The Wealth of Nations at 250: how has economics changed since Adam Smith?

The world has changed drastically over the two and a half centuries since the publication of what is widely seen as the founding text of economics. But its author’s core ideas – about specialisation, exchange and accumulation – continue to provide valuable insights for researchers and policy-makers.

In 1759, the year in which Adam Smith published The Theory of Moral Sentiments, the Carron Company ironworks was founded near Falkirk, about 25 miles from where he was teaching in Glasgow. It would go on to be Europe’s largest ironworks, employing more than 2,000 workers. Industrial change was taking shape close by, but the scale of the transformation ahead was scarcely imaginable – even to Smith himself.

Writing amid these changes, Smith explained in The Wealth of Nations (1776) how specialisation, exchange and accumulation could make nations richer. As Tony Wrigley (1988) puts it, he ‘held to a model of growth that was asymptotic in character rather than exponential’. In other words, substantial improvement was possible but ultimately limited. The sustained rise in living standards that Deirdre McCloskey calls the Great Enrichment lay beyond what Smith’s framework was built to explain.

Asking the system that Smith constructed in 1776 to explain the subsequent 250 years is quite the test of external validity. So it is tempting to leave his magnum opus on the shelf, taking selective quotes occasionally and thinking less about how his account as a whole might still be useful. Yet taking Smith’s ‘imaginary machine’ seriously means asking how its connections stand up to new evidence, and where we may augment or modify them.

The 13 contributions that I have brought together in a new book – The Wealth of Nations at 250 – pursue that question. No single volume could cover every angle, but these chapters span economic history, development and growth theory across several continents and centuries. What follows introduces each of the volume’s chapters, grouping them by what they do to Smith’s machine. Some give his mechanisms greater precision, while others bring new forces into view. The sharpest disagreements concern what those mechanisms imply for policy.

The gains from exchange endure

At the heart of Smith’s system is the idea that the gains from the division of labour depend on the extent of the market. In their contribution to the collection (Chapter 7), Vernon Henderson, Leigh Shaw-Taylor and Jacques-François Thisse give this mechanism detailed geographical support using data for 19^th century England and Wales. Falling transport costs encouraged urban specialisation, while innovations spread beyond their initial locations. Towns changed both what they produced and their place in the wider economy.

The same mechanism helps to explain why specialisation remains limited in some places today. Douglas Gollin’s account of contemporary sub-Saharan Africa (Chapter 8) shows how high transport costs and weak market integration restrict the division of labour.

But a road does not settle the matter. Insufficient competition in transport, insecure property rights and limited protection against shocks can leave specialisation too costly or risky. A household may retain farming as insurance even when another activity promises higher returns. Smith’s mechanism survives: understanding when people can use it requires closer attention to their circumstances.

For Smith, agricultural improvement came first in the progress towards a wider division of labour. In her contribution to the collection, Nancy Qian (Chapter 4) finds support for Smith’s account of agricultural surpluses feeding towns and supporting industry, but unequal landholding and weak institutions can absorb the gains. Smith himself recognised departures from the agriculture-first order he described as natural. Subsequent experience makes the conditions clearer: more food can support a wider division of labour, without guaranteeing prosperity or prescribing a single route towards it.

New forces come into view

An economy can become more productive through the division of labour. But explaining why living standards continued to rise across generations takes us to a transformation that Smith could not reasonably have foreseen.

In his contribution, Oded Galor (Chapter 2) offers an account of that transformation. For most of history, technological progress raised population size rather than living standards, as Thomas Malthus later described. Over time, a larger and more diverse population accelerated innovation, and faster technological change raised the returns to education. Parents responded by having fewer children and investing more in each of them. This demographic transition allowed productivity gains to translate into sustained increases in income per person.

Galor traces how geography, culture and population diversity shaped when different societies made that transition, and hence the inequality between nations that we see today. Wider markets are part of this story, but the escape from ‘Malthusian stagnation’ needs an account of technology, human capital and fertility that Smith could not have supplied.

Our evidence now also extends much further across time and space. Smith himself compared nations, contrasting a stationary China with a declining Bengal and a rapidly advancing British North America. Reconstructed national accounts now reveal episodes of growth long before industrialisation (Broadberry et al, 2015).

In his contribution to the collection, Gareth Austin (Chapter 3) extends Smith’s comparisons into a history of Europe, Asia and Africa over several centuries. Different combinations of land, labour and capital encouraged different technologies and institutions, so there was more than one path towards higher productivity. Once one country had industrialised, the opportunities facing every other changed.

Bob Allen (Chapter 5) reaches even further back: food surpluses, settlement and storable grain supported specialised crafts in the ancient Near East before the emergence of the states and extensive transport networks that Smith thought were key. Evidence unavailable at the time helps to distinguish the origins of specialisation from the conditions that later enlarged its scope.

Other additions concern work that was present all along, but neglected by Smith. The workers in his account of the division of labour are largely adult men. But Jane Humphries (Chapter 6) shows how women and children supplied labour to expanding sectors, and how their availability enabled new divisions of work within families and workshops.

Caring work did more still: it raised children, sustained adult workers and absorbed the shocks that markets did not. Smith’s butcher, brewer and baker may have pursued their own interest, but someone else’s invisible hands prepared the dinner. Affection, duty and altruism were part of what made market activity possible. Bringing that labour into view changes our account of how growth through specialisation was sustained, and of who bore its costs.

In The Theory of Moral Sentiments, Smith had already given sympathy and moral judgement a central place in human conduct. The relationship between the two books has often been neglected, or even presented as a problem, but modern work can trace these connections more explicitly and more coherently.

Tim Besley and Maitreesh Ghatak (Chapter 9) take up that connection directly. Many people care about more than their own income: workers accept lower pay for jobs that they find meaningful; and consumers and investors reward firms that pursue social or environmental goals. Markets can match people to organisations whose missions they share, and those values in turn shape what firms produce and how.

But the influence also runs the other way, as the economic environment shapes which motivations flourish. The motivations on which a market economy depends are themselves part of what needs explaining.

Religion is part of that environment. Smith himself treated it in economic terms, arguing that competition between many small sects would produce more moderate religion than a single established church. Sascha Becker (Chapter 10) revisits these themes and reviews the modern evidence connecting religion with economic outcomes – from literacy and human capital to trust and institutions. The evidence does not support any simple claim that religion uniformly promotes or obstructs prosperity. What matters is how particular beliefs and religious institutions interact with the incentives that people face.

On a related level, Margarita Gatsou and Uwe Sunde (Chapter 11) show how patience can interact with longevity and institutions: insecure returns and short lives discourage investment in the future, while greater patience can help to improve those conditions. Beliefs and motivations become part of the process to be explained.

Natural liberty remains a contested guide

These findings make Smith’s ideas more useful, but they do not yield a single prescription for government. The system of natural liberty required justice, defence and public works. The difficult question is when the state should do more while protecting the sources of growth. The chapters on China and on mercantilism bring that question into focus: how do we distinguish public action that enables productive initiative from action that obstructs it?

China might seem an obvious case for directing industry from above, but Xiaodong Zhu (Chapter 12) disputes that reading. He argues that growth was strongest when farmers, local officials and private entrepreneurs had room to initiate change. Large markets rewarded entrepreneurial innovation; the state’s commitment to political control and a dominant state sector imposed limits on it. On this account, China’s experience supports Smith’s confidence in decentralised initiative. The presence of a powerful state does not establish that its direction of industry caused the growth.

Dani Rodrik (Chapter 13) asks whether Smith’s critique led us to dismiss too much of what the mercantilists advocated. He identifies a continuing tradition of pragmatic policies, from trade protection to East Asian export-oriented industrialisation. Its recurring concerns include the composition of production and employment, close collaboration between business and government, and adaptation to local circumstances. Markets matter here too. But the policy problem includes helping new productive activities to emerge, and natural liberty alone may offer insufficient guidance.

Both Xiaodong Zhu and Dani Rodrik emphasise different things and are not testing the same policies against each other. Together, however, they caution against explaining growth simply by whether the state intervened. What matters is what the intervention did: a policy that encourages a new activity may create opportunities for exchange, while one that shelters an incumbent may restrict them. Which effect dominates, and under which institutions, is the question with which the two chapters leave us. Smith’s suspicion of privilege remains pertinent even where the case for public action is strong.

The historical record makes the judgement harder still. Joachim Voth (Chapter 14) argues that warfare built fiscal capacity, while colonial commerce and profits from slavery contributed to British investment and industrial expansion. He draws on Smith’s recognition that security underpins commerce, but challenges his assessment of the economic consequences of empire. Institutions organised around coercion and privilege could also contribute to the enrichment of particular nations – it does not establish an improvement in welfare overall. This makes whose wealth grew, and at whose expense, inseparable from the explanation.

Adam Smith’s ideas today

As a forthcoming Observatory article will set out through Smith’s essay The History of Astronomy, an imaginary machine makes observations intelligible, but new observations can unsettle it. Smith could not have seen what the Carron Company and its successors would set in motion, and some of his judgements have not survived what followed.

Yet the connections at the centre of his system – between specialisation, the extent of the market, and the institutions that sustain exchange – still organise much of how economists explain prosperity. The contributions to the volume show how much remains to be added to that machine, and how much of it continues to work.