THE WEALTH OF NATIONS | PART 2 (BY ADAM SMITH) - YouTube

As promised, here is the second part of The Wealth of Nations, one of the most influential books ever written about economics

If you haven't watched the first part yet I'd advise you to do that

now, as some of the takeaways here build on those from the previous part

Let's continue where we left last time ...

Takeaway number 6: Accumulation and employment of capital

What's the similarity between Michael and a country like the US, China or Sweden?

It is that they get wealthy in the same way

Allow me to introduce The Swedish Investor's "Stairway to Money"

All copyrighted and original content, of course

Each different step represents a category that an individual can spend money on

To become wealthy a person wants to spend money on the higher steps and not the lower ones

At the bottom, we have services meant for consumption

These are the worst things that you can spend your money on, as you'll consume them instantly

Vacations, dinners and video on demand all belong to this category

The next worst thing to direct your money towards is products meant for consumption

Products depreciating value from the time of purchase,

but at least they're not as bad as services because you will still be able to sell them at a later stage,

even though it may only be at a fraction of their original value

Cars, clothes and phones belong to this category

Then we have products that do not depreciate in value and that often keep their value through inflation

Important entries in this category are collectibles and a house to live in

And at the top, we have investments

This is a very broad category indeed, and anything which is expected to generate more cash in the future

than the outlay of money is today, plus a reasonable return, belongs here

Therefore - starting a business,

educating yourself, investing in the stock market, or renting out properties all belong here

It's the same with countries

If a country buys services from another country, money flows right out from it without being replaced with something else that is valuable

If a country buys products from another country,

at least some of the value is still preserved as products can be sold again at a later stage

It is similar with a third step in our Stairway to Money

A country gets rich by increasing its own productivity by starting businesses there,

by educating its people so that their skill and dexterity increases, or by buying productive assets from other countries

BUT ...

... and this is unimportant but

Neither people nor nations should be afraid of having expenses just because of this

Both people and nations, if they want to acquire wealth, should focus on what they are naturally good at and then outsource the rest

This is what we shall focus on next

Takeaway number 7: Globalization - the shortcut to increased wealth

Here we have. Michael Lewis, a 32 years old engineer

He's working at a job where he's paid a base monthly salary, but he's also compensated for overtime

For overtime hours, he nets

approximately $30 per hour

Given this, here comes a few questions for you:

Should michael cook his own food?

Should michael clean his own house?

And, sorry now i'm getting a bit silly just to prove a point here, should michael build his own phone instead of buying one from apple?

From a wealth standpoint the answer is no to all of these questions

It makes sense for Michael to do what he is best at,

earning money from that and then hire other people to do what they are best at for everything else that he demands

Perhaps Michael can cook his own food, but it takes him about an hour to prep a single meal,

which means that he does so at a cost of $30,

because he could have spent that time working as an engineer

Therefore, it doesn't make sense for him to do it as he can just buy a meal outside for $15

Similarly, he can clean his own house, but it takes him 2 hours to do

So that's $60 for Michael, while he can hire someone to do it for $40

And as an engineer, he is capable of building his own phone,

but it might take him something like 200 hours plus $200 in materials

That's a $6,200 phone! Why not just go buy the latest IPhone for $1,000?

If it doesn't make sense to do something at 6 times the price it doesn't make sense to do so at 2 times the price,

and probably not at 1.5 times the price either

It is the same with nations

For nations to increase their wealth,

they should be focusing on the things that they are really good at, and then hire other nations to do what they are best at

For example ..

The US is obviously a leader in many different businesses, but among others, in the fast food and entertainment industry

China is incredible at producing most products at very low prices

And in Sweden, we are quite good at producing furniture ...

... sorry, I mean at making everyone else produce furniture for themselves, of course

Now, should Sweden try to produce the same products that China can produce much cheaper?

No.

Should China compete head-to-head with Hollywood?

Probably not.

Should the US have everyone produce furniture for themselves?

Definitely not!

All these countries can be more productive, and in that increase their wealth, by simply doing what they are best at,

and then trade goods with each other

Also, to make another comparison between individuals and countries in their quest for wealth:

Both of them will earn more by having rich neighbors or acquaintances

People know that if they want to be rich, they should move where other people are rich

And probably even more importantly - they should acquire rich friends

It's the same with nations

A country should want their neighbors and trading partners to be wealthy, because eventually that wealth will spill over to them, too

Just look at this map

But we've been getting this backwards for centuries now

In the 18th century,

Great Britain and France, probably the two wealthiest countries in Europe at that time,

did everything they could to make business miserable for each other instead of cooperating

They even went to war with each other!

Today, let's hope that the two most important economies of our time, the US and China, don't make that same mistake

Takeaway number 8: Why free trade is superior, and why governments shouldn't interfere

As we talked about in the previous video - in a capitalistic society,

money will naturally flow where the returns are higher and disappear from where their returns are lower

In a society where the government does not interfere, two rules will guide capital

- Capital is naturally employed where it can produce the greatest returns

This is actually a good thing, because businesses like these are more sustainable than anything else

They will employ people where there is demand and a real competitive advantage

- Capital is also naturally employed in the home market, as this comes with less risk

This is also good, because it creates working opportunities in the own country

For these two reasons, it is totally unproductive when governments interfere with the market

Just as an imaginary example:

Say that we, in Sweden, would do something as silly as setting up a ban on movies created in Hollywood

What would happen when such a ban is introduced?

Excluding potential retaliation, it will yield higher profits for the film industry in Sweden than what would naturally be the case

Therefore, more capital will be incentivized to flow to this industry

But this business still isn't competitive on a global scale. Everywhere else than in Sweden, people will still watch movies from Hollywood!

Moreover - the capital in Sweden

which goes towards the creation of film is capital that could have been directed towards something where Sweden is competitive on a global scale,

like the previously mentioned furniture

Generally, politicians must have a small dose of God Complex if they think that they are smarter than the aggregated thinking of the market

when it comes to capital allocation decisions in businesses

There are two examples when it might be necessary to introduce duties, bans and tariffs though:

- For goods that are important for the defense or survival of the country

- And when a tax is imposed even on such domestically produced goods

You don't want to shift the favor to the foreign goods, at the very least

Apart from that, governments should probably stay away from using duties, bans and tariffs on foreign goods

They should not incentivize certain industries or disincentivize

others, because the market is likely to do this very well on its own, thanks to the before mention two

There are a few areas where a government is absolutely necessary for the wealth of a nation though,

and that is what we shall cover in the next takeaway

Takeaway number 9: What is the purpose of a government?

According to Adam Smith, there are some tasks in a society that the market and private people have little or no interest in solving

The four that Smith discusses are:

- The defense of a country

- The justice system

- Some type of infrastructure

- And basic education

The defense of a country is absolutely necessary for its wealth to increase

Interestingly enough, a country is more and more likely to be invaded the richer it is

Or so it was in the old days at least ..

Consider the raids of Genghis Khan and his Mongolian savages of the much wealthiest cities of China

Or how the vikings invaded many much more established societies in Europe

The savages actually had the advantage at this time, as they were much more skilled fighters

But that all changed with the invention of the firearms

Firearms were expensive to make, and no matter how skilled an army of spears and bows were, it couldn't beat one equipped with firearms

And so, the odds changed in the favor of the wealthy nations, who could afford these supreme weapons

Anyways ...

A nation must be able to defend itself to sustain its wealth

And as this benefits everyone in a society, it does make sense that a government has the responsibility of this task

Justice, is similarly an expense that benefits everyone in a society

In the old days,

justice was often exercised by those in power, but one can easily understand how such a system can be very corrupt

It is essential that justice and power are separated. Otherwise - who should bring justice to those in command?

Similarly, a justice system that is based on profits tend to be very corrupt too, so it doesn't lend itself well to the free markets

It used to be like this too, everyone that wanted justice had to bring a gift to the judges

As you can probably imagine, the person who brought the greatest gift tended to get a little bit more "justice" than everyone else ...

So to speak.

Therefore, the task of bringing justice to its people should be paid for by a government

But those that use the justice system often should probably pay extra for that

Infrastructure, such as the most important roads and docks used for commerce of a country, is something that benefits everyone too

But it doesn't invite the same conflict of interest as the justice system does, and should thereby often be held privately

Infrastructure should be financed with revenue from the commerce

which can be carried by means of it. Because in this way, money will much more seldom be wasted on infrastructure projects

Some infrastructure projects can be important without being profitable, but in that case they should often come with a local tax,

not a national one

Without some type of basic education being free and probably also mandatory, some of the country's inhabitants,

those that are born into poverty, will most likely never learn how to read write or count

Such inhabitants are unlikely to increase the productivity of a nation

Therefore, we want to avoid that this happens

A benefit such as learning to read, write and count benefits everyone and it should be one of the purposes of the government

of making sure that this is done

Takeaway number 10: How should a government be financed?

So ..

with defense, justice, infrastructure and education, a publicly financed government seems to be the most fair and logical solution

But there are many different options of financing something, and some are definitely better than others

Here are 4 principles for creating good taxes:

Equality

Each person should contribute in proportion to his or her abilities and in proportion to the revenue

which he earns under the protection of the state

It is difficult to make sure that the wages, profits and rents (the three sources of income which we discussed in the previous video)

are all taxed equally, but they should at the very least be taxed equally individually

Certainty

Time, quantity and manner of payment must always be clear

This is probably the most important principle. A little bit of uncertainty

is worse than a great deal of inequality

Uncertainty leads to the potential corruption of the tax gatherer

Convenience

Taxes should be due when the contributor is most likely to be able to pay

The consumer pays whenever he consumes a service or product, and the wage earner should pay taxes as soon as he gets the wage,

not at some other time when he might already have spent it all

Efficiency

A tax may never be more burdensome to the people than it is beneficial to the government

For instance ...

- As few people as possible should be required for gathering the tax

- A tax should never discourage industry

- And the degree of visits and examinations of the people shouldn't make them feel oppressed

With these 4 principles in mind, i'd like to ask you a question:

Do you think that it is a good idea for a country to have a wealth tax?

In other words, a tax which is in proportion to the total assets of private people.

Please comment with your answer down below!

Alright, that's it for Adam Smith's Wealth of Nations

Here are two unusual recommendations for further watching from other channels:

You can watch me doing the Navy Seal's screening test for eight hours, if you want to watch me in a lot of physical pain

Or, you could watch this summary of 79 of my book summaries

Cheers guys!