THE WEALTH OF NATIONS SUMMARY (BY ADAM SMITH) - YouTube

Adam Smith was a Scottish economist, philosopher and author, and a very successful one at that

His masterpiece, The Wealth of Nations was released in 1776

and was at that time considered very controversial, but it has laid out the groundwork for pretty much all economics since

Smith is often referred to as "the father of economics" or "the father of capitalism" for good reasons

The Wealth of Nations main message is probably that we must trust in incentives

Adam Smith was a pragmatist who knew that people will always act in their own

self-interests, and therefore, every economic policy introduced must always take that into account

Secondary and tertiary effects must always be considered

A society can do no better than to set up the correct incentives so that humans will act in the best way possible

This is a top 5 takeaway summary of The Wealth of Nations, written by the father of economics Adam Smith

And this is The Swedish Investor, bringing you the best tips and tools for reaching financial freedom through stock market investing

... who apparently also likes to go off topic sometimes and talk economics. Well!

Takeaway number 1: Productivity is king

The people of a nation will be better supplied with all the products and services that they have occasion for

if one or two of the following happens:

First, an increase in the number of people who have a job compared to those who don't

And secondly, an increase in the productivity of those jobs

This could be said to increase their "wealth"

It depends much more on the latter than the former

Thousands of years ago, our ancestors were employed, all of them

Every day, everyone had the job of catching food for themselves

Yet today, even the poorest people of a western civilization

are wealthier than the kings and queens from those times!

Consider this story:

A man was handed the task of inspecting the construction of a waterway in a certain communistic land

When he arrived at the site, he saw a thousand people digging with spades while great digging machines stood idle nearby

He asked the manager of the project:

"Why don't you use the machines over there instead?"

"Well, sir, that's because these people would be unemployed in no time!"

The inspector thought about this for a minute and then returned home

The next day he went back to the site and went straight to the manager

He handed him a spoon

"Why don't you use a thousand of these instead?"

To the wealth of a nation, productivity is king. It is improved by three factors primarily:

- Dexterity or skill in doing something

- Avoiding loss of time changing from one task to another; and

- Proper use of machinery

The two first factors come from the division of labor

Instead of having everyone in a society doing everything themselves,

we should each do what we are best at, and then trade products and services with each other

The greater the extent of this trade (or the greater the market) the greater the possible division of labor and thereby

the greater the productivity

Just think about all the specialized products and services that we exchange with each other in a great city

You would probably not find a store like this one in a small country village, but in the great city of New York, you can

The division of labor increases as transportation is improved. Adam Smith gives an example from his experience in the 18th century:

6-8 men can, by water carriage, transport the same amount of goods in the same time with a single ship

as 100 men with 50 broad wheeled wagons and 400 horses

This is why rivers and sea coast towns often develop faster. They allow a greater division of labor as they extend the market of trade

So ...

Ships were much better than horses,

but I think that Adam Smith would be jealous if he looked at us today, because now we have Amazon!

Takeaway number 2: Money: What is it, and why do we use it?

When the division of labor is established, every man supplies himself with but a small amount of the goods that he actually needs

Instead, he participates in exchanging

But in the beginning,

it must have been very inefficient to try to trade with one another when supply and demand didn't always match ...

Hey Franky!

Look at this nice spear that I just created!

Could I get some of that tasty meat that you have if I give you my spear?

No deal, Bob. I already have like 10 spears, but I could use a pound of salt

Hey Randy! Look at this nice spear that I just created!

Could I get like a pound or two of your salt if I give you my spear?

No deal Bob. You know that I'm too old to go hunt these days, but I could use a new shirt.

Hey George! Look at this nice spear that I just created! Could I get a shirt if I give you my spear?

Yeah, of course Bob. I'll be happy to trade a spear for a shirt

Nice!

Oh, but I think that one spear is probably worth more than one shirt. How many shirts have you got?

I only have one shirt to spare at the moment, unfortunately

Well, then no deal George!

This was quite inconvenient to say the least

Enter: Money

Money facilitates the exchange of commodities that we produce

To get back to the first takeaway, one can say that they increase the productivity of exchange

Quite early, metals were used as money and they have at least two qualities which make them suitable for this purpose:

They basically do not perish and they can be divided into many parts and then fused again

Some things have value in use - like spears, meat, salt and shirts

Other things have value in exchange - like bills, coins and metals

That which has high value in one, often is quite worthless from the other standpoint

You can't use a dollar bill for anything. I mean you can't eat it or anything

Similarly, a spear might be quite useful but it doesn't work well for exchange, as we just saw

As long as people trust that money can be exchanged for something else that they are in need of later,

they are happy to trade their own produce for that money

It all boils down to that: Trust

Warren Buffett has said that it is quite misleading that on the backside of every dollar bill, it says "in god we trust"

Because, what it should actually say is "in The Federal Reserve we trust"

Takeaway number 3: The three components of price

The real price of everything is its price in labor

Something that takes more time, energy or resources to bring up often has a higher real price

Bob didn't want to make that final deal with George because he thought that his spear had a higher real price than George's* shirt

However, there's also a nominal price and that is the price as measured in money

Because it's difficult to measure and compare labor, we've come to estimate real prices in terms of money instead

The price of everything that is produced resolves itself into either one or more of the following three components:

- A wage, to pay the labor who did the work

- A profit, to pay for the capital that was laid out for the work to happen

- And a rent, to pay the holder of the land where the work and or exchange must take place

We all know that wages can differ a lot between different occupations

Just look at the average salary of a McDonald's cashier and compare that to the salary of a neurosurgeon

Similarly, profits differ from industry to industry, but not as much, and also they should average out over time,

something that we'll get to later

These are the average profits measured as return on equity for different industries during the period 1999 to 2019

And the factor that can differ the most is of course rents

In New York, for example,

you'll have to pay about $5,200,000 per acre of land, while in the country village of Eksjö in Sweden, you'll pay only about $20,000.

How much you have to pay to buy land correlates well with how much rent you can get for it

Because of this, the proportions that make up the price of a certain product or service differs a lot depending on its type and

where it is bought

A massage for example costs $60 an hour in the previously mentioned Eksjö,

while it costs $105 an hour on Manhattan in New York

The difference in price between the two locations can pretty much fully be contributed to the difference in rents

And some of it in the difference in wages that are necessary to sustain someone in New York

The price of a certain product or service is determined by the supply and demand

Actually, it is determined by something called the "effectual demand",

which is those that demand the product at a price so that it allows for the wages of workers,

the profits and replacement of capital of businessmen, and often some rent for landowners

I mean ..

I want a Tesla. It's just that i'm not ready to pay $70,000 for it yet

Thus i'm a part of the demand, but not the effectual demand, that can actually bring the product to the market

Takeaway number 4: The three components of price, part II

Let's have a look at these three components separately

A worker will always demand a wage so that he can at least purchase the necessities of life for himself and his family

This is the bare minimum which even the simplest type of job must pay, because otherwise,

such workers will cease to exist over time

In countries where no minimum wages exist, the simplest jobs will tend to be at this level and not higher

This is because workers are at a natural disadvantage when trying to bargain how much of that price which was mentioned earlier

which should go towards their salary

They typically exist in abundance compared to capital and land and

moreover, they typically do not have much money spared so they can't afford to wait for a better opportunity

But salaries can differ a lot which we shall see later

A businessman is someone who employs his capital to earn a profit within a specific trade or industry

The more capital that is employed in a certain industry, the higher the competition there becomes, and the lower the profits tend to be

So it must be in society as a whole too. If there are no intelligent ways to employ capital anymore returns will be low

Over time, even though some companies can hold on for very long, returns on capital will even out across industries

This is because where returns are high, there will be incentives to move capital, and where returns are low,

there will be incentives to remove capital

This restores an equilibrium of sorts

If you want to know more about which types of industries that can withstand competition the longest, head over to my summary of "Competitive Strategy"

An owner of land will either try to sell his land for a profit or lend it out for a rent

Either way,

someone down the line will eventually try to lend it out for a rent,

or use the land themselves, and then it is they who gain the rent

Rents vary A LOT depending on location

Some types of land basically afford no rent at all. while those that people find attractive -

land in cities or beautiful beach properties - earn a lot of it

Something that should be noted is that rent is quite like a monopoly price

After normal wages have been paid and the businessman have been able to replace his capital with a decent profit,

the owner of the land will pretty much take what's left

Land is immovable and irreplaceable,

and is therefore peculiar compared to the two other types of revenues that can be earned

Takeaway number 5: Why some jobs pay more than others do

So ...

Profits of industries should average out over time,

and more rent is given to the person who holds a property in a city or at a beach, okay ...

But why the **** does my neighbor have a higher salary than me, even though I'm much smarter than him?!

The wages of labor are decided by supply and demand, like everything else

The following five factors tend to affect this to increase the wages of a specific job

- The expenses and difficulties of learning it

- The inconsistency of payments

- The trust and responsibility

- The improbability of success; and

- The hardship dirtiness and disagreeableness of the job

In the 18th century a blacksmith had to be an apprentice for many years before he was allowed to open his own trade

During this time, he earned very little or basically nothing at all

The higher wage that he got once finished is a compensation for those years, and the apprenticeship

helps in limiting the supply of such workers

A mason could only work during good weather conditions, and so his hourly wage had to be compensated for those idle hours

A greater responsibility means that fewer people are suited for that type of work and therefore wages are higher

Back in the days, lawyers and doctors had such roles (and they still have by the way)

The improbability of success is another factor that matters

The expected wage of a job with a very high fail rate is often even lower than normal jobs,

but the person who succeeds typically gets the salary of those who fail too (kind of)

People searching for gold or treasure belonged to that category

And in the 18th century the most dirty and disagreeable job one could possibly get

was probably that of the public executioner, and the pay was thereafter

Today, a difficult and expensive job to get would be that of the previously mentioned neurosurgeon

An inconsistent one might be that of a real estate broker

A job which requires a lot of responsibility. is that of a pilot

Improbability of success is high among elite athletes and musicians

And the dirtiest and most disagreeable job is probably that of a hedge fund manager!

This book is more than 900 pages long, so I'm definitely going to make a part 2 on this with 5 additional takeaways

In part 2 we'll cover topics such as globalization,

free trade, and the purpose of a government

So you'll probably get to hear more about incentives in part 2!

See you soon! Cheers!