Smith's seminal work, The Wealth of Nations, aims to create a new understanding of economics. Smith writes largely against the mercantile system that existed at the time of writing, but, along the way, gives a complicated but brilliant account of an economic system based in human nature and deeply rooted social dynamics. The text is characterized by fact-heavy digressions, tables, and appendices that blend hard research with broad generalities, demonstrating his commitment to give evidence for what seem like timeless observations about the nature of economics.
Books I and II focus on developing the idea of the division of labor, and describing how this division adds to the opulence of a given society by creating enormous surpluses, which can be exchanged among members. The division of labor also fuels technological innovation, by giving intense focus to certain tasks, and allowing workers to brainstorm ways to make these tasks more efficient. This, again, adds to efficiency and grows surpluses. Surpluses, Smith writes, may be either traded or re-invested. In the latter case, technologies are likely to improve, leading to even greater efficiencies.
Book III considers Great Britain in the context of the the social evolution of society in general, which begins, according to Smith, with hunting and gathering societies and progresses through agricultural stages to arrive at a state of international commerce. According to Smith, the fall of Rome and the rise of feudalism retarded this progression by creating a system of decreased efficiency.
Book IV goes on to criticize the “mercantile commerce” that characterized much of Smith's Europe. Smith's first major criticism of mercantilism is that it conflates value and wealth with precious metals. According to Smith, the real measure of the wealth of a nation is the stream of goods and services that the nation creates. In making this point, Smith invents the idea of gross domestic product, which has become central to modern economics. The wealth of a nation is increased not by hoarding metals, but by increasing the productive capacity by expanding the market—by increasing trade.
An important theme that persists throughout the work is the idea that the economic system is automatic, and, when left with substantial freedom, able to regulate itself. This is often referred to as the “invisible hand.” The ability to self-regulate and to ensure maximum efficiency, however, is threatened by monopolies, tax preferences, lobbying groups, and other “privileges” extended to certain members of the economy at the expense of others.
Finally, in the last book of The Wealth of Nations, Smith describes what he considers to be the appropriate roles of government, namely defense, justice, the creation and maintenance of public works that contribute to commerce, education, the maintenance of the “dignity of the sovereign,”—activities that are to be financed by fair and clear taxation.
