Most of The Wealth of Nations (WN) is simply Smith explaining how the world works, from his point of view. Basically it is just an economics text, full of definitions and concepts, summarizing much of the existing economic knowledge of the times as well as adding some of his own insights. He seldom makes moral judgments about how things should work.

When Smith explains how each person acting in their own interests works for the good of all, he never said that each person’s own interest did not or should not include the interests of others. If I believe my time would be better spent knitting my friend a hat for his birthday than earning money to spend on myself, then I should do it. Smith does not refute or condemn such behavior.

In Wealth of Nations, Smith rarely resorted to making value judgments, generally just stating things the way he saw them. When Smith states that “man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only.” (WN book 1, chapter 2), he means only that. His speech about the butcher, the brewer, and the baker was mostly just an example to show that people need to specialize in what they are good at, even to the extent of producing more than they themselves need, and that we need to deal with people regularly that have no personal interest in us. He was simply explaining how the business world works, and that it usually produces a system that gets things done even if everyone does act in their own interest, as humans tend to do. He never states that this is the way it should work, only that it is the way it does work.

Smith liked the idea of many marketers acting in their own interests because he thought it would keep out monopolies. He did not believe in free markets because he felt they had an inherent goodness. He supported them because he thought a free market system would lead to greater competition and fewer monopolies, increasing the betterment of all people.

Smith’s principle for international free markets is: “It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy.” (WN book 4, chapter 2) Simple. He felt that trading with other countries was useful if it would save the home country money and improve the life of its people. This was a very basic belief from a world hundreds of years ago and did not mean that Smith would necessarily subscribe to the large-scale trade agreements of today.

Adam Smith believed in free markets and laissez-faire. However, he did not take this as severely or narrowly as many scholars do today. Nor did he take it as severely as many are taught that he did. He believed markets should be free as a means to the end of competition, which he felt would lead to the good of all. He believed that since government was not omniscient, it could not force the markets to operate in a way that would be of the best benefit to the people. He understood that if each person worked rationally and to their own best interest, good would be done and in most instances a competitive market would thrive.

On the other hand, though, Smith realized that there were times when the market would not operate as it was meant to, and that there would be certain markets that would not always naturally operate in a competitive manner. Barriers to entry, geography, and lack of property rights are several potential causes of imperfect markets. He felt that under these circumstances government intervention was sometimes necessary. Smith frequently said things such as “All monopolies in particular are extremely detrimental.”

Smith spoke of apprentices and pin-makers, not of transnational corporations and Wal-Mart, in a world that was quite different than ours today. And above all, he wrote about what he saw around him. He is not, as many erroneously maintain, the Patron Saint of free, unregulated, uncontrolled markets. MT