The Wealth of Nations Summary: Adam Smith

The Wealth of Nations Summary

The Wealth of Nations Summary provides a free book summary, key takeaways, review, best quotes and author biography of Adam Smith’s book regarding wealth. Adam Smith’s inspiring account of political economy is a book par excellence.

This book The Wealth of Nations is a must-have for all serious economists. It was initially published in 5 volumes. This book is a practical milestone in economic history. Adam Smith, its author, is in every economics textbook. But, Smith’s theories show they’re full economic and social innovative power just in context. He came into the scene at a critical juncture. That is when absolutist nations were controlling the world’s rare metal reserves. These countries wanted to raise their wealth through strict foreign policies. Such nations were encouraged by an entirely new idea of national wealth. That is, it didn’t come from gold. Instead, it came from the hard work of the citizens.

Hence, economic markets must function as if directed by an invisible hand. Driven by every person’s self-interest. The country only has to give a system and some public goods and services. Smith’s idea of ideal socio-economic harmony developed some cracks over-time. But, his thoughts have encouraged many famous economists in the last 250 years. These include Milton Friedman, David Ricardo, and Vilfredo Pareto.

“The division of labor, by reducing every man’s business to some one simple operation, and by making this operation the sole employment of his life, necessarily increases very much the dexterity of the workman.”

This Summary Will Help You Learn

  • As per Smith which economic activities are key for increasing country’s wealth, and
  • How his ideas drove the free trade movement.

Take-Aways

  • Adam Smith laid the foundation of classical economics with his work in 1716.
  • He didn’t approve of mercantilism’s economic intervention. And he also rejected protective duties that hamper free trade.
  • Mercantilism saves producers. But, it discriminates against customers.
  • Adam said that for the efficient production of goods, division of labor is a must.
  • He felt that the exchange of goods needs public intention to trade.
  • The bigger the market, the better will be the exchange of goods. Agreement between consumers and suppliers forms the market price.
  • Using durable currency for exchange reduces transaction costs.
  • A good’s real value is the labor it stands for. This true price doesn’t change. In contrast, the nominal price keeps on changing.
  • People will be more productive if they can act economically more freely.
  • The government mustn’t interfere in economic activities. Instead, it must only provide defense, law and public institutions.
The Wealth of Nations Summary: Adam Smith

The Wealth of Nations Summary

Progress through Division of Labor

Division of labor has dramatically improved efficiency. Earlier a person made a product from the start till end. But now, production could be divided into separate steps. For example, producing one pin needs 18 different steps. An unskilled worker can produce just a few pins every day. But, what if 18 people each do only one step. Now, they can make many thousand pins in one day. A division of labor is the most significant achievement of modern society. It developed as people have the natural tendency to exchange goods. Every person has unique talents. And given the help from a barter society, workers can specialize. The butcher provides meat, the baker bakes, etc.

The Market and the Invention of Money

For trade to work, customers and suppliers need a marketplace to meet. The market’s size has a direct impact on the degree of division of labor. Hence, if the market is small, specialization won’t work. For example, in a small village, a porter is not needed. But, in a big city, porters are high in demand. Where there are waterways, carts are not required. Ships send goods faster and efficiently over more considerable distances. So, trade gains motion.

But improved transport also creates an issue for traders. What will they do if they can’t find people to trade with? Or parties who demand their products? The creation of money as a means of trading solved this problem. Firstly, currency took the shape of natural goods like salt, cattle. But, finally, people began using precious metals. To avoid fraud, nations regulated and formally engraved the precious metals. This gave birth to coined currency.

Natural Price and Market Price

But, the true value of a good is shown regarding what it costs to make. And not about money. The value of every product is equal to the labor needed to make it. For example, killing a beaver needs twice as much work as killing a deer. So, a beaver is worth two deer. The true value of labor is shown by its exchange rate.

Suggested Reading:  The 7 Habits of Highly Effective People Summary: Stephen R. Covey

Computed this way, a commodity’s value doesn’t change. As it involves the same amount of labor always. So, the labor is the true price of that product. But, the nominal price can change. It may be due to a fall in the value of silver or gold, for example. A society status, i.e., poor or rich, determines commodity prices. This roughly equals their labor cost.

Supply and Demand

Often, a commodity seller wants to earn a profit. If the seller can’t make a profit, he should sell at the purchase price. The purchase price is the sum he paid for them. Yes, he suffers a loss of profit. Plus, the pain of knowing that the money could’ve been invested elsewhere.

The market price is the price a seller can get. It depends on the relation between the market’s demand and supply. If there’s a massive supply in the market, prices will reduce. In contrast, prices will increase if a product is in short supply. But, if demand-supply are equal, the product will sell at its natural price. If a seller can create a monopoly, he can keep the supply low. And hence, get paid the highest price for it.

The Remuneration of Labour

A man’s proceeds from all his labor were only his at a time. This was when land wasn’t private property. And the rich didn’t amass a tremendous amount of capital. But, today the scene has changed. People using property must give some of the proceeds of their labor in return. This is also applicable to the ones who work for other people. Yes, employees and employers can negotiate the amount of remuneration. But, it must never be less than the level of survival. The labor market functions along with the commodity market. So, if labor demand rises, suppliers will fight to get the best workforce.

Composition and Use of Capital

Before the division of labor, no-one needed capital. Also, nobody would stock necessities. When they’d be hungry, people would go hunting. If they wanted new clothing, they’d use animal fur. But, after the division of labor, things changed. People began stocking necessities like raw materials, food, and clothing. Once people do this, some of them will collect more things than others. And then they’ll try selling the extra to make a profit. Thus, it becomes their capital. Products which are produced and sold are “circulating capital.” Tools, machines or property are “fixed capital.”

The same definitions apply to national capital which does to personal wealth. But, except that part of national capital which is immediately used. A nation’s fixed assets are its properties, businesses, and skills of its people. Its current capital includes all the money in circulation. Plus, its stock of supplies and products be it finished or work-in-process. Countries find it simpler to produce and maintain paper money. Such currency is as secure, efficient and fitting as coins. But this is as long as its buying power stays stable.

The Demise of Agriculture

A natural system controls capital use. People who earn money from their labors in fields must reinvest in agriculture. Hence, trade and commerce would be of secondary importance for them. Even foreign trade for that matter. But, this order was overturned during the evolution of modern European states. During that time, foreign trade drove commerce. This led to significant improvements in agriculture. But, then the Roman Empire fell. So, jobs like farming and animal husbandry started fading in Europe. The robbers who damaged the empire also damaged trade between rural and city areas. As a result, cities shrunk, and farmers left their lands.

Freedom and Possession

Western Europe fell prey to poverty. A few landlords took control of the fallow fields. The land lost its relevance as a means of insuring a person’s livelihood. Instead, it became a symbol of power. The farmers on these farms became workers of their feudal lords. Landlords owned the land, the animals, and the seeds. And the farmers were equal to slaves. They even worked just like slaves. That is, they didn’t work more than needed. People make an effort only if they know they’ll enjoy the fruits. Every extra amount of freedom given to the farmers results in higher efficiency. And in simple words more wealth.

The Rise of the Cities

City people got freedom a lot earlier than rural people. Their protectors gave them many privileges. For example, urban tradespeople and artisans were exempt from poll taxes, bridge tolls, etc. City people were also free in other terms. They could choose a town council and mix with communities. City people could build walls and create their defenses. But, farmers didn’t have any protection. Hence, they were subject to assault. Still, the growth of cities also benefited the farmers. Because cities gave huge markets for agricultural produce. City people bought unused land and cultivated it. They even spread law and order to nearby villages.

Suggested Reading:  The Gospel of Wealth Summary: Andrew Carnegie

The Flaws of the Mercantile System

The mercantile economic system has two wrong views. Still, many countries always follow it blindly. Firstly, a country is rich if it has huge reserves of gold-silver. Thus, many nations make it their goal to collect huge amounts of precious metals. To hold the country’s wealth, people were banned from exporting such metals. Or at least, high taxes decreased these exports. Luckily, the merchants made the British government understand some key things. That is, they may first pay for commodities with gold. But, reselling those products to other nations will bring even more gold to the UK. Hence, the country removed bans on exporting precious metals.

The 2nd mistake of this system involves keeping a positive balance of trade. For example, the English worked to export more than they were importing. Hence, merchants weren’t permitted to import goods which England could produce. Or bring any products from nations that had a negative trade balance with England. But, at the same time, countries found many ways to promote exports.

They gave payments to exporters whose products were subject to duties.

  • They gave grants for some trades.
  • Special state trade contracts gave benefits to domestic goods.
  • State founded colonies where their traders can have monopolies.

The whole mercantile model is false and harmful. It only serves the traders and producers, neglecting customers.

“All the different nations of Europe have studied, though to little purpose, every possible means of ac­cu­mu­lat­ing gold and silver in their respective countries.”

The Tasks of the State

The country’s efforts to limit or boost its economy in many sectors are harmful. Rather than promoting growth, they ruin it. The country’s goal must be the free growth of all its market members. If these members follow the rules, they’re subject to the free play of market forces. Yes, the state has specific tasks which individuals can’t fulfill. Such tasks are:

  • National defense – Country’s first duty is to save its people from outside attacks. Hence, it should have an army.
  • Justice – To enforce the law and stop violence among citizens, police, and courts are needed. The state needs to provide for all this.
  • Public institutions – The country needs to govern all institutions where people can’t expect to earn a profit. These include churches, schools, streets, universities, and bridges.

The nation depends on tax revenues to complete these jobs. Taxes on profits, salaries, and pensions are allowed. The taxes are assessed based on the pre-decided rate of the citizen’s means.

Suggested Reading: The Power of Positive Thinking Summary

Suggested Reading: How to Win Friends and Influence People Summary

The Wealth of Nations Review

The work of Adam Smith is considered instrumental in economics, and this book is another evidence of that. The book has explained various key concepts of economics that how countries can manage their economy and grow their wealth in the long term. He focused on some key economic activities, which can play their crucial role in growing the wealth of nations. His ideas are very much clear in this book, which are mostly in favor of free trade as he doesn’t believe in imposing protective duties. Adam explained that how Mercantilism can show discrimination against the rights of customers, and how it only serves the purpose of producers. He fully supported the idea of division of labor in this book. He sees its importance regarding increasing efficiency. The books also explained that how the system of market and money should work. The suppliers and customers should have a considerable market, where they can make free trade and exchange good and money.

The author also gives notice to the free trade and freedom by explaining the situation in Western Europe, where land and fields were controlled by a few landlords. They gained more power with this and snatched the freedom of other poor class of society. The role of farmers in this system was just equal to slaves, who owned nothing. So, when people don’t’ have any motivation to work, then they work as per the need, and never make extra efforts, which is also a bad thing for the overall economy. The book kept claiming that the mercantile system develops such systems, which are harmful and false for the economy. If a country wants to do well regarding economic growth, then it is important to allow all market members to grow freely. The hard work and commitment from people will help a country to grow its wealth by boosting their economic activities.

Suggested Reading:  How to Stop Worrying and Start Living Summary: Dale Carnegie
The Wealth of Nations Summary: Adam Smith

The Wealth of Nations Quotes

“The division of labor, by reducing every man’s business to some one simple operation, and by making this operation the sole employment of his life, necessarily increases very much the dexterity of the workman.”

“All the different nations of Europe have studied, though to little purpose, every possible means of ac­cu­mu­lat­ing gold and silver in their respective countries.”

“Labor, it must always be remembered, and not any particular commodity or set of commodities, is the real measure of the value both of silver and of all other commodities.”

“What is the real measure of this ex­change­able value; or, wherein consists the real price of all commodities?”

“Labor was the first price, the original purchase money that was paid for all things.”

“It was not by gold or by silver, but by labor, that all the wealth of the world was originally purchased.”

“Every individual is continually exerting himself to find out the most ad­van­ta­geous employment for whatever capital he can command.”

“The sub­sti­tu­tion of paper in the room of gold and silver money replaces a very expensive instrument of commerce with one much less costly.”

“In agriculture too nature labors along with man; and though her labor costs no expense, its produce has its value.”

“It is each man’s interest to live as much at ease as possible, and if someone’s rewards are the same whether he performs or does not perform an onerous duty, he will either neglect it or perform it as slackly as his superiors permit.”

“The scarcity of money is not always confined to improvident spend­thrifts. It is sometimes general through a whole mercantile town and the country in its neigh­bor­hood. Over-trad­ing is the common cause of it.”

“The wealth of a neighboring nation, however, though dangerous in war and politics, is certainly ad­van­ta­geous in trade.”

“The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities.”

The Wealth of Nations Summary: Adam Smith

About the Author

Adam Smith was born on June 5, 1723, in Scotland. He was the son of a jurist. Smith learned moral viewpoint from Francis Hutcheson. Hutcheson’s teachings mix the views of philosophers like David Hume and John Locke. Smith studied in Glasgow and Oxford. He then taught for some time. After that, he became the professor of logic at Glasgow University in 1751. And a year later he became a professor of more science. During this time, he was in touch with David Hume.

In 1763, he left Glasgow for a 2-years educational voyage to Switzerland and France. There he worked as a private teacher of a young duke. Smith had close interactions with French physiocrats Quesnay and Turgot. From them, he got the idea for his major work The Wealth of Nations. But, he didn’t complete and published it until 1776. Smith was appointed as duty controller in Edinburgh in 1779. He died there on July 17, 1790. Just before his death, he asked his friends to destroy his incomplete writings.

Feedback

Having read this Wealth of Nations Summary, we hope you can gain some insights about wealth. Do you have any comments which you would like to share with us? Please feel free to share your thoughts with us.

Suggested Reading: The Power of Positive Thinking Summary

Suggested Reading: How to Win Friends and Influence People Summary

Best Selling Books

SaleBestseller No. 1
The Wealth of Nations (Modern Library)
835 Reviews
The Wealth of Nations (Modern Library)
  • Modern Library
  • Adam Smith
  • Publisher: Modern Library
  • Edition no. 0 (01/25/1994)
  • Hardcover: 1130 pages
SaleBestseller No. 2
The Wealth of Nations (Bantam Classics)
835 Reviews
The Wealth of Nations (Bantam Classics)
  • The Wealth of Nations
  • Adam Smith
  • Publisher: Bantam Classics
  • Edition no. 0 (03/04/2003)
  • Mass Market Paperback: 1264 pages

Last update on 2018-11-14 / Affiliate links / Images from Amazon Product Advertising API

7 COMMENTS

  1. Howdy very nice web site!! Man .. Beautiful .. Wonderful ..

    I’ll bookmark your blog and take the feeds also…I am satisfied to find a lot of helpful information right here in the
    post, we need develop extra techniques on this regard, thanks for sharing.

  2. Howdy very nice web site!! Man .. Beautiful .. Wonderful ..

    I’ll bookmark your blog and take the feeds also…I am satisfied to find a lot of helpful information right here in the post, we need develop extra techniques on this regard, thanks for sharing.

  3. I’ve been absent for some time, but now I remember why I used to love this blog. Thank you, I’ll try and check back more often. How frequently you update your website?

  4. I simply had to thank you so much all over again. I do not know what I might have worked on in the absence of those tricks documented by you about this industry. This was an absolute traumatic condition in my view, but being able to view your specialized tactic you managed it made me weep over happiness. Now I’m happier for the work and in addition expect you know what a powerful job you’re doing teaching other individuals by way of your website. I am sure you haven’t met all of us.

  5. Fantastic. I have really got what I was looking for in The Wealth of Nation.Verry useful. Gonna check it out later. Thanks so much

LEAVE A REPLY

Please enter your comment!
Please enter your name here