Wealth definition by Adam Smith (Classical Economist) - Class 11 PDF Download

Introduction

Economics comes from the ancient Greek word “oikonomikos” or “oikonomia.” Oikonomikos literally translates to “the task of managing a household.” French mercantilists used “economie politique” or political economy as a term for matters related to public administration.

Adam Smith’s Definition of Economics

Adam Smith defined economics as, 'A science which enquires into the nature and causes of wealth of nations'

Features of wealth definition

• Study of wealth: The main objective of economics is to examine how people earn wealth and spend it.
• Causes of wealth: Economics seek to examine causes which lead to increase wealth.
  It can be increased by its production and accumulation.
• Economic man: Man is aware of his self-interest. Economic man trys to achieve his self interest by increasing his material gains through acquisition of wealth.

Criticism of Smith’s Definition

• The wealth-centric definition of economics limited its scope as a subject and was seen as narrow and inaccurate. Smith’s definition forced the subject to ignore all non-wealth aspects of human existence. 
• The Smithian definition over-emphasized the material aspects of well-being and ignored the non-material aspects. It was assumed that human beings acted as rational economic agents who mindlessly strived to maximize their own well-being. 
• The Smithian definition prevents the subject from exploring the concept of resource scarcity. The allocation and use of scarce resources are seen as a central topic of analysis in modern economics.

Smith's Primary Thesis

• The core of Smith's thesis was that humans' natural tendency toward self-interest (or in modern terms, looking out for yourself) results in prosperity. Smith argued that by giving everyone freedom to produce and exchange goods as they pleased (free trade) and opening the markets up to domestic and foreign competition, people's natural self-interest would promote greater prosperity than with stringent government regulations. 
• Smith believed humans ultimately promote public interest through their everyday economic choices. “He (or she) 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,” he said in "An Inquiry into the Nature and Causes of the Wealth of Nations."
• This free-market force became known as the invisible hand, but it needed support to bring about its magic. In particular it was the market that emerged from an increasing division of labor, both within production processes and throughout society that created a series of mutual interdepencies, promoting social welfare through individual profit motives. In other words, once you specialize as a baker and produce only bread, you now must rely on somebody else for your clothes, somebody else for your meat, and yet somebody else for your beer. Meanwhile the people that specialize in clothes now must rely on you for their bread, and so on.

The Elements of Prosperity

Boiling the principles Smith expressed regarding the invisible hand and other concepts down to essentials, Smith believed a nation needed the following three elements to bring about universal prosperity.

• Enlightened Self-Interest: Smith wanted people to practice thrift, hard work, and enlightened self-interest. He thought the practice of enlightened self-interest was natural for the majority of people. In his famous example, a butcher does not supply meat based on good-hearted intentions, but because he profits by selling meat. If the meat he sells is poor, he will not have repeat customers and, thus, no profit. Therefore, it's in the butcher's interest to sell good meat at a price that customers are willing to pay, so that both parties benefit in every transaction. Smith believed the ability to think long-term would curb most businesses from abusing customers. When that wasn't enough, he looked to the government to enforce laws. Extending upon self-interest in trade, Smith saw thrift and savings as important virtues, especially when savings were used to invest. Through investment, the industry would have the capital to buy more labor-saving machinery and encourage innovation. This technological leap forward would increase returns on invested capital and raise the overall standard of living.
• Limited Government: Smith saw the responsibilities of the government as being limited to the defense of the nation, universal education, public works (infrastructure such as roads and bridges), the enforcement of legal rights (property rights and contracts), and the punishment of crime. The government would step in when people acted on their short-term interests and would make and enforce laws against robbery, fraud, and other similar crimes. He cautioned against larger, bureaucratic governments, writing, "there is no art which one government sooner learns of another, than that of draining money from the pockets of the people." His focus on universal education was to counteract the negative and dulling effects of the division of labor that was a necessary part of industrialization.
• Solid Currency and Free-Market Economy: The third element Smith proposed was a solid currency twinned with free-market principles. By backing currency with hard metals, Smith hoped to curtail the government's ability to depreciate currency by circulating more of it to pay for wars or other wasteful expenditures. With hard currency acting as a check on spending, Smith wanted the government to follow free-market principles by keeping taxes low and allowing free trade across borders by eliminating tariffs. He pointed out that tariffs and other taxes only succeeded in making life more expensive for the people while also stifling industry and trade abroad.

Smith’s Theories Overthrow Mercantilism
To drive home the damaging nature of tariffs, Smith used the example of making wine in Scotland. He pointed out that good grapes could be grown in Scotland in hothouses, but the extra costs of heating would make Scottish wine 30 times more expensive than French wines. Far better, he reasoned, would be to trade something Scotland had an abundance of such as wool, in return for French wine.
In other words, because France has a competitive advantage in producing wine, tariffs aimed to create and protect a domestic wine industry would just waste resources and cost the public money.