Summary: The Wealth of Nations — Adam Smith

Who is Adam Smith? Well basically, he’s a guy who developed a whole new understanding of economics. He goes down to single details and in the long run, you finally understand the bigger picture.

I must say, it isn’t the lightest of reads, but it’s worth it.

Division of labour

( — the assignment of different parts of a manufacturing process or task to different people in order to improve efficiency)

He says, that the division of labour increases the output of a society. It’s a great method to improve innovation. Innovation also increases output.

Smith says, that value of a product is determined by labour. How many people are needed to make the product? Are there risks? What are the qualifications of these labourers?

The Invisible Hand

If you would dump a bunch of people in a country, they would automatically start collecting and trading. Adam Smith says that we have a natural tendency toward self interest. The free market was created.

For a nation to be prosperous, Smith believed that the following things are required:

1. Enlightened Self Interest

A butcher doesn’t sell you meat because he wants to do you a favour. He does that so he can make profit. If his meat is bad, you wont come back (Nowadays, the government has made many restrictions too). That’s why it’s in his best interest to sell you the good stuff. This in the long term, curbs businesses. The butcher would thereafter start saving money, which he would then invest into innovations.

2. Limited Government

Smith says the responsibility of the government are:

• defense of the nation
• universal education
• infrastructure (roads and bridges)
• legal rights (contracts)
• punishment of crime (robbery, fraud…)

Smith says, that a government that is too bureaucratic will drain the productivity of a nation.

3. Solid Currency and Free-Market

Put simply: By backing currency with hard metals the government couldn’t reduce its value. Nowadays, the governments print money like crazy, funding wars or other wasteful expenditures. Smith prefers free market principles where the money is backed and can be traded internationally without tariffs. Tariffs can make life more expensive. (Which it does).

Random fact: Did you know, that one of the first currencies was cattle?