The Wealth of Nations by Adam Smith

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  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.)
  • 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.

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Michael Siliski

Michael Siliski

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