The Wealth of Nations: Books I-III [Paperback]

Undoubtedly the most important work in the study of economics, and perhaps the most misunderstood. Adam Smith has been referred to invariably as "The High Priest of Capitalism" his detractors disparage the perceived reckless laissez faire approach, and the inappropriate claimants to his mantel espouse an unrestrained system that Smith himself did not endorse.
This is first and foremost a study, rather than any political manifesto or handbook for the new right. Drawing from a wide range of sources including ancient history, studies of colonies, of China, Russia, and even systems of slavery, Smith examines the system of economic development and economic competition. His discourse on the division of labor occurs early within the book, and moves toward studies of the nature of employment, of the motivation behind commerce and service, the origin and exchange of money, and the development of towns and countryside, and the interactions of the various economies.
Detractors and false heirs would do well to take note that Smith expresses a reserved attitude toward the nature of business owners, arguing that they will constantly seek to reduce wages. Further on in his study of the origin and exchange of money, he argues strongly against the excessive issuing of paper money and the printing of money, taking a very cautious tone against practices liable to cause devaluation.
His examination of banking is especially relevant for our modern times. He speaks of rationality within lending, but is not dismissive of blinded irresponsible lending, and speaks out against such a system remaining unrestrained.
An important legacy Smith lays out, which the isolationists on both sides of the political spectrum would do well to take note of, is his critique of the Mercantile system. Mercantilism is based on the notion that a nations worth should be stored in gold, to fund foreign wars, and that this should be accumulated through protectionist policies favoring domestic produce, and raising duties and tariffs to provide an unfair edge over foreign produce.
Smith uses a very good example that any wine enthusiast could relate to, namely the advantage of the importation of foreign wine as opposed to home produce. Smith believes that while Scotland could grow vineyards, the true wine growing potential lies in France, and it would be of greater interest both for the enjoyment of wine, and the specialization of Scottish industry, to rely on import from abroad.
Ultimately Smith dismisses Mercantilism as an uncompetitive practice harmful to both the consumer, and the adaptability and versatility of domestic industry, achieving the opposite of its desired effect.
The latter parts of the complete volume address the various functions of the state, education, the judicial system and the military. Within this section Smith discusses mainly cost, but also examines the various merits of certain service, for example the fact that a judge would earn less than a lawyer, therefore one must take the bench out of a sense of duty. Smith examines the thing that ultimately pays for it all, taxation.
Despite going into much duty and elaborating, the general reading of Smith's argument is that lower taxation is preferred, and excessive taxes on industry are ultimately counterproductive. Despite the fact that WON was written long before the age of Globalization, Smith does recognize that excessive taxation on capital and production can drive investment out of the country.
The latter parts of the book concern largely the maintenance of essential functions of the state, such as the civil service.
A book with a divided and misunderstood legacy, and one that should be read by all economists, regardless of their particular school or slant on the science.
In many ways a founding text of the modern world, a timeless classic if there ever was one.

At Amazon prices the two volume set containing Smith's Wealth of Nations Books 1 to 5 is hard to beat. Both volumes have critical introductions by Andrew Skinner and each contains both original references and a modern bibliography. Penguin are to be congratulated for making so good an edition available under their Classics imprint.

On the other hand the set of two volumes has an amusingly surreal feature: Each volume contains an index to both volumes - but in Volume 1, references to Volume 2 have italic page numbers and in Volume 2 references to Volume 1 also have italic page numbers. At first this made me think that the index for Volume 1 was in Volume 2 and vice versa (and I've known it to happen ;-). See what you think if you buy it.

Apart from that the only thing I'd add is that if you are serious about reading Smith, then you should also read Marx's Capital and Keynes's General Theory because these works are, even now, the three most significant landmarks in the economic literature.

Granted that at times Smith labours a point. But this remains a classic work that marks a milestone in economic thought. Until Smith, economists tended to be men of commerce (such as Dudley North) or political philosophers (such as Locke). Although Smith undoubtedly falls into the latter camp, the Wealth of Nations is important for being a study of economic theory for its own sake. This was a novelty and in some way marks the foundation of economics as a stand-alone subject. This book is purely about the fundamentals of political economy; how supply and demand interact, how money functions, how divided labour is exponentially productive and much else besides.
A must for every economist's shelf.