Summary

Adam Smith lays out one of the first exhaustive accounts of how a complex, developed economy functions. Published in 1776 during some “difficulties” in the relationship between Britain and one of its colonies, Smith makes the case for fundamental economic concepts like free markets and the division of labor.

The first book, by far my favorite, presents the fundamentals of Smith’s concepts of value, wages, and labor. One of his key observations concerns the transport of goods. He argues that without the capacity of water to transport heavy items easily, civilization itself would have been greatly hampered. This insight helps explain why civilizations emerged near bodies of water that were easily navigable, most notably in the Mediterranean. It is always fascinating to observe how the limitations imposed by an environment affect the systems that find ways to thrive within those given constraints.

One of the main goals of this book was to combat the then-popular view that a country’s wealth should be measured by the amount of silver or gold it held in its treasury. This system, known as mercantilism, focused largely on trade relations and trying to avoid situations where more money was leaving the country via imports than was coming in via exports—otherwise known as a trade deficit. Smith took great pains, using several case studies, to convincingly argue that the wealth of a nation lies not in how much money it possesses but in its ability to produce commodities. A fantastic case study was the fall of the once-superpower of Spain. Spain was utterly obsessed with amassing gold and silver, which informed their entire relationship with the Americas. Smith points out in an ingenious fashion how this obsession caused them to neglect investment in local manufacturing and flood their markets with gold and silver. This counterintuitively made everything more expensive because, to Smith’s point, gold is merely the medium through which value is transported, not the value itself. As the supply of gold increased, its real value—how much corn it could buy—decreased. This had the dual effect of raising the cost of living in Spain while simultaneously making their exports less desirable to neighboring nations. For this reason, Smith argued that grain is a much better proxy for real value because, during his time, the amount of labor required to produce it was relatively stable. Thus, if a bushel of corn costs twice as much gold as it did one hundred years ago, we could deduce that the supply of gold in that economy had proportionately increased.

Another goal of The Wealth of Nations was to demonstrate how free markets were often preferable to heavily regulated ones. A particularly controversial example he gives is about price controls on grain during a famine. As a leader facing a grain shortage, you would expect the price of grain to rise as the supply dwindles. The temptation would be to impose price controls to ensure your subjects can continue to access grain despite the shortage. Smith would argue that this is a surefire way to turn a shortage into a famine. He contends that as the supply dries up, the price will gradually increase. This, in turn, will cause your subjects to ration their purchases because they naturally can’t afford as much as they previously could. This results in the grain supply being depleted at a slower rate, giving the leader a chance to limp through the shortage, while the other approach guarantees a famine. That being said, Smith wasn’t against all regulations and in fact argued for several different types, but typically ones that would act to shape the economy instead of restrictions which limited the movement of capital.

Smith covers a lot of other ground, some of my favorites being:

  • The relationship between rural and urban production
  • The different employments of capital
  • Specialization
  • Broad strategies for creating an effective tax system
  • The likely bad investments that colonies make

Thoughts

It’s hard to give a review of this book because, on one hand, it is an absolute classic, but on the other hand, it was probably the driest book I’ve read all year. It dove into the minutiae of various European trade agreements, using various forms of currency with which I am not familiar. Many cities and leaders were referenced to whom I had not the slightest connection. The overall effect was that it was difficult to stay focused. I tried to remedy this by reading various resources after finishing the book to ensure I was understanding his arguments correctly. That being said, this book is a slog to get through. It was helpful in rounding out my economic understanding, but my time might have been better spent listening to a lecturer work their way through the text instead of tackling it myself. That being said, I found the first book to be especially interesting and full of useful descriptions and theoretical explanations.

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People/Adam Smith