The Wealth of the Nations
The Wealth of the Nations by Smith was written to outline economic theories that had been oppressed by the European governments. Smith writes this book at a time when nature did not understand the power of free trade and trade competition as the cause for innovation and development. The states owned trade thus making policies and laws that only protected their trade merchants and countries that traded with them. There was absolute monopoly of trade and economy. With the kind of monopoly, merchants of one country could not trade with others from another country. Through the tenets of his theories, Smith used The Wealth of the Nation to assert free market hence achieving great influence on trade and economy both at the time and in the modern trade market. Some of the proponents he underscores include specialization, absolute advantage, comparative advantage, industrial revolution, and free market.
Specialization
Adam smith contends and elaborates specialization through division of labor, a thought he shares in The Wealth of the Nations. He believes that countries can specialize in the production of commodities due to different labor cost each different country incurs in the production of one particular commodity. He uses an example of a pin factory to illustrate how nations or companies can subdivide labor in the production of goods (Smith 26). If nation A for example takes 2 labor days to produce commodity X while nation B takes 4 labor days to produce commodity X; it is therefore appropriate for nation B to drop the production of commodity X so that nation A specializes in its production. Nation B can also specialize in producing commodity Y, which nation A spends much labor to produce. First, specialization of this nature will help both nations to produce their specialized commodities in large volume at cheaper labor. According to smith, labor cost is most vital in the productivity of every country.
He further illustrates specialization by the society analogy. In every society, people specialize in their areas of work so that butcher sells meet, shoemaker makes shoe, teacher teaches children, baker bakes bread, and candlestick maker makes candle sticks. At the end of the day, everyone finds market for his or her products. Specialization promotes trade and avails market unlike when everybody wants to produce everything.
Absolute Advantage
According to Smith, countries that practice specialization have absolute advantage against each other. For example, one nation might have favorable conditions to produce a commodity at a cheaper human labor as compared to another nation producing the same commodity. The nation with cheaper labor thus enjoys absolute advantage against the one with expensive labor (Schumacher 55). He further urges nations to embody specialization in the event they experience absolute advantage in their production. Absolute advantage promotes specialization and trade among countries. For instance, if the nations specialize to produce the good for which they lack absolute advantage, their need to obtain the good they cannot produce will lead to international trade hence availability of market for every country.
Comparative Advantage
Comparative advantage occurs when one nation enjoys relative efficiency in the production of one particular commodity as compared to another. The level of efficiency is measured in the cost of labor used to produce the commodity. Countries enjoy comparative advantage because of different resources and technologies they have. According to Smith (65), the value of a commodity reflects the amount of labor that went into its production. It is the reason nations with cheaper labor enjoy comparative advantage against the ones with expensive. In order to trade, Smith urges nations to employ specialization their production.
Industrial Revolution
Adam Smith advocates for independence of industries through his proponent of laissez-faire that expresses the need for governments to stop interfering with industries (Schumacher 54). Government subsidies to merchants and trade policies that promote monopoly undermine the industrial growth. He therefore creates free economy without interference, which promotes the industrial revolution.
On the other hand, Smith uses division of labor to explore productivity in industries. He encourages industries to specialize in their production based on absolute advantage and comparative advantage they have against each other. Division of labor provides market and increases the rate of productivity thus escalating industrial growth.
How Countries Increased their Living Standards
Free market promotes trade among countries who produce different goods (Schumacher 63). For example, during the opium war, Japan traded with the west in textile, guns ships, and railroad. The trade improved the Japanese economy widely thus improving the living standard of her citizens.
Furthermore, countries that specialized in production quickly developed because they reduced labor cost and secured market for their goods. Through international trade, England accessed ships and guns from Japan. The trade promotes economic development beneficial for improved living standards. For example, access to amenities like roads, health, and schools. As industrial revolution expanded through these factors, towns developed leading to improved housing in most countries that felt industrial development.
Conclusion
Economic development depends on the key proponents contended by Adam in The Wealth of the Nations. He uses the book to encourage specialization through division of labor, which is dictated by comparative advantage and absolute advantage. In essence, Smith’s contention is a great influence on industrial revolution and international. He advocates for industrial independence and trade among nations depending on what they produce.
Works cited
Schumacher, Reinhard. "Adam Smith's theory of absolute advantage and the use of doxography in the history of economics." Erasmus Journal for Philosophy and Economics5.2 (2012): 54-80.
Smith, Adam. "An inquiry into the nature and causes of the wealth of nations: Volume One." London: printed for W. Strahan; and T. Cadell, 1776: 26-68
