The Wealth of Nations

In 1776, the same year out nation declared its independence from England, a Scottish economist, Adam Smith, wrote a book that sought the answer to the kinds of questions we've been asking. In tact, he called his book An Inquiry into the Nature and Causes of the Wealth of Nations. Smith examined the factors that cause one nation to be rich, another to be poor.

Smith equated wealth with income. Today, we think of wealth in terms of the ability to generate income. A nation mat can generate high levels of income is wealthy; one that is capable only of low levels of income is poor. What is it that allows a nation to produce a high level of income, to make it wealthy?

Money. Does more money make a nation wealthy? Many of the people that lived in Smith's times thought so. And it's not so preposterous a notion. The great writer F. Scott Fitzgerald is said to have remarked to his fellow writer, Ernest Hemmingway, "You know, Ernest, the rich are different from us." Hemmingway replied, "Yes, I know. They have more money than we do."

But what is true for one person isn't always true for a whole nation. Suppose the total amount of money in the United States were to double instantly. Suddenly everyone would have twice as much money in his or her wallet or purse, twice as much money in the bank, twice as much money squirreled away in the ash tray of the car - twice as much money everywhere. Would we be richer? If you think about it for a moment, you'll see that the answer is "no". We'd still have the same number of cars, the same number of houses, the same amount of food, the same number of schools. The fact that everyone had twice as much money wouldn't change the amount of goods and services available. What would happen is mat the prices of these goods would go up, but we wouldn't be any richer. We would not have created wealth.

Adam Smith had the benefit of having observed the follies of the great colonial powers in trying to get rich. Countries such as Portugal and Spain invested enormous effort in stealing gold from the New World, based on the mistaken notion mat having more money would make them rich. But as they got all that gold, which was used for money then, they succeeded mainly in causing prices to go up. Portugal was one of the most successful looters of New World gold; it managed to force its prices up by 200 percent during the 16^th century!

More money makes for higher prices. It doesn't create wealth. If it did, ending poverty would be simple; we could simple print up more money. Life in the real world is not so easy.

Natural Resources. Another possible source of wealth is a nation's stock of natural resources. Surely the availability of such factors as fertile land, a good climate, mineral deposits, timber and ocean resources well make a nation wealthy.

This possibility is certainly more realistic than the first one we considered. But it, too, falls short as an explanation of wealth.

Consider Japan and India, Japan is a very successful country, one many people expect (or fear) will play an increasingly dominant role in the world economy. It has virtually no natural resources. Indeed, it must import every raw material it uses from other, generally poorer, countries that have natural resources. India, though, is greatly blessed with natural wealth. It has roughly six times as much land available for agriculture - per person - as does Japan. Yet India is desperately poor, while Japan is rich. Income per person in Japan was nearly 16 times as that in India, according to me most recent data available from the World Bank.

Compare incomes in North America with those in South America. South America is by far the richer continent in terms of natural resources. When Adam Smith was writing, South America was considered by many to have the greater prospect for economic development. But Smith put his bet on the prospects for Norm America, particularly for what would become the USA. Natural resources, he said, are no guarantee of wealth.