Scottish philosopher and economist Adam Smith first published Wealth of Nations in 1776. It is a foundational book for classical economics. In it he promotes the idea of "the invisible hand," that an economy operates best when it is left alone by the government...
“It is the highest impertinence and presumption therefore in kings and ministers to, pretend to watch over the economy of private people and to restrain their expense either by sumptuary laws or by prohibiting the importation of foreign luxuries. They are themselves always and without any exception the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.”
But what about that last phrase, "that of their subjects never will... ruin the state"?
Smith is sharply critical of the morality and foolishness of the ruling class. But he passes lightly over the morality of the common man. At one point he said that the impulse to save for overall improvement of one’s life is greater than the impulse to spend on present pleasure. This might have been true in his day as free societies were emerging (especially America) and since the European and American societies were strongly influenced by the Christian faith. Smith doesn't mention this latter point at all. In fact he considered clergy in general to be "idle hands" that produce nothing and therefore are a drag on the economy.
I read the Wall Street Journal and the New York Times daily and I rarely hear anything of the relationship between the morality of a society and its productivity. In Smith's case he probably just assumed that the morality for productivity would always be present in society. Smith observes this simple truth: productivity can only be increased by increasing the number of productive people or the productivity of the individual people themselves. His great assumption is that if people were only given the right to own capital and to work and trade freely all will be well. But there is more to it than that.
This is one of my favorite quotes and is the basis for almost all of my thoughts about economics:
"Whatever is prudence in a family cannot be folly in a great kingdom."
In fact the Greek word underlying the English word "economy" is the Greek word for "family." Smith does say that the greatest encouragement to industry is the equal administration of justice so that each man can retain the fruits of his own labors. But this statement assumes that each man really wants to labor and is not inclined to cheat his neighbor. The fact is that the same immoral tendencies of the ruling class are also found in all people. While ownership and free trade are essential to productivity, they are not sufficient. We need what every family needs: Self-sacrifice for others, respect, honesty, self-discipline, cooperation, etc. Where do these habits come from? I would argue that they have all been part of the Christian worldview which until twentieth century and Europe and the twenty first century in America. What will happen to productivity if this worldview is displaced by something else?
Here are the rest of my notes on Adam Smith's Wealth of Nations.
Wealth of Nations, Adam Smith
Audio Book, 35 hours 17 minutes
Smith compares an uncivilized nation to a civilized one. In the former most are employed as hunters or fishermen. Yet they suffer want. In the latter some do not work at all and consume much of the produce. Yet even the poorest in this nation is much better off than in the uncivilized nation. This book endeavors tp explain why this is so.
Savage people all do the same thing. But a society is better off if they divide the labor and specialize in their work.
Superior nations excel in agricultural production.
“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. Nobody but a beggar chooses to depend chiefly on the benevolence of his companions.”
Smith distinguishes between the natural price and the market price. The market price may increase due to scarcity or to the wealth and competition of the consumers.
The goal of workmen is to increase their wages. The goal of masters is to decrease them. Since the masters are fewer in number, it is easier for them to combine and to control the wages.When there is a dispute, the masters can live longer on their stock than the workman.
Smith notes that half of all children die before reaching maturity.
Wages rise with the increase of national wealth.
The most important measure of national wealth is population growth. Population in England was doubling every 500 years. Population in the colonies was doubling every 20-25 years. Labor in the colonies is so well rewarded that large families are a boon not a burden.
China was one of the most populated and well cultivated countries in the world. Yet wages were very low. Poverty was terrible. Children were drowned like puppies in water.
The reward of labor is the reason for increasing national wealth.
Vegetables such as potatoes, carrots, turnips, etc., had decreased in price by half in the last 30 years. This because of the transition from the spade to the plow.
Poor people have a higher birth rate. Prosperity hinders conception. Infertility is more common among the rich than among the poor. Also the rich find it difficult to have more than two or three children. Poverty, however, is a great detriment to the rearing of children.
Every species multiplies in proportion to their means of subsistence.
If there is a greater demand for labor, there will be a greater reward for it. This greater reward will also increase population growth.
The wages of labor are the encouragement of industry.
Where wages are high the workmen will be more industrious.
Workmen paid well by the piece often overworked themselves.
Workmen who work moderately last longer and will produce the greater amount of work.
Smith mentions laws that capped interest rates. 10% was probably the most common legal maximum. Religious zeal sometimes caused all interest to be outlawed, but Smith points out that this probably increased the amount of usury that was actually taking place.
Proverb: “Money makes money.”
In the Roman Empire courts rarely got involved in contract disputes. This was probably the cause of high interest rates.
The vocation of executioner is the highest paid vocation. Hunting fishing are low paying because many enjoy those vocations.
Most men over value their own skills.
Husbandry requires some of the greatest skills, and these skills are hard to develop.
Large corporations do not improve productivity. The greatest motivator for productivity is not the corporation but the customer. (The closer the workman is to the customer, the higher his motivation will be to greater productivity.)
Clergymen were paid roughly the same as journeymen. Clergymen are often paid 40 lbs/year.
Clergymen and men of letters were often paid less because their education is paid for by the government, and therefore there were many of them. This lowered their wages. Scholars were sometimes granted licenses to beg. (This could also be because what they produced, such as encouragements toward morality, were not valued by the society.)
Rice is the most productive crop. A rice field is a bog and is unfit for any other crop. Potatoes are another very productive crop. Potatoes are nutritious. They are difficult to store.
Rich people take great pride in objects that are very scarce. Beauty, utility and scarcity drive prices higher.
Labor is really the value that lies behind all silver.
A certain amount of gold and silver is lost every year by those who bury it and then die.
Three great orders of society: 1. Those who live by rent. 2. Those who live by labor.3. Those who live by profit.
“If the prodigality of some was not compensated by the frugality of others, the conduct of every prodigal, by feeding the idle with the bread of the industrious, tends not only to beggar himself, but to impoverish the country.”
“Every prodigal appears to be a public enemy, and every frugal man a public benefactor.”
Smith held a positive view of men in general. Claimed that the impulse to save for overall improvement of one’s life is greater than the impulse to spend on present pleasure. I wonder what he would say about that today?
Smith complains about the unproductive segments of society (unproductive hands): clergy, politicians, and the military. These people produce nothing and have to be maintained at the expense of those who are productive.
Overall productivity can only be increased by increasing the number of productive people or the productivity of the individual people themselves.
Productivity can only be increased through improved technology or through a better distribution of labor. Both of these require capital.
“It is the highest impertinence and presumption therefore in kings and ministers to, pretend to watch over the economy of private people and to restrain their expense either by sumptuary laws or by prohibiting the importation of foreign luxuries. They are themselves always and without any exception the greatest spendthrifts in the society. Let them look well after their own expense, and they may safely trust private people with theirs. If their own extravagance does not ruin the state, that of their subjects never will.”
“A person who can acquire no property can have no other interest but to eat as much and labor as little as possible. Whatever work he does beyond what is sufficient to purchase his own maintenance can be squeezed out of him by violence only and not by any interest of his own.”
Smith notes that in ancient Italy cultivation of corn degenerated when production depended on slaves.
“In commercial countries therefore, riches, in spite of the most violent regulations of laws to prevent their dissipation, very seldom remain long in the same family.”
In a country where the land is owned by a few, the overall productivity will be less than in a country where the land is owned by many. The small proprietor is more productive than the large proprietor.
“Whatever is prudence in a family cannot be folly in a great kingdom.”
Smith concludes that famines are caused by governments which try to remedy the inconveniences of a natural dearth.
Smith says that laws concerning corn are similar to laws concerning religion. Both tend to be a logical because they suffer from the prejudices of the people.
Smith says that Spain took over the countries that Columbus discovered because the people were unable to defend themselves. They sanctified this decision with the idea that they were doing it to bring these people to Christianity.
Smith complains about tithes that are rigorously imposed upon people. He also says that donations given to mendicant beggars are attacks upon the poor.
Smith points out that in the colonies legislative duties and some executive duties are carried out by the people themselves in a Republican manner. There is more equality among the people in the colonies then there is in the mother country.
Smith contends that slaves treated with respect and gentleness or more useful and productive than slaves that were mistreated.
The greatest encouragement to industry is the equal administration of justice so that each man can retain the fruits of his own labors.
Smith argues that Britain should let the colonies go free. This would alleviate the great expense of the military control of the colonies. Free trade between Britain and the colonies would increase the wealth of all. The only thing that maintains the war is the economic advantages that the political class has through its laws and regulations.
Smith says that in America shopkeepers tradesmen and lawyers are becoming statesmen and that they are forming a new kind of government. He predicted that this empire would become one of the greatest of all.
Smith highlights three great inventions: the first is the invention of writing, the second is the invention of money, and the third is the invention of economical tables which is the combination of the first two.
China is such a huge country that it has its own division of labor which supports a great amount of it as wealth. However China's wealth would increase much more if it would take on foreign trade.
Smith compares the mines of Hungary and in the mines in Turkey. The mines of Hungary are much more prosperous because they are worked by freemen. These freeman employ much more technology than the slaves that work in the mines in Turkey.
When capital is given to one species of the economy by “extraordinary encouragement,” the overall wealth of the economy is diminished.
As a nation becomes more productive and wealthy, it invites the jealousy of other nations who might seek to rob its wealth.
Where there is no property, civil government is not so necessary.
In England court lawyers and clerics were paid by the page. This led to the increase of writing.
Smith complains about stupid missionaries who exaggerate their descriptions of foreign lands.
Smith criticizes the notion that foreign travel is good for the education of youth.
The defense of a nation rests on the “martial spirit” of the people.
Religious teachers that receive their income from their hearers are always more ambitious than those who receive income from other sources.
Religious Teachers with new ideas often gain an audience while the teachers holding to the past have more trouble keeping their followers. This leads them to appeal to the government to restrain the teachers of new ideas.
People should support the state according to the ability that they have… (A graduated tax!)
The poor generally raise more children. Some of the poor are disorderly and have bad conduct. However they do not raise many children because perish for want. (The welfare state has changed this.)
“There is nothing so absurd which has not sometimes been asserted by some philosophers.” Cicero
The Romans, at the end of the First Punic War, reduced the value of the “oz” in order to pay off debts… from 12 oz of copper to two oz. This did not create a lot of problems. The poor were in debt to the rich. They benefitted from this. (This is probably Paul Krugman is such an advocate for national debt. He probably thinks it can only help the poor since it provides them with public aid, and it is eventually paid for by the rich. However, how much have the poor lost through the lack of private enterprise? In the end the people he wants to help are still poor.)
Most nations have reduced the value of their currency.
Smith ends with an appeal to get out of the colony trade which brings more loss than profit.
