STL #5: Wealth of Nations Book 1: Impressions

My Thoughts On: December 14th, 2003

The Wealth of Nations, Adam Smith's grand economic treatise that established most modern thought behind economics is perhaps one of the most important books when dealing with society, government and the economy ever written. But man, it's one dry read. Here I give my impressions on the first book of his 5 book compilation.

Well, I'm slowly reading Adam Smith's daunting economic treatise, "The Wealth of Nations", complete and unabridged. A very enlightening work, but dryer than dried drywall. Very difficult to read because of it's mid-1700's dialect, but containing so much valuable thought about the economy and the world that it's hard to excuse not reading it. Many economics professors have not read this book from cover to back, but I will be amongst the few who takes the challenge.

I just hit the end of the first book of the 5-book work, and figured I'd take a moment to record my thoughts. Maybe this overview will shed a little light for you all on the nature of Smith's work, and the importance of the lessons he teaches.

"An Inquiry into the Nature and Causes of the Wealth of Nations" is the full title of Smith's work, which is a total indication of how drawn out the work is. But if you can get past that, "The Wealth of Nations" is the mark of genius, and a classical masterpiece that will increase your intelligence level by exponential values, in fact, I like to think of the book as Intelligence^2. You simply have to have the patience to understand it. It's ironic that one of the most important books ever written is a book that is hard as hell to read due to it's ancient dialect and dryness.

Smith was not a real economist, by his own admission in fact, he called himself a "moral philosopher". He didn't do much by the way of predicting how the market moves, he did however intend to explain why it moved and how that connection played into politics and society. He explained a lot of things about money, government, wages, jobs, trade, education, business and ethics that are all just as important today as it was then. Wealth of Nations was a book that most people wouldn't read, but the knowledge from it created what we know as modern economics. Smith is to economics & politics what Newton is to physics.

In Book 1, whose official title is "Of the Causes of Improvement in the productive Powers of Labour, and of the Order according to which it's Produce is naturally distributed among the different Ranks of the People" (which I will simplify to read "Book 1"), discusses many of the basics of Adam Smith's contributions to the understanding of society in general and how wealth works. He immediately brings up the principle of "Division of Labour", which can best be described as the most fundamental way society improves itself. Division of Labour is any time a single operation is divided into multiple parts, and worked by more people, to create a better system.

Take for instance, the example he gives, the making of pins. Pins back in his day were hard to make on your own, as I'd imagine they would be today. One person would be hard pressed to thin a line of metal, cut it, pound it, refine the tip, and make more than 20, let alone 1, useable quality pins. Even if you are using all the modern pin-making machines we have today. But if you take 10 people, have them work the same machinery one step at a time, and allow each of them to specialize in one part of the making of pins, these 10 people can make tens of thousands of uniform, quality pins in a day, where individually they'd have a hard time making even 100.

Division of Labour is limited by the power to exchange. If something is far away and can't find a good market, obviously it'll be hard to find the extra labour to divide the tasks so the industry can improve more. If labour isn't divided very well elsewhere, then there isn't much improved to exchange your goods for, so naturally Division of Labour is useless if you divide it too much. The usefulness of Division of Labour is almost entirely based on exchange.

Exchange is important in Smith's world, and our own, because once you move away from a system where everyone does everything for themselves (including making pins, growing food, hunting, weaving clothes) to a system where people specialize in given tasks (the assembly line of pin makers who lives off his wage and has little time to do anything else) then you must find a way for the people to get everything they need (the assembly worker at the pin factory needs to eat, after all).

Division of Labour provides for the best way for people to cooperate and improve their lives, but it doesn't leave people self-sufficient. Back in the crude times of yore, a family would do everything necessary to feed itself and survive. It was a poor time, but they got by on that (they had to) and labour stayed as undivided as ever, making the improvement of life move real slow. Today however, we each have jobs, and we don't need to grow our own food (and most of us couldn't even if we wanted to). Life is better today than it was then - and if we had stayed in that same self-sufficient state, we never would've improved to where we are today. In fact, Smith suggests such technological, agricultural, industrious, social improvement is downright impossible without Division of Labour. So Division of Labour is a good thing, but it leaves each of us needing to trade to get what we want, instead of just getting it via our own means. After all, we're too busy working to do things like grow our own food, knit our own clothes, fuel our own stoves... and many convienences of today simply require more than one person to bring it to you (computers, cable television, cars, electricity, running water... imagine if we had to get everything ourselves!).

This gives rise to money-based societies. Bartering is great, trading what you have for something else, but it's hard to barter cows, sheep and nails for things and get EXACTLY what is best for you, as it is hard to trade with others and give them EXACTLY what they want. So, back in the day, people would pick a few commodoties to trade with, that were commonly recognized. They used to be simple things, like sheep, cows, salt, shells, tobacco, sugar, leather, etc... but simply put, those units are still hard to work with. So it was in the interest of everyone to pick a medium of trade that was...

1. Not perishable

2. Easy to divide into many parts

3. Easy to recombine

4. Durable

5. Abundant

6. Still useful in it's raw state, and easy to convert back into it's raw state

With these qualities, you could trade the material back and forth, be able to recognize how much and for what you are trading for, and then get what you want in trade from others by measuring out exact amounts to trade. The only thing that fit the bill was precious metals like, iron, copper, silver and gold. These metals became the primary basis of our coinage system.

Smith reminds us that these metals are valuable based on bullion, too. The price of the metals for other things helped dictate the price of the coins, creating a balance that kept money from becoming too overvalued/undervalued (it's funny that since we eliminated this system in the United States somewhere in the 60's that inflation has skyrocketed). So, knowing all of this, knowing how money socities are really just organized bartering socities, and knowing how this all effects division of labour which influences how a nation improves itself... Smith moves on to investigate the various parts that go into the exchange value of coinage and other tradable commodities. By understanding what dictates the exchange value, e.g. the shopping-window sticker price, we can understand how exchange socities grow and thus, understand where the wealth truly comes from.

There is a difference between the real value of something and how much it's commonly sold for. Smith says that the real value of something is the amount of labour is can purchase or command. If you can make others work hard and long for something, then it has a higher value than if you can only make them work a little bit for it. Likewise, you pay your weight in labour every time you make something, and it's value to you should be relative to the amount of skill, energy and effort you put into making it. However, lots of other factors affect the sales prices of things, besides this "real" value. Smith investigates into the different factors that go into price.

First he says that the real value, the real wealth behind things is indeed labour, and that we have to take this in mind when we sit back and look at historical changes in prices and trade. Debts paid in corn reflect better real values than debts in silver or gold over a period of 200-300 years, simply because the amount of labour behind corn hasn't changed much in that 200-300 years, while the amount of labour behind silver and gold definitely has. However, over the period of typical years, corn changes annually, and silver and gold become better measures in those timespans to work with. Money prices are fine as they are, but we must remember that ultimately the value of goods rely on the amount of labour that goes into them.

So Smith divides up the parts of prices into three pieces for us to understand. The first piece of course is labour, because that's the "real" value we put into what we work for. The second part is profit. Profit is important because we need to replace the things which we use to make something (the "stock") if we hope to continue producing them. Employers of this "stock" need some kind of way to not only compensate the amount of stock they use, but to gain from it's use (if you break even then using it is a waste of your time and effort). This gain is called "profit", and it's another factor we place into the price of things. Lastly, we have to talk about rent. Rent is the amount of price paid into the use of a limited kind of stock we call Land. Landowners will always need some kind of rent, or else it wouldn't be worthwhile for them to let it be used. By making all the parts of business worthwhile for each of the respective people in them, the common labourer, the employer who secures the deals and trades, and the landowners who secure the land... we make sure each of these people are enriched and make enough to live life and get by (at the very least). If they all can't live and get by on what they have, then none of them will be able to do business, will they?

Therefore, we must factor in wages of labour, profits of stock and rent of land into any kind of price we put out on the market. Still with me? Take a break or something, because as much as I can modernize Smith's points, I can't make it any less dry. Go drink a pitcher of water, then come back, as this is dry, dry stuff. Dry like hot sand in sandstorms in the Sahara desert. But very important to know.

Sometimes the three parts of price are confused, and in rare instances they are combined or only one or two parts actually go into a price (everything must have at least one of the three parts, because labour always exists as the real price of things). So we gotta understand there is a certain leeway. For instance, let's say you farm your own land. Anything you gain you might call "profit". However, you still have to compensate yourself for your own labour (wages), you must gain enough to justify using all of your land (rent) and you must compensate for the stock you put into cultivating all that land... THAT is your profit. Even the one guy who farms on his own a few acres of land must then consider, even if unconsciously, the various parts of his work (wage/rent/profit) and these things will in some way affect his price. Even though he might call the money he makes "profit", that's not an accurate way to describe everything he does and what that money is there for.

Then Smith gets into supply & demand, which can dictate a difference between the "natural" (rent/wage/labour) price and the "market" price (the cash pricetag you see on that toaster at Walmart). The market price as a general tendency will always difts towards it's "natural" price, which is good, because when it's at that state it will always compensate the people in that business for all their hard work, investments, and give them a reason to continue being productive. It also makes for a good trade on the part of the consumer. Everyone benefits when things are at their "natural" price. Certain events may keep the market price from gravitating back to natural prices, however. Unexpected surplus or unexpected shortages naturally affect the real price of things. Government interference and regulation can too. A monopoly, in Smith's language, is any time a businesses in a market has enough control to forcefully underproduce to drive up prices. This can sometimes be in local marketplaces (when in your town there is only one major supplier of, let's see, apples - that one supplier can sometimes underproduce to drive up profits for himself, making you pay more) and sometimes the marketplaces are national or international (when one business owns a dominant share, the monopolies we know today). I'll discuss monopolies more in a later edition of See the Light, because I think there is a lot of distinction between what we think of modernly as monopolies and what is truly negative about them.

Smith rails hard on government intervention, which is one of the most major factors to keep natural prices away from their real prices. He says that in systems of perfect liberty, where people are free to decide for themselves what they value and don't, it's easier for wealth to grow because it's easier for people to acquire exactly what they value and do so for less labour. Anything that restricts this circulation of wealth, by legislating intervention, makes prices harder to move to their "natural" levels. Remember, the aim is to get those natural and market prices to match up, and they do so best naturally when there is no legislation or outside government interference.

In the later chapters on wages of labour/profits of stock/rent of land, Smith espouses a lot of basic principles. Rich and stationary economies don't create high wages, yet poor and moving economies do. Stationary (rich or poor) is not a great state to make rewards for wages any higher. Smith often refers to employers as "masters", which has plenty of negative connotations that didn't necessarily exist then. He does look down on businessmen for their greed, but this is by no means a criticism of their ultimate motives to be businessmen. A lot of Smith's dialogue sounds negative towards Capitalism (which wasn't even a word in his time), yet any anti-Capitalist intent drawn from the book is entirely out of context with what Smith was actually saying over the course of his works.

About profit, Smith says that in a rich and prosperous country who has grown to it's utmost, profits would be lowest, because competition would saturate the society. Of course, a rich and prosperous nation is what we want. But sometimes people's interests (the workers, the employers) are disdained by the effects of prosperity (lowering wages, lowering profits)... in spite of the fact that in general, this means better things for everyone (richness and prosperity). This can sometimes lead to people leaning towards backwards policies (workers - trade protectionism, employers - government legislated monopoly controls and trusts), that are negative to their own markets, but viewed positively because of the percieved increase in wages/profits. Of course, this increase is percieved, because while wages/profits are at a higher level in this state, general society (the context for wages/profits) is very poor making those earnings pretty meaningless to all but a corrupt and powerful few.

Smith dedicates a chapter towards discussing the inequalities between wages and profits (what factors make some go down while the other goes up), which basically outlines common sense for the most part. Skilled labour is naturally going to gain a higher reward in wages, even though it's less physical hardship, it's the result of more time and mental hardship. Admiration for a trade, probability of success in it, agreeableness, difficulty, education... all of these things are factors that will increase/decrease wages outside the simple hardship of working them. Smith also brings up an important point about the inequalities of profit, noting that increased competition in cities create fewer profits but greater fortunes (less of the price is profit since there is competition but the increased trade results in greater gains overall) and that isolated countryside trade has higher profits (less competition means more monopolistic tendencies in pricing) but fewer real riches. He goes on to make the ironic note that employers curse lower rates of profit, despite those lower rates often indicating a healthier stance in the marketplace.

Then, in part 2 of the chapter on inequalities between wage and profit, Smith again blames government interference for much of the differences. This consistent claim that government intervention hurts the marketplace in literal and ethical ways is a constant throughout his work, and he was one of the first to really take this stance. Any Libertarian should be able to appreciate this stance.

The last chapter of the book, the rent of land, is long and hard to summarize. This review of the book is already long as it is, and threatening to become just as dry as Smith's work, so I'm going to cut it short here. A few vital points he talks about in his chapter on rent is that the rent of land is regulated by the rent of other lands for other purposes, if rent becomes too high in one area of industry, the land will typically be turned to other use. In his 80 page Digression on Silver, he basically sums up with addressing a lot of misconceptions about the value of silver, which helps the reader to understand a lot of misconceptions in the value of things in general. Just because the price of something is cheap, doesn't necessarily mean that money has inflated, nor does it mean necessarily that the thing itself is actually cheapened. If a toaster is $10 when it was once $15, that doesn't mean the dollar went down, nor does it mean that the toaster has less real value. It does mean a combination of things, but you can't tell just by looking at it's price, you have to look at the price of the greater parts of the markets. If toasters and ovens and televisions and couches and chairs and beds all went down in price... THAT is a greater indicator that the dollar has inflated. If toasters went down while ovens, televisions and couches went up... THAT is a greater indicator that toasters are really worth less than they used to be.

In his conclusion to this drawn out, long-winded book, he groups up the three classes of people, wage-earners, landlords and profit-seekers, and talks about how they contribute to society. He says the landowners, because the value of their rent income is affected by the general status of society, are naturally concerned with the positive growth of society yet they often lack the knowledge to understand this or why. He says the same of wage earners, but makes them sound much more stupid to a point sometimes of total insolence (which is understandable sometimes, since wage earners spend more time in their trades than investigating politics). The profit-seekers, however, are typically oriented towards being interested in their own rates of profit, sometimes too being ignorant of the factors that go into their profits. A good stockholder or employer though typically can, even if he/she doesn't know it, advance society towards the better simply by acquiring and growing in their business, whether or not their understanding ever really goes past their own pocketbook. He does add that if you are to be suspicious of anyone proposing legislation, be suspicious of business lobbyists who would love to use the law to make profits.

All these people in some way are self-interested in the business of society at large, all because of Division of Labour. The nature of the improvement of society, divided labour, increased exchange, valuation of wealth... all relies a lot on people's ability to decide what they value for themselves. That is the source of true wealth, and the most practical way to acquire fiscal wealth. This all relies on government staying away from business... in fact, it's almost as if nature intended it to be that way. Anything that interferes in this circulation of money interferes with the growth of wealth.

That's the lesson of Book 1. Time to continue reading. If you got this far, thanks for giving my review a look, and I'll be sure to post reviews of the later books in his compilation later.

Until next time,

- Good ol' PA