The Wealth of Nations Summary of Key Ideas | Adam Smith

Learn Visually

Learn the key ideas of The Wealth of Nations in a fun visual way with an interactive infographic.

Introduction

An Inquiry into the Nature and Causes of the Wealth of Nations—widely known, simply, as The Wealth of Nations—earned Adam Smith timeless renown as the “Father of Modern Economics.” In this over-1,000-page tome, the foundation is laid for virtually every aspect of modern economic activity as we know it today. True to its incredibly direct and self-evident writing style, its purpose is boldly declared in the long-form title: to uncover the principal causes that drive the pursuit of wealth in the natural course of human affairs.

What exactly are these principles behind the shared human urge to acquire wealth? How strongly do Adam Smith’s insights and assertions from the 1700s parallel our understanding of economics today? As with any great literary work, a brief look at the life of the author can bring fundamental insights to reveal the mindset behind their most celebrated work.

Adam Smith’s Perspective

Being both a product of and a driving force behind the Scottish Enlightenment, Adam Smith pursued a highly ambitious academic career starting at the age of 14. Through multidisciplinary studies, he became well known as a moral philosopher before his economic writings took center stage. In the context of his life’s work, The Wealth of Nations serves as an important individual component of a deeply cohesive lifelong effort in learning and teaching the larger historical framework of humankind.

Much is made of Adam Smith’s emphasis on the self-driven underpinnings behind most, if not all, major economic pursuits. Counterintuitive though it may seem today, it’s helpful to frame his incredibly dimensional beliefs about self-determination with this quote from his earlier moral writings:

“How selfish soever man may be supposed, there are some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him”

It’s clear that the intrinsic value of happiness at any scale was something of a unifying theme in Smith’s work, especially when compared with this similar moral maxim from The Wealth of Nations:

“No society can surely be flourishing and happy of which by far the greater part of the numbers are poor and miserable.”

StoryShot #1: Radically Specialize Your Labors

As though conscious of its tendency to demonstrate points just as they are made, the style of The Wealth of Nations establishes its specialty for bold, self-evident prose right where it all begins:

“The greatest improvement in the productive powers of labor, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the division of labor.”

This primary teaching is to place a premium on improving the quality and production of one’s work as a specialized and unique component of the social fabric. While emphasizing this foundational principle variously throughout the book, it is almost just as quickly leveled back down to basic, natural forces more attributable to experiential pressures than to vague or otherworldly inner wisdom.

“This division of labor, from which so many advantages are derived, is not originally the effect of any human wisdom […] It is necessary, though the very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility”

Here, it’s life circumstances over any kind of shining ambition that at once anomalistically, but with no less dignity, drive people to begin collaborating and stratifying their mutual specializations in the most mutually beneficial ways. In this light, our most foundational lesson almost steers into an exposition on the natural basis of contract law—but even more quickly, such pretense is explicitly denied. Instead, the phenomenon is described as people driven to collaborate due to the “accidental concurrence of their passions.”

It could be said that the underlying philosophy is that there is a little-to-no inherent contradiction between the genuine pursuit of one’s aims and pursuing that which is good for one’s peers. To complete this dynamic, the text invokes a kind of self-interested empathy as indulgent in its self-restraint as it is accommodating of the other’s selfishness:

“We address ourselves, not to their humanity but their self-love, and never talk to them of our necessities but their advantages.”

In wanting more from others, this lesson comes just short of prodding the reader to become fully capable of the very worth that they would externally seek.

StoryShot #2: Facilitate Labor Properly And Efficiently

In considering human labor, the specialization of labor—or “worker dexterity”—described above is included alongside two other factors which, when all three are taken together, greatly increase the volume of productive labor. Altogether, these factors are:

1. Increase the dexterity and skill of laborers;
2. Guard that time so easily lost when transitioning between tasks;
3. Harness the power of available machinery.

To put it crudely, working harder only goes so far, and the maximum expansion of wealth requires reducing distractions from your specialty and leveraging all available equipment to multiply your effort.

“Ease of efficiency is another essential.”

In the first two points combined, we are encouraged to look at the human body and the mind which directs it as something of the prime instrument that labor is performed. To modern minds, it’s easy to fit what is described here with the ultra-trim processes behind modern-day assembly lines.

Yet this is a process of freely organized effort, both individually and within dedicated, specialized groups. Improving one’s dexterity and reducing all seemingly small but ultimately flow-crushing hesitancies go hand in hand to maximize the use of one’s body and mind for the greatest efficiency.

In the third factor, we reach an escalation of the original principle—specialize your labor—which expands to include those means which lie beyond the self. The reader is encouraged, if not required, to continually seek mechanistic ways to accomplish the same task more easily, quickly, and skillfully by orders of magnitude higher using whatever machine-assisted methods are possible.

StoryShot #3: Perpetuate Market Value By Increasing The Rate Of Exchange

In contemplating the market in which labor is divided, that division of work has a self-perpetuating value that perpetuates itself through the power of exchange. This encourages a healthy respect for the natural force a market can exert.

These natural forces are likened very literally to the natural forces of the physical environment, which, when harnessed wisely, create new forms of labor and an immense boost in trade. It is interesting how thoroughly geographical or even biological market forces are described in The Wealth of the Nations.

Even as a simple matter of arithmetic, these natural market forces can be demonstrated to the same effect:

“Six or eight men, […] by the help of water-carriage, can carry and bring back in the same time the same quantity of goods between London and Edinburgh, as fifty broad-wheeled wagons, attended by a hundred men, and drawn by four hundred horses.”

In the text, these and many other calculations are enumerated at length to show the tremendous amplification possible with a well-utilized natural environment, technology, or market… better yet, the three combined. Note, too, the ultra-specialization and mechanically powered work inherent to the water-carriage operators whose labor value in the market has become equivalent to the value of a hundred men, four hundred horses, and all the equipment they use.

Heed market forces, and respect at once their capacities for expanding and limiting labor—but just the same, don’t be afraid to step outside the one you’re in if it is not expanding the trade you are most fit for.

StoryShot #4: Maintain A Fixed Standard Of Weights And Measures

Lest the takeaways listed above seem even vaguely like the ivory-tower musings of its time, it’s worth noting that Adam Smith spent considerable time learning from the merchants who opened colonial trade to Scotland. According to the Encyclopedia Britannica, Smith had “undoubtedly” acquired “detailed information concerning trade and business” which “gave a sense of the real world to The Wealth of Nations.”

So far, we have only an efficient assemblage of diligent cottage industries. What’s missing is an equally efficient medium for exchanging value—money. As a “butcher seldom carries his beef or his mutton to the baker,” he realizes it is “more natural and obvious […] to estimate […] value by the quantity of money, the commodity for which he immediately exchanges them.”

Here, it’s forewarned that any true specie of money can fluctuate in value just like any commodity, and its only purpose is to most closely approximate the value of labor. Labor is described as “the ultimate and real standard by which the value of all commodities [can] be estimated and compared.” Comparatively, money is only the nominal price of labor, which alone is the real price of things.

You might practice this now by calculating the time and labor the desired items requires of you to obtain them, rather than attribute the item’s value to nothing more than the list price. There are, as there always have been, multiple mediums of exchange. For that matter, in trying to sharpen the comparative value of different forms of money, Smith arrives at a sobering caution for future generations:

“[I]n every country of the world, I believe, the avarice and injustice of princes and sovereign states, abusing the confidence of their subjects, have by degrees diminished the real quantity of metal, which had been originally contained in their coins.”

The point, above all, is to provide a measurement by which those with disparate means of bartering can affix a universally understood price on the production of their labor. The Wealth of Nations clarifies the historical gravity of this seemingly dry topic by thoroughly explaining examples throughout history where labor became the nominal price of money, by which all other things were measured. The proper role of money is the exact opposite.

StoryShot #5: Resolve The Price Of Your Labor To What It Entails

“Every individual endeavor to employ his capital so that its produce may be of greatest value.”

Several factors effectively determine the value of any given labor, as follows:

• If one species of labor is more severe than another, then that superior hardship will be accounted for in its price. The fact that others won’t want to do it naturally creates pressure for market buyers to either accept the higher price or go without the service.

• The esteemed one has in their talents will naturally incline them to value their labor according to the dexterity and ingenuity involved in it—the time and arduous effort spent acquiring these rare skills will be accounted for in labor costs once acquired.

• Beyond labor, one may then acquire a significant stock of the produce of labor, which can be thought of as “only a different name for the wages of a particular sort of labor.” That sort of labor is the inspection and direction of valuable commodities, also known as capital. This type of value is regulated by different principles than labor itself, and its measure is by profits acquired through efforts that stock was invested in.

Since the only kind of “commodity” that both can be controlled and cannot be taken from its place island, it is referred to as a “peculiar” form of commodity. Either way, control of this “peculiar commodity” results in yet another name for wages, the wages of rent.

The “wage” of rent is paid for by those with capital stock because capital depends on land to apply stock and laborers for its profits—and if that stock is not employed on land the stock owner controls, the one who does control that land can easily acquire rent from the stockholder or render the stock useless.

However your labor is measured, it’s necessary to resolve its true, inherent value by comparing it to the same value it can be exchanged for. This is true whether your labor is measured in wages, stock, or rent (by laborers, capital directors, and landholders, respectively).

StoryShot #6: Allow Capital To Flow Freely

When people are free to move without restriction, those with capital naturally desire to apply it where it will yield the highest profits. If too many capital owners do this in the same place, however, there will be a flood of capital in a single area. This results in a devaluation of that capital, which is much more plentiful and thus easy to come by.

At that point, those same capital owners have a renewed desire to leave that area and seek new places where their capital can function at a higher value. This elasticity is a natural aspect of a market, where the people who make that market function are free to choose where to invest their labor and other property.

Any disruption to this elasticity breaks down the ability for capital to productively spur regional trade, making it burdensome to be productive and creating a regressive economic force. Rather than grow and expand into new areas where trade enables specialized labor to flourish, trade slows. Then, even the most specialized labor becomes limited to the same extent by which the market in which that labor seeks to apply itself limits its opportunities to earn wages.

Rather than allowing labor to specialize, stagnant capital encourages labor to flow to it, interfering with the ability of specialized laborers to minimize the time wasted unnecessarily changing between tasks (see the second of the three points in takeaway #2 once more). The value of labor depends on the market gains that occur when capital flows—and owners of capital depend on laborers who can maintain dexterity and skill, which is nearly impossible when they are pressured into less economically rewarding opportunities for their most skilled trades.

Even those collecting rents eventually face the pressure to finally incentivize capital owners once more if this dynamic continues long enough—but only if free access to markets is not interfered with.

StoryShot #7: Ensure The Proper Scope Of Government

Though Adam Smith believed in an extremely limited government in most ways, there are several key areas in which he believed the government had essential functions—but only by carefully balancing its powers to keep it from exceeding its proper role.

The roles advocated in The Wealth of Nations included simply:

1. Educating the population in the basic means of reading, writing, and counting;
2. Provide national protection;
3. Establish justice.

The structuring of the judicial function is advocated in a way that ensures a judiciary does not have any more power than is necessary to carry out its functions—or even allocating that power to a separate part of government that has no or the most limited possible financial incentive to control the courts for its interests.

The Wealth of Nations also discusses the establishment of taxes for infrastructure, which is advocated in a way where only those who get immediate use of the amenities pay those particular taxes, and thus it is left for the most localized governments to carry out.

StoryShot #8: Maintain Open Trade, Even Unilaterally

The logic of unilateral trade is that governments adhering to a policy of unimpeded international trade will benefit even if other governments try to restrict trade with them. As the fastest possible markets on the entire planet learn that they have major reliable opportunities in the country with an open trade policy, it will generate an enormous amount of economic rewards for that country with the open policies.

Even if a large proportion of the world’s nations were somehow thwarted from engaging in these opportunities, it is unlikely if not impossible to stop all nations from engaging in trade. No matter what, the open trade policy will function to entice valuable international economic activity.

Final Summary And Review Of The Wealth Of Nations

As most readers express upon reading Wealth of Nations, it is a much more exciting and inspiring book than most bargain for when they decide to read an incredibly dense economics textbook. Nevertheless, countless figures throughout world history and throughout time have continually turned to Adam Smith’s timeless classic to guide their journey towards wealth.

From the division of labor to make the most efficient use of it, the value of that labor self-perpetuates through the power of increased exchange. When that market has a commonly recognized standard of true money, the value of labor can be more accurately set. Surrounding markets will flourish if capital is allowed to move freely, which is a natural occurrence so long as trade is not continually restricted. If a nation can keep its government from restricting its markets from flourishing, then then the nation is well-positioned to engage in open trade that can boost its global partners just as the success of local markets can naturally spread to other localities if capital is not restricted.

At least, that is the synthesis of the lessons contained in this most awesome literary work—or as some think of it, a map to success. If you liked this short crash course in one of the most significant economics books in history, comment below or share to show you care.