Title: Wealth of Nations
(Wordsworth Classics of World Literature)
Author: Adam Smith
Pages: 1008 pages
Publisher: Wordsworth Editions Ltd.; Classic
World Literature edition (5 July 2012)
Language: English
The Wealth of Nations is composed of five books each
with a number of chapters. I figured I'd share what I've learned from
my reading of the book as I go. So here it is for the first 7
chapters which set the scene before some of the more detailed text.
Overall, Smith has a fairly easy turn of phrase and the
language used in the book is not archaic even though it was published
in the 1700s. It is easy enough to follow and dwells on the
fundamentals to ensure that the reader has fully grasped these prior
to moving on in the book. I thought I'd try to summarise what each
chapter is trying to say in this review to give an idea of how Smith
has developed this work.
Book
1 - Introduction and Chapter 1:
Smith establishes labour as the fundamental basis of
national economic output (commodities). Smith advises that the
national economic output will be regulated by a) the way in labour is
applied, and b) the level of employment. Smith highlights how
specialisation and the division of labour has enabled the production
of many of the commodities of life (such as glazed windows) which
would not have been possible for any one person to produce for
themselves within their lifetime to the same standard.
Book
1 - Chapter 2:
Smith recognises people's "almost constant occasion
for the help of his bretheren".
He recognises that people's ability to "truck, barter and
exchange" goods and services to satisfy their needs and wants,
enables the division of labour described in the first chapter to be
useful to those specialising in the production of one sort of good or
service.
Book
1 - Chapter 3:
Smith draws the conclusion that the division of labour
is limited by the extent of the market for goods and services. He
highlights that denser population centres will give rise to greater
specialisation and division of labour than less dense centres. For
example, the market for nails for building work in a dense population
centre is greater in that centre and would give rise to specialised
nail-makers mass producing nails. In a remote rural region with very
low population density and difficulty or prohibitive expense in
importing mass produced nails, making nails may be done by a
blacksmith who also makes all manner of other metal objects (less
specialisation and division of labour).
Book
1 - Chapter 4:
This chapter looks at money and how this evolved as a
way to usefully and conveniently facilitate trade. It talks about
trade was initially facilitated through exchange of weights of
precious metals such as gold and silver for goods and services. Smith
goes on to describe how the uniform goodness of precious metals was
attested through stamping a quality mark on it with this giving rise
to coinage. Smith also recognises that coinage was debased at the
expense of national subjects by sovereign states and princes by
gradually reducing the amount of gold and silver in the coin over
time in order to create more money from this skimmed precious metal.
This chapter introduces the concept of "value in exchange"
and outlines how the "real" value of exchanged commodities
is composed.
Book
1 - Chapter 5:
Smith expands upon the concept of "real" value
and compares it to "nominal" value. Real value is that
which is given up to produce a commodity and nominal value is the
money price of that commodity. These values are not always that same
with a tendency for a commodity with a nominal value under or over
its real value to move towards the real value. This chapter revisits
the topic of the value of money in terms of the quantity of gold and
silver in coins. Interestingly, he suggests that government
regulation making silver and gold the legal tender except for small
change would stop the "discreditable" conduct of banks in
counting out pennies to depositors calling for their deposits in a
bank run. He adds that this regulation would require banks to hold
more cash in reserve which would be a considerable security to the
banks creditors (including depositors). This suggestion of government
regulation and reserve requirements is a feature of the banking
system today.
Book
1 - Chapter 6:
In
this chapter Smith breaks down the price of any good or service into
either one or more of three parts:
-
The wages of labour
-
The profits of stock
-
The rent of land
A
common thread with all of this, as outlined in the introduction to
his book, is that the stock cannot turn a profit and rent cannot be
provided without labour. Another interesting anecdote Smith makes in
this chapter is that of Smith likening the charging of rent by
landlords who annexed the commons as "reaping where they never
sowed".
Book
1 - Chapter 7:
This
chapter essentially introduces the basic economic concepts of demand,
supply and equilibrium price. It also talks on the spectrum of
perfect competition and oligopolies and monopolies and the effect of
this on the price that is charged versus the "natural"
price. An insightful quote from this chapter is:
"The
exclusive privileges of corporations, statutes of apprenticeship, and
all those laws which restrain, in particular employments, the
competition to a smaller number than might otherwise go into them,
have the same tendency, though in a less degree. They are a sort of
enlarged monopolies, and may frequently, for ages together, and in
whole classes of employments, keep up the market price of particular
commodities above the natural price, and maintain both the wages of
the labour and the profits of the stock employed about them somewhat
above their natural rate.
Such
enhancements of the market price may last as long as the regulations
of policy which give occasion to them."
My
conclusion ... so far
My
main takeaways from this are that Smith has done a good job at
linking economic prosperity to "useful" employment of
labour. He also logically and systematically creates a basis for his
economic principles based on empirical evidence available to him at
the time and from his experiences. He makes it clear that the
economic principles are subject to reality and that they may not
always hold depending on other factors. Importantly Smith recognises
the importance of society and everyone contributing what they are
able to progress it. Through induction and a couple of statements
Smith also recognises the role of regulation in the economy to ensure
it operates in the best interests of society (e.g. reserve
requirements and anti-trust / monopoly regulation). There are two
ways to read an interesting quote Smith made in Chapter 7 as
reproduced above. One is to infer that the exclusive privileges
relates to preferential treatment of certain corporations by
governments and sovereigns such as the East India Compony while the other is more general and relates to the general privileges
enjoyed by corporations, namely, limited liability and a higher
barrier to entry into this structure by those with greater resources
than those without such resources.
Overall,
my own reading of the text has changed the way in which I have
thought of Adam Smith. I see in the words of the author and the ideas
espoused, someone trying to create a model by which to better
understand economics. The economics espoused in this text is that
based on hard work (labour) being the prime mover in economic
performance with the real value of things being that which is given
up by those who perform the labour. He does include stock and land as
secondary elements but these can only be utilised through labour.
Sounds to me so far that true capitalism is based on "useful
labour" rather than playing around with the money supply or
having hoards of unused stock and land.
More
to come in Part 2 (just need to finish reading more chapters).
