Finance and the Wealth of Nations

Abstract

Adam Smith believed that the wealth of nations was constrained primarily by the extent of the market place. By expanding the market, the introduction of trade between regions permitted entrepreneurs to take advantage of economies of scale and hence enhance the wealth of nations. Thus for Adam Smith economic growth was primarily demand-driven. The key to overcoming existing production constraints was the expansion of demand. The obvious moral of Smith’s analysis is that no nation that aspires to be wealthy can be an island unto itself. Of course, implicit in the Smith analogy is that the internal market is already satiated with goods so that domestic market expansion is unlikely, if not impossible. In any case, the ubiquitous classical law of diminishing returns has no significant role to play in Smith’s inquiry into what limits the wealth of nations at any point of time.