The Wealth of Nations by Adam Smith

★★★★★ A monumental work. Sheer brilliance.

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As the book that created the field of modern economics, the Wealth of Nations is generally regarded as one of the most influential books ever written. It’s for that reason that it’s been on my bucket list for a while now, but I was happy (and somewhat surprised) to find that it’s also quite an engaging read, for the most part. I am not an economist, and I understand that most of the concepts here have roots before Smith, but I found stunning the degree to which Smith derives the key ideas of economics from first principles and weaves them together into a coherent view of the world that mostly holds up to this day. While obviously the field has developed considerably since the mid-18th century, and there are some errors in Smith’s theory (most notably to me, the assumption that labor is a fundamental measure of value), I think that if this were the only book you ever read on economics, you could use the theory to reason about the world and come to the correct conclusion 90% of the time. That’s remarkable.

The Wealth of Nations was first published in 1776, and then revised by Smith and published in 4 further editions up to 1789. It is composed of 5 books, but I found the first, which lays out the core principles of economics, by far the most striking. You could pretty easily read the first seven chapters of this book and come away with at least half the value. In book I, Smith develops a compelling narrative of how to understand economic activity:

1. The division of labor is the core driver for increased prosperity, as it makes our activities more productive. (Smith uses the famous example of pin production, where 1 worker alone can produce perhaps 1 pin per day, but 10 workers together can produce 48,000.) Division of labor increases productivity through the increased skill of each worker, the efficiency of keeping each worker focused on one task, and the tendency for focused workers to automate their tasks. The division of labor is not the result of anyone’s foresight and planning, but rather the gradual consequence of our propensity to trade. Animals don’t trade — they can take something, or they can beg for it—but humans can, and the way we get what we want is by offering someone else what they want in exchange: “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.”
2. The degree of division of labor is determined by the size of the market. Large markets can support many more narrowly-defined jobs than small ones. So for example, a city can support a porter while a small town cannot, and a country workman must take on a range of tasks that in town would each get their own specialist. How can you increase the size of the market? Increase trade.
3. Efficient trade requires a medium of exchange: money. Otherwise, trade is limited: if you raise cattle and want to buy salt, you have to buy one ox worth of salt to make the exchange work. Metal is the choice for money pretty much everywhere, because it is durable and divisible. Moving from raw metal bars to metal coins with official public stamps makes money more efficient, since you no longer need to weigh or assay the metal.
4. Money doesn’t have an intrinsic value, but rather, like other commodities, a price that varies with place and time. (Here Smith proposes that there is a fundamental value determined by the amount of labor required, which is not in keeping with modern economics.)
5. Prices are composed of the wages of labor, the profits of stock, and the rent of land. Sometimes, profits might look like wages, or the same person might earn both the profit and the rent (or all three), but they are always conceptually separate. (I love this quote: “As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce.”)
6. Prices are set dynamically by supply and demand. Market prices respond to supply/demand imbalances, and buyers and sellers adjust their behavior in response to prices to bring the market back to equilibrium. Competition, both between buyers and between sellers, is the key mechanism. While there are many short-term fluctuations in prices, over the long term it is restrictions on competition, mainly monopolies and regulations on free labor (e.g. enforced unpaid apprentices—7 years in Smith’s time!) that can distort prices. (Note Smith’s argument on prices seems a bit tied up by the idea of a fundamental natural price, which I think is obsolete.)
7. Wages and profits are also set by supply and demand. Wages are determined by various characteristics of the job (attractiveness of the work, training requirements, etc.), and wages rise due to availability of capital and competition for laborers, which tends to be in the countries growing the fastest. Profits, however, are driven down as capital stocks increase, due to competition. (Smith has the rent of land as a monopoly price, set by what the tenant can afford to pay, but as I understand it modern economics looks at land as just a factor in a competitive market.)

Book II dives into the capital stock, banking and interest, book III into the differences in wealth between different countries, book IV into how the government should interact with the economy, and book V on taxation. Again, many of the specific examples are illuminating, but to my mind they are applications and extensions of the core theories outlined above rather than separate ones. There are interesting bits all along the way, but a couple that were particularly memorable for me include:

• In book IV, Smith spends multiple chapters attacking the mercantile system, the reigning theory of political economy at the time. The mercantilists believed that wealth was equal to your stock of precious metals, advocating for building large of gold and silver, and that countries should focus on maximizing their trade balances, e.g. through high tariffs. Smith vigorously goes after these misguided conceptions. I found it a striking reminder that this wasn’t a purely academic exercise, but that the way the world was being run at the time was actually based on a different theory. The Wealth of Nations was extremely influential in the years after its publication—for example, apparently it was known to and read by the founding fathers of the United States as a guide for how to run an economy.
• Also in book IV, the digression on corn laws is a very interesting case study of Smith’s theory to a specific industry and policy debate. It’s illustrative of Smith’s grasp of dynamic systems and how central incentives are to understanding all behavior and economics.

While many paint Smith as the touchstone for laissez-faire policy today, he is in fact very measured compared to modern libertarians. He’s actually fairly skeptical of employers and manufacturers, who he sees as being able to collude to hold down wages or reap monopoly profits. He sees a very important role for the government (particularly in defense, administration of justice, and providing public goods), and consistently comes back to the point that laws and institutions are absolutely central to economic policy. He talks about cases where we should have exceptions to free trade, including for defense, to counter foreign tariffs, or to allow labor to adjust to new policies and avoid shocks to employment. And at various points he both advocates for a cap on interest rates and progressive taxation. It’s not as easy to pigeonhole him into a modern policy framework as one might think.

I came away with an abiding admiration for Smith’s intellect and ambition. He manages to join a piercing insightfulness with an obviously intense amount of research and the ability to build structure and theory in a very noisy area. He also translates all of that into a (mostly) engaging narrative, sometimes using crisp examples and sometimes a wealth of historical evidence to build his case. Two and a half centuries of economics development later, these are still hard topics to think about—dynamic systems just aren’t super intuitive for most of us—so for Smith to have wrapped his head around them as much as he did, with no roadmap, is a monumental achievement.