08/13/2012 06:13 pm ET Updated Oct 13, 2012

The Wealth of Nations

It is not from the benevolence of the butcher, the brewer or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. ~Adam Smith, 1723 - 1790

The answer to the question of why some countries are rich and others poor has long been a subject of discussion. The Scottish philosopher and economist Adam Smith made some particularly incisive considerations concerning countries' prosperity in his classic work, An Inquiry into the Nature and Causes of the Wealth of Nations, written over two hundred years ago but nonetheless relevant today.

With regard to the work, Princeton professor Alan Krueger says "No book has had more influence on economists' thinking and economic policy and by extension on the world population's material well-being." Some consider the book to be the first formal study of modern economy, and despite being published in 1776, the principles remain valid over time even while many appear to ignore them.

The Wealth of Nations describes how the division of labor and the expansion of trade increase production, wealth, and social well-being. Today, not even the most populist politician would dispute the benefits of the division of labor, which allows each person to specialize in the activities that he or she carries out most efficiently.

Higher productivity allows a person to generate beyond immediate needs, resulting in an exchange for other surplus products. This spurs commerce and allows us to enjoy the satisfactions that we would not have with mere self-sufficiency.

Increased production reduces the price of market goods. At the same time, the expansion of trade boosts demand, which ultimately results in increases in production to satisfy it, making it necessary to hire more workers, thus increasing wages and along with it, the standard of living in a country.

According to Smith, another factor that greatly increases labor productivity is fixed capital investment, that is, in infrastructure and machinery. This investment in principle is for the benefit of shareholders but in the long term it benefits the worker, by increasing productivity. At the same time, if national savings are generated, resources are guaranteed to increase such capital investment, and a virtuous cycle is created that speeds up economic growth.

Perhaps where divisions most lie today are in terms of the role of the state. Smith argues that government should center efforts on national defense and dispensing justice as well as creating divisions and agencies beneficial to the community and infrastructure, as long as these activities are not profitable for private investors. He adds that governments that spend beyond their income generate debt that represents a huge burden for future generations. With great foresight he pointed to the "enormous debts which at present oppress, and will in the long-run probably ruin, all the great nations of Europe."

While some details can be argued against today, it's hard to dispute that savings, investment, and the expansion of trade, as well as healthy public finances, promote the wealth of nations.

If we have known all of this for 236 years now, why do some politicians seek to forget these basic principles of economics and prosperity?