the fact that it is infinitely more complex and difficult to manage, and the United States rather than Britain is situated at its core. While the terms used today are different from the ones used in Smith’s day, it is still possible to recognize the same basic concerns: the creation and augmentation of wealth, the size of the market, the division of labour and labour specialization, the mobility of labour and capital, international trade, enlightened self-interest, economic and political liberalism, laissez faire, the “invisible hand,” and the centrality of economics, or what Smith called “political economy,” in the overall scheme of things.

72This system is the main preoccupation of countries, governments, politicians, planners, corporate officials, international organizations, economists, policymakers, and development experts in every part of the world. The reason for this is obvious. Without the production, distribution, and consumption of wealth, the prospects for improvements in standards of living and the quality of life are bleak indeed. So are the prospects for social stability and political order. Without the production, distribution, and consumption of wealth, people and countries in every part of the world would be fighting for an economic pie that is shrinking rather than expanding, with all that that would imply for lack of employment and investment opportunities, a great deal of pain and suffering, insufficient opportunities for people to feed themselves and their families, and a great deal of uncertainty and unrest. In such a state of affairs, the potential for violence, conflict, and confrontation would always be close to the surface of society, and much greater than it is today.

73If The Wealth of Nations played a seminal role in the genesis of the modern world system by focusing attention on the production, distribution, and consumption of wealth, it also played a seminal role in focusing attention on the way in which wealth is defined, measured, compared, and adjusted for changes in price levels. Numerous methods and techniques have been devised for measuring “the wealth of nations,” as well as for comparing the wealth of one country with the wealth of other countries. It is thanks in no small part to The Wealth of Nations that such well-known forms of measurement and comparison as income per capita, national accounts, consumer price indices, changes in the purchasing power of money, and, particularly, gross domestic product and net domestic product (or, as they are called in The Wealth of Nations, “gross revenue” and “neat revenue”), are fundamental elements in the vocabulary and mechanics of the world system today. The notion of “neat revenue” was especially important in Smiths view because it indicated what was left over at the end of one year to be applied to creating and augmenting wealth in the following year (as quoted by Barber, p. 45):

The gross revenue of all the inhabitants of a great country comprehends the whole annual produce of their land and labour; the neat revenue, what remains free to them after deducting the expense of maintaining; first, their fixed; and, secondly, their circulating capital.

74Concern with issues such as these did a great deal to shift attention away from wealth in the form of gold, silver, and other precious metals, which had been central in earlier periods of history, and towards wealth in the form of the “necessaries and conveniences of life,” or what today is called gross domestic product. It is on this much more fundamental and tangible way of defining, measuring and comparing wealth that the entire world system of production, distribution, and consumption, with its adjustments for changes in the purchasing power of money, is predicated. Not only are countries compared on the basis of their gross domestic income and gross domestic expenditure, but also changes in gross domestic income and gross domestic expenditure are monitored very carefully to determine whether they are increasing or decreasing, and at what rates.

75While much more concern is focused in The Wealth of Nations on the production of wealth than on the distribution of wealth, that topic is not neglected, and is indeed fundamental to Smith’s view of the world, as indicated above. It is also a fundamental concern of the world system today. While there are more classes and interest groups in society today compared to Smith’s time, people and countries in every part of the world are very much concerned about the distribution of wealth among them. In fact, the distribution of wealth has been a consistent concern of economists, politicians, governments, people, and countries ever since Smith’s time, resulting in the creation of elaborate theories to explain why different classes and interest groups receive different rates of remuneration for the contributions they make to production and society. The distribution of income and wealth is never far from the front burner of economic and political concern, regardless of whether countries are in an ascending, descending, or stationary state.

76The contribution of The Wealth of Nations to the genesis of the modern world system does not end here. While this classic publication was concerned largely with the production, distribution, consumption, and measurement of material and monetary wealth, or what economists today call “macroeconomics,” it was also concerned to a certain extent with how individuals and institutions function in the economy and the marketplace, or what is called “microeconomics.” This gave rise in the nineteenth and twentieth centuries to elaborate theories of consumer and corporate behaviour, the development of corporations and the theory of the firm, the role of “enlightened self-interest” in motivating individuals and institutions to perform in the market, the analysis of consumption patterns and trends, consumerism, and the concepts of labour productivity and productive capacity. Many of the battles that are being waged throughout the world today by labour, management, and governments over labour productivity, and the need to recognize the contributions of health care workers, homemakers, religious leaders, women, service providers, educators, and the like, can be traced back to the distinction made in The Wealth of Nations between “productive” and “unproductive” labour.

77The Wealth of Nations also contributed substantially to understanding how economies and markets function today. This understanding emanates from the search for laws capable of explaining economic behaviour, the determination of incomes and prices, the circulatory and interdependent nature of the economy and markets, and the need to understand economies and markets as complex entities or “dynamic systems.” Governments, corporations, economists, planners, and policy-makers in all parts in the world, as well as international organizations such as the World Bank, the International Monetary Fund, the Organization for Economic Cooperation and Development, the G8, the World Trade Organization, and the World Economic Forum, use this information on a regular basis to develop and plan contemporary economic systems, local, regional, national and international economies, markets, and the world system as a whole.

78The Wealth of Nations was not only concerned with how economies and markets do function, it was also concerned with how economies and markets should function. Adam Smith designated markets as the main vehicles for discharging economic functions, as well as the principal devices for realizing economic and political liberalism, free or freer trade, the unrestricted mobility of labour and capital, and vigorous competition between producers and consumers. This focus on markets is very much alive today, as interest in markets, “market economies,” and the market potential of the internet readily confirm. The focus on economic and political liberalism, free or freer trade, the unrestricted mobility of labour and capital, and vigorous competition between producers and consumers has never been greater than it is today, as confirmed by the creation of the European Union, the proposed Free Trade Agreement of the Americas, the World Trade Organization, and the attempt to make the world a “free trade world” predicated on democracy, capitalism, conservatism, competition, and international trade. This is vintage Adam Smith. By arguing in favour of minimum rather than maximum government involvement in the economy and the marketplace, or, as Thomas Carlyle described it, “anarchy plus a constable,” Smith set in motion beliefs and convictions about the role of government in economic life that resonate with many people, institutions, countries, and governments today, particularly those concerned with conservatism, capitalism, democracy, and the global economy.

79While The Wealth of Nations played the pivotal role in the genesis of the present world system, the industrial revolution and the rise of capitalism were not far behind.

80The industrial revolution achieved its effects by placing a high priority on industry in general, and industrial development, manufacturing, and commerce in particular. This had the effect of shifting the locus of decision-making from agriculture to industry, from foodstuffs and raw materials to consumer goods and manufactured commodities. While many countries continue to be heavily dependent on agriculture today, particularly in Africa, Asia, Latin America, and the Caribbean, there is no doubt that the large majority of countries lust after industrial development, since they believe, as Adam Smith and the first industrialists believed, that industrial development possesses the potential to expand the economy, and multiply the fruits of economic development, far more than agricultural development does.

81Nor is this all. The industrial revolution opened the doors for myriad developments in technological invention and innovation that are still working themselves out today. Thanks in no small part to the industrial revolution, and its heavy reliance on science, scientific achievement, and technical acumen, the world has experienced a continuous outpouring of technological developments, and is currently in the throes of a revolution in communications and information that is every bit as profound and powerful as the industrial and technological revolutions of earlier times.

82What is true of the industrial revolution is also true of the connection between religion and capitalism. The phenomenal changes that occurred in religion and capitalism in the sixteenth, seventeenth and eighteenth centuries, whether driven by a “Protestant ethic” or not, have also had a profound effect on the development of the modern world system. There is not a country in the world that does not understand how essential it is to accumulate capital and create a surplus of production over consumption if higher standards of living, and higher levels of income, expenditure, output, and economic growth, are to be achieved. It is clear that more and more countries in the world are moving towards the capitalist system of production, distribution, and consumption in general, and the profit motive and capital accumulation in particular, regardless of whether they are socialist, communist, democratic, dictatorial, liberal or conservative.

83In combination, then, these three developments—religion and the rise of capitalism, the industrial revolution, and, above all, The Wealth of Nations—laid the foundations for the development of a world system that is predicated primarily on the centrality of economics and economies in general, and markets, profits, specialization, industrialization, capital accumulation, and economic growth in particular. They also laid the foundation for the division of the world into two unequal parts. On the one hand, there were the industrializing and urbanizing countries of western Europe, which rapidly developed their industrial, manufacturing, commercial and technological capabilities, and became highly diversified in their economic output, operations, and economies. On the other hand, there were the countries of Africa, Asia, Latin America, the Caribbean, the Middle East, and (in Smith’s day) North America. They quickly became colonial satellites of the leading European countries, and were made to be highly specialized in their economic output, operations, and economies. Their principal function was to provide natural resources and raw materials to those European countries where they could be transformed into finished products, as well as to serve as markets for the rapidly expanding industrial output of these European countries.

84This was a very different world from the world of the mercantilists and the great geographical discoveries, which had been based on extending European contact to other parts of the world, and increasing the flow of gold, silver, and other precious metals into Europe. The world of capitalism, the industrial revolution, and The Wealth of Nations was increasingly based on colonization, colonialism, and increasing the capacity of colonies to satisfy the economic and political aspirations and interests of their “mother countries.” This was accompanied by a shift in the centre of economic gravity in Europe from Spain and Portugal to Britain, France, Germany, and the Netherlands. It was also accompanied by the creation of a whole series of colonial and imperialistic relationships between Europe and the rest of the world that were destined to have a profound effect on economic, social, political and diplomatic developments and relationships throughout the world (see Hobson, Easton, Said, and Asad). While Adam Smith, the capitalists, and the industrialists were excited about colonial development and international trade, they unleashed forces, factions, and divisions that have long dominated the world, and that lie at the heart of many of the pressures, tensions, and hostilities throughout the world today.

© Les Presses de l’Université d’Ottawa | University of Ottawa Press, 2008

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