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Wealth of Nations by Adam Smith

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A Foundational Treatise on Economics
1 review about Wealth of Nations by Adam Smith

A Foundational Treatise on Economic Thought

  • Mar 17, 2011
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The Wealth of Nations by Adam Smith, October 27, 2003 (Amazon)
By     Joseph S. Maresca "Dr. Joseph S. Maresca CPA,...  New York USA

Adam Smith is considered a founding father of economic theory.
In the Wealth of Nations, he laid a foundation for the free market while
at the same time explaining some of the problems encountered by workers.
He explained that all work had to be
highly organized in order to be productive. In addition, he
recognized that machinery facilitated work. This notion serves
as an important foundation for more modern patent practice.
He praised the ingenuity of inventors and makers of new

The author spoke of increased production as a
condition precedent to enhancing the power of labor. From this
precept, he explained that the size of a market would dictate
the division of its constituent labor. For instance, a small
community in the suburbs might be serviced by a local
"General Store"; whereas, a county in a large city would be
serviced by a retail chain store with hundreds of employees
and a highly sophisticated management structure. 

In Adam Smith's time, metals were popular in the manufacture of commodities.
Problems were encountered in weighing the metals and arriving
at a uniform system of metrics. The theory of pricing was
a function of the toil needed to purchase a good. For instance,
the price of an auto was a function of the many hours of labor
necessary to earn the money to buy the car. In addition, the price of an
item was related to its constituent parts.

For instance, the price of linen was a function of the labor
of the flaxdresser, spinner, weaver, bleacher and overall
employer. The natural price varied with the price of component
parts. For instance, if the semiconductor was reduced significantly in price-
then the overall price of an electronic
appliance would go down. Adam Smith saw labor as a function
of national wealth. He recognized that laborers had to earn
more than a mere subsistence in order to live dignified lives.
He told a story of a mother in the Highlands of Scotland who
had to raise 20 children so that 2 would survive. Presumably,
18 children would die from various diseases and poverty.
The interest rates at the time were low. In England, rates
hovered at 5%. In France, the rates were 3-5% . The government
could borrow at 2% in Holland.

Adam Smith defined a wage as a function of the following:
o the ease or hardship to do work

Consider the case of a diamond cutter. The art of cutting a
diamond is a precise process which requires extensive training
and expert worksmanship. The demand for precious stones was a
function of their inherent beauty, scarcity and workmanship
involved in polishing them and preparing them for commercial use.

o the difficulty and expense of learning a trade

A skilled surgeon required years of medical training and a
long apprenticeship in anatomy and surgery.

o the constancy of employment
o the trust reposed in the workpeople
Consider the case of a landowner who took a year-long vacation
to the Orient. He/she would leave behind a manager to run the
entire business on a 24/7 basis. This high degree of trust
reposed in the workperson required a commensurate compensation.

o probability of success or failure of the venture
Consider the effort required to cross the Atlantic. The trip
was lengthy, dangerous and prone to failure due to the vagaries
of nature, pirating on the high seas and disease. Naturally,
a worker had to receive a greater compensation to take these
factors into consideration.

o the danger inherent in doing the work
Consider the danger inherent in entering a diamond mine.
The possibility of collapse was a constant threat. Accordingly,
workers were compensated commensurate with the threat level.

Adam Smith explained that fear of misfortune dampened the taking
of risks. He knew (intuitively) that investors were risk averse.
In addition, there was a restriction on training new labor.
In Sheffield, no master cutter could train more than a single
cutter . Apprenticeships were lengthy. i.e. 7 years in length

Adam Smith explained that food was a source of rent to the
landowners. The pricing of metals was a function of the price
in the most fertile mine in the world. Whatever increased the
fertility of the land increased its value by implication.
Markets in foodstuffs were restricted because refrigeration
did not exist until motors and condensers were perfected.
Essentially, there were no operable refrigerators until the
famous Clausius statement was perfected in the engineering

Accordingly, the market for butcher's meat was confined to the
country of origin. Wool and raw hide could be transported;
however, meat was consumed locally as its shelf-life was limited.
The value of money was a function of the value of annual produce.
Accordingly, increased quantities of commodities raised the
value of money. Low fixed rates of interest promoted business
and discouraged usury. Riches were a function of the annual
produce which created the wealth and supported the tax base.
High duties were enforced to protect the local markets. Treaties
between countries helped local merchants to craft meaningful
trade sequences. Exports were encouraged .

The expense of erecting public works was a function of the
taxes raised on the land and the proportion of yield from the crops.
Governments granted bounties to merchants who wanted to sell
overseas in order to assist them in making a profit and
defraying costs/risks. This work is a classic in theoretical
and practical economics.
A Foundational Treatise on Economic Thought

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