Adam Smith's "The Wealth of Nations" (Part 2/4)

Hey hey everyone, back again to discuss or to continue discussing Adam Smith's The Wealth of Nations, and this episode is going to cover Book 2 and Book 3. So if you're jumping into this for the first time, just know I've covered Book 1 in the previous episode, so go and listen to that first.

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Here let's continue on the wealth of nations with book number two, titled On the Nature, Accumulation, and Employment of Stock. Now stock here, by stock he's referring to the wealth in terms of capital, materials, labor, you know, tools, machinery, whatever. And this is the primary focus of this book. So before the introduction of the division of labor, in a society that was based on subsistence, there was little desire to actually accrue stock, or to accrue certain supply, or your stockpile, because all you were trying to do was provide for yourself and probably your family. And then with the introduction of the division of labor, suddenly people became dependent not only upon themselves or the people immediately around them, but upon a whole host of other people, because their needs were suddenly being met in the market, which meant that they were dependent upon not only the person or people making a product, but also the people transporting the product, the people selling the product, and so on. So now there's a whole lot more people involved in supplying for others.

But here we have another chicken and egg situation again, in which stock was essentially required to form the division of labor, but then again it seems to be that it's necessary for there to be a division of labor for the formation of stock to occur at all. But in any case, he doesn't really answer this or solve this problem. He says that in any case, the quantity of stock is going to determine how widespread the division of labor will be, and just how powerful and prominent it will be. Where if you have more stock, you're going to be able to employ more people to do these kinds of jobs, you're going to be able to draw upon more resources that are going to make the division of labor that much more effective and productive.

So stock can be broken into two broad groups. So there is that which will produce revenue, which is capital, and then there's that which is for personal use. So there's capital in terms of stock, and then there's just what you're just immediately going to use for yourself. Now what you're going to immediately use for yourself, maybe not immediately, but over the course of time, you're going to use for yourself can be further broken into three categories. So in terms of stock that you're using for yourself, there can either be that which you intend to immediately use, like if you buy a, I don't know, buy a burger, you're going to use it or if you buy paint and you're using it to paint your house, it's just something you're just using for yourself.

There's also that stock can take the form of revenue that you're going to use to then buy something for yourself. That is, this is revenue that you're not going to be putting into your business or into your wages or into anything else that is going to earn you more capital. It's just something you're going to use to spend on paint or draperies or, you know, a new comforter or whatever. And then there is stock that you already have, like chairs, your house, furniture, things that are going to wear out with time that you're using that aren't bringing you more revenue in the long run.

Now capital is that which is being, can be spent back, is being put back into yourself in terms of, you know, uh, the machinery you own or the wages you're spending that will make you more money at the end of the day that is going to be used for production. And that can be broken into two possible forms. There's either fixed capital or circulating capital.

Now fixed capital is the capital that is in the form of like machinery that isn't going anywhere. That you've bought and because you, and now that you own it, it's something that's going to continue making you revenue. It's going to continue generating profit for you. Now by contrast, there is circulating capital and that's capital that you're going to always have to be spending or spending on like labor that you won't have forever. That is going to go away, uh, depending on who's going to pay it more. And so you have these two, they aren't competing, but you have these two forms of capital that people can make profit from.

So in some industries there might be a heavier emphasis placed on fixed capital versus circulating capital like fixed capital is more prominent within manufacturing than within like trading. So some merchants are just going to buy something from someone else with their circulating capital, with their cash. They're going to buy an apple from someone else for a dollar and then they're going to sell it themselves for $1.25 or whatever. So they're making money not with any fixed capital with something that's constantly going to be earning money for them that they own, but just by the distribution and the circulation of capital itself.

Now these types of revenue extend beyond just individuals to, uh, they extend beyond to society at large. So there's within society, there's going to be a general stock for consumption that doesn't generate revenue. There's going to be fixed capital stock like machinery that yields revenue. And then there's going to be circulating capital like money or goods sold for revenue. And these are the kind of three broad forms that stock can, can assume it's going to generate or not generate revenue.

And so although there might be more of an emphasis on fixed capital in some domains like manufacturing, for example, they are dependent upon one another to some extent. That is, you can't actually make profit unless there's such a thing as circulating capital, capital that can be acquired through trading, right? So you can't actually sell anything from what your fixed capital gives you unless there was circulating capital that you could sell it for.

So over the course of time, the amount of money that someone makes because of fixed capital in the form of like machinery, for example, might actually go up, but that doesn't actually say anything about the real value of what it's yielding because as the nominal value of the money you're actually getting goes up, so too might be the cost of other things. And so it might not actually mean that your value is, has gone up. And likewise, the value of the actual money is going to be determined by the cost that it requires to actually bring that money to market, like to actually ship gold from other parts of the world or from mines or whatever, to bring it to market is also going to have an effect on what you can buy or how much gold is going to be paid for, whatever it is you're producing.

Now this kind of changed with the introduction of paper money because that was much easier to produce, much easier to transport. Now the emergence of paper money, I think, can be explained as follows, where some people saw it necessary to kind of contain and to protect gold. And so there are these institutions erected that assume the form of early banks that served as places that held gold for you, held your gold, and they would give you a kind of paper IOU or like a sign of how much gold you had in the bank that they could then, they could give to you and then you could exchange for other things. So that gold determined the value of that paper money, it was directly attached one to the other.

But with paper money, chances are it's only going to be recognized by the nation that issued it, that created it. So this was obviously before the time of any kind of conversion of paper money. So let's say, for example, if you had a given nation, let's say, you know, England, just for fun. Let's say England, if you accounted for the price of all the labor, all the materials, all the commodities and everything, let's say that that amounted to a million dollars at the time, just for the sake of argument, amounted to a million dollars in gold, the value of gold.

Now if you were to issue out 500,000 worth of paper money, you'd be confronted with pretty bad inflation because there'd be a lot more value going around than there is actually prices or actual things to buy. So the value of everything, the value of money would go down quite, quite greatly. And because other countries don't recognize paper money, the way to get around that would be to start sending out gold and silver, you know, in your stockpiles to these other countries that recognize gold and silver as valuable to them as well.

And so it is necessary to regulate how much paper money is actually going to be introduced into the economy, because otherwise it'll lead to pretty heavy inflation, and if it exceeds the actual amount of gold and silver in stockpile and reserve, then that'll mean that it is based, predicated upon nothing.

Now this is obviously an outdated idea, because value still circulates today even though we've dropped the gold standard, it's, you know, money is hardly based on anything tangible, and yet value still circulates and so on. We know what's going on. But he still maintains that this must be regulated so that the value of paper money, so that the occurrence of paper money does not exceed that of the occurrence of gold and silver.

So likewise, he sees possible issues with banks, right, that are willing to just give out money based off of nothing, to just open up a bank and say, oh, I'm going to give out these loans, you're going to pay me back 10% interest and no questions asked. What that'll do is just increase the supply of paper money without it having any connection to the gold around, which is just going to lead to inflation.

And what should happen then, in a perfectly running system, is that the amount lent out in the form of paper money should never exceed however much they have in the form of gold. And if it ever did, then it would immediately, because of inflation, it would immediately just find its way back to the bank. The paper money would find its way back to the bank, which is a funny idea, Adam Smith, like, yeah, at the time, I guess, but that is certainly not the case today, where capital can be hoarded, sent to overseas banks, where it can just gain interest for doing absolutely nothing, nothing productive, and it just, yeah, there's no value there. Or, well, there is value, but it's not producing anything. But Adam Smith very much sees the value of credit and of loaning money.

So for example, let's say you were a capitalist and you had, you know, however much money put into your business, you'd probably keep a little bit of money on the side in case of, like, an accident, in case of, like, a crisis in stock or whatever. Now with the introduction of the possibility to give out credit, to lend out money, what that allowed for is to give people a sense of ease, where suddenly they could say, like, okay, I can spend all the money I have, and if I run into a jam, then I can just borrow it. And they would just hope that wouldn't happen, and it probably wouldn't. So now there could be more money put safely and securely into production, into the market, which can then generate more revenue, can allow for more expansion, and so on.

But again, that has to be tempered so that there aren't too many loans given out, because if a country is predicated too much upon paper money, it'll be more likely to collapse, for everything to come crumbling down, because it needs to be tethered to something real and tangible. And so there has to be some kind of regulations put in place to not allow that to happen, even though he maintains that it'll be in their interest not to have that happen, because it will be deleterious to everyone involved, like, it'll have pretty negative effects.

And he says that any kind of regulations that inhibit lending, that tell people you cannot lend what you own, is a slight against what he calls natural liberty, which goes back to that idea about virtue that I kind of briefly presented in the first episode. So there should ultimately be fewer and fewer regulations for Smith, even though he recognizes that there must be some kind of oversight, just in case. Because ultimately, for him, if you have a system that is really a free market system, then so many different people are going to have a stake in it, whereas previously, it was just the world of kings and priests and whatever, if there was a collapse, it could just be brought about by one person.

Now, if there's an actual form of competition between banks, no one bank can get big enough to tear down the whole system. Which is funny, because that's exactly what happened in 2008. But in any case, he's saying that because there would be such competition, no one bank would have enough power, have enough supply to actually bring down the entire market. And so there would be all these kind of natural forming safeguards, just by virtue of competition.

And now from here, he considers more closely the roles or the distinction between productive and unproductive labor that I just kind of mentioned briefly in the last episode. And to reiterate, productive labor refers to labor that produces things, whereas unproductive labor doesn't produce things like, for example, a priest or an army person or whatever, who don't actually produce anything with what they do.

Now the only way that it is possible to have unproductive labor and have them actually earn money, like to have teachers or physicians or priests or army people to earn money, is if there is productive labor occurring. Otherwise there wouldn't be actual revenue, money, to pay people with to do unproductive labor.

So firstly, in any nation, he says that productive labor must be covered. Productive labor must be covered with the profits, with the revenue that is made from that productive labor. And then it is only with the extra that suddenly that money can be spent on unproductive labor, for people to do things other than producing things to participate in the growth of the economic wealth, of the economic commonwealth.

So that which is spent for him on productive labor is what he calls capital, because it's going back into the system of production for the sake of growing production, of growing the economy, whereas money that is spent on unproductive labor is just revenue, where the former is good for industry, that is, capital is good for industry, and the latter is good for what he calls idleness. And it's pretty clear where his preferences are, that is, this emphasis strictly on production, which is, I guess, good, but at the same time it's pretty problematic that he's just reducing all these other forms of labor as not real, or being lesser than. But in any case, that's what we have here. So the more money that's spent on production will ultimately be better for society at large, because that is what is going to increase the actual well-being of people in an economic sense than the amount spent on unproductive labor.

So this money that is spent, that is capital, that is spent on productive labor can be spent in four ways. Either by procuring or acquiring root produce annually required by society, or by being spent on manufacturing and preparing that produce, or three, by transporting that produce, and four, by dividing up and distributing that produce. And all four of these are essentially what occur in the present economy, or in the contemporary economy that he was writing in.

Now between agricultural production and manufacturing and trade, agricultural production puts the most labor into action. So it puts into action the labor of animals and humans and nature, whereas manufacturing is just a kind of human creation that depends upon certain human conditions like towns or cities in which manufacturing occurs. And then by contrast, something like trade puts the least amount of labor into action. So you have agricultural production, manufacturing, and then trade, where manufacturing puts somewhere in between the two, into production or into action. And then trade can be further subdivided into three possible forms. There's either home trade, so trade within your own country, or sorry, things that are produced in your country that are sold to another country. There's foreign trade, which is the purchasing of foreign goods for home consumption. And third, there's carrying trade, which is transacting the commerce of foreign countries.

So of these three, the first is best for a country's annual produce, because the first is what comes from selling, or it is the act of selling your produce, your products, your commodities, to another country, which increases the supply of monetary wealth in your country, because you're obviously getting paid for it, which can then be, if put back into the system as capital, can then work to expand and grow the country's economy. And foreign trade should almost only occur, though, when the needs have been met in the country itself, when the real cost of labor has been met, that is, when people have enough to eat, and they can actually labor, not just in the dollar value that they're given, because that might not be enough, because the dollar value means actually nothing. The question is, does it actually cost the cost of the price of living and the price of food?

And that puts us here into the third book, as I said, these two are pretty short here. So that puts us into the third book, titled Of the Different Progress of Opulence in Different Nations. So a healthy country, in terms of its economy, is going to have a very cooperative relationship between its country, its countryside, you know, in like the farmlands, and in its towns. So between the town and the country is going to be a very strong relationship, where the rural areas generally will come first, but he's going to turn that over on its head in a moment, because the rural areas are often credited with supplying food for the towns, where you have food shipped in from the countryside to feed people in the towns.

But in order for that to happen, it depends first upon the farmer's kind of willingness to expand, because if the farmer is making enough for themselves and their family and maybe their small little community, why would they think about sending more of it to make a profit somewhere else if their needs are already being met? Well, of course, they must have a kind of predilection for, a taste for, this possibility of making profit. Now it is a certain kind of person that is equipped for that, and there is a historical condition that he lays out for this, that he credits this with. And he attributes this, at least in one part of Europe, in England, I think, or in kind of, you know, Western Europe, he attributes this to the Burghers, which were a group of people that started to gain autonomy from the power of feudal lords and stuff within various cities, and because they gained this kind of economic autonomy, they were able to accrue their own capital and wealth.

And they saw lucrative business opportunities by cultivating land outside of the cities. So they would go and cultivate land, which they knew they could earn profit from, and they knew profit was good for them living in the city, you know, in the hustle and bustle of the city, as opposed to a country person who just wanted to supply for themselves, their family, maybe their small community. So now there was this new incentive introduced to expand and to cultivate new land, which meant that there's a kind of reversal here in how we're viewing this progress, or this progression for Smith, where it seems like the town and the value and the kind of wealth that came out of the town encouraged the cultivation of the land.

So the lords at the time, who still held a lot of power, especially in the countryside, didn't really like the burghers who were suddenly encroaching upon their power with their own capital that they've gotten from the towns that, you know, has come about through trade and stuff. Now if you're listening, if you have been listening, you'd probably say, well, how did they actually gain that capital if they had nothing to eat? They must have had to get stuff from the countryside first. Well, it comes down to geography to some extent, where Smith says that for the most part cities are on rivers, and they're able to actually provide for themselves their own subsistence by drawing upon that river, by using the river as a means of transport, of trading food and stuff, and supplying for themselves then.

So it seems like the expansion of the town came before, in part, the cultivation or the wholesale cultivation of the countryside. Now the lords didn't like this because this was encroaching upon their power, encroaching upon their land, but the king at the time wasn't a huge fan of the lords who were trying to form their own kind of like bureaucracy to some extent, and the king was on the side of these burghers, people who could then challenge the authority of the lords by accruing their own capital.

So the towns encouraged more agriculture in the country in three ways, because they opened markets to sell produce, the people in the cities became richer and sought investments like cultivating land, and thirdly, towns introduced order and good government. Because they were more autonomous people, more people free from bondage, they could then therefore form their own governments that were not predicated upon the same kind of feudalism, archaic feudalism that was infringing upon their rights as humans.

This is certainly something that Karl Marx picks up on as well when he identifies that capitalism is by and large necessary to move people away from the traditions of the past into newness, to increase the stock of possible wealth for people, to increase knowledge, to increase literacy.

All of these things did happen with the introduction of capitalism, and this is something that like I said Marx picked up on, but Smith does play this up quite a bit more than I think he needs to, but in any case. So there should still be this steady balance between agriculture and just commerce and manufacturing and trade, because agriculture is quite steady. It's something that the entire country can benefit from, and it supplies a constant supply of products that can then be traded. And so if a country moves away from, you know, doing this work in terms of production on its land, if it stops cultivating its own land, then it will run the risk of running into not chaos, but crisis, because it won't have anything to fall back on in a time of let's say hyperinflation or anything like that.

And that more or less covers book three here, and this is only about half of the entire Wealth of Nations. Next time I'm going to cover book number four, and then book number five, but yeah if you listened this far, I'm happy about that. If there's anything I omitted that you think I should have included, I'd love to hear about it. If you like what I did, like, share, subscribe, tell your friends, who knows they might get a kick out of it, leave five stars, a review on Apple Podcasts, and yeah, catch you next time.