Adam Smith's Mistakes in the Wealth of Nations
Table of Contents
Adam Smith wrote the Wealth of Nations as an attack on Mercantilism which has since evolved into Neoclassical Economics that is similarly focused on the profit motive, as opposed to the social motive.
Some shallow-minded economists, such as Ricardo and Malthus point to Smith’s corn-based valuation as his fundamental mistake.
They think that Smith meant that grain-prices would affect prices of commodities similar to how oil affects most commodities nowadays:
Smith’s doctrine, that the price of corn immediately and entirely regulates the prices of labour and of all other commodities, is so directly contrary to all experience. It itself cannot possibly be true.
Adam Smith also created another standard measure of value. Sometimes he speaks of corn, at other times of labour, as a standard measure, as if labour and corn were equivalent expressions.
He assumes that when a man’s labour becomes doubly efficient, he could produce twice the quantity of a commodity. He would then receive twice in exchange as before. If this were true, if the labourer’s reward were always proportional to what he produced, and if his commodity would purchase the equal amount of corn then yes, labour or corn might accurately measure the variations of other things.
But they are not equal. Labour is an invariable standard correctly indicating the variations of other things. Corn is subject to as many fluctuations as the commodities compared with it.
None of the later economists realized that Smith’s perspective was abstract and metaphysical:
- Corn price represents life
- Labour price represents stress and trouble
Smith’s Only Mistake
Despite his attack against merchants, it’s very strange to see a passage in Smith’s work that actually unjustly favors merchants.
If the society has insufficient capital to cultivate all its lands and to completely process all its rude produce, there is even a big advantage that its rude produce should be exported by a foreign capital.
This will allow the whole stock of society to be employed for more useful purposes.
The wealth of ancient Egypt, China, and India demonstrate that a nation may be very opulent even though foreigners carry most of its exportation.
However, this idea goes against his own observation that the interest of merchants is opposite those of society.
This came true in the Opium Wars when the Chinese entrusted their external trade to British merchants instead of building their own merchant fleet.
The British became greedy and started bringing in opium which destroyed Chinese society, creating civil war.
This eventually led to the entry of Communism in the most populous country in the world, which killed so many Chinese (Great Leap Forward) and has made mainland China fundamentally anti-Western.
Update April 2025: Trump’s Trade War
The Trade War by the US exposes the real foundation of Western morals which is utility. Trump is willling to sacrifice his allies and friends just to be materially wealthy.
This is opposite of Smith’s principles which are based on fellow-feeling and friendship, and low profits.