After the economic and housing meltdown starting in 2008, I was inspired to learn more about economics. One of the books I chose to read was Wealth of Nations by Adam Smith. I am so glad I did. Not only did it enrich my understanding of economics, it provided countless entertaining quotes, tidbits about history, and just plain interesting observations. When I was about 70% of the way through it, I asked my husband if he thought I should finish it or start on another book. He asked me to finish it. I think he liked the quotes I was feeding to him from it!
The amount of information that Adam Smith integrates in this book demonstrates an enormous intellect at work. He combines knowledge of geography, history, industry, and, of course, economics. After reading Wealth of Nations, I have found reading any modern book on economics to be much easier as I already have a firm understanding of many of the fundamentals.
The following is a “book report” on this great work. It is not intended to describe everything in the book, but rather those points that I found most interesting and are most relevant to the problems of today. It is also meant to encourage you to read it.
Adam Smith is considered by many to be the father of modern free market thought. He passionately writes in favor of freedom and against government intervention. The term “laissez-faire capitalist” had not been invented yet, but he refers to the ideal government as being one “in a perfect state of liberty.”
Give the name of his book, you can imagine that Smith’s main motive is to think about and give suggestions as for what creates a wealthy society. He is compassionate and clearly takes into consideration the happiness and well-being of all ranks of people, not just one special interest group or another. After reading Wealth of Nations, I have a new favorite word: “Opulence.”
Adam Smith famously wrote in defense of enlightened self-interest. The philosophy of enlightened self-interest is that each person pursuing their own interest drives them to create valuable products. This is what creates a wealthy society—each person naturally doing things to their own advantage, not working in the name of the “public good.” He writes:
Every individual is continually exerting himself to find out the most advantageous employment for whatever capital he can command. It is his own advantage, indeed, and not that of the society, which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to the society.
By directing that industry in such a manner as its produce may be of the greatest value, [an industrious person] intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.
I have never known much good done by those who affected to trade for the public good.
The other major thing to take away from Wealth of Nations is the advocacy of the division of labor.
Smith writes, “It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy.”
He argues that the division of labor is one of the greatest accelerators of wealth. If one man can get good at doing one thing, he gets very proficient at it. A master of one trade can produce much more than a jack of all trades. He uses the example of one machining operation in order to make a pin, thus allowing one person to produce many more pins than several people trying to make pins.
To make this point, Smith describes several factories he toured. I am particularly impressed with this for Smith obviously had knowledge of current industry. Ask yourself how many economists today understand the manufacturing processes in modern factories.
This point has influenced my life personally. Sometimes when I go to do something, I ask myself if it is really something I should do by myself or if I can buy it cheaper than I can make it. I also do this at work. A large company should be able to divide its labor efficiently. I have saved my time both at home and work this way.
From these foundations, the division of labor and the pursuit of profit, most of Smith’s other points logically follow.
One point made by Smith several times over, and which rings true today, is his unadulterated criticism of “corporations.” A corporation as he meant it is different than what we know today. By corporations, he means businesses that use government law to restrict competition.
One of the main methods to restrict competition used by these corporations in old Europe was to limit the number of apprentices allowed in a trade and demand a long apprenticeship until any person is allowed to enter a trade. He writes:
To have served an apprenticeship in the town, under a master properly qualified, is commonly the necessary requisite for obtaining this freedom. The bye-laws of the corporation regulate sometimes the number of apprentices which any master is allowed to have, and almost always the number of years which each apprentice is obliged to serve. The intention of both regulations is to restrain the competition to a much smaller number than might otherwise be disposed to enter into the trade.
The purpose of these long apprenticeships was not to demand quality workers. It was to ensure not too many men entered the trade, which would threaten the currently established men. If the trade you were trained in folded, you would have to spend another 7 years learning a new trade—even if it was a nearly identical trade. It caused many people to become poor and unable to find work at young ages. If anyone is nostalgic that such apprenticeships produced quality workmen, Smith comments:
An apprentice is likely to be idle, and almost always is so, because he has no immediate interest to be otherwise. In the inferior employments, the sweets of labour consist altogether in the recompence of labour. They who are soonest in a condition to enjoy the sweets of it, are likely soonest to conceive a relish for it, and to acquire the early habit of industry. A young man naturally conceives an aversion to labour, when for a long time he receives no benefit from it.
Due to the suppression of competition, these policies create businesses which enjoy a monopoly. They are large, bloated, and charge much higher prices than would happen in a free market. Because of how large they are, their collapse would have much stronger ripple effects in an economy. This thus spurs fear and anxiety among people that they must stay in business; thus emboldening these monopolies even more.
Smith rejects this state of things, preferring instead a large number of smaller businesses competing with each other. He writes:
The industry of Great Britain, instead of being accommodated to a great number of small markets, has been principally suited to one great market. Her commerce, instead of running in a great number of small channels, has been taught to run principally in one great channel. But the whole system of her industry and commerce has thereby been rendered less secure, the whole state of her body politic less healthful than it otherwise would have been.
It is undeniable that this is the situation in America today. We hear the exact same verbiage—that businesses are “too big to fail.” The overwhelming majority of these businesses that are “too big to fail,” such as Fannie Mae or Freddy Mac, are businesses that enjoy special privileges via government intervention.
Smith also makes a passionate argument against trade restrictions on the importation or exportation of goods. This follows naturally from his argument in favor of the division of labor.
The more people can trade, the greater the division of labor, and the greater the wealth of all. The division of labor gets better and better with more and more people. Trying to do everything on your own is inefficient. Trading with a town makes it better. With a state, even better. With a country, even better. More resources can be put to more directed use. Take for example when a country, due to its resources, would struggle to produce something. In IV.2.15, Smith writes that it takes 30 times the amount of expense to grow grapes and thus make wine in Scotland as it does in other countries. Would it make sense to prohibit the importation of wine just to encourage sales of Scottish wine? It would be a drain on capital in Scotland to do so.
Smith argues that laws against importation from one country are designed solely to give a monopoly to manufacturers within a country. It is not wages that increase from these monopolies but profits. He writes:
It is the industry which is carried on for the benefit of the rich and the powerful that is principally encouraged by our mercantile system.
Another thing that struck me about Wealth of Nation is that Smith argues against using a “balance of trade” as a barometer of the success of a country—something we still do to this day!
The argument (from others) is that it is preferable to have more gold in a country than any other item—that more gold must mean a wealthier country. Today, the barometer is more money. As such, importation is considered bad—since gold/money leaves the country while other goods come in. Exportation is considered good—since gold/money comes into the country while other goods go out. The “balance of trade” is exports minus imports.
Smith argues that there is no inherent value in keeping gold in an economy. If gold is wanted, the free market always finds a way to supply it. If a country is giving gold away in return for food or clothes, clearly those people would prefer to have food or clothes instead of gold. Smith, comically, argues that one would not think that we need to accumulate pots and pans—also non-perishable forms of wealth—as the measure of success of an economy.
Something that was extremely refreshing when reading Wealth of Nations is his unequivocal opposition to slavery. Naturally, as he argues that each man works for his own profit, a slave is the most unprofitable type of labor to take in.
The experience of all ages and nations, I believe, demonstrates that the work done by slaves, though it appears to cost only their maintenance, is in the end the dearest of any. A person who can acquire no property, can have no other interest but to eat as much, and to labour as little as possible. Whatever work he does beyond what is sufficient to purchase his own maintenance can be squeezed out of him by violence only, and not by any interest of his own.
Smith’s treatment of slavery is refreshing because he so simply states that it is wrong—all while never trying to claim that all of America is evil for having practiced slavery.
Too often when we hear of slavery in America, we are told that “that’s simply what always had been done.” Or we might hear that “Well what is wrong to us was not wrong to them.” Or “They didn’t know what they were doing was wrong.”
Actually, it doesn’t take any particular enlightenment to see that slavery is wrong. Taking someone in, treating them like garbage and forcing them to work, is wrong. You have to be morally depraved to not see it, no matter if it is the 18th or 21st century.
However, despite the early evils of slavery and violence, Smith never tries to take these pockets of evil and hang it around all of America’s neck, as so many do today. He just states what it was: wrong in what it was and moves on.
This is what Smith had to say about the American colonies:
From shopkeepers, tradesmen, and attornies, they are become statesmen and legislators, and are employed in contriving a new form of government for an extensive empire, which, they flatter themselves, will become, and which, indeed, seems very likely to become, one of the greatest and most formidable that ever was in the world.
This, from a British economist in seventeen seventy six!
I completely delighted in reading Adam Smith’s comments on education. They actually deserve their own article. But, briefly, he makes very similar arguments as those today who argue for private schools. He writes, “Those parts of education, it is to be observed, for the teaching of which there are no public institutions, are generally the best taught.” He says public endowments were so certain and sure that the professors at universities don’t have to do well in order to attract students and get paid. Some professors, he writes, didn’t even hold regular classes! This is a particularly compelling point because it is often thought and taught that our founding fathers wanted public education. But Smith, a genuine free market thinker, an influence our own founding fathers, and is considered by some a founding father of America, favoured free competition among schools. He did however advocate some basic funding of education so everyone could be literate.
This is what Adam Smith had to say about gun rights:
In modern war the great expence of fire-arms gives an evident advantage to the nation which can best afford that expence, and consequently to an opulent and civilized over a poor and barbarous nation. In ancient times the opulent and civilized found it difficult to defend themselves against the poor and barbarous nations. In modern times the poor and barbarous find it difficult to defend themselves against the opulent and civilized. The invention of fire-arms, an invention which at first sight appears to be so pernicious, is certainly favourable both to the permanency and to the extension of civilization.
Based on other statements of his, he is also clearly an undying supporter of his nation’s military and admired the courage and bravery exhibited by soldiers.
At the end of the book, Smith discusses public debt. I was astonished to find out that the same argument given in my freshmen course on macroeconomics at Penn State University was addressed by Adam Smith in 1776. The argument is that public debt is OK “as long we owe it to ourselves.” Smith addresses this “apology”:
In the payment of the interest of the public debt, it has been said, it is the right hand which pays the left. The money does not go out of the country. It is only a part of the revenue of one set of the inhabitants which is transferred to another; and the nation is not a farthing the poorer. This apology is founded altogether in the sophistry of the mercantile system […]
But though the whole debt were owing to the inhabitants of the country, it would not, upon that account, be less pernicious.
The idea that public debt is acceptable “as long as we owe it to ourselves,” is the same as saying that it is OK that your brother-in-law owes you money because it is “all in the family.” It makes no sense that debt is acceptable or not based on artificially drawn national borders.
Adam Smith makes the same essential argument. By giving wealth to one set of the population, you are taking wealth from another. And, in doing so, you are taking wealth from the productive members of society and giving it to the unproductive.
Smith also describes how nearly every prosperous European nation has driven itself into debt. In a non-prosperous nation, there is nothing to buy, so the government doesn’t buy anything. But in a prosperous nation, they always borrow money from either their own citizens or another government. Smith argues that the governments usually make interest only payments on the debt. In times of peace, they may reduce the debt some, but they never eliminate it. The government sets up a temporary tax to pay for specific debt. That tax then gets mortgaged several times, to pay for several different types of debt. The temporary tax inevitably becomes permanent. Because the government is weighed down by this oppressive debt, it can never end the taxes it set up to pay the debt.
And, should a government need to increase taxes even more due to a war, it must tax even further—taxes that are much more improper and invasive than the original taxes.
One of the most jaw-dropping parts of the book is that Smith writes that to pay its debt, the method of payment has nearly always been to debase the currency. Imagine if the U.S. government decided that every new $1 it prints will now be a $5 bill. It’s pretty easy to pay off your old debts, which are fixed. You ostensibly pay off a $100 debt but with only $20 of real money. This should be sobering to all Americans as they look at their government which is being utterly crushed by debt.
In reading almost all of Wealth of Nations, I feel like a Battlestar Galactica quote is appropriate: "All this has happened before. All this will happen again."
The final topic of Wealth of Nations is surprising to say the least: Adam Smith calls for England to let her American colonies go!
There are many other topics in Wealth of Nation such as the explanation of currency and banking. However, they would make dry book report topics.
It would be ideal, in my opinion, if someone were to develop an abridged version of this 1100+ page book. Sections describing how economist [so-and-so] was wrong because the accounting was faulty can easily be removed.
I wanted to end this book report on a light note. Smith has so many interesting observations on life and people. I wanted to share some.
This is what he had to say about fertility in women of “lower” versus “higher” classes:
A half-starved Highland woman frequently bears more than twenty children, while a pampered fine lady is often incapable of bearing any, and is generally exhausted by two or three. Barrenness, so frequent among women of fashion, is very rare among those of inferior station. Luxury, in the fair sex, while it inflames, perhaps, the passion for enjoyment, seems always to weaken, and frequently to destroy altogether, the powers of generation.
This comment from Smith on countrymen versus city folk still rings true today:
The common ploughman, though generally regarded as the pattern of stupidity and ignorance, is seldom defective in this judgment and discretion. He is less accustomed, indeed, to social intercourse, than the mechanic who lives in a town. His voice and language are more uncouth, and more difficult to be understood by those who are not used to them. His understanding, however, being accustomed to consider a greater variety of objects, is generally much superior to that of the other, whose whole attention, from morning till night, is commonly occupied in performing one or two very simple operations. How much the lower ranks of people in the country are really superior to those of the town, is well known to every man whom either business or curiosity has led to converse much with both.
The following was said about Princes but can be applied to nearly any son of wealthy people today:
To improve land with profit, like all other commercial projects, requires an exact attention to small savings and small gains, of which a man born to a great fortune, even though naturally frugal, is very seldom capable. The situation of such a person naturally disposes him to attend rather to ornament, which pleases his fancy, than to profit, for which he has so little occasion.
This one is long and requires some pondering but is really well worth it. Smith is talking about university professors. Because money is so certain due to public endowments, there is no objective measurement to decide who should keep their job and who shouldn’t. A completely arbitrary system is put in place to decide who is doing well and who is not, thus who will get fired. As professors have no idea who will get fired and who won't so they just start blindly following their administrators, at the expense of their students. I have known many cowardly managers who the following can be applied to and for this reason:
If the authority to which he is subject resides, not so much in the body corporate of which he is a member, as in some other extraneous persons, in the bishop of the diocese, for example; in the governor of the province; or, perhaps, in some minister of state it is not indeed in this case very likely that he will be suffered to neglect his duty altogether. All that such superiors, however, can force him to do, is to attend upon his pupils a certain number of hours, that is, to give a certain number of lectures in the week or in the year. What those lectures shall be must still depend upon the diligence of the teacher; and that diligence is likely to be proportioned to the motives which he has for exerting it. An extraneous jurisdiction of this kind, besides, is liable to be exercised both ignorantly and capriciously. In its nature it is arbitrary and discretionary, and the persons who exercise it, neither attending upon the lectures of the teacher themselves, nor perhaps understanding the sciences which it is his business to teach, are seldom capable of exercising it with judgment. From the insolence of office, too, they are frequently indifferent how they exercise it, and are very apt to censure or deprive him of his office wantonly, and without any just cause. The person subject to such jurisdiction is necessarily degraded by it, and, instead of being one of the most respectable, is rendered one of the meanest and most contemptible persons in the society. It is by powerful protection only that he can effectually guard himself against the bad usage to which he is at all times exposed; and this protection he is most likely to gain, not by ability or diligence in his profession, but by obsequiousness to the will of his superiors, and by being ready, at all times, to sacrifice to that will the rights, the interest, and the honour of the body corporate of which he is a member.
See more of a collection of quotes from Wealth of Nations here.
Wealth of Nations, despite whatever its flaws, is a powerful book in defense of economic liberty. Smith argues passionately for the success and prosperity of a nation and in favor of the betterment of people of all ranks. I enthusiastically encourage you to read it. You will not regret it.
Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. 1776. Dolphin Books, 2008. Kindle.
Enjoy this article on economics? See Amber's article On ‘Demand Side’ Economics: Why Spending Cannot Improve the Economy but Freedom Can