The Wealth of Nations by Adam Smith | Notes & Summary
Summary
Smith seeks to answer the question what makes some nations wealthier while others poorer.
Smith attributes the wealth of nations to the division of labor, free markets, and the advent of money.
The division of labor is economically good, generating immense surplus from the increased innovation, efficiency, and dexterity of its workers. But it is morally detrimental as it makes an individual focused on a very narrow and confined sphere.
Smith is an advocate of free trade because it further encourages the division of labor but also it is the logical solution when you conceive of a countries wealth not according to how many paper bills it has but to the amount of production it has (he introduces this notion which evolves into GDP). Also since all production of goods are for the consumer, he believe free trade is in the interest of the consumer as opposed to the producers (this is the birth of consumerism).
The advent of money is important for both the division of labor as well as free trade since it reduces friction during bartering. He proposes a basic labor theory of value that eventually Marx adopts.
Smith’s invisible hand and whole claim about laissez-faire economics operates in very specific constraints that aren’t in effect today. These constraints are antagonistic to the incentive of corporations however. The invisible hand both functions on the personal level by providing moral boundaries and on the system level by directing goods.
As opposed to what many may conceive of Smith, he believed that governments should be responsible for a whole host of activities that are for the public good: defense, police, justice, education.
Context
The goal of this book is to determine why some nations are wealthier than others. His opponent at this time is a proponent of mercantilism — the idea that a country can only get rich if another country becomes poor which leads encouraging exports and discouraging imports. It is a paradigm shift comparable to the origin of species.
He believes that wealth and happiness are inextricably linked. This is an implicit assumption that he holds that does most of his normative work. He is content on just talking about how to increase the wealth of nations because he believes that more wealth relates to more happiness.
Question: does he ever challenge this assumption? This seems contradictory with his psychological view, how we gain happiness from the more relativistic sympathy rather than the absolutist wealth. It seems to run contradictory to how he thinks sympathy is our greatest source of happiness no? He seems to reject this notion that greatness and wealth is what we should strive towards in the Theory.
Answer: Theory of moral sentiments and wealth of nations don't operate on the same level. The aim of WoN is simply to explain how countries can be wealthy.
Smith believes that the wealth of nations are caused by the division of labor, the broadening of markets, and the establishment of money. All of these however are formed simply by everyone pursuing their narrow self-interests. Private vice leads to public virtue. Not for every action but in the long run. In this way, smith presents a teleology of history and the motor behind his is self-interest. In order to compete with others in the market sphere, we constantly innovate, create better health care systems, treat our workers better. This happens by virtue of the market sphere.
The Division of Labor
Smith’s view on the division of labor, much as his views on many things are ambivalent but mostly positive. He attributes it economic success and the much less mentioned moral decline which Marx inherits and critiques. He believes it makes workers more dextrous in labor but most stunted in mind and character.
Economic benefit (Book 1)
What is surprising is the primacy that smith attributes to the division of labor in economic spheres:
The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed or applied, seem to have been the effects of the division of labour." He believes that it alone accounts " for the superior affluence and abundance commonly possessed even by the lowest and most despised member of civilized society, compared with what the most respected and active savage can attain to in spite of so much oppressive inequality.
The division of labor began because 1. We have our own natural strengths and learned strengths 2. We are an animal that has an instinct for bartering and exchanging. It does not rely on some overarching plan but is a formation of natural evolution:
This division of labour, from which so many advantages are derived, is not originally the effect of any human wisdom, which foresees and intends that general opulence to which it gives occasion. It is the necessary, though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility; the propensity to truck, barter, and exchange one thing for another.
Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. 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. We address ourselves, not to their humanity but to their self-love.”
It requires 1. trade 2. a large and well connected economy 3. and finally money that reduces friction when bartering.
It increases 1. The dexterity of the workers who perform specialized tasks 2. The efficiency of the plant overall which he explains in his famous example of the pin factory 3. Innovation because now workers are focused on something so narrow they understand its mechanisms so well. Also division of labor creates a new class of “innovators”. 4. Immense and wealth to society because of this surplus even if it isn’t distributed evenly.
Moral Detriment (Book 5)
However, this division of labor and focus on specificity is not all helpful, on the individual laborer it could be seen as a detriment.
He naturally loses, therefore, the habit of such exertion and generally becomes as stupid and ignorant as it is possible for a human creature to become. The torpor of his mind renders him not only incapable of relishing or bearing a part in any rational conversation, but of conceiving any generous, noble or tender sentiment, and consequently of forming any just judgment concerning many even of the ordinary duties of private life.
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His dexterity at his own particular trade seems, in this manner, to be acquired at the expense of his intellectual, social and martial virtues. But in every improved and civilized society this is the state into which the laboring poor, that is, the great body of the people, must necessarily fall, unless government takes some pains to prevent it.
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But the understandings of the greater part of men are necessarily formed by their ordinary employments. The man whose whole life is spent in performing a few simple operations, of which the effects are perhaps always the same, or very nearly the same.
Smith believes that this negative effect should be combated by state intervention. Smith does not frown down upon the state across the board:
The public can facilitate this acquisition by establishing in every parish or district a little school, where children may be taught for a reward so moderate that even a common labourer may afford it; the master being partly, but not wholly, paid by the public, because, if he was wholly, or even principally, paid by it, he would soon learn to neglect his business.
Free Trade
Smiths promotion of free trade is twofold. First is how important an extensive and wide market is to further the division of labor and all the benefit which ensues from that.
Second smith is arguing against a protectionism that limits imports (to protect local producers who aren’t competitive) and also exports (like high tech machinery again to protect the producers interests). Smith made two paradigm shifts that are still prevalent today. 1. He thinks that the wealth of nations should be measured by their ability to produce rather than the amount of metals it has in its bank (this gave rise to today’s notion of GDP). Mercantilism “have taught us to believe, that national wealth arises more immediately from exportation than from production.” 2. He thinks that governments have been protecting the interests of the producers but clearly “consumption is the sole end and purpose of all production” and that “the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.”
Smith hates government regulation because, at his time at least, it prevented competition from producing the best goods in the cheapest manner. (Proponents today who use Smiths argument against environmental regulations are misguided on his argument.)
Smith likes free trade both because it increases production AND it satisfies the consumer’s interests.
QUESTION: would smith still encourage free trade of one nation even if all others remained closed? In other words does he think free trade is a prisoner’s dilemma type of problem where it’s better if we all cooperated but there is no incentive to do so initially?
ANSWER: He never articulates a position on exports or imports at all. He is going to consider certain goods not buyable and sellable on the market.
QUESTION: why would not limiting imports increase production? Smith gives one argument about how all the poorly organized Scottish wine producers would be forced to work somewhere else if there was no ban on the import of French wine, is that what he means?
ANSWER: WoN is famous for its awareness of social limits and when governments should intervene.
The Invisible Hand
The natural effort of every individual to better his own condition, when suffered to exert itself with freedom and security, is so powerful a principle, that it is alone, and without any assistance, not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often encumbers its operations; though the effect of these obstructions is always more or less either to encroach upon its freedom, or to diminish its security.
There are several key conditions for the invisible hand to truly function however. This nuance is again lost in contemporary discourse.
Open market, no barriers to entry
No seller big enough to move prices
No buyer big enough to move prices
No producer holds a pivotal private technology
Perfect information perfectly understood
Government to enforce property and contract laws
What’s fascinating is that these conditions are exactly the type of conditions that a company does not want to be in, it is termed “commodity hell.” Instead, you want asymmetrical information, and to become a monopoly with private technology. Smith was incredibly critical of the cooperations at the time precisely because they tried these maneuvers.
QUESTION: How feasible is capitalism if the actors within it are diametrically opposed to the conditions of its beneficial operation.
ANSWER: There is an attack-defense asymmetry when it comes to capitalism. Capitalists can simply point to the great empirical results that happened with capitalism and the poor results of other economic modes of production.
QUESTION: There appears to not only be a mechanism of markets but also something manifesting on the individual level as well probably related to sympathy. On the individual level it seems to give us moral boundaries to operate in and on the state level it seems to be able to efficiently direct resources to where it is most needed. What is the nature of this invisible hand?
ANSWER: it constrains on both the individual level and the system level.
The Role of Government
Smith had a very nuanced view on Government. He believed that there are systems that fall outside the realm of what a free market can achieve such as: police, defense, education (which he called for due to the detrimental effects of the division of labor).He even believed that government should regulate banks because they were in a unique position to cripple the economy.
Labor Theory of Value
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.
Smith articulates a labor theory of value that is latter adopted by Marx in his critique. He sees an anomaly in that there are many goods that are high use value but low exchange value such as air and water.
Smiths solution is that the exchange value is correlated to some function of labor and capital (strong emphasis on labor). In primitive societies, he believes all labor has similar and stable value. Of course, the actual nominal value on the market does not always match the exchange value due to fluctuations.
Question: how plausible is the labor theory of value today? Is it compatible or in competition with supply and demand which is another explanation for price.
Answer: it is largely refuted today.
Resolving the Two Smiths
Humans are portrayed as inherently self-interested in the Wealth of Nations:
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. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.
While in the Theory of Moral Sentiments, humans are portrayed as having innate care for the well-being of others.
To me the reconciliation between these two smiths is not difficult at all, if we only consider that in the former Smith is interested in how humans behave in economic systems which are mostly devoid of emotion but filled with quantifiable calculations. In Wealth, smith is talking about Man the economic actor and how he behaves in economic systems. There is no contradiction because when you buy food, you don’t have any overwhelming emotions for the butcher to sympathize with. (Unless you are a beggar which smith explicitly says relies on the benevolence of the community). Now that’s not to say an economic actor would prevent child labor out of sympathy for example, which constitutes the personal level of his invisible hand. In other words, the impartial spectator would approve of butcher’s actions.
Theory examines man’s tendencies generally, while Wealth focuses on the economic animal with a “propensity to truck, barter, and exchange one thing for another.” Smith isn’t saying that the Butcher isn’t benevolent to anyone but simply that its not FROM his benevolence that society progresses but from his self-interested part.
The Theory of Moral Sentiments explicitly says that we care about those closer around us because it is easier to sympathize with them, it is a book about our immediate sphere. The WoN is a book about strangers and impersonal exchange. He is interested in how we behave not how he would like us to behave, both are descriptive projects due to his belief in God. Smith’s choice to devote separate books is a reminder of the challenge we face in our modern world where we have to interact with two spheres: a close and personal one and a distant and impersonal one. Smith’s formal decision reminds us to not confuse the norms we use. Hayek extended this further and thought that confusing the norms, and trying to extend the egalitarian kindness from family to society would lead to tyranny.
Within Smith lies a seeming contradiction: he romanticizes wealth generation and division of labor in WoN, but he also criticizes it in ToMS. Smith’s radically different tone in his two books is a stark reminder of the two spheres we live in, the prices we pay for our material abundance, and the fact that we must separate our lives clearly.
Smith shows us how and where we can still be virtuous in life and what kind of relationships and with whom we need to sustain them with.
Miscellaneous
QUESTION: if smith believed that our drive for acquisition was purely for utility, how does he reconcile this with the more relative view in the Theory of Moral Sentiments where he thinks we want to be rich ultimately to garner attention?
ANSWER: Adam smith doesn't foresee consumption for consumptions case. He thinks our desires are complex but we consume mostly for utility.
With regard to profusion, the principle which prompts to expense is the passion for present enjoyment; which, though sometimes violent and very difficult to be restrained, is in general only momentary and occasional. But the principle which prompts to save is the desire of bettering our condition, a desire which, though generally calm and dispassionate, comes with us from the womb, and never leaves us till we go into the grave. In the whole interval which separates those two moments, there is scarce perhaps a single instant in which any man is so perfectly and completely satisfied with his situation as to be without any wish of alteration or improvement of any kind.