This benign view of the condition and prospects of the labouring poor extends to the indigent as well — the "lowest ranks" of society. England was the first country — and for a long time the only country — to have a public, secular, national (although locally administered) system of poor relief. Unlike some of his successors — again, Malthus, most notably — Smith had no quarrel with poor relief as such. What he did vigorously oppose were the "settlement laws" that established residency requirements for the poor, thus limiting their mobility and opportunities for improvement, as well as depriving them of the liberty enjoyed by other Englishmen. In the same spirit, he argued for proportional taxation and taxes on luxuries rather than necessities, so that "the indolence and vanity of the rich is made to contribute in a very easy manner to the relief of the poor".

Smith's optimism failed him at one point. Toward the end of The Wealth of Nations, in what has come to be known as the "alienation" or "immiseration" passage, he described the effects of the division of labour on a man who has spent his life performing a few simple operations, with no opportunity to "exert his understanding" or "exercise his invention".

He naturally loses, therefore, the habit of such exertions, and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him, not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any general, noble, or tender sentiments, and consequently of forming any just judgment concerning many even of the ordinary duties of private life. Of the great and extensive interests of his country he is altogether incapable of judging; and unless very particular pains have been taken to render him otherwise, he is equally incapable of defending his country in war. The uniformity of his stationary life naturally corrupts the courage of his mind, and makes him regard with abhorrence the irregular, uncertain, and adventurous life of a soldier. It corrupts even the activity of his body, and renders him incapable of exerting his strength with vigour and perseverance, in any other employment than that to which he has been bred. His dexterity at his own particular trade seems, in this manner, to be acquired at the expense of his intellectual, social, and martial virtues.

This is a damning portrait — and a surprising one, because these are the labouring poor whom Smith earlier praised and for whom he held out such high promise. It also contradicts the opening sentence of the book: "The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is any where directed, or applied, seem to have been the effects of the division of labour." Yet towards the end of the book, that "skill, dexterity, and judgment" — and much else — seem to be belied by the division of labour. An explanation for this apparent contradiction may be found in the final sentence of that passage: "But in every improved and civilised society this is the state into which the labouring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it."

"Unless government takes some pains. . ." Smith went on to suggest just how this might be done: by means of a state-administered, state-supported, state-enforced system of education. A school would be established in every district where children, including those "bred to the lowest occupation," would be instructed in reading, writing, and arithmetic. The burden of the cost of this system would be borne by the state, although parents would be charged a fee so modest that even the common labourer could afford it. The schools themselves would not be compulsory (there were already pauper schools and varieties of private schools), but some form of schooling would be. To ensure a proper level of instruction, the student would have to pass an examination in the "three Rs" before entering a guild or setting up in a trade.