hISTORY eNDED IN 1776:

Wealth was not gold and silver in Smith's contrarian view. Precious metals, though reliable as media of exchange and for their own industrial uses, were no more than claims against the real thing. All of the gold and silver in the world would leave one starving and freezing if they couldn't be exchanged for food and clothing. Wealth to the world's first economist was plainly this: goods and services.

Whatever increased the supply and quality of goods and services, lowered their price or enhanced their value made for greater wealth and higher standards of living. The "pie" of national wealth isn't fixed; you can bake a bigger one by producing more.

Baking that bigger pie, Smith showed, results from investments in capital and the division of labor. His famous example of the specialized tasks in a pin factory demonstrated how the division of labor works to produce far more than if each of us acted in isolation to produce everything himself. It was a principle that Smith showed works for nations precisely because it works for the individuals who make them up.

He was consequently an economic internationalist, one who believes in the widest possible cooperation between peoples irrespective of political boundaries. He was, in short, a consummate free trader at a time when trade was hampered by an endless roster of counterproductive tariffs, quotas, and prohibitions.

Smith wasn't hung up on the old mercantilist fallacy that more goods should be exported than imported. He exploded this "balance of trade" fallacy by arguing that, since goods and services constituted a nation's wealth, it made no sense for government to make sure that more left the country than came in.

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