Wealth of Nations

So! As previously noted on this blog, for a little while now I've been planning to tackle "The Wealth of Nations" by Adam Smith. I've grown increasingly interested in economic books over the years, and TWoN is by far the single most influential book in the field, as the book that almost single-handedly established economics as a distinct area of scholarship. My parents generously gifted me a cool old volume from the 1930s for Christmas, and I've been taking my time reading through and absorbing it. I had assumed I'd write one post after finishing it, but I've been reading for well over a month now and am just up to page 350 of a 950+ page book, so I figured I'd treat this like an epic fantasy RPG and write multiple blog posts as I proceed through it. I've finished the first two books: "Of the Causes of Improvement in the productive Powers of Labour, and of the Order according to which its Produce is naturally distributed among the different Ranks of the People" and "Of the Nature, Accumulation, and Employment of Stock." I am taking a mild risk in writing "early", as later books may change my understanding of the previous one, but that's a risk we'll all have to take!

 

Some minor technical notes first: this book's text was taken from the fifth edition but was heavily footnoted by the editor. I skipped over almost all of the footnotes, I find that they break up the flow and usually don't add much value to the discussion. But when I did read some notes, they could be interesting. In particular, the editor points out places where Smith was mis-quoting a source or misunderstanding something he had read. For example, Smith recounts a charming but apocryphal story about how a major innovation in steam engine design was created by the lazy boy who was paid to attend to the machine and rigged up a contraption so he could go goof off with his friends instead of tediously resetting a piston.

That error of Smith's is a good reminder that great authors aren't gods, and their work can be valuable without everything in them being literally true. I'm reminded a bit of China Mieville writing in A Spectre Haunting about judging authors based on what they're trying to do. To the degree we judge Smith as a historian, he's doing a good job for his era but a very poor job by modern standards. But to the degree we judge Smith as a teacher, he's fantastic, picking examples that stick in your mind to illustrate the concepts he's trying to get across, even if those examples never actually happened.

I had earlier slightly bemoaned reading all the way through his Theory of Moral Sentiment before starting on The Wealth of Nations, but I can see now where this builds on the earlier work. Where ToMS started on a biological level in the course of explaining ethics, here Smith is starting on a zoological level to explain economics. Man has an innate drive to "truck, trade and barter." If I'm good at picking apples, I'll pick a ton of apples, and then trade you a portion of my apples in exchange for a portion of the meat you get while hunting. According to Smith, this is unique among the animal species. We don't observe a dog trading a bone with another dog. And while different species of dogs have varying advantages (some dogs are fast, others are good at ferreting out rodents, others are good at guarding), dogs don't cooperate with one another to combine their distinct strengths. As in The Theory of Moral Sentiment, Smith emphasizes that man is a social animal: our strength is not in our individual bodies and minds, but in our ability to cooperate together.

The division of labor is the supercharging source of prosperity. He describes a team of people making nails, with each worker focusing on one part of the task. One man melts the metal, another draws it out, another pounds it into shape, another affixes the head. This team of four men can make many times more nails than they could if each of the four made each nail from start to finish. But being able to have this division of labor requires a critical mass of workers and materials, so in Smith's day you only tended to see prosperity in coastal towns and along navigable waterways, where large numbers of people could find and collaborate with one another. In remote inland areas, like the Scottish highlands, there are fewer people and it's harder to connect with others, so there each person needs to do many things: instead of a person being part of a team that makes nails, one person might make all the nails used for miles around, as well as all the horseshoes and repairing broken doors and building fences. In that environment, each person needs to do many things, so there's less specialization, and thus less efficiency, and thus less prosperity, as every hour of labor results in less output. 

It's interesting to see this flip side to the discussion of the alienation of labor. Smith positions specialization as a positive: you can develop a deep skill and expertise in some activity, can take pride in being particularly good at that activity, and your skill leads to a macro benefit of increasing overall productivity and prosperity for not just you but the society you are part of. But I think more modern commentators focus on how specialization separates the worker from the product. If you're one of seven people who worked on a nail, then it isn't really "your" nail. You've been reduced to one monotonous and repetitive task. There's still a macro benefit, but your hourly experience probably feels worse since your job is more dull; and much of the macro benefit will flow to the owner of the nail factory, not to you.

This discussion of wealth requires an understanding of value, and Smith's argument is that ultimately labor is the only true standard of value. He acknowledges that "labor" can be somewhat amorphous and hard to attach a specific number to. For example, an hour of work from a highly skilled professional, like a doctor who has spent a decade studying medicine, may be worth much more than a week of work that does not require any particular training. But he thinks that throughout nations and centuries labor is really what we're ultimately measuring with our money. I'm spending my time in labor to get money so I can buy goods and services that others have spent time laboring to produce.

He looks at other possible baselines for measuring value. Commodity prices, like for wheat, can vary a lot from year to year, although they vary much less from century to century. If there's a bumper crop of wheat in one year and a drought the next, the price of wheat will vary a lot. But the average real value of wheat in one century will be very close to its value in another century. On the other hand, the value of precious metals like gold and silver vary little from year to year, but can vary a lot from century to century. In the short term there's a fairly small and limited supply of precious metals and a constant demand for them; but over the long term new mines are discovered that expand the supply of metals, and sovereign states tend to debase existing coinage which drives down the real value, so over the long run the real value of precious metals consistently declines. And Smith notices that the declining value of precious metals and currency benefits existing debtholders, typically the state, in much the same way that inflation does today in the 21st century.

The first book has a long discussion on the history of money, including barter systems, mediums of exchange and measures of value (cows were often used in trade, but it's hard to make change with a cow), metals and minting official currency. Reading this reminded me that I've wanted for years to re-read The Baroque Cycle; I still remember a great scene where someone wants to make a purchase and the prospective customer and merchant spend many pages debating the provenance and value of the coinage being offered. I now think that Stephenson may have written that fictional exchange immediately after reading this passage in The Wealth of Nations. Unreliable currency, with lower gold or silver mixed in by the sovereign or the edges shaved off by citizens caused much chaos, angst and friction for even the most routine commercial transactions. 

Smith identifies three components that make up a price: labor, land, and capital. I think modern economists would consider land a form of capital, but for his era land made a lot of sense, especially since agricultural production still dominated the economy. Later in the book he spends a lot of time analyzing the role of rent: stepping a bit further back, I think in his time the owners of land tended to be the landed gentry and nobility, who he refers to as "the country Gentlemen", while the owners of capital were the merchant burghers. At the time he was writing, landowners seemed to have the upper hand over capital owners, and they would extract maximum rent. I think this is basically in line with Marx's analysis, as Smith was writing in the waning days of the aristocracy and the dawn of the bourgeoisie. 

Smith writes about the "natural price" a good might command, which I think correlates to what I learned as "pure competition" back in primary school. With many buyers and sellers, it's very hard to make a profit, so things will tend to sell for what they cost to make: the rent to the landlord, the wages to the laborer, and the minimum upkeep on capital to replenish depleted supplies and replace durable goods. On the other hand, if a market is a monopoly with only a single seller and multiple buyers, things will cost as much as the market can bear. In this scenario a large profit will be possible, although Smith thinks that will tend to favor the landlord more than the owner of capital.

It's really interesting to see Smith dive into the competition between labor and capital, which I associate with Marx but is central to Smith. I was fascinated to read Smith say that, at the time he was writing, the law forbade "combinations" among workers, but not among owners. The opposite is true today, and thank goodness! It's wild to think of a world where labor unions are illegal and price-fixing cartels are legal, but that was the reality just 150 years ago.

Smith notes that we don't tend to notice the collusion among owners to depress wages, but that is because it's so common that it's unremarkable, just a silent background to our economic activity. In contrast, combination among workers tends to be very noticeable, as they loudly demand and agitate for higher wages. As Smith explains, this is because workers are coming from more of a place of desperation: they badly need help and can't afford to wait a long time to receive it. In contrast, owners have accumulated wealth, and can patiently wait out for more favorable conditions. Owners also have the civil magistrate on their side and can wield the law to drive the workers back. So owners will always have the upper hand.

But despite that, there is a minimal floor for wages: workers need to be able to make enough to support themselves, and enough to reproduce and replenish the workforce. Smith estimates that this roughly means one wife and four kids per worker, assuming only two survive to adulthood. So owners will pay workers enough to raise a small family, but no more than that. This keeps the working class the working class: stable enough to continue existing, but not earning enough to accumulate their own capital and rise into an upper class.

Smith observes that wages can be offered above the subsistence level, but only when there is an increased demand for labor. Interestingly, this isn't based on the absolute wealth of a nation, but rather by rapid growth within the country. He observes that England is far wealthier than North America, but North American wages are substantially higher than English wages. The population of England is estimated to double in 500 years, while the population of North America is expected to double in 20-25 years. (Apologies for the odd tense, I keep going back and forth on whether to write this in Smith's present voice or my past voice.)

England has a sort of stasis in the late 1700s: it has a lot of wealth, but that wealth is held by the owners (landlords and capitalists); there is a stable labor force that is large enough to fill all the jobs required in England, but not a lot of room for new jobs to be demanded or created. In contrast, New York has much less wealth, but a rapid increase in jobs: it wants men to dig canals, to build ships, to establish new fisheries, to clear farmland, and so on. This raises the demand for labor above what the current pool of workers can provide. And goods are cheaper in North America, so wages go a longer way, and because prices are lower less profit flows to the owners. It's a really interesting use-case.

Oh - and now that I write all that, I can see that it's just another formulation of Thomas Piketty's observation that inequality will decrease in economies where the rate of growth is greater than the rate of return on invested capital, and inequality will increase when the rate of growth is less than the rate of return on capital. Again, it's amazing how much we knew about the economy 200+ years ago.

On page 73, Smith writes:

The difference between the genius of the British constitution which protects and governs North America, and that of the mercantile company which oppresses and domineers in the East Indies, cannot perhaps be better illustrated than by the different state of these countries.

North America, with cooperation and rights for citizens, has rapidly increased the standard of living. But the East Indies, with a harshly capitalist corporation maximizing profit over all other concerns, is overseeing an empire of misery, starvation, and extreme poverty. There is tons of money being made in both hemispheres, and arguably more money to be made in the East Indies with its lucrative spice trade, yet only in one hemisphere is a rising tide lifting all boats. Anyways, I deeply appreciate Smith's look at the structures and frameworks that economies operate in.

Moving back to price: there are a lot of points where Smith seems to be thinking about something fundamentally differently from how I'm used to thinking about it. This isn't to say that he's wrong, or that I've been wrong, but they're kind of opposite. As one example, when Smith looks at a price, he sees the various components that compose it: wages paid to the laborer, rent paid to the landlord, the cost of replenishing your supplies, and your profit. Sum these all together and you get the price. He observes that in, say, North America, the wage input to the price may be a good deal higher, but the profit demanded is lower, which allows the good to be sold at a price where it can compete with goods produced from other countries with lower wages. But personally, I'm accustomed to thinking of "profit" as the amount that's left over once you've collected the price and subtracted all of your inputs. Profit is the solution (an output) to the mental equation in my mind, Price - Cost = Profit. But for Smith, profit is itself an input to the price, something the investor/owner/operator demands as compensation for the use of their capital. To Smith, Cost + Profit = Price. Those two equations are mathematically identical, but imply very different levels of agency, cause and effect.

Based on other readings of mine, I'm curious if this is a change in mindset as a result of the "consumer revolution" that started in the early 1970s. As I understand it, earlier generations tended to focus on the business side of the economy (workers + owners), and consumers picked from whatever the producers produced. But particularly in the United States there has been a shift to a mindset of "the customer is always right," which has gradually but inexorably led to a monomaniacal focus on the cheapest goods and the fastest, easiest shopping. I've grown up in this consumer-oriented regime so it's all that I've known. Anyways, that might be why my mental model starts with the price (the thing the consumer pays) rather than ending with the price (the thing the producer charges).

Throughout the early part of the book, Smith uses the word "Stock" frequently, and in most cases I mentally substitute "Capital" wherever I see that word. It isn't necessarily a 1-for-1 substitution, and again, he probably thought about things in different ways than I would. This is a tangent, but this kind of makes me think of the difficulty of translating an ancient Greek text into modern English. For example, we would say that the word "πνεῦμα" (pneuma) is ambiguous, since depending on the context we might variously translate it as "breath", "spirit" or "wind". But to an ancient Greek, it wouldn't be ambiguous at all: it was a single thought in their mind, a breath/spirit/wind. They just saw the world differently from how we do. For Smith, I'm reading about "Stock," which is an English word and I'm a native English speaker, but we do think about things slightly differently across the centuries.

Tangent aside: Smith writes in the abstract about how pricing should work, in a system with perfect competition, and then about how it does work in practice in the real world. Particularly in mainland Europe, and to a lesser extent in England, the skilled trades are dominated by what he calls "corporations" and what I think we would call "guilds." He explains the system whereby the number of practitioners is carefully limited, including a system of apprentices and journeymen. After a fairly dispassionate explanation of how the system works, he argues strongly against it. He notes that the reform would hurt both the masters and their apprentices, but it would help the public to a greater degree by making their production more affordable for everyone else in the nation.

It's interesting to consider the argument against guilds alongside the more modern (post-industrial-revolution) unions. It seems like guilds and unions cause an almost identical effect of organizing and limiting workers in order to demand a higher price for their labor. Free-market economists would almost certainly agree that we should avoid unions and let anyone do any work for anyone else at whatever price they agree on. I do think unions are different: in the guild system the masters occupied a role more like self-employed small-business-owners in charge of their own destiny, while in the post-industrial economic landscape the ownership class has almost all of the power. So Smith's argument against guilds might be closer to an argument against cartels than to an argument against labor unions.

Smith doesn't use some words that are common today in economics, like "inflation". But he does talk about those topics, either using different language or just describing them without naming them. I actually kind of like that, as it really forces you to understand the concepts. He embarks on a very long discussion about the changing value in the price of wheat over multiple centuries; as he patiently unpacks the reasons for the changes, he isn't just describing inflation and deflation, but explaining why they are occurring, including the expansion of the supply of silver from the discovery of the Potosi Mines in Peru, alongside the steadily increasing wealth and productivity in England, and so on. But Smith also uses some terms, like "nominal" versus "real" money prices, which are still in use today, even though I think those are slightly more esoteric in economic discussions than "inflation" is.

Smith uses the word "Stock" a lot early on in the book without defining it. Heading into Book Two, he starts going into much more detail on what he means by "Stock". He means many different things! A "circulating stock" might be like the goods in a merchant's store: he buys them, stores them, sells them, and replenishes them, gradually making more money over time from his profit. A "fixed stock" might be a machine, which costs a large sum to create, and an ongoing price to maintain and operate, but that enables the generation of new goods much more efficiently than without such a machine. And the "money stock" is the money available for investment, and so on. Smith also introduces the word "Capital" around this time and increasingly uses that word instead; it kind of feels like he changes his mind about what terms to use midway through writing the book.

Many of the concepts and arguments in The Wealth of Nations reappear a few years later in Alexander Hamilton's reports as the first Secretary of the Treasury, and I think Hamilton generally does a better job of explaining things than Smith does. Which does make sense: Smith is explicitly writing for an audience of men concerned with business, while recognizing that the book might also be read outside of that circle. Hamilton was writing for politicians, which included some businessmen but also many farmers, lawyers, clergy and others with only a layman's grasp of economic ideas. Smith has a few good and memorable turns of phrase, and comes up with a few good analogies, like picturing the flow of money as cutting channels into the land, or as a highway that enables trade in goods but does not itself generate any goods. But I think Hamilton's analogies are better and his writing is clearer.

The book contains many references to topical concerns of the day. I'm sure I'm missing a lot, and I'm missing many nuances of the ones I do recognize, but he will periodically weigh in about particular bills Parliament is considering or has passed that support certain forms of trade, and Smith will argue that such intervention is unnecessary or counter-productive. He references recent market disasters like the South Sea bubble and the Mississippi Company bubble. He seems to be arguing against a line of thought that Britain should make an effort to grow its "carrying trade" capacity, which its wealthier rival Holland dominated. The proponents believe that the carrying trade is the source of Holland's wealth, while Smith believes the opposite, that the fact Holland has fully invested in its domestic agriculture and manufacturing means that the only place it can now place surplus capital is in international trade, and so the dominance is a result of its wealth and not its cause. So if Britain wants to compete, Smith thinks it should fully invest in its domestic capacity as well instead of chasing after the international carrying trade. I think history proved Smith to be correct. This is another of the many (though not universal) cases where he thinks markets lead towards the best solution: left alone from political interference, people will invest in the activities that grant the greatest reward, and the "invisible hand" will guide them to those activities that provide the maximum benefit to the nation as a whole.

It is amazing to see how many things repeat over the centuries. He describes the process of "redrawing"; as I understand it, it's essentially like taking out a loan to pay off a previous loan. In the late 1700s, this would usually happen by drawing on funds from Bank A in Glasgow, then before that came due drawing on funds from Bank B in London, paying back Bank A, then before the Bank B note came due drawing new funds from Bank A, etc. This could continue for quite some time, and would give the appearance of a profitable commercial activity, but was based on a nihilistic ouroboros that would inevitably lead to calamity. When one bank stopped participating, the whole house of cards would collapse. Anyways, this immediately made me think of one of the many schemes that were revealed by the Great Financial Crisis of 2008. Basically, there was one institution (I think maybe Bear Stearns or Lehman Brothers) that would continually execute electronic trades between two departments. Because the trades were continuously ping-ponging, they never "settled" and so didn't appear on the books. When the company went bankrupt, one of the servers got unplugged. Then the other party was stuck with those bad debts on its books. So where from the outside it looked like nothing at all was going on, in reality there was this enormous debt that was just suspended in midair. Anyways, this reminds me of Investing In US Financial History - almost everything that happens has happened before, each generation recreates the financial crimes of its ancestors. In my opinion, only robust and enduring regulations will save us.

One other random note: probably the hardest problem I've been having with this book isn't the language or the historical references, but with the currency. He writes very specifically, which I appreciate, but when he's rattling off shillings and pounds and guineas and farthings I have no idea what he's talking about and can't follow the math. I should probably take a detour to memorize the pre-decimilization currency regime so I can follow that very important element for the rest of the book.

I've been jotting down notes about some passages that particularly struck me, because I thought they were insightful or ridiculous or intriguing. Here they are! 

Page 11-12:

What a variety of labour too is necessary in order to produce the tools of the meanest of those workmen! To say nothing of such complicated machines as the ship of the sailor, the mill of the fuller, or even the loom of the weaver, let us consider only what a variety of labour is requisite in order to form that very simple machine, the shears with which the shepherd clips the wool. The miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal to be made use of in the smelting-house, the brick-maker, the workmen who attend the furnace, the mill-wright, the forger, the smith, must all of them join their different arts in order to produce them. Were we to examine, in the same manner, all the different parts of his dress and household furniture, the coarse linen shirt which he wears next to his skin, the shoes which cover his feet, the bed which he lies on, and all the different parts which compose it, the kitchen-grate at which he prepares his victuals, the coals which he makes use of for that purpose, dug from the bowels of the earth, and the other utensils of his kitchen, all the furniture of his table, the knives and forks, the earthen or pewter plates upon which he serves up and divides his victuals, the different hands employed in preparing his bread and his beer, the glass window which lets in the heat and the light, and keeps out the wind and the rain, with all the knowledge and art requisite for preparing that beautiful and happy invention, without which these northern parts of the world could scarce have afforded a very comfortable habitation, together with the tools of all the different workmen employed in producing these different conveniencies; if we examine, I say, all these things, and consider what a variety of labour is employed about each of them, we shall be sensible that without the assistance and cooperation of many thousands, the very meanest person in a civilized country could not be provided, even according to, what we very falsely imagine, the easy and simple manner in which he is commonly accommodated. Compared, indeed, with the more extravagant luxury of the great, his accommodation must no doubt appear extremely simple and easy; and yet it may be true, perhaps, that the accommodation of an European prince does not always so much exceed that of an industrious and frugal peasant, as the accommodation of the latter exceeds that of many an African king, the absolute master of the lives and liberties of ten thousand naked savages.

Phew! This is a really stirring and dramatic passage, that both explains a lot and gives a strong sense for why this is such an important topic. I really like how he centers the importance of cooperation and community: any single person's life is made much richer by all the other lives that have indirectly touched it. He also hammers on specialization, which recurs throughout the first book as kind of the central key in unlocking prosperity: the shepherd isn't digging coals out from the bowels of the earth or smelting ore or making glass windows. Experts are doing all of those things. And the shepherd in his turn is expertly shearing his sheep, producing a steady stream of wool far more efficiently than a miner or a glazier would be able to make.

This end of this passage also calls back to an analogy in The Theory of Moral Sentiments that I had issues with, where Smith said something like "The lowliest beggar sunning himself by the side of the road possesses that same security which kings are fighting for." I think he overstates the similarity of the rich man with the poor man, but I agree that there are conveniences in modern life that everyone benefits from regardless of their class. Smith is contrasting the poorest people in a "civilized", modern, industrial nation from the members of a "primitive" hunter-gatherer society like those in North America or certain areas of Africa. I do wonder how his time is different from ours. I feel like we are less "on a level" within a given society than was the case in his time. That difference is absolutely quantifiable in dollar terms, comparing those with billions of dollars in wealth with those who have negative wealth. But it's harder to quantify on a "conveniences" level - poor people have access to common public goods like roads, parks, and libraries, as well as free private goods like Instagram and Google. 

Page 50:

The real value of all the different component parts of price, it must be observed, is measured by the quantity of labour which they can, each of them, purchase or command.

I discussed this above, but I do like how Smith brings everything back to labor as the fundamental unit of value. 

Page 72:

In any neighborhood of Canton many hundred, it is commonly said, many thousand families have no habitation on the land, but live constantly in little fishing boats upon the rivers and canals. The subsistence which they find there is so scanty that they are eager to fish up the nastiest garbage thrown overboard from any European ship. Any carrion, the carcase of a dead dog or cat, for example, though half putrid and stinking, is welcome to them as the most wholesome food to the people of other countries. Marriage is encouraged in China, not by the profitableness of children, but by the liberty of destroying them. In all great towns several are every night exposed in the street, or drowned like puppies in the water. The performance of this horrid office is even said to be the avowed business by which some people earn their subsistence.

Yikes! Every once in a while Smith drops a casual but jaw-droppingly racist passage like that. It does kind of call into question his other research when he blithely repeats something like this. He periodically references China throughout the book; in his telling China is actually much more wealthy than any European nation, but its people are more desperate and poor. I forget if he directly draws this connection, but it may be related to his argument elsewhere that wages rise when an economy is growing and shrink when it is stagnant; because China has been so wealthy for thousands of years, its workers may be less well compensated than North American workers who occupy a rapidly growing economy.

Page 87:

Profit is so very fluctuating, that the person who carries on a particular trade cannot always tell you himself what is the average of his annual profit. It is affected, not only by every variation of price in the commodities which he deals in, but by the good or bad fortune both of his rivals and of his customers, and by a thousand other accidents to which goods when carried either by sea or by land, or even when stored in a warehouse, are liable. It varies, therefore, not only from year to year, but from day to day, and almost from hour to hour. To ascertain what is the average profit of all the different trades carried on in a great kingdom, must be much more difficult; and to judge of what it may have been formerly, or in remote periods of time, with any degree of precision, must be altogether impossible.

This matches my experience too! I kind of know what profit I made in a given year just because I had to pay tax on it, but I couldn't tell you what my "average" profit is, or what I might expect in the year to come. It's all incredibly variable for the reasons Smith describes. 

Page 107:

There are some very agreeable and beautiful talents of which the possession commands a certain sort of admiration; but of which the exercise for the sake of gain is considered, whether from reason or prejudice, as a sort of public prostitution. [...] The exorbitant rewards of players, opera-singers, opera-dancers &c. are founded upon those two principles: the rarity and beauty of the talents, and the discredit of employing them in this manner. It seems absurd at first sight that we should despise their persons, and yet reward their talents with the most profuse liberality. While we do the one, however, we must of necessity do the other.

This passage is so funny to me. I don't know why Smith thinks opera-singing is so scandalous and despicable.

Page 142:

Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favor of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters.

I think that's a really keen insight, and very applicable to today as well. Whenever Congress is considering labor laws, business ownership and management are always well-represented in lobbying. Whenever a law seems to favor workers, it is fair; but when it seems to favor owners, it may not be fair.

Page 160:

The food produced by a field of potatoes is not inferior in quantity to that produced by a field of rice, and much superior to what is produced by a field of wheat. [...] Should this root ever become in any part of Europe, like rice in some rice countries, the common and favourite vegetable food of the people, so as to occupy the same proportion of the lands in tillage which wheat and other sorts of grain for human food do at the present, the same quantity of cultivated land would maintain a much greater number of people, and the labourers being generally fed with potatoes, a greater surplus would remain after replacing all the stock and maintaining the labour employed in cultivation. [...] The common people in Scotland, who are fed with oatmeal, are in general neither so strong nor so handsome as the same rank of people in England, who are fed with wheaten bread. [...] But it seems to be otherwise with potatoes. The chairmen, porters, and coal-heavers in London, and those unfortunate women who live by prostitution, the strongest men and the most beautiful women perhaps in the British dominions, are said to be, the greater part of them, from the lowest rank of people in Ireland, who are generally fed with this root. No food can afford a more decisive proof of its nourishing quality, or of its being peculiarly suitable to the health of human constitution.

I just love this full-throated adoration of potatoes!

From page 170, while discussing the laws governing ownership of new silver mines in Peru and new tin mines in Cornwall:

In both regulations the sacred rights of private property are sacrificed to the supposed interests of public revenue.

I kind of chortled when I first read that: "the sacred rights of private property" sounds sardonic to my ears. I can imagine Smith rolling his eyes as he writes that. On further reflection, I started wondering if he was being sincere - he definitely is a very strong proponent of private property (which he contrasts with the preceding feudal system, not public ownership). Smith isn't usually very funny, but there are a couple of moments where I read him having a playful or sarcastic tone. This may or may not be one of those.

On page 238, Smith observes that the price of gold and silver has declined at the same time that the wealth of Europe has increased. While most contemporaries argue that these changes are correlated, he says that they had very different causes, which just coincidentally occurred around the same time. The decline in the price of gold and silver was driven by the discovery of massive new mines in the New World. And:

The other from the fall of the feudal system, and from the establishment of a government which afforded to industry the only encouragement which it requires, some tolerable security that it shall enjoy the fruits of its own labor. Poland, where the feudal system still continues to take place, is at this day as beggarly a country as it was before the discovery of America.

I think that first sentence is a great summary of Smith's overall (but not complete) political/economic philosophy: laissez-faire. Government should provide security (I presume from foreign invaders, domestic bandits, and local criminals), and leave business alone, which will then thrive. This ties in with Bernstein's Birth of Plenty thesis, although per Bernstein private property rights are necessary but not sufficient for prosperity.

Page 276:

That revenue, therefore, cannot consist in those metal pieces, of which the amount is so much inferior to its value, but in the power of purchasing, in the good which can successively be bought with them as they circulate from hand to hand. Money, therefore, the great wheel of circulation, the great instrument of commerce, like all other instruments of trade, though it makes a part and a very valuable part of the capital, makes no part of the revenue of the society to which is belongs; and though the metal pieces of which it is composed, in the course of their annual circulation distribute to every man the revenue which properly belongs to him, they make themselves no part of that revenue. 

That's a nice little analogy and explanation, and makes me think of Hamilton's description of money as "vibrating" as it moves throughout the economic system. Further on page 276:

Every saving, therefore, in the expence of maintaining the fixed capital, which does not diminish the productive powers of labour, must increase the fund which puts industry into motion, and consequently the annual produce of land and labour, the real revenue  of every society.

Also nodding to Bernstein here - if, say, an invention allows someone to do their work more efficiently and with less expense, they will earn more profit, which will then give them more money that they can use to expand their operations or invest in other businesses, leading to the virtuous cycle of a steadily growing economy.

Page 297:

The difficulties, accordingly, which the bank of England, which the principal bankers in London, and which even the more prudent Scotch banks began, after a certain time, and when all of them had already gone too far, to make about discounting, not only alarmed, but enraged in the highest degree those projectors. Their own distress, of which this prudent and necessary reserve of the banks was, no doubt, the immediate occasion, they called the distress of the country; and this distress of the country, they said, was altogether owing to the ignorance, pusillanimity, and bad conduct of the banks, which did not give a sufficiently liberal aid to the spiritual undertakings of those who exerted themselves in order to beautify, improve and enrich the country.

Again, Smith can be funny - I read the latter part of this with a very arch, sardonic voice. Like the use of "sacred" from page 170, the word "spiritual" feels out of place in what I think is a comedic sense. Like so much in this book, this is a reminder that nothing has changed in the last 250 years: when financial charlatans are exposed, they claim that The Fate Of The Country is at stake, and blame their woes on sound financial practices instead of their own excessive risk-taking and bad decisions.

Page 305:

The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either. The judicious operations of banking, by providing, if I may be allowed so violent a metaphor, a sort of wagon-way through the air; enable the country to convert, as it were, a great part of its highways into good pastures and cornfields, and thereby to increase very considerably the annual produce of its land and labor.

I kind of laugh at how bad that metaphor is, but I also kind of love it. He's imagining a Jetsons-style world where we can fly above the ground, which means we don't need roads on the ground, so we can use that land for growing more crops. In context, he's arguing that the paper money circulated by the banks for domestic commerce frees up metallic currency for international commerce, leading to higher overall utilization and a growing economy.

Page 308:

To restrain private people, it may be said, from receiving in payment the promissory notes of a banker, for any sum whether great or small, when they themselves are willing to receive them; or, to restrain a banker from issuing such notes, when all his neighbours are willing to accept of them, is a manifest violation of that natural liberty which is the proper business of law, not to infringe, but to support. Such regulations may, no doubt, be considered as in some respect a violation of natural liberty. But those exertions of the natural liberty of a few individuals, which might endanger the security of the whole society, are, and ought to be, restrained by the laws of all governments; of the most free, as well as of the most despotical. The obligation of building party walls, in order to prevent the communication of fire, is a violation of natural liberty, exactly of the same kind with the regulations of the banking trade which are here proposed.

Passages like that are part of what piqued my interest in reading this book. Adam Smith has a reputation as the ultimate in libertarian free-market ideology. As noted above, he does favor free markets; but in contrast to today's free-marketers, he also is a firm believer in rules that support the greater good, even when they limit the activities between willing participants. I think his analogy here is really good: it isn't perfect liberty to demand people protect their homes against fire, but it's important for society as a whole to impose its will on everyone to limit the risk caused by a few reckless individuals.

Page 318:

In the progress of improvement, rent, though it increases in proportion to the extent, diminishes in proportion to the produce of the land. [...] In the ancient state, the little trade that was stirring, and the few homely and coarse manufactures that were carried on, required but very small capitals. These, however, must have yielded very large profits. [...] Though that part of the revenue of the inhabitants which is derived from the profits of stock is always much greater in rich than in poor countries, it is because the stock is much greater; in proportion to the stock the profits are generally much less.

This is very insightful, and very true today as well, in all sorts of situations. It's possible to make a very large profit percentage-wise by investing in a small business; but there is a limit to how much investment a small business can absorb. A large business with larger revenues will generate a larger total profit, but a lower rate of profit. Looking at global investing, the developed world's GDP generally chugs around at about 2% annual growth. The developing world may experience much larger growth rates, but they have much smaller economies. Once they grow large enough to "catch up" to the first world, their growth rates inevitably slow. Piketty describes this mostly in terms of technology, but I think the size and level of capitalization plays a major factor as well.

Page 336:

As capitals increase in any country, the profits which can be made by employing them necessarily diminish. It becomes gradually more and more difficult to find within the country a profitable method of employing any new capital. There arises in consequence a competition between different capitals, the owner of one endeavoring to get possession of that employment which is occupied by another. But upon most occasions he can hope to justle that other out of this employment, by no other means but by dealing upon more reasonable terms. He must not only sell what he deals in somewhat cheaper, but in order to get it to sell, he must sometimes too buy it dearer.

Similar to the previous quotation, this describes how as the total size of investment in a country rises, the rate of return falls. This feels especially prescient here as Smith was writing before the Industrial Revolution fully kicked off. One of the defining aspects of that era was a fully-capitalized Britain that ran out of domestic projects to invest in, which led to massive British investments in the United States, paying for canals, railroads and other major undertakings. Many of those projects eventually went bankrupt, ruining the British investors but leaving America with a robust infrastructure paid for by foreigners.

Page 354:

When the capital stock of any country is increased to such a degree, that it cannot be all employed in supplying the consumption, and supporting the productive labour of that particular country, the surplus part of it naturally disgorges itself into the carrying trade, and is employed in performing the same offices to other countries. The carrying trade is the natural effect and symptom of great national wealth; but it does not seem to be the natural cause of it. Those statesmen who have been disposed to favour it with particular encouragements, seem to have mistaken the effect and symptom for the cause.

I wrote about this passage above - Smith is addressing a contemporary discussion about the government setting economic priorities, but in the course of this he is making some profound observations about the overall course of economic development. On a metaphysical level, I think it's so important to properly establish cause and effect, and Smith is really good at that, disentangling different factors and explaining when one produced the other, or when two things coincidentally happened around the same time but were unrelated. On an economic level, I really like his bottom-up, inside-out view of the economy, which makes intuitive sense and is well supported by the data he shares. 

Okay, that's it for this entry! So far I'm loving this book. The language is of course archaic, but I find the odd spellings ("cloaths", "justle" and such) to be charming. While many passages are dry, he's capable of very vivid and compelling prose. So far he's given a magisterial overview of how human beings come to trade with one another, how money facilitates those exchanges, how specialization in labor increases the overall efficiency and wealth in a community, and how banking increases the resources available to private enterprise beyond what gold and silver currency can support. He's also given a great overview of stock/capital, the different forms it can take and the jobs it can accomplish. There is a slightly-askew, out-of-time sheen to some of his writing, as I'm peering 250 years into the past to try and understand if he's saying some things slightly differently from how I would, or if he's accurately describing a world that's different from the one I inhabit. In any case, this has been one of my favorite economic books I've read, and I'm eager to continue through it!