The Wealth of Nations – Adam Smith [Book Summary]

by Nick

A thriving economy is based on the principle of economic freedom.

Based on the selfishness of the entrepreneur, the division of labor and free competition, the market provides justice and equality.

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Book #1

Adam Smith‘s “The Wealth of Nations” analyzes the economic factors that contribute to the growth of the wealth of peoples.

Under the wealth refers to the income of society produced over a certain period.

The basis of economic growth and productivity is the division of labor. The division of labor contributes to:

  • “Increase employee agility.” Improving craftsmanship, blacksmiths, for example, are able to “make each over 2300 nails a day”;
  • saving time lost in the transition from one type of labor to another. This allows the employee to do one thing and not “stare around”;
  • the invention of machines that facilitate and reduce labor.

People are more likely to discover easier and faster ways to achieve any result if their attention ‹…› is directed to only one specific goal.

The reason for the division of labor is the natural tendency of man to exchange. The division of labor depends on the size of the market. A vast market creates favorable conditions for the division of labor and production.

In a narrow market, the division of labor is pointless – a village carpenter, for example, is forced to be a jack of all trades, otherwise, he cannot survive. The expansion of markets is due to new modes of transport (river and sea shipping).

The following is a question of money. They arose because of the difficulties of directly exchanging goods for goods. Each manufacturer tried to get a product that no one refuses to take in exchange.

Each product has a consumer and exchange (property to exchange for another thing) value. An example is given of water and diamonds: there is nothing more useful than water, but you can’t buy anything for it.

Diamonds have no consumer value, but their exchange value is enormous. The product has a market and natural price. Market – this is the price depending on the balance of supply and demand. Natural price is a monetary expression of exchange value.

The natural price represents the central price, to which the prices of all goods are constantly gravitating whatever the obstacles that deviate prices from this sustainable center.

With free competition, supply and demand balance market and natural prices.

But the main measure of the value of any product is labor. The cost of goods is a natural property of a thing that it has from nature. In early society, value was determined by the labor expended in the production of the goods and the labor bought in the exchange process. In a civilized society, the number of these types of labor does not coincide, since the second type is less than the first.

Any value consists of three types of income: wages, profits, and rents.

Salary is the price of labor. It is necessary to distinguish between nominal and real wages. The first is determined by the size of the money, and the second depends on changes in the prices of commodities. The size of wages depends on population growth. With the growth of wealth, the demand for labor increases, wages increase, and the welfare of society grows. As a result, population growth is accelerating, leading to an excess of labor – wages are reduced and fertility is reduced. This, in turn, leads to a shortage of workers and higher wages.

The salary level also depends on:

  • on the acceptability of various occupations (the remuneration is higher, the less pleasant the work);
  • from the costs to acquire the necessary skills (educated and trained people on average earn more than those who lack education or training);
  • on the degree of permanency of employment (higher pay if permanent employment is not guaranteed);
  • from trust in employees and their responsibility (assumed responsibility must be rewarded);
  • on the probability of receiving the expected pay in conditions when it is not at all guaranteed (professions with a high level of risk guarantee higher pay on average than professions with a low level of risk).

People are not equally prone to work, but the market mechanism pays tribute to everyone, regardless of profession.

Profit is a deduction from the worker’s labor product. The value created by him falls into two parts. One of them receives a worker in the form of wages, and the other forms the profit of the owner. Profit is the result of what the worker does beyond the norm necessary to create his salary.

Rent also represents a deduction from the product of labor. Its appearance is associated with the emergence of private ownership of land. The landowner requires an increase in rent even if the land improvement is made by the tenant at his own expense.

Book #2

The theme of the book is capital and factors contributing to its accumulation.

Capital is the stock of unfinished products, allowing the manufacturer to bridge the time gap between the expenditure of resources and the appearance of the final product.

The owner receives income from capital. Capital is divided into fixed and circulating.

The difference between them is that the first makes a profit “without moving from one owner to another or without further circulation”, and the second “constantly leaves him in one form and returns to him in another”.

The basic capital includes not only the instruments of labor and construction but also the sum of “acquired and useful abilities of all residents and members of society”.

Next, a definition of gross and net income is introduced. The gross income of the state is the entire annual product of the country. Net income is considered to be that part of it that the inhabitants of this country can, without spending their capital, attribute to their consumer stock.

The capital of the company increases due to the fact that part of the annual income is saved. This is facilitated by productive labor and thrift.

Productive labor increases the value of a product when “the price of this item can subsequently … set in motion a quantity of labor equal to that which originally produced it.” It is “sold in any single item or product that can be sold.”

The larger the share of productive labor, the higher will be the opportunity to increase production in the future. Comparing factory workers with servants, the author notes that the former not only reimburse their wages but also bring profit to the owner. An entrepreneur becomes poorer if he holds many servants. All who do not create profit are unproductive workers.

Along with actors and clowns, they include “the sovereign with all his judicial officials and officers, the entire army and navy.”

“We are driven to frugality by the desire to improve our situation” and this desire is stronger than the “desire for pleasure”, which pushes to expenses. A thrifty person is a benefactor of society. The author protects intermediaries and retailers because their work is productive.

Concluding the book, the author gives a diagram of the optimal distribution of capital across the country. At the head of the hierarchy of production in agriculture, since its products are enough to pay rent, wages and profits. In second place in productivity is industry.

The third is domestic trade, then foreign and, finally, transit trade, which does not affect productivity.

Book #3

The book presents a summary of the history of the national economy of Europe.

Under natural development, “a large part of the capital of any developing society is sent, first of all, to agriculture, and then to manufactories and, last but not least, to foreign trade.

This order of things is so natural … it has always … been respected to one degree or another … In all modern European states it has turned in many ways turned over on the head. ” This is due to “customs and mores”, preserved from the historical past of many countries.

The main brake on the development of agriculture was slavery.

If a free peasant is interested in the results of labor, then “a serf, unable to gain anything but his food, tries only not to burden himself with excessive labor and does not allow the product of the land to far exceed what is necessary for its existence”.

To this were added peasant duties and heavy taxes “lying on the peasants.” State policy also “was unfavorable for improvement and cultivation of land” (for example, the export of bread without special permission was prohibited). Trade did not develop, “in view of the ridiculous laws against those who raised and lowered prices, buyers, as well as privileges granted to fairs and markets.”

Urban development was the reason for the rise of agriculture and not the consequence:

  • Cities provided the village with a “large and ready market for the raw produce of rural areas, they encouraged land cultivation and their further improvement.”
  • the capital of urban residents “was often spent on the purchase of land for sale, of which a significant part would often remain uncultivated.”
  • the urban economy “led to the establishment of order and good governance, and with them to freedom and security of the individual in rural areas, the inhabitants of which until that time lived in an almost constant state of war with their neighbors and in slavish dependence”.

Therefore, industrial European countries, unlike countries with developed agriculture, developed very slowly.

Book #4

The book criticizes various aspects of the politics of mercantilism. In each case, it is explained for what purpose a particular law was issued, duties or restrictions were introduced. Then it is shown what this led to in the end – each time it turns out that the measure in question either did not achieve its goal or led to the opposite result.

Political economy is considered as a branch of knowledge necessary for a statesman. Her task is to increase wealth and power.

… it should not give advantages or provide special encouragement to foreign trade in commodities, preferably over domestic trade.

Personal interest is a powerful engine for the prosperity of society.

Striving for their own good, people are guided by the “invisible hand” of the market to the higher goals of society. It is necessary for an individual to be allowed to “completely freely pursue his own interests of his own free will and compete in his labor and capital with the labor and capital of any other person and the whole class”.

Therefore, if a person increases his wealth through enterprise, industriousness, and frugality, he thereby increases the wealth of society.

At the same time, free competition, equalizing the norms, leads to an optimal distribution of labor and capital between sectors.

The book ends with a call to pay attention to the consumer, whose interests “almost constantly sacrifice the interests of the manufacturer.”

Book 5

The main topics discussed in the book are issues of taxation and the role of the state in the economy.

Payment of taxes should be assigned to everything without exception – to labor, capital, land. A separate chapter lists the principles of tax policy:

  • taxes should be paid by all citizens, each according to their income;
  • tax payable should be fixed, and not changed arbitrarily;
  • any tax should be paid in a form that is the least shy for payers;
  • tax should be established on an equitable basis.

All states should develop in their own production only those goods that are cheaper than in other places. This will create an international division of labor that is beneficial to all countries. Any attempt to prevent such a division on an international scale will only bring harm.

The state has “three very important responsibilities”: ensuring military security, justice and “the obligation to create and maintain certain public facilities and public institutions, the creation and maintenance of which cannot be beneficial to individuals or small groups”.

 

Why You Should Read “The Wealth of Nations”

  • To understand how the economy works
  • To become a financially literate person
  • To put yourself among the best professionals in the field

This book is available as:

eBook | Print