Adam Smith: Wealth of Nations (Summary) PDF

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Simplified, paraphrasing summary by chapter of Adam Smith's 1776 "Wealth of Nations". In English....

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Adam Smith: The Wealth of Nations (1776) Summary Introduction §

Adam Smith starts his landmark book by making a basic statement, saying that he's going to talk about what counts as the "wealth" of a country and how certain countries tend to have more wealth per person than others.

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For starters, the wealth of a nation depends on the number of people who are productively employed compared to those who aren't. Next, you have to wonder about these people's level of skill and education.

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But Smith wants to figure out how many modernized countries have fared very differently when it comes to producing wealth. In other words, why have some succeeded more than others? Does it have to do with the people and land in that country, or can governments bring in specific policies that make the country wealthier? Of course, this is a question we're all still asking today. Just listen to two politicians argue about the economy and you'll see what we mean.

Book I, Chapter 1 Of the Division of Labour

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For starters, Adam Smith wants us to know that one of the biggest achievements of many wealthy countries is something called the "division of labor." In other words, the fact that we have specialized people for specialized tasks makes us much more productive than having a bunch of people who try to do every job well.

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Adam Smith uses the example of pin-makers in England to illustrate his point. An amateur who doesn't know anything about pin making could probably make one decent pin per day. But when you bring in someone

who is specialized at stretching a wire, another one at cutting it, another one at pointing it, etc., then you can make thousands of pins a day. §

That's the secret of specialization and the division of labor. Any advanced system of manufacturing works this way.

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By dividing labor up into simple, specialized roles, we also give ourselves more opportunity to invent new machines that can do certain tasks for us (like the way robots weld metal onto cars today).

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For this reason, Smith believes that even the lower classes of developed countries are still better off than the richest people in some less developed ones. In his mind, much of this is due to the division of labor.

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Book I, Chapter 3 That the Division of Labour is Limited by the Extent of the Market §

So now we've got a division of labor and the exchange of products and services among these specialized people. It seems like there's no limit to what these two things can do. But Smith is quick to remind us that there is a limit, which is what he calls "the extent of the market."

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By this, he means that people can only exchange products or services if other people want them. So yeah, it's great if you love to make steakflavored cookies. But you won't get far if no one wants them. (We want them. Mmm, steak.)

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In many cases, a person's job is limited by the kind of town they live in. If you're an expert plower of land, you probably won't live in the middle of a huge city because there's no land around to plow. So you move out to the country where people want your services.

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Smith also makes a point about how great it is to be near water, since water allows people to transport goods way more easily than over land. That's why even today, you'll find that most of the world's big cities are found near water that boats can use for shipping.

Book I, Chapter 4 Of the Origin and Use of Money §

So if we asked you, "Why does money exist?" what would your answer be? Well before you decide, you might want to check out this chapter of The Wealth of Nations. Because ol' Smithy is going to lay it out for us.

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Turns out that if you're a coat maker who makes a thousand coats a year, you're going to end up with 999 coats too many. So you want to trade those coats for other things you might need, like food. But why not just trade a coat for a hundred potatoes? Why does money have to come into the equation?

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Well for starters, maybe the only people who want to buy your coats are potato growers. But if you want something more in life than coats and potatoes, you're out of luck because the potato folks are the only ones you can trade with. That's why you need something that will allow you to sell your coats while still buying the products of people who don't want coats.

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Smith walks us through how shells, metals, and other little objects have been used as money in other societies, like dried cod in NewFoundland.

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But of all the different things used as money, people have tended to prefer metal because it's not easy to find and because it's so durable.

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But using metal as money can be inconvenient because you have to weigh the stuff every time you take it as payment. Just imagine yourself in the line at Starbucks and waiting for the barista to weigh every coin handed to them.

Book I, Chapter 5 Of the Real and Nominal Price of Commodities, or of Their Price in Labour, and Their Price in Money

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Adam Smith begins this chapter by reminding us that people are only rich or poor depending on how much stuff they can afford to buy. In other words, money itself doesn't have any value. It's only valuable insofar as it can buy "labour."

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Maybe we should explain. When you spend five dollars on pop and chips, you're not just paying for the pop and chips. You're paying for all the work a bunch of other people had to do to create those things. In Adam Smith's mind, all value is connected to human work. Therefore, the value of stuff is connected to the trouble someone took to make that stuff.

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But then again, Adam Smith reconsiders. Maybe the value of stuff isn't connected to labor, but to the value of other stuff that we're willing to exchange for.

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At this point, Smith feels like he has to make a distinction between the "real" and "nominal" value of things.

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The nominal value is the amount of money you pay for it. Sometimes gas is cheap and sometimes it's expensive, so its nominal value goes up and down. But the "real" value of something is the amount of necessary things (like food and shelter) that you can get for it.

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Smith calls this "real" value because it's connected to the real needs of human life, while money value can change with taste and fashion over time.

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For proof of this, just check out how much people were willing to pay for CDs in 2000… vs. today.

Book I, Chapter 6 Of the Component Parts of the Price of Commodities §

Why do some jobs pay more than others? For Adam Smith, there are several reasons, but one of the most obvious reasons is the fact that some jobs are tougher than others. Some jobs require more skill and expertise than others, which is another reason they're paid differently.

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In the first societies, workers got to keep all the profit of their own labors. But as some people started to build up stockpiles of stuff (which today we call "wealth"), they used this extra stuff to pay other people to work for them. That's when bosses started existing and taking a cut of the workers' profits. Then when private property gets invented, some people start charging other people rent to live on their land or in their buildings. And that's when you get landlords.

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When all is said and done, there are three things that make up the price of every product: the labor it took to make the product, the profit that the company wants to make, and the rent that the company gets charged on its buildings or its machines. The rent and labor (wages) make up a lot of the price, but anything beyond that is the company's profit.

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When you look at the big picture, the wealth of a country can also be broken into labor, profit, and rent.

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Book I, Chapter 7 Of the Natural and Market Price of Commodities §

In any country, province, or town, there tends to be an average wage that people of a certain job make for their work. This is what you would call the market price of labor. And for Smith, this average wage works the same way for the prices of products, and it's all determined by the laws of supply and demand. The same forces control the price of rent.

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Smith refers to these average rates of wage, rent, and profit as the "natural" rates.

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The two main things you have to consider when looking at the price of labor or products are 1) the supply and 2) the demand. These two things always control how much stuff costs.

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For example, if you have tons of chips to sell but nobody wants them, you have high supply and low demand. So the price of the chips will be low because people don't want them all that badly. But if a bunch of people decide they want some chips, the price will start to go up. And if your supply of chips runs out while people's demand goes up, then the price will go even higher because people will be desperate to buy one of those last bags of chips.

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Whenever the price of a product is a direct reflection of how much people actually want the thing, then that's what Adam Smith calls the natural price of that product.

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If there's only one person who makes that product though, they have a monopoly and they can manipulate the supply of the product in order to make the price whatever they want it to be. That's when the nominal (money) price starts to get away from the natural price.

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The same forces are what control people's wages. When there's a sudden boom in business, a company has to expand and it needs new workers to do so. So as its demand increases, it pays more money to attract the workers it needs. That's why you hear about regular people making tons of money in places where a company has suddenly found oil.

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For Smith, there are all kinds of things that can make the nominal price of a product higher or lower than its natural price. But over the long run, he thinks that prices tend to hover around the "natural price."

Book 1, Chapter 8 Of the Wages of Labour §

As Smith mentioned in an earlier chapter, we live in a world where bosses pay wages to workers and earn a profit on whatever money they make beyond the cost of those wages. It's true that some people are

self-employed, but the vast majority of workers have some kind of boss. §

Smith is quick to note that it's easy for a bunch of company bosses to get together and agree to drive the price of wages down.

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But we never hear about this in the papers. We only hear about it when workers organize to drive wages up.

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Smith doesn't agree with either tactic, but he admits that the public is more biased against unions than it is against corrupt business people. He even talks about how some people are run out of business just for paying their workers too much and making other companies look bad.

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Smith also makes a point of saying that workers' strikes tend not to make any long-term gains for workers. There are many who'd disagree with that, though.

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For Smith, there is a certain price that wages can't go below, and that's the price necessary to keep a worker alive. If wages ever went lower than the price of staying alive, then workers would begin to die off and they wouldn't bother working anymore because they'd know they couldn't continue living.

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But wages need to actually be higher than this because the workforce would die out if they didn't have the money to raise families.

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One time when the workers are in the driver's seat is when the economy is growing. The growing economy means that companies have a growing need for workers. And if this demand is constantly going up, then the bosses will have to pay more and more to attract the workers they need.

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Smith points to the example of America, which in 1776 is growing so quickly that people's wages are doubling and tripling every five years. Even though England is a richer country, wages aren't growing because the economy has a consistent size from year to year. So it's not about whether a country is rich, but whether it's growing. That's why you hear people obsessing so much about growth when they talk about companies or the economy.

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On the whole, Smith feels that the wages paid to workers in England have increased in value, not because people are getting paid more but because the cost of life's necessities (like food) has gone down.

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Adam Smith takes a moment here to talk about how wage laborers are far superior to slaves because wage laborers are cheaper. For example, a master has to make up for lost profits when a slave gets sick.

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But when a wage laborer gets sick, he needs to pay for his own expenses. Plus, slaves have no incentive to work hard, while laborers want to make more money and get promoted.

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Obviously, there are a bunch of better reasons for why slavery shouldn't exist, but Smith takes a moment here to say that it doesn't make sense even on an economic level.

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Adam Smith also makes an argument for a standard workweek (with weekends off) so that laborers will have a chance to rest and be better at work.

Book I, Chapter 9 Of the Profits of Stock §

You might think that when people and companies start to use more and more of their resources to produce stuff, their profits would increase. But it's actually just the opposite.

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That's because the more people there are producing stuff, the more competition there is. In an effort to get people to buy their stuff, people start dropping their prices and their profits end up shrinking. It's great for the people buying their stuff though, because who doesn't love low prices?

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Smith also mentions that countries that are open to trade with other countries always tend to be wealthier because they open their companies to international competition. This ends up driving down the price of stuff.

Book I, Chapter 10 Of Wages and Profit in the Different Employments of Labour and Stock §

Smith returns to the idea of why some jobs are paid more than others, and he gives us five reasons: §

the unpleasantness of the job;

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the easiness or difficulty of the job;

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the security of the job;

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the responsibility of the job, and;

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the likelihood of succeeding at the job.

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For starters, a job's wage will depend on how crummy it is to perform the job.

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Some jobs, for example, are so dirty and gross that you have to pay people a ton of money to do them.

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Second, some jobs require so much skill that you have to hire specialized people to do them. That means you'll have to pay more.

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Third, you'll probably have to pay more to attract someone to a job that is temporary or might go away at any moment. That's because the person will need extra money when they find themselves looking for a new job.

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Fourth, you'll have to pay more money if you're trusting a worker with a ton of responsibility. For example, you don't want to pinch pennies with a person who's running a nuclear reactor.

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Fifth, you have to pay more money to people who get jobs that are difficult to get. For example, a person wouldn't go through tons of years of medical school and rack up student debt if they didn't think they'd have a good-paying job at the end of it.

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Some jobs pay less because they involve work that people would do on their own time. For example, the salaries of journalists have gone down since the Internet became popular because there are tons of people out there who are prepared to write about the news as a hobby instead of a job. This ends up reducing the value of professional journalists.

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Adam Smith goes on to talk about how people are biased toward thinking that everything will work out for them. This is especially the case when people are young. They choose their careers based on what they like to do instead of basing their decisions on future wages or job security, so they end up taking risks on being artists or whatever and end up poor.

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Adam Smith admits that people sometimes make huge fortunes overnight by speculating in stocks. But he says that this kind of gamble has a huge risk and that for every rich stock guy there are a bunch of ruined ones.

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Sometimes, the wages of a certain job are lower because it's a job people tend to do in their spare time. Cottage industries are part of this, like when people knit sweaters in their free time and sell them. These knitted sweaters will be cheaper than their natural price because knitting them wasn't that person's day job.

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One of Smith's biggest beefs in this book is with government regulation, and here's the part where he starts sounding off about it.

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For starters, Adam Smith hates it when laws or government policies discourages competition in the marketplace. For example, certain policies around becoming a registered tradesperson can make it difficult for people to enter this business. For example, being an apprentice for seven years was part of becoming a legal carpenter in Smith's time.

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For Smith, this law is only in place to increase the salaries of working carpenters and to prevent these salaries from going down by having too many carpenters around competing for work. You'll see the same thing today with legal associations, which try to control the number of lawyers in the country in order to keep lawyers' wages high.

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Within every nation, there is always trade going on between town and country. The country provides the town with basic materials like food, wool, etc. The town pays them with stuff like manufactured goods (like machinery for their farms or TVs or other stuff). The town also has banks that lend money to the farms so the farms can expand.

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But Smith admits that the people of the towns have an unfair advantage because they can easily organize themselves against the farmers. Farmers are spread over a huge area and have a much more difficult time getting together and making sure they get fair prices for their crops.

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Smith also mentions that government taxes and restrictions on products from other countries tend to protect their own manufacturers from outside competition.

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This keeps prices up and profits high for these people, but everyone else suffers from paying more for these products.

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In some cases, government regulation actually drives down wages. For example, public school teachers don't make much because the government wants cheap education to be available to all children. This is good for the country, even though it comes at the expense of teachers by driving down their wages.

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Smith also hates government policies that prevent people from moving from one place to another for work. For example, people don't like it when immigrants move to their neighborhood...