Review of Wealth of Nations by Adam Smith

Rounding out the tour of leading enlightenment thinkers, we arrive at the cornerstone of modern economic thought: The Wealth of Nations, the juggernaut from Adam Smith published in 1776. The actual title is An Inquiry into the Nature and Causes of the Wealth of Nations, which actually gives you a pretty good preview into his prose style. But wordy or not, the book maps out in great detail how economies actually work, and how wealth is generated and flows through it, written in eighteenth-century language with virtually no math. If you don’t come to the book already in possession of a deep passion for the subject of economics, then you will likely fall asleep many, many times while reading this book.

But my own short attention span aside, man, what an amazing book. Smith sets up his premise and then proceeds to overwhelm you with so much detail that you have no choice but to agree. He does this for the subjects of division of labor, the component parts of prices, the employments of stock, the causes for variability of precious metal prices, the existence of opulence in rich nations, the mercantile system, the revenues peculiar to the sovereign, and the role of the state in all of this. And with each topic he dives so deep into the weeds that as a reader you lose touch with the outside world and all you can see is weeds in every direction—until twenty-five pages later, when he says, “and as these several examples demonstrate” followed by his thesis, and you just have to hand it to him.

I was pleased that numerous topics from the book seemed self-evident to me, and it was nice to see them so convincingly argued, but they weren’t exactly revelations. An example of this would be the division of labor, the idea that the narrower the portion of a process an individual can concentrate on, the more efficient it will be and thereby the greater the productive power. I don’t know that I’d ever thought about it in exactly these terms, but it stands perfectly to reason. He describes this in the context of early industrialization, and you can practically see the visions of mass production dancing across the page.

Another example of something that wasn’t obvious but makes perfect sense is that the three parts of the price of commodities are rent, wages, and profit, and an enterprise is only viable if it can cover all three. Land generates rent by the tenant, the work done there generates wages for those who do it, and the stock that is used in that work generates profit. You can apply this formula to farming, manufacturing, and retail, and it helps you make sense of why the gas in San Francisco is so much more expensive than in Topeka: because the rent is too damn high! These three go together in all cases, whether it is agriculture or manufacturing, and the price of everything has these three embedded into it. I’d never known this before, but having it presented so clearly it made good sense.

Other topics were more subtle and required some effort on my part to grasp the concept and mechanics. The relationship between the quantity of gold and silver in an economy and their market prices didn’t entirely make sense to me, and, to be honest, it still doesn’t. To some extent the price of silver and gold is tied to their abundance and the presence of productive mines. But with supply and demand being in balance, the price of these metals gets higher the richer the country is and falls the poorer the country is. This is not at all intuitive, and it took many pages of Smith’s explanations for me to barely grasp how it is true. And now I’ve forgotten.

What I realized ultimately is Smith, Hamilton, Rousseau, and Paine were all writing about the same thing: How do we make the best society? Each of them approached it from his own perspective and contributed his own insights, but I believe they were all working on the same project. How does the world work in its natural state, and how could it work in a state built by and for humans? With a deep and subtle understanding of the world, can we envision a society of peace and plenty, virtue and abundance? In his introduction, Smith shares this ghastly example:

Among the savage nations of hunters and fishers, every individual who is able to work, is more or less employed in useful labour, and endeavours to provide, as well as he can, the necessaries and conveniences of life…. Such nations, however, are so miserably poor that, from mere want, they are frequently reduced… to the necessity sometimes of … abandoning their infants, their old people, and those afflicted with lingering diseases, to perish with hunger, or to be devoured by wild beasts. Among civilised and thriving nations … the produce of the whole labour of the society is so great that … a workman, even of the lowest and poorest order, if he is frugal and industrious, may enjoy a greater share of the necessaries and conveniences of life than it is possible for any savage to acquire.

Smith is here to talk about economics, but fundamentally he is making a moral argument, an assertion backed by voluminous data, that a better society can be achieved capable of raising the lowest among us higher than any could alone. Isn’t this essentially what Rousseau said? But unlike the pure philosophy of Rousseau, Smith has a working model and a set of pretty specific recommendations. And I can’t speak to Smith’s opinion on the advent of the American experiment, I can say with confidence that he had no trouble telling the sovereign what to do.

Smith is a proponent of the free market at all levels, and he goes to great lengths to demonstrate why interference in the market always reduces the wealth of a nation. As an example, he rails against the apprenticing system as bad for everybody. Apparently the apprenticing system was developed by the tradesman guilds in order to control the number of people who can practice a particular trade. The result is that you get apprentices who are not inclined to work hard, who spend many years learning a trade which they might have learned in one year or less with a bit of application. Without apprenticeships, motivated beginners would work hard to learn a trade, and would join any profitable market, likely at lower prices, and soon the market would reach equilibrium between supply and demand, which is always good for a nation and good for consumers.

Another example of deleterious meddling is the granting of monopolies, which is typically done by the state. Monopolies greatly benefit those receiving them, because manufacturers are rich and powerful and able to exert sufficient influence to make the monopoly happen. But the result is a stifled market and artificially higher prices, which is, of course, always bad. In Smith’s view, a government should stay out of trade entirely. The three jobs of the government are 1) provide for the defense, 2) administer justice, and 3) administer public works. Other than that, they need to just get out of the way and let the market sort itself out.

I couldn’t help but notice that much of the rationale of The Federalist Papers concerns the flow of trade, with the federalist argument being that fewer barriers are the desired state, which is of course straight out of Smith; I’m sure that this helped power the young country’s rapid economic rise. That and all the resources to steal from the savages.

Overall, The Wealth of Nations was a hugely edifying and massively exhausting read, and it gave me a firmer grasp of why people get so up in arms about the free market. What he never covers, I guess because it hadn’t really happened before, is what happens when a country gets really wealthy. The world of Smith was at the very beginning of industrialization, and the subsequent economic revolution created new dynamics and pressures unforeseen by Smith. For this reason, Galbraith’s The Affluent Society is on my list as well, and while I hope that he is better at brevity than Smith, my main hope is that he approaches the moral questions as well. I’d never really thought about economics as a moral issue before Smith, but now I couldn’t look at it any other way.

Excerpt from The Wealth of Nations, by Adam Smith

It has been the opinion, however, of the greater part of those who have written upon the prices of commodities in ancient times, that, from the Conquest, perhaps from the invasion of Julius Caesar, till the discovery of the mines of America, the value of silver was continually diminishing. This opinion they seem to have been led into, partly by the observations which they had occasion to make upon the prices both of corn and of some other parts of the rude produce of land, and partly by the popular notion, that as the quantity of silver naturally increases in every country with the increase of wealth, so its value diminishes as it quantity increases.

In their observations upon the prices of corn, three different circumstances seem frequently to have misled them.

First, in ancient times, almost all rents were paid in kind; in a certain quantity of corn, cattle, poultry, etc. It sometimes happened, however, that the landlord would stipulate, that he should be at liberty to demand of the tenant, either the annual payment in kind or a certain sum of money instead of it. The price at which the payment in kind was in this manner exchanged for a certain sum of money, is in Scotland called the conversion price. As the option is always in the landlord to take either the substance or the price, it is necessary, for the safety of the tenant, that the conversion price should rather be below than above the average market price. In many places, accordingly, it is not much above one half of this price. Through the greater part of Scotland this custom still continues with regard to poultry, and in some places with regard to cattle. It might probably have continued to take place, too, with regard to corn, had not the institution of the public fiars put an end to it. These are annual valuations, according to the judgment of an assize, of the average price of all the different sorts of grain, and of all the different qualities of each, according to the actual market price in every different county. This institution rendered it sufficiently safe for the tenant, and much more convenient for the landlord, to convert, as they call it, the corn rent, rather at what should happen to be the price of the fiars of each year, than at any certain fixed price. But the writers who have collected the prices of corn in ancient times seem frequently to have mistaken what is called in Scotland the conversion price for the actual market price. Fleetwood acknowledges, upon one occasion, that he had made this mistake. As he wrote his book, however, for a particular purpose, he does not think proper to make this acknowledgment till after transcribing this conversion price fifteen times. The price is eight shillings the quarter of wheat. This sum in 1423, the year at which he begins with it, contained the same quantity of silver as sixteen shillings of our present money. But in 1562, the year at which he ends with it, it contained no more than the same nominal sum does at present.

Secondly, they have been misled by the slovenly manner in which some ancient statutes of assize had been sometimes transcribed by lazy copiers, and sometimes, perhaps, actually composed by the legislature.

The ancient statutes of assize seem to have begun always with determining what ought to be the price of bread and ale when the  price of wheat and barley were at the lowest; and to have proceeded gradually to determine what it ought to be, according as the prices of those two sorts of grain should gradually rise above this lowest price. But the transcribers of those statutes seem frequently to have thought it sufficient to copy the regulation as far as the three or four first and lowest prices; saving in this manner their own labour, and judging, I suppose, that this was enough to show what proportion ought to be observed in all higher prices.

Thus, in the assize of bread and ale, of the 51st of Henry III. the price of bread was regulated according to the different prices of wheat, from one shilling to twenty shillings the quarter of the money of those times. But in the manuscripts from which all the different editions of the statutes, preceding that of Mr Ruffhead, were printed, the copiers had never transcribed this regulation beyond the price of twelve shillings. Several writers, therefore, being misled by this faulty transcription, very naturally conclude that the middle price, or six shillings the quarter, equal to about eighteen shillings of our present money, was the ordinary or average price of wheat at that time.

In the statute of Tumbrel and Pillory, enacted nearly about the same time, the price of ale is regulated according to every sixpence rise in the price of barley, from two shillings, to four shillings the quarter. That four shillings, however, was not considered as the highest price to which barley might frequently rise in those times, and that these prices were only given as an example of the proportion which ought to be observed in all other prices, whether higher or lower, we may infer from the last words of the statute: “Et sic deinceps crescetur vel diminuetur per sex denarios.” The expression is very slovenly, but the meaning is plain enough, “that the price of ale is in this manner to be increased or diminished according to every sixpence rise or fall in the price of barley.” In the composition of this statute, the legislature itself seems to have been as negligent as the copiers were in the transcription of the other.

In an ancient manuscript of the Regiam Majestatem, an old Scotch law book, there is a statute of assize, in which the price of bread is regulated according to all the different prices of wheat, from tenpence to three shillings the Scotch boll, equal to about half an English quarter. Three shillings Scotch, at the time when this assize is supposed to have been enacted, were equal to about nine shillings sterling of our present money. Mr Ruddiman seems {See his Preface to Anderson’s Diplomata Scotiae.} to conclude from this, that three shillings was the highest price to which wheat ever rose in those times, and that tenpence, a shilling, or at most two shillings, were the ordinary prices. Upon consulting the manuscript, however, it appears evidently, that all these prices are only set down as examples of the proportion which ought to be observed between the respective prices of wheat and bread. The last words of the statute are “reliqua judicabis secundum praescripta, habendo respectum ad pretium bladi.”—“You shall judge of the remaining cases, according to what is above written, having respect to the price of corn.”

Public Domain.

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