Book Summary: The Wealth of Nations by Adam Smith

Quick Summary: The Wealth of Nations laid the foundations of modern economics. Smith outlined the arguments for free trade, the advantages of the division of labour and the need to prevent governments from excessive meddling with the market. 

This is the book that introduced the idea of the ‘invisible hand’ of the free market, and should thus be familiar to anyone who wants to understand the political arguments over tariffs, protectionism, corporate power and the future of globalisation.

You do not have to read the entire book if you don’t have time. This book summary provides an overview of everything you can learn from it.

Let’s get started without further ado.

The Wealth of Nations Book Summary

Introduction

Every nation’s yearly labor is the fund that provides it with all the necessities and comforts of life that it consumes annually, and which always consists either in the direct product of that labor or in what it buys from other countries with that product. The ability, dexterity, and judgment with which a nation’s labor is usually used, as well as the percentage of people engaged in beneficial labor versus those who are not, determine a nation’s wealth. Regardless of a country’s soil, climate, or size, the abundance or scarcity of its yearly supply must be determined by those two factors, particularly the former rather than the latter.

In primitive hunter-gatherer societies, for example, everyone who is capable of working is more or less engaged in productive labor, providing for himself and his family or group. Such countries, on the other hand, are so impoverished that they are frequently forced, or believe they are forced, to murder or abandon members of society who are not immediately productive. Even if many people do not work in civilized and prosperous countries, they consume the fruits of ten times more labor than those who do. Even if he is thrifty and diligent, a poor man in a civilized country may enjoy a greater share of life’s comforts than any barbarian.

Division of Labor

Division of labor means that the same number of people can produce more than if they did the labor individually from start to finish.

The division of labor appears to have resulted in the greatest increase in labor’s productive capabilities, as well as the majority of the ability, dexterity, and judgment with which it is used. In general, when labor is divided into smaller parts and assigned to a specialized party, the labor becomes much more efficient and capable of producing more output.

This significant increase in job volume has been attributed to three factors. To begin with, an increase in a worker’s dexterity inevitably increases the amount of work he can do; and the division of labor, by limiting each man’s business to a single basic action, inevitably improves a worker’s dexterity.

Second, the advantage of reducing time spent transitioning from one type of job to another is substantial. It is difficult to move quickly from one type of job to another that takes place in a different location and employs completely different technologies. Third, everyone should be aware of how much labor can be eased and shortened by using appropriate equipment. The development of a large number of machines simplifies and accelerates labor, allowing one man to do the work of many.

The human proclivity to barter and exchange one thing for another leads to the division of labor. This proclivity is ingrained in human nature and is one of the traits that distinguishes humans from other species. Furthermore, the proclivity for trading is universal—even a beggar will trade used clothing for food, shelter, or other necessities. We meet the majority of our needs by following the maxim “Give me what I want, and I’ll give you what you want.”

For example, we look forward to our dinner not because of the butcher’s, brewer’s, or baker’s goodness, but because of their concern for their own interests. We appeal to their self-love rather than their humanity, and we never discuss our own needs with them, but rather their benefits. As a result, there is a natural division of labor. As people trade to satisfy their needs, some eventually specialize in specific necessities such as food, shelter, and clothing.

Because the division of labor is caused by the power of exchange, the breadth of this division must always be constrained by the size of the market. Nobody can be encouraged or motivated to devote their entire attention to one job when the market is small.

Certain types of manufacturing, even the most basic, can only be done in a large city with a large enough market. The more customers a person can sell their goods to, the more specialized that person can become.

Because it is much cheaper to transport goods by water than by land, the size of any particular market will be limited by its proximity to navigable waterways. Because their borders are limited by terrain, all of Africa’s interior regions and many areas of Asia appear to have been in the same barbaric and uncivilized state at all times in history. Eastern China, on the other hand, is prosperous because of its extensive network of waterways, which facilitates internal trade.

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Money

The division of labor is limited in the absence of a monetary system, and people end up with excess products and no profitable way to dispose of them. For division of labor to work, there must be a commodity that all economic system participants accept in exchange for their goods. This commodity is known as money.

In all civilized countries, money has become the universal tool of trade, allowing commodities of all kinds to be bought and sold or exchanged for one another. Throughout history and around the world, many different commodities have been used as money. Cattle were most likely the most common tool of trade in the early eras of civilization, though it must have been a difficult way to conduct business. Salt was the usual medium of trade for Abyssinia; it was shells on the Indian coast, dried fish in Newfoundland, tobacco in Virginia, sugar in several West Indian colonies, and skins or prepared leather in other places.

In all nations, however, overwhelming forces appear to have compelled mankind to choose metals over all other commodities as a source of money. Metals can be stored with minimal loss because few things are less perishable, and they can be split into pieces and fused back together without loss, a feature that no other similarly durable commodity has. For example, if a man wanted to buy salt but only had cattle to trade for it, he would have had to buy an entire ox’s worth of salt all at once because he couldn’t split his ox into smaller pieces.

The word value has two different meanings: “value in use” and “value in exchange.” The usefulness of an object is represented by its value in use, whereas the ability to purchase other products is represented by its value in exchange. After all, the relative or exchangeable value of things is determined by the norms that people naturally adhere to when exchanging goods for money or for one another.

The things that have the most use value have little or no exchange value; on the other hand, the things that have the most exchange value, such as money, have little or no use value. When you think about it, nothing is more useful than water, but it can only buy so many things. A diamond, on the other hand, has little practical value but can frequently be exchanged for a wide range of other items.

Individual Wealth

Every person is wealthy or poor in proportion to his or her ability to enjoy life’s necessities, comforts, and amusements. However, once the division of labor is in place, a man’s own labor can only provide a small portion of these. The vast majority of them must then be obtained through the labor of others, and he must be wealthy or poor in proportion to the amount of that labor that he can command or afford to purchase.

The worth of a commodity to the individual who owns it and intends to trade it for other commodities rather than use or consume it is equal to the amount of labor that it allows him to buy or demand. As a result, labor is the true measure of the exchangeable worth of all commodities. The true cost of anything is the effort and difficulty involved in obtaining it.

Labor, like other commodities, has a nominal and a real price. The number of necessities and comforts of life provided for it determines its actual price; the amount of money determines its nominal price. This monetary price is useful as a guide, but because the values of gold and silver fluctuate constantly, it can never be a completely accurate indicator of labor’s value. The money price of a commodity is only a reasonable approximation of its actual labor price when the currency is not too debased.

Wages, Profit, Rent

Every item’s price is resolved into one of three components, wages, profit, or rent – or all three parts; and in every developed society, all three portions are included, more or less, as component parts, in the price of most goods. For example, one portion of the price of maize pays the landlord’s rent, another portion pays the wages or upkeep of the laborers and laboring animals used in its production, and the third portion pays the farmer’s profit. These three components appear to account for the entire cost of maize, either immediately or in the long run.

A working horse, for example, is made up of three components: the rent of the land on which he is raised, the labor of caring for and raising him, and the farmer’s earnings. Even if the grain price covers the direct cost of the horse, the total cost is still broken down into the same three components of rent, labor, and profit, either immediately or later.

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Natural and Market Prices

Every culture has a standard or typical pay and profit rate for every type of work. This rate is naturally regulated, in part by societal conditions and in part by the unique characteristics of each job. Every community also has a standard or average rate of rent, which is influenced by a number of factors, including the general state of the society in which the property is located, as well as the natural or enhanced fertility of the land. These ordinary or average rates are known as the natural rates of wages, profit, and rent at the time and place where they usually prevail.

When a product’s price is neither higher nor lower than the amount required to cover land rent, labor salaries, and stock profits, the item is sold at its natural price. A commodity’s market price, on the other hand, is the price at which it is frequently sold. It could be higher, lower, or exactly the same as the natural price.

The market price of any given product is determined by the proportion between the amount actually brought to market and the demand of individuals willing to pay the natural price of the item.

When the quantity of a product brought to market falls short of the effective demand, all individuals willing to pay the natural price cannot obtain the quantity they desire. Some will be willing to pay more. A rivalry will immediately erupt between them, and the market price will rise above the natural price, depending on the severity of the deficit or the rivals’ wealth and luxury. As a result, the cost of basic necessities skyrockets during a famine.

When the supply of a product exceeds the effective demand, it cannot be sold to everyone who is willing to pay the natural price. As a result, some of the product must be sold to people willing to pay less, and the lower price they offer must lower the overall price. After that, the market price falls below the natural price.

Wages of Labor

The product of labor is the natural remuneration or pay of labor. The contract between two parties whose interests are far from aligned determines the average wage of labor. Workers want to get as much as they can, while masters want to give as little as possible. Workers are more likely to band together to raise labor wages, whereas masters are more likely to band together to lower them.

In general, masters must have the advantage; however, there appears to be a rate below which ordinary wages, even of the lowest species of labor, appear difficult to reduce for any significant period of time. A man must always be able to support himself through his job, and his earnings must be sufficient. This is the minimum wage. In most cases, subsistence pay must be slightly higher than the bare minimum for survival; otherwise, the worker will be unable to raise a family, and the lineage of such laborers will not survive beyond the first generation.

It is difficult to determine the average labor pay, even in a specific location and time period. This is because profit is unpredictability. Because profit fluctuates so much, a tradesperson can’t always give you the average of his year profit, let alone his daily profit; as a result, salaries fluctuate accordingly. Salaries are influenced not only by changes in commodity prices, but also by the good or bad luck of a master’s competitors and customers, among a thousand other factors.

The Variation of Labor Rates

There are five major factors that explain why labor wages differ from one occupation to the next. To begin, labor rates differ depending on how simple or difficult the job is. A tailor, for example, is paid less than a weaver. His job is much easier. Weavers earn less than smiths. The most despised of all jobs, public executioner, is paid more than almost any other common profession in proportion to the amount of labor done.

Second, the ease and low cost of learning a new business, as well as the difficulty and cost of doing so, affect labor salaries. Third, salaries in professions differ because some crafts have significantly more consistent employment than others.

Fourth, labor wages vary according to the amount of trust that must be placed in the workers. Goldsmiths and jewelers are always paid more than many other workers because they are entrusted with valuable materials. Fifth, labor remuneration varies according to the likelihood or improbability of success. If 20 people apply for a job and only one is hired, the one hired is usually paid the sum of the salaries of the other 20.

Land rent, defined as the price paid for the use of land, is a monopoly price by definition. It is proportional to the farmer’s ability to provide rather than the landlord’s ability to take. Rent from grain-producing land will eventually set the standard for all other types of rent because grain is the most fundamental commodity.

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Capital

There are five major factors that explain why labor wages differ from one occupation to the next. To begin, labor rates differ depending on how simple or difficult the job is. A tailor, for example, is paid less than a weaver. His job is much easier. Weavers earn less than smiths. The most despised of all jobs, public executioner, is paid more than almost any other common profession in proportion to the amount of labor done.

Second, the ease and low cost of learning a new business, as well as the difficulty and cost of doing so, affect labor salaries. Third, salaries in professions differ because some crafts have significantly more consistent employment than others.

Fourth, labor wages vary according to the amount of trust that must be placed in the workers. Goldsmiths and jewelers are always paid more than many other workers because they are entrusted with valuable materials. Fifth, labor remuneration varies according to the likelihood or improbability of success. If 20 people apply for a job and only one is hired, the one hired is usually paid the sum of the salaries of the other 20.

Land rent, defined as the price paid for the use of land, is a monopoly price by definition. It is proportional to the farmer’s ability to provide rather than the landlord’s ability to take. Rent from grain-producing land will eventually set the standard for all other types of rent because grain is the most fundamental commodity.

Paper Money

The price of any commodity is always broken down into one or more of the following three components: labor pay, stock profits, and land rent. The gross revenue of a large nation’s people is the gross income of all goods produced by the country’s land and labor. The net revenue is calculated after deducting the cost of maintaining fixed capital. Net revenue, not gross sales, is the true measure of profit and prosperity.

Paper notes are the primary medium of exchange for money. They are a great way to trade money in general. The first advantage of paper money is its low replacement cost in comparison to replenishing the gold and silver money supply. Furthermore, merchants can use their entire capital by opening cash accounts and repaying the bank when transactions occur.

Paper money, on the other hand, has risks and drawbacks. One significant issue is the risk of a bank overextending itself financially by issuing more banknotes than the country can easily consume and employ. Furthermore, paper money allows businesses to engage in excessive trading, resulting in a cycle of increasing debts that eventually leads to bankruptcies. As a result, when using paper money, people must exercise caution and make sound decisions.

Productive and Unproductive Labor

Productive labor is labor that adds to the value of capital by replacing it with products that generate more capital. Unproductive labor, on the other hand, has no such impact on added value. A manufacturer’s labor, for example, adds to the overall value of the materials he works with. The labor of a lowly servant, on the other hand, adds nothing to the worth of nothing.

When a man hires a large number of manufacturers, he becomes wealthy; when he hires a large number of menial workers, he becomes impoverished. Of course, the labor of the lowly servant has value, may be useful or necessary, and is worthy of the same compensation as the labor of the manufacturer, but it does not produce value; it is simply a service.

Meanwhile, the labor of the manufacturer is fixed and realized in some specific topic or vendible commodity, which lasts for at least some time after the labor is completed. As a result, a country’s overall economic development is dependent on saving and investing, whereas spending, even on hospitality or charity, contributes to a loss of national wealth.

Loans

A lender always considers stock loaned at interest to be capital. He anticipates that it will be returned to him in due course, and that the borrower will pay him a yearly fee for its use until then. It can be used as either a capital or a stock held for the borrower’s immediate use. If he uses it as capital, he will invest it in the maintenance of productive workers who will profitably replicate the value. If he uses it as a stock for immediate consumption, he will be unable to restore the capital or pay the interest without sacrificing another source of income, such as property or land rent.

Nations have tried and failed to limit the amount of interest a lender can charge for his capital or to prohibit interest-bearing lending entirely. As a result, people begin lending and borrowing illegally, usually at interest rates higher than the legal rate.

A capital letter can be used in four different ways. The first is to obtain the rough product required annually for the use and consumption of society; the second is to manufacture and prepare that rough product for immediate use and consumption. The third method entails transporting either raw or manufactured product from where it is abundant to where it is desired; and the final method entails dividing large quantities of produce into smaller pieces to meet the sporadic needs of people who want them. Commercial trade within a country, rather than foreign trade, is most beneficial to a country’s wealth because it encourages domestic labor the most.

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The Development of Agriculture

The exchange of goods between town and country is the great commerce of every civilized society. The town provides the country with both subsistence and manufacturing materials. The country compensates by returning a portion of the manufactured goods to the town. The country provides wealth to the town, but both benefit from this trade. Both parties benefit from mutual and reciprocal gains, and the division of labor benefits all parties.

The majority of a developing society’s capital is naturally channeled first to agriculture, then to manufacturing, and finally to international trade. However, this natural order is experiencing a steady inversion in Europe. Foreign trade brought all of the better industries to some towns, and manufacturing and foreign trade combined gave rise to the major agricultural advances.

Commercial and industrial city growth and wealth aided the development and agriculture of the nations to which they belonged in three ways. First, they encouraged the development and improvement of the country’s primitive product by providing a large and accessible market for it. This advantage was extended to almost everyone with whom they did business, not just the countries in which they were located.

Second, the money amassed by city dwellers and merchants was frequently used to purchase estates, much of which was often uncultivated. Merchants are often the most ambitious and effective improvers. This is because a merchant is accustomed to investing his money primarily in profitable ventures, whereas a simple country gentleman is accustomed to spending it. Anyone who has had the good fortune to live in a commercial town in an unimproved area knows that merchants’ activities in this regard are far more vigorous than those of ordinary country gentlemen. The habits of organization, economy, and attentiveness instilled in a merchant by mercantile activity make him far better equipped to carry out any improvement project profitably and successfully.

Third, and most importantly, trade and manufacturing gradually restored order and good governance, as well as individual liberty and security, among the people of the country, who had previously lived in constant conflict with their neighbors and slavish dependence on their superiors. As feudal lords exchanged their riches for manufactured luxury items from the cities, their legions of subordinates gradually disbanded and they reverted to being just ordinary landowners without the power to threaten their neighbors.

What Makes A Nation Wealthy

Political economy proposes two distinct goals: first, to provide a plentiful revenue or subsistence for the people, or more precisely, to enable them to provide such a revenue or subsistence for themselves; and second, to provide sufficient revenue to the state or commonwealth to fund public services. Political economics is intended to benefit both the people and the government. The two political economic systems are the trade system and the agricultural system.

Money serves as both a means of exchange and a unit of value. Because of its role as a means of exchange, money makes it easier to obtain anything else we desire. To become wealthy, you must first figure out how to make money.

A wealthy country, like a wealthy individual, is expected to have a lot of money and to find ways to keep getting more. A mistaken approach to national wealth is to believe that a country must keep hoarding money in order to become richer. This is referred to as mercantile policy. It almost seems to equate wealth and prosperity with the amount of gold in reserves. Money, after all, makes money. To make money, you must first spend money. When you see a farmer sowing his field, you don’t think to yourself, “Oh, he’s wasting his resources.” You are aware that these seeds will eventually produce more resources. The same is true for money. Hoarding silver and gold will only get a country so far; what makes money is using it to establish markets, manufacture goods, and develop agriculture.

Balance of Trade

The domestic industry engaged in making products is more or less guaranteed a monopoly of the home market by restricting the importation of products from other nations that can be produced locally, either through high tariffs or outright bans. However, this does not always imply that it is the correct course of action. Domestic industries with monopolies in their home countries can charge whatever price they want.

The customer would have to pay a higher price than if competing imported goods were available, because competition means lower prices for customers and more incentive for industries to innovate and develop. In any case, customers will prefer local products. Furthermore, if import taxes are high enough to discourage importation, they will reduce customs revenue because the lower volume of imported products will balance the high import duties.

Similarly, imposing import restrictions on specific countries in order to achieve a positive trade balance with those countries is pointless. Even if such a balance were required, import restrictions would be ineffective. Import restrictions encourage smuggling and raise the total value of imported goods by encouraging merchants to import these commodities from more expensive countries. Finally, traditional balance-of-trade indicators, such as the difference in exchange rates between two countries, are fatally flawed.

The concept of trade balance is flawed because, regardless of who is exporting or importing at any given time, both nations benefit from global commerce, albeit not equally. Worrying about imports and exports when they have little impact on the overall health of the economy is illogical.

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Drawbacks and Bounties

Merchants and manufacturers want their goods to be sold worldwide. As a result, they are frequently required to apply for specific export incentives. One example is disadvantages. When an imported item is re-exported within a certain time frame, merchants are compensated. Such encouragements have the effect of preventing obligation from disrupting the natural equilibrium that exists among all of society’s various occupations, rather than overturning it. They tend to preserve rather than disrupt what is, in most cases, beneficial to preserve: society’s natural division and distribution of labor. Instead of hurting, such setbacks benefit customs revenue.

Drawbacks, on the other hand, are only advantageous if the products for which they are provided are actually sold to a foreign country and not secretly re-imported into the same country. Some exemptions, particularly those for tobacco, have been used in this manner on a regular basis, resulting in a slew of scams that have harmed both the revenue and the honest merchant.

Bounties are another form of encouragement. Bounties are sums of money paid for the exportation of a specific good. Unlike disadvantages, bounties usually have a negative impact on the economy. If a bounty is offered on a certain type of product, producers will rush to export it, leaving the supply in the home country low or overpriced.

Furthermore, if the country is experiencing a shortage of that product, recovering it may be impossible. For example, when the harvest is plentiful, farmers will export grains to other countries. However, if the harvest is scarce, there will be insufficient grain reserves in the country, forcing them to import. As a result, only those sectors of commerce that cannot function without them should be rewarded.

Colonization

The motivation for the establishment of European colonies in America and the West Indies was not as clear and obvious as it was for ancient Greece and Rome. Though the Roman colonies differed greatly from the Greek colonies in many ways, the motivation for both was clear. They arose from an unavoidable need or from a clear and obvious usefulness.

Both the Greeks and the Romans needed to secure new land and resources to support their expanding populations. The establishment of European colonies in America and the West Indies, on the other hand, arose out of nowhere, and while the benefits have been enormous, they are not entirely obvious and visible. Greed appears to be the most likely explanation.

Despite this, no colony in North America has advanced faster than the English. The abundance of excellent land and the freedom to run their own affairs appear to be the two main reasons for the success of new colonies. Because the British American colonies face far less legal and economic interference from their respective home nations, they outperform their French and Spanish counterparts. The European economy benefits from colonies, which create a new market for trade. On the surface, colonies do provide military and financial assistance to their home countries, but in modern Europe, this is uncommon.

Colonial trade monopolies harm the home country more than the colonies because they divert money away from much more productive domestic sectors. A nation will benefit more from its colonies if it fully integrates them into its legislative and tax systems, or if it peacefully severes diplomatic ties with them and instead forms an alliance.

The Mercantile System Is Anti-Consumer

Though the commercial system promises to benefit all countries by encouraging exports and discouraging imports, the effect is frequently the opposite. All of these laws have the goal of extending our own industries, not by improving them, but by depressing those of all our neighbors and, to the greatest extent possible, putting a stop to the unpleasant rivalry of such competitors.

The sole goal and aim of all production is consumption, and the producer’s interest should be pursued only to the extent necessary to promote the consumer’s. However, the consumer’s interest is nearly always sacrificed in favor of the producer’s under the mercantile system, and it appears that production, rather than consumption, is the ultimate goal and aim of all industry and trade. As a result, the mercantile system is unfriendly to consumers and contributes to the phenomenon of the rich getting richer and the poor getting poorer.

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The Three Duties of the Commonwealth

The sovereign or commonwealth is responsible for three primary functions, each with its own set of costs. The primary responsibility of the sovereign or commonwealth is to defend society against the aggression and invasion of other autonomous communities. Only a military force can carry it out. The cost of creating and deploying this armed force in times of peace and conflict varies greatly depending on the state of civilization and stage of development. With each stage of civilization’s development, defense becomes more expensive and specialized.

The second responsibility is to protect every member of society, to the greatest extent possible, from the injustice or oppression of other members of society, and to create an accurate administration of justice. This, too, necessitates a wide range of expenditure levels throughout history. While defense costs are usually very high for the sovereign or commonwealth, justice costs are usually well offset by court fees.

The third and final responsibility is to construct and maintain public institutions and public works that no individual or small group can erect or maintain, even if they are extremely beneficial to a large community. Performing this job has required varying levels of expense throughout history.

While public works that benefit the entire society may be justified in being funded by a tax on the entire population, charging those who actually use the works would be more equitable. Following the public institutions required for societal defense and justice administration, other essential institutions include those that facilitate societal commerce and those that promote education.

Taxes

The production of land, rather than the rent of land, is the most important source of income for a country. The revenue from land is divided between the landowners and the state. The crown derives revenue from crown lands in a great and civilized monarchy. This revenue is insufficient to cover the state’s costs, which must be covered by taxes.

Individuals’ private income is primarily comprised of three components: rent, profit, and wages. Every tax must be paid from one or more of these three sources of income. Every state’s subjects should contribute to the government’s support in proportion to their individual abilities and the income they receive under the state’s protection. The cost of governance to a country’s people is comparable to the cost of management to the joint tenants of a vast estate, who are all obligated to pay in proportion to their respective stakes in the estate.

The tax that everyone must pay should be predictable and not arbitrary. Everyone should be aware of the time, method, and amount of payment. Where this is not the case, every individual subject to taxation is at the mercy of the tax collector, who may either aggravate the tax on any contributor or extract some present or profit for himself.

Every tax should be collected at a time or in a manner most convenient for the taxpayer. Most importantly, a tax should never be so high that it discourages people from paying it, and the government or sovereign should use it as wisely as possible.

The Debt of Nations

Commerce and manufacturing are unlikely to thrive in any state where there is no regular administration of justice and citizens do not feel secure in their ownership of their property. The same is true in jurisdictions where contract faith is not legally supported and the state’s power is not routinely used to ensure debt repayment from all individuals who are able to pay. This is why primitive civilizations lack major commercial or industrial capitals. Individuals who hoard whatever money they can save and conceal their hoard do so because they distrust government justice.

Massive debts burden and, in the long run, threaten to bankrupt all of Europe’s great nations. They borrow on personal credit, without assigning or mortgaging any specific funds for loan repayment; and when this resource fails them, they progress to borrowing on specific fund assignments or mortgages. This constant increase in unfunded debt will cause merchants and all citizens to distrust the government, harming the economy.

The most common method of repaying a nation’s debt is to reduce spending and raise taxes, but illogically high taxes will cause people to refuse to pay them. As a result, raising taxes on non-essentials such as alcohol and tobacco is the best option.

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The Wealth of Nations Review

The science of economics as we know it today has many predecessors, but Adam Smith probably deserves to be credited as its true founder. The Wealth of Nations is his masterpiece, in which he introduces the idea of the ‘invisible hand’ of the free market:

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….He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it….he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he 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.

It’s not necessary for a business person to know every detail of economic theory and history, but it would be remiss not to have at least a basic idea of the concept of supply and demand curves, productivity, the division of labour and so forth. And it is with Smith that many of these concepts found their first clear definition.

Of course, as a book from the eighteenth century, it is not always an easy read. Smith has an easy-going writing style and explains most of his points clearly, but there are an awful lot of pages in which he discusses the price of corn in contemporary markets or expounds on the errors of the mercantilists. It’s definitely advisable to read this in an abridged version, ideally, one with a good introduction and that is well annotated.

His primary focus is the question of what constitutes a nation’s wealth – it was widely accepted at the time that this could be measured in precious metals and that it was therefore in the interests of powerful economies to rig the trading system in their own favour, to boost exports and minimise imports. 

Smith’s insight was that true wealth consisted of the goods and services a nation produced and the capital assets used in that production and that setting trade free of petty constraints would thus increase wealth.

He was also one of the first to clearly make the intellectual case for the division of labour, which would become one of the key features of the factory system through the Industrial Revolution. And by arguing that capital assets were a part of the nation’s wealth, he made the case for countries to invest in their own future.

Another theme was that, because market forces operated automatically, driven only by the self-interest of all participants, prices would naturally fall and rise with demand and supply and that governments should restrain from too much regulation and interference in the market. In particular, it should avoid granting monopolies or tax preferences and controls.

He also made the case that the government did need to keep the peace and security, build infrastructure and educate the populace. So while Smith is especially beloved of free-market fundamentalists in the modern world, the economic basics are also in place in his work for those who believe in enlightened regulation and government investment. 

Smith didn’t take the extreme position that a government should be utterly minimal, merely that it should restrict its activities to the right and proper areas and should minimise its interference in the market. And anyone who wants to object to modern capitalism or to dispute the free-market purist ideology should be familiar with Smith if only to ground their arguments in strong economic foundations.

Since Smith is the founding father of free trade, this is an interesting work to return to in the modern world, when anti-globalisation is on the rise and there is increasing talk of tariffs and protectionism. It is certain he would have been against the latter policies, though he may well also have frowned on the degree to which corporations have been able to capture governments and influence their own regulatory framework (often to the detriment of smaller companies).

You don’t need to have read this book to do business in the world today. But the global economy might be very different if it weren’t for the ideas expressed in it, and the future shape of the global economy may depend on how we react to the twenty-first-century forms of the very same problems that Smith was commenting on.

About The Author

Adam Smith FRSA was a Scottish economist and philosopher who was a pioneer of political economy and a key figure during the Scottish Enlightenment. He is known as the “Father of Economics” or “Father of Capitalism.” His most famous work, The Wealth of Nations, is widely regarded as his crowning achievement, laying the groundwork for classical free market economic theory.

The Wealth of Nations Quotes

“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

 

“Wherever there is great property there is great inequality. For one very rich man there must be at least five hundred poor, and the affluence of the few supposes the indigence of the many. The affluence of the rich excites the indignation of the poor, who are often both driven by want, and prompted by envy, to invade his possessions.”

 

“Man is an animal that makes bargains: no other animal does this – no dog exchanges bones with another.”

 

“The value of any commodity, therefore, to the person who possesses it, and who means not to use or consume it himself, but to exchange it for other commodities, is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities. The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.”

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