“Wealth of Nations” Book I by Adam Smith (1776)

“Wealth of Nations” Book I by Adam Smith (1776)

Introduction

  • Discussion on Wealth:
  • Ratio of Total Amount Produced / Total Number of Consumers
  • If this ratio goes up, the nation is better off and wealthier
  • Q: Why do country have different have different ratios? Either higher or lower?

Chapter 1 – Division of Labor

  • The best way to improve productivity is the Division of Labor
    • A small amount of labor can be all in the same building
    • At a larger scale à larger number of workers à can’t all be in the same building, or even the same city
  • Example: Pin-Making:
    • Unskilled laborer could maybe make 1 in a day
    • Divide the tasks into discrete actions
      • A – Drawing out wire
      • B – Straighten wire
      • C – Cut wire
      • D – Point the wire
      • E,F,G,H,I – Put a head on the pin
      • J – Put pin into envelope (Finished product)
    • Operations with Division of Labor are more productive in this production
      • Estimated production of 48000 pins a day for 10 workers, each doing 1 specific task à 4800 pins per worker
    • Workers performing all 10 tasks themselves à 40 pins a day
    • This is true with most productions
  • The efficiency has led to separate trades which depend on level of industry in a county
  • Some trades are more likely to be divided than others
  • When comparing countries, differences in productivity are greater in manufacturing than in agriculture à depends on other things, land fertility, weather, climate
    • Division of labor will provide efficiency in agriculture but nothing like n manufacturing
  • Differences in productivity due to Division of Labor are down to:
    • Productivity – the reduction of jobs down to single tasks being repeating give the worker a more precise expertise in that task à he becomes more efficient
    • Saving time à time is usually lost in the switching between tasks, hot things get cold, cold things get hot, you may have to go to another building or city to finish the job
    • Technology helps labor become more efficient by making it faster, more accurate and of a better quality.
  • Inventers observe the methods of production and find ways to automate steps, cut steps out, combine steps, make better quality, make work faster, less dangerous and overall cheaper.
  • Example: Woolen Coat:
    • Steps in the production:
      • Shepherd
      • Wool sorter
      • Comber
      • Dyer
      • Scribbler
      • Fuller
      • Dresser
    • Further needs in bringing the coat to market:
      • Shipbuilding
      • Sailors
      • Sailmakers
      • Ropemakers
    • Needs to shear a sheep with shears:
      • Miner
      • Furnace builder
      • Timber merchant
      • Burner of coal
      • Brick maker
      • Brick layers
      • Furnace worker
      • Mill wright
      • Forger
      • Smith
    • All of these steps and more are necessary just to make a woolen coat
  • The variety of labor in a nation will increase the scope and scale of production and the overall wealth of a nation

Chapter 2 – Principle of Division of Labor.

  • Trade drives Division of Labor à result of humans’ speech and reasoning faculties à unique to humans
  • Animals may cooperate but not through contracts or property rights
  • We need deep cooperation and humans are never independent in society
    • More likely to succeed if we can convince others that they will benefit from cooperation
    • The basis of exchange: you’ve got something I want and I’ve got something that you want… let’s trade
  • “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.”
  • Treaty, barter, purchase are the causes of trade
    • Even homeless people beg for money to go buy food, shelter, etc.

Chapter 3 – Division of Labor is Limited by the Extent of the Market

  • The extent of the Division of Labor depends on the extent of the market
    • Small markets à little Division of Labor because there is only a small surplus and a small demand for that surplus
  • Many jobs can only exist in a large town because a village is far too small for some of them
    • Villages are limited to farmers who are their own butchers, bakers and brewers
    • Families live far apart and don’t have neighbors to trade with
    • They must do all sorts of jobs get by
  • Small towns à a carpenter must also be a joiner, cabinet maker, wood carver, wheelwright, plough wright, cartwright
    • Can’t compete with larger scales in terms of prices and quantities as well as range of good
  • Shipping and transport also plays a large role in the size of a market
    • Compare a horse and cart to a ship for transporting goods
    • Shipping by boat can reach places a horse can’t reach, fasters, cheaper and safer
    • Must rely on navigable waters
    • Horse and cart don’t need waters to reach inland
    • Boat transport opens up the size and distance within a single market by making sale of goods abroad possible
  • History shows that the largest, wealthiest cites were accessible by boat: Athens, Rome, Babylon, Alexandria (on seacoast and rivers) on the Nile, Danube, Rhine, Ganges à China, Middle East, coastal areas of Europe.

Chapter 4 – Origin and Use of Money

  • Production leads to excess of product which is traded for other products
  • However, with the expansion of markets and the Division of Labor, producers need to find a producer of something they want who also want what they want. Without this coincidence, trade doesn’t happen.
  • As things continued, a medium of exchange was need
    • Products’ prices were stated in terms of other products – 1 suit of armor got you 9 oxen in one place and 100 oxen in another
    • Salt was often used as a common medium for exchange since it was popular, divisible and durable
  • Use of metal came about because it had similar features and wasn’t used for food
    • It became a common store of value
    • Spartans used iron, Romans used copper and then later silver and gold were used
  • Large bars were difficult to divide, weigh and carry
    • Uniform coins were minted and stamped to have a uniform weight for conveniences and guarding against shaving a bar’s size
  • Denominations usually associated with weights and proportions were established between gold, silver, copper.
  • Smith wonders why useless diamonds are so expensive but very useful water is so cheap…

Chapter 5 – Real and Nominal Price of Commodities, Labor and Money

  • Value of a commodity comes from what it can buy you in other products à ratio of work done in product A and product B
    • Having wealth and money will save us toil but need to toil to get money
  • Labor is the first price and is determined by the value of those who have it and want to trade it for other things
  • Wealth is power (Thomas Hobbes) à size of a fortune à size of power to command others’ labor or to purchase goods.
    • Difficult to say the proportion between one sort of labor and another or price of a commodity
    • Some hours worked are worth more and are more productive than others
  • Money facilitates exchange and the ratios of labor
    • The amount of money a butcher gets for his meat dictates what and how much he can buy of other things
  • Money itself can change value depending on its supply
    • Discovery of new sources of gold/silver changes supply and prices
  • Labor’s value depends on the laborer’s productivity and skill
    • Money is some way to measure it objectively
  • Labor’s value also depends on how much the buyer wants it
  • Difference between Real and Nominal Price of Labor
    • Real is always the same but Nominal includes changes in supply to gold and silver in market
  • Always a temptation to debase and shrink coins to a prince’s advantage which diminishes the value of goods and services
  • Introduction of more supply is usually gradual à lessens marginal value
    • More fixed supply is, steadier commodity prices are
  • Degradation of coins and lower quantity of a metal in a coin worsens value and distorts market
  • With a fixed supply of coins, increasing productivity in a production decreases its price
  • Changes in money supply vary year to year changes over centuries
    • More likely to see greater annual variations in crop harvests à prices will fluctuate more for that reason
  • Labor seems to be more fixed value than money or the product
  • Long-term leases on land tend to be difficult to measure real/nominal prices for because both incorporate variations over many years
    • Different markets have different prices based on the price of a good which is based on supply and overall supply in the market
  • Begin to use different metals for different sized transactions (gold for large, silver for medium, copper for small)
    • Proportions are usually determined by the market
  • When money/metal is degraded, it must be reset in relative values and denominations but markets are the ones that determine what they actually buy
  • Different countries determined this differently according to availability and possibility of enforcing ratios
  • Too much good à less divisible, too much copper à annoying
  • Seigniorage – revenue collected from minting coins
  • Loss of supply or increase causes fluctuations in the market for gold, silver, copper à lost at sea, used for jewelry, etc. are inevitable but not a serious and constant worry

Chapter 6 – Component Parts of Price of Commodities

  • Before money, if labor is used to kill 1 beaver = labor used to kill 3 deer, the relative price will be 1 deer = 3 beaver
    • Reflection of relative amounts of labor used in production
  • In advanced societies, skill of labor will be incorporated into the price of labor à Man A can make 3 coats in an hour, Man B can make 1 coat in an hour à Price A:B à 3:1
    • Labor is paid a wage based on its productivity, inputs bought but the entrepreneur/undertaker must receive profit for risk.
  • Profit is different to a wage. Rather than being based on productivity, the entrepreneur must manage labor, inputs and create a production plan. Profit is based off his ability to manage inputs efficiently for what’s demanded
    • Once all land is private in a society, owners will try to use it for a profit even if they don’t personally produce or manage anything. Laborer/manager will have to pay for the use of land and materials.
  • Example: Corn
    • Costs – renting land, labor’s wages, profit of farmer (rent, wage, profit all vary based on industry), pay for capital depreciation.
    • Rent, wages, profit sources of revenue and have exchangeable values
      • Revenue from labor à wage
      • Revenue from stock à profit
      • Revenue from land à rent

Chapter 7 – Natural and Market Prices of Commodities

  • Every city, region, country has an average wage or price of a certain job
    • Related to rent rates and commodity prices – different is different area
    • Depends on who’s working (supply) and who’s paying (demand)
  • Natural price à prevailing price à long-term prices
  • Market Price – short-term price based on current demand. If demand rises, market price will rise above natural price à max depends on how strong demand is
    • Component acts as an auction for labor/labor/commodity
    • If scarcity persists, market will find a way to meet demand, increase supply and affect price à importation, smuggling, substitution, migration, monopoly breaking

Chapter 8 – Wages of Labor

  • Entrepreneurs pay labor and earn profit à most workers work for a manger and not themselves
    • Entrepreneurs may collude to drive down wages and so drive up profit, often secretly
    • Very open when labor tries to drive wages up
    • Public tends to be more against labor than entrepreneur because businesses are often out of business because wages are too high
    • Workers who strike gain short-term, but not in long-term
  • Wages have a natural floor below which a worker won’t work. Workers need to have a wage to be able to have a family to provide future generations of workers.
  • The American economy was small at the time of publication but growing à wages needed to rise to attract new workers and keep the old ones.
  • England was larger but growth was slower à wages were steady
    • Growth plays the greatest role in rising wages
  • Wages in England effectively rise not because wages are rising but because prices of goods are falling
  • Paying wages is better than having slaves because the owner has to pay maintenance on sick slaves and gives no incentive to work hard or be more productive
    • No promotion, no economic sense
  • Workers need time off, vacations, holidays, etc. to recuperate and be better workers

Chapter 9 – Profits of Stock

  • Production increases don’t lead to increased profits because profitability increases à increased competition
    • Lower price à lower profits
    • Need to lower prices to encourage buyers to buy your product, not your rivals’
  • Countries open to trade are usually richer because they are open to international competition. This serves to lower prices across the board and wages go farther with lower prices.

Video Summary on Division of Labor:

Video Summary on Price, Wages and Profit:

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