Friday, June 30, 2023

Review of The Wealth of Nations by Adam Smith

This book review was written by Eugene Kernes   

Book can be found in: 
Genre = Economics
Book Club Event = Book List (01/27/2024)

Watch Short Review


“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.  It is impossible, indeed, to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice.  But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies, much less to render them necessary.” – Adam Smith, Book I: Chapter 10: Of Wages and Profit in the Different Employments of Labour and Stock, Page 80

“That increase in the quantity of the precious metals, which arises in any country from the increase of wealth, has no tendency to diminish their value, I have endeavoured to show already.  Gold and silver naturally resort to a rich country, for the same reason that all sorts of luxuries and curiosities resort to it; not because they are cheaper there than in poorer countries, but because they are dearer, or because a better price is given for them.  It is the superiority of price which attracts them; and as soon as that superiority ceases, they necessarily cease to go thither.” – Adam Smith, Book II: Of the Nature, Accumulation, and Employment of Stock Introduction, Pages 132-133

“According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings: first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact justice; and thirdly, the duty of erecting and maintaining certain public works, and certain public institutions, which it can never be for the interest of any individual, or small number of individuals to erect and maintain; because the profit could never repay the expense to any individual, or small number of individuals, though it may frequently do much more than repay it to a great society.” – Adam Smith, Book V: Of the Revenue of the Sovereign or Commonwealth, Page 407


Is This An Overview?

The wealth of nations depends on the production capacity of the nation, not on the money or resources the nation has.  With labor that uses those resources to make products.  Money flows into nations that engage in producing products for others.  Rich or poor attributes depend on how much the people in the nation can afford to enjoy necessities, conveniences, and amusements of human life.  No individual can provide everything that they need on their own, due to limitations of knowledge, skill, effort, or time.  That means that individuals need to trade.  Obtaining most of what they need through trade.  Trade enables specialization through division of labor that leads to improved productive capabilities.

As the wealth of nations depends on production capabilities, policy decisions influence how much wealth can be produced.  Rent, profit, and employment opportunities increase as the wealth of nations improves.  Neglect for the productive capacity leads to a loss of value for the land, power of labor, and is a general cost to society. 

A sovereign, or a government, has three duties.  To provide defense, to establish an effective justice system, and provide public works.  An able government can facilitate production, which increased the revenue the government will receive through taxation.   The more the people can produce, the more the sovereign can afford.  Getting products to market, through expansion of the market or reducing the costs of bringing products to the market with reliable infrastructure, enables more production of those products.  Individual effort in production is encouraged when the labor is rewarded appropriately.  People invest more resources and effort when those decisions are rewarded.  When people fear their superiors, or think the outcomes of their efforts will be expropriated, they will not utilize their resources. 


What Is Wealth?

Rich or poor depends on how much labor can be commanded, or what can be afforded.  Poverty is not defined by a low value of precious metals.  Poverty is defined by a lack of ability to make purchases. The more wealth, the more power the individual has to command labor.

The value of precious metals is determined by the supply of the precious metal into the commercial world.  When more resources enter the market, their price decline which reduced profits.  Superiority of price attracts money into a nation.  Market price depends on supply and demand.

Trade brings with it new ideas and products.  Bringing in different manufacturers into the nation.  When the extend of the market increases, the price of the produce increases.  The product becomes more valuable.

Wealth of other nations is dangerous during war and politics, but advantageous during trade.  As the sovereign obtains revenue from the people, should a conqueror use destructive methods, the conqueror destroys the very source of the potential revenues.

Other ways to reduce wealth is when government makes bad policies, which can bring about scarcity of resources such as food.  Uncertainty about taxation encourages corruption.  The more misconduct in an industry, the more resources are taken away from use. 


What Are The Effects Of Division Of Labor? 

No individual can produce all that they desire.  No individual has enough time or skills needed to produce all products needed.  Therefore, each individual needs to cooperate with others in production efforts.  With trade, each individual obtains from others what is worth more to the individual than the seller.  It is through their own interest in wanting to obtain more in value, that people trade, not because of benevolence.

Division of labor is positive-sum, as it is to everyone’s advantage.  Enabling more production than what would have been available without division of labor.  The surplus can be sold in the market.  The more extensive the market, the more advantageous.

As agriculture improved to enable fewer people to produce more food, that let others pursue other employment.  Division of labor is limited by the extend of the market.  With a small market, each individual needs to complete more than one type of task.  But as the market expands, they can dedicate themselves to less types of employment for they will be able to obtain more than what is needed for consumption.

Specialization of labor leads to more knowledge within each function.  As the people better understand their work, they are more likely to innovate to improve their task.  There are consequences to specialization, as the people lose the skills that they do not use.


How Are Rewards Divided?

Wages depend on conflicting interests of the employee and employer.  The workers want higher wages, while the employer wants lower wages.  The employers have a relatively easier time to collude due to their lower number.  Also, employers generally have previous savings to rely on, while the worker cannot last long without an income from work.  People of the same trade tend to meet together to conspire against the public.  Little can be done to prevent such meetings, but they should not be rendered necessary. 

Advantages and disadvantages in different employments tend to equality.  More people will enter fields that have advantages, therefore reducing the advantages.  And to shun disadvantaged employment.

There are efforts that increase production of wealth, and non-production efforts that maintain and distribute the wealth.  Non-production efforts are important as they can increase the productive capacity of productive labor. 


What Are The Effects Of Competition?

Much improvement comes from knowledge of their own interest that has been employed upon the public.  The interests of manufacturers are usually in conflict with the public.  Expending competition is in the interest for the public, while narrowing competition is in the interest of the manufacturer.  Reducing competition is a tax upon citizens. 

Keeping production developments secret can make a firm prosperous.  A monopoly has the same effect.  A monopoly understocks products to keep their prices higher.  Monopoly is antagonistic to good management. 

Monopolies do attract more employment and resources, but not necessarily improves the industry for society.  Monopolies increase the price of the product, which would have been made more cheaper elsewhere. 

Restricting trade would mean having to rely only on what the domestic economy can produce.  Some industries would need to be protected for defense purposes, or to develop an industry.  Each nation can retaliate to the industrial protection policies another nation imposes.  Firms can get a legal monopoly in domestic market, but not in foreign markets. 



This book is difficult to read.  The author builds a complex understanding of the topics, by expressing the various supporting claims, counterclaims, and various conditions.  Many economic ideas presented have been improved and made more systematic.  The improved ideas have a lot of resemblance with those in this book.

There is a lot of diverse history presented, as proofs of concepts.  This book should not be used as a historical reference, as historical sources and understanding have improved.  The historic example quality is mixed.  There are examples that enable a better understanding of the topic, while other examples can distract from the content. 

Questions to Consider while Reading the Book

•What is the raison d’etre of the book?  For what purpose did the author write the book?  Why do people read this book?
•What are some limitations of the book?
•To whom would you suggest this book?
•What is wealth?
•What is the productive capacity?
•What increases or decreases wealth?
•Do resources contribute to wealth?
•What is the purpose of labor?
•Why do people trade?
•What is division of labor?
•What are the duties of a sovereign (government)?
•What is the function of money? 
•What is the extend of the market?  What effect does the extend of the market have?  
•What are property rights? 
•How to define a rick or poor society? 
•Why does money flow to some societies and not others? 
•What is the effect of trade?
•What is competition?
•What are the effects of a monopoly?
•Why protect trade?
•What effect does trade protection has?
•What are the classes of labor? 
•Why use money?
•What is the purpose of capital?

Book Details
Full Title:              An Inquiry Into The Wealth Of Nations
Publisher:    Publishing
Edition ISBN:      9781420932065
Pages to read:       566
Publication:          2009
1st Edition:           1776
Format:                 Paperback

Ratings out of 5:
Readability    2
Content          4
Overall          4