Adam Smith's Legacy: His Place in the Development of Modern Economics

By Michael Fry | Go to book overview

5

ON THE WEALTH OF NATIONS

Franco Modigliani

I must begin with a confession: my title is intended to be a bit misleading—a play on words. For when I refer to 'the wealth of nations', the title of Adam Smith's famous book, I am using the expression 'wealth of nations' in the modern sense of the stock of national net worth, whereas he means the flow of the annual produce or essentially what we now mean by national income (except that, in contrast with the modern western practice, he maintains that services should not be included in income).


SMITH'S VIEW OF THE DETERMINANTS OF SAVING

What does Smith have to say about the determinants of wealth, the flow by which it is accumulated, or saved, and about its role in the economy? First, he is a strong supporter of the view that productively employed capital plays an essential role in determining the growth of Smithian weath—

The annual produce…of any nation can be increased in its value by no other means but by increasing either the number of its productive labourers or the productive power of those labourers who had before been employed. The number of its productive labourers, it is evident, can never be much increased, but in consequence of an increase in capital. (II, iii, 32)

And to increase the productive power of the same number of labourers 'an additional capital is almost always required' (pp. 274-5). This investment and hence saving is necessary and sufficient for the growth of output, at least as long as labour is in elastic supply.

This view of the essential role of saving in economic development is

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