Adam Smith's Wealth of Nations: Introduction and Book I

Adam Smith's "The Wealth of Nations" developed from decades of lectures on jurisprudence, examining how market exchange creates prosperity through division of labor and specialized skills.

• Two core observations drive Smith's thinking: humans seek approval from others and have a propensity to "truck, barter and exchange"
• Exchange is Smith's key concept—not just for goods but for ideas, sentiments and social coordination
• Division of labor dramatically increases productivity through specialization, increased dexterity, and tool development
• Smith's famous pin factory example shows how 18 specialized workers produce thousands of times more than individuals working separately
• The extent of the market limits division of labor—larger markets allow greater specialization
• Smith argues that differences between philosophers and street porters arise from "habit, custom, and education" not innate capacity
• While profit is legitimate, Smith criticizes how powerful interests manipulate government to restrict competition
• Justice (respecting person, property, and promises) forms the essential foundation for any functioning commercial society
• Smith's work intended as a handbook for lawmakers, not ideological advocacy
• The Wealth of Nations represents applied moral philosophy addressing how societies become prosperous

Join us next time when we'll examine Book Two of Smith's masterpiece.

If you have questions or comments, or want to suggest a future topic, email the show at taitc.email@gmail.com !

You can follow Mike Munger on Twitter at @mungowitz

Chapters

• 0:00 Introduction to Wealth of Nations
• 15:04 Smith's Foundation: Exchange and Human Nature
• 32:23 The Division of Labor and Pin Factory
• 45:52 The Role of Markets and Money
• 1:01:37 Labor, Capital, and Profit
• 1:14:22 Smith's Critique of Market Restrictions

Transcript

The Wealth of Nations. An overview and covering the introduction in Book one. This is Mike Munger, the Knower of Important Things from Duke University. This week I'm doing the third of a series of special podcast episodes considering the Scottish Enlightenment, Adam Smith, and the Wealth of Nations. The previous two episodes have covered the lead up to the Scottish Enlightenment and the scientific approach or model that Smith uses. The addition that I'll be working from and the one you should have is the 1982 reprint edited by Campbell and Skinner you can get from Liberty Fund. I want to acknowledge again the support and help of Liberty Fund, especially from Amy Willis of AdamSmithWorks where these podcasts will also be released simultaneously. There will also be extended show notes and academic and pedagogical resources. For those of you who want to use these podcasts as an aid in teaching Adam Smith in your classes, I am obliged to acknowledge that I have a particular view of Adam Smith and his life's project and that view is far from universally held.

I've developed that view by listening to and reading a number of people who know a lot more than I do, including Christopher Berry, Daniel Klein, Nicholas Phillipson, James Otteson, Maria Pia Paganelli, Russ Roberts, Craig Smith, as well as quite a few others. If the outline and discussion I give here is correct, it's a credit to those mentors. If I get something wrong, it's entirely my own fault. A note on listening- these next six episodes will be looking at specific parts of the Wealth of Nations and I'll give page numbers to the Liberty Fund edition so you can follow along if you want. I'll try to give page numbers anytime I give a direct quote. Straight out of Creedmore. This is TAITC Special, Adam Smith: Wealth of Nations, episode three. Let's start with some background on the book. Smith began to give public lectures in the late 1740s.

His interests and ambition are frankly breathtaking in retrospect, perhaps unrealistically broad. He's working at that time on an enormously wide scale, lecturing on rhetoric, particularly on the theory of language, and that work alone is quite a bit more interesting and unique than I think he's given credit for. But then we don't really have the work because it was not published. He was lecturing on jurisprudence, a fashionable subject in Edinburgh, which was a city where people were very interested in legal education, but to be fair, jurisprudence at that time had a broader meaning in the Lectures on Jurisprudence, which is also available in a Glasgow edition edited by Meek, Raphael, and Stein from Liberty Fund. We're told, and this is the first paragraph of the Lectures on Jurisprudence, Smith's definition is jurisprudence, is that science which inquires into the nature of laws, the different kinds of laws and the reasons upon which they are founded.

Smith was constructing something that David Hume called an Experimental Science of Man, a study of the principles of human nature as they are formed in us by living in civil society. This is a Newtonian, in a way, anti-rationalist method because it's based first on observation. It is however built up from two aspects of human nature. Now, these are not assumptions, they're observations. Those two aspects of human nature, which it is claimed were obvious from observing was first human beings have a concern for propriety and approval and that a system of propriety develops out of that because our concern for approval means that we look for the approval of others and eventually we even act in ways that would get approval because we ourselves in the form of the impartial spectator are acting on behalf of the rest of society. So we're looking for approval even from ourselves, from our own conscience.

Second aspect is a propensity to truck, barter and exchange, and that is the key to the wealth of nations. But the reason that this is the third episode, even though the podcast series is supposed to be about the Wealth of Nations, is that you can't understand the Wealth of Nations without understanding the first assumption about propriety. And really that's going to come down to justice and we'll come back to that soon. I should note though that Wealth of Nations should not primarily be thought of as economics. It's more like sociology or anthropology. People live in civil and commercial society learning to cooperate and we'll come back to this soon exchange and communicate using the powers of language. All of those kinds of social interaction is what Smith is looking at in the Wealth of Nations. He wanted to study what happens in different types of civilizations and his interest in what we would now call political economy began to take shape in the process of lecturing on jurisprudence, which is the study of different kinds of laws and the reasons for them and how it is that human beings in ordinary living in particular societies and civilization begin to acquire a sense of justice.

(00:05:23)

One of Smith's major propositions is that we can't function in civil society unless there is an idea of justice and that's lying in the background. We have feelings about justice. Remember, justice is a negative virtue. The abstaining from what is another's. What is another's? Well, there are three things. They're person, they're property, and things that they are promised or promises that they have made. When people are wronged or treated unfairly, those who have done those wrong or unfair actions should be punished. A sentiment of justice and injustice is essential to our ability to survive in any society known to history for Smith. Now what that means is that I react positively in approval for things that are just for actions that are just, I disapprove and I become angry or upset if I see someone behave unjustly. Where do we get this from? For Smith, it's deeply influenced by the way that we own or don't own property, but it's also influenced by the laws of justice and the way that those are administered by any form of government.

If we feel that government has fallen into the hands of tyrants or people that are just incompetent, if we think that our governors are incapable of defending justice, our own interests are then threatened. Even if the threat is not immediate, if we see someone else treated unfairly, our own sense of justice is going to be offended. The more immediate territory where Smith starts to ask what we would now call economic questions start out in lectures on jurisprudence, the first 10 or 12 pages, and these questions are big. What are the important functions of government? How can these functions be administered fairly? The perceptions that the rules themselves are fair and that they're uniformly enforced are both required to rule over a stable, relatively contented form of society. A big part of that package of administration and jurisprudence must address prices and I mean all prices, wages, rents, commodity service, transport, food Smith thus set off to create an integrated system where the central problem of jurisprudence, the rules are fair and the rules are fairly enforced, can be answered.

So prices have more to do with how we distribute the goods and services that everyone in society needs, not so much what we would now call economics. So many of the topics and lectures that eventually made up the Wealth of Nations actually preceded the writing of Theory of Moral Sentiments. Smith was working on this beginning in the 1740s. From the beginning, Smith was interested in talking about the fair price of commodities, the fairness of administering the delivery of commodities. So that's where he comes through with his first insights into the fact if the government administers those laws, and this is important, we will be more content, we will be happier, the system will work better if we as individuals are afforded a greater scope of choice and action to be able to look after our own interests unencumbered by artificial rules, regulations and so forth.

Now, this is very [Friedrich] Hayek yet, because there's the local knowledge problem and Smith talks about this pretty explicitly. Dan Klein does a good job of highlighting points where this happens, but if you read with an eye towards looking at the local knowledge problem, it's pretty clear that the reason that individuals need substantial scope to be able to make their own choices is that they know more about what choices will make them happy and frankly what choices are even really available than government officials do. And Smith is very skeptical of concentrations of power. He thinks that government officials or for that matter commercial actors are unlikely to have an incentive to care primarily about what people want. They will try to act on their own behalf. So we have both the problem of incentives and knowledge that run through this from the very beginning. As I said, there's one key concept in all of Smith's work that integrates all of the various parts when it comes to understanding the wealth of nations, and that's exchange.

(00:10:04)

Now let me explain because that may not be obvious. The notion of a market and the coordinating actions of a market are the basis of his thinking about how we should start to address problems of jurisprudence. He doesn't think about writing about economics or government separately. That distinction would make no sense to him. Now, this was picked up on by James Otteson in his excellent book, Adam Smith's Marketplace of Life. Our equating markets with economics, which is separate from policy, is anachronistic in the sense that we're reading something into Smith that just isn't there. In Smith's view, I think he would just say that it's wrong, but in any case, that's not how Smith thought. What Otteson notes is that the reason to think of the process of propriety and self-governance as things that people develop is exchange. The key concept is exchange, which is a very old word.

Exchange means to change or modify by going out. Someone who exchanges is going outside of themselves and looking to others. The people you exchange with are all doing the same. Smith's notion of exchange is extremely encompassing. It comprises goods, food, ideas about manners, politics, science sentiments. In the second episode, we talked about sympathy in the sense of synchronizing or exchanging pathos or feelings and attitudes. Notice how powerful the coordinating and conflict reconciliation functions of exchange really are. In an exchange, a person must make an offer or they can decide not to make an offer and then at least one other person can decide whether to accept or not to accept that offer. It's up to them. So I go to a movie, I love it, I talk to a friend, they see the same movie, they hated it. Each of us offers to exchange or synchronize our sentiments, but that offer's turned down.

Each of us is likely to moderate our views as if we were negotiating. I think that perhaps I miss something. The movie wasn't that great if my friend whom I trust didn't like it. My friend wonders if perhaps there are aspects of the movie she had not really thought about If I whom she trusts liked the movie. So remember, Smith's two core axioms are we wish to synchronize pathos or sympathy sentiments, especially sentiments about our own actions and those actions of people around us. And second, we wish to truck barter and exchange partly to improve our status and station, but also because we like to gossip, discuss things and exchange ideas to improve our understanding of the world and reduce that annoying sense of wonder and confusion that comes from failing to understand. Smith's thinking about government justice, fairness, and commerce in the 1740s and early 1750s led to an unimaginably wide project.

How is it that we become the people we are and how are societies formed? These questions are connected. We become the people we are in part because of the influence of society. And we talked last time about the parable of Smith suggests someone who is raised on an island by themselves would have no idea if they were handsome or ugly and they would have no idea how people would react to their actions because they would have no sense of manners. In both cases. There was no mirror to be held up in one case. I didn't have a mirror to look at his physical face and would've no judgment about what was ugly or handsome anyway, because had nothing to compare himself to. But also the mirror that society raises about what is moral and what is immoral based on approval and disapproval would never have formed any sense of propriety.

In this island person, society is formed as the aggregate, the equilibrium of all the actions and attitudes of the people it comprises. So that's Smith's point of entry. He's thinking about all these things in his late twenties in Edinburgh. What he does after 1752, after he becomes a professor of moral philosophy at Glasgow, is he starts working on that problem alongside considering the problems of socialization, which is what he develops in Theory of Moral Sentiments. The problem is then how is it that society is formed and how is it that society judges our actions, and that's the central work in Theory of Moral Sentiments. The surprising thing is that much of what Smith had worked on before was much more about commercial society and the problem of jurisprudence. What are the good policies that produce a healthy and successful commercial society? So he's worked on the backbone of his two great books simultaneously and as Nicholas Phillipson says, Smith for reasons best known to himself decided to complete the work on the theory of moral sentiments, the theory of socialization and the ethical implications of that before he sat down and worked on the questions try to understand the dynamics of commercial society.

(00:15:28)

But the point of all this is that Smith had worked on problems of commerce first in his lectures. The idea that he worked on morals first and then turned to commerce as if these were different subject is simply incorrect. It's a mistake to think that he saw commerce, markets, or economics as a separable domain. For Smith commerce is organically connected with the society in which people are acting, and we talked last time about three different categories- moral community, moral order, and moral anarchy. In a moral community, markets function well, but not at scale because all of our connections are personal. I'm actually looking to your personal approval or disapproval. In a moral order, where we have impersonal exchange, it may be a little more difficult because we have to rely on market institutions rather than on personal connections. The advantage of the moral order is that as long as we are all committed to justice, we don't have to be committed to benevolence.

We all have to be committed to justice. As long as we have justice, far greater output and opulence is possible because a market order can operate at very large scale and take advantage of division of labor. No market system, no organized commerce though can long survive in a system of moral anarchy. The third category, because government is no longer maintaining justice or the protection of property, person, and promise, the failure to maintain justice always ensures the failure of commercial society. And so for that reason, commercial societies can only be successful if the government is able to maintain justice. You can't put commercial society on top of a corrupt and unjust government. Commercial society cannot work in that setting. Again, the crucial notion here is exchange. If we look at the Lectures on Jurisprudence to see how Smith prefaces his discussion of political economy, the questions he's asking are why are we different from the animals?

The most indigent of species? So in order to survive we have to cooperate. In order to cooperate, we had to invent language and that is the origin of exchange. Cooperation with the use of language is a discussion, and so exchange when it is discussed in Theory of Moral Sentiments is about trading. We trade sentiments with each other. We're looking for a of psychological deal. It's nice to have a discussion with people and to feel that what we're saying is regarded with sympathy. We're negotiating. We relish the process of trading our ideas. It's what happens in any tutorial at a university or at least a British university, was what Smith was used to. Any conversation that we have in a park, it's a kind of negotiation or exchange of ideas. So the process that he's describing in Theory of Moral Sentiments, and the process that regulates our social lives is exactly the same process he's discussing when we trade our goods and services.

He's saying we spend all of our lives trying to persuade people. Well, persuade is a kind of exchange. That's why rhetoric matters. What we're doing when we're exchanging is using our most persuasive arts in actual exchange or in an exchange of ideas. We're trying to exercise exchange. In the Lectures on Jurisprudence, section two, part two, Smith says,

If a person asserts anything about the moon, though it should not be true, he will feel a kind of uneasiness in being contradicted and we'll be very glad if the person he's endeavoring to persuade should be of the same way of thinking with himself. We ought then mainly to cultivate the power of persuasion and indeed we do so without intending it since the whole life is spent in the exercise of it. A ready method of bargaining with each other must undoubtedly be attained as was before observed.

No animal can do this, but by gaining the favor of those whom they would persuade. Indeed, sometimes animals seem to act in concert, but there is never anything like a bargain among them monkeys, when they rob a garden through the fruit from one to another until they deposited in the hoard, there's always a scramble about the division of the booty and usually some of them are killed. 

Well, this is almost exactly like the discussion. In fact, he goes on and talks about the philosopher and the street porter. This is almost exactly, this was from Lectures on Jurisprudence 1763 and the actual lectures that were written down by the student happened to be in 1763, but this might've been from five or seven years earlier that Smith had started to lecture about this topic in this way. So from the 1750s, Smith was thinking in terms of exchange animals don't exchange, humans do exchange, and about the example of the philosopher and the street porter, and we'll say more about that in a little while.

(00:20:17)

What's interesting about this is that his thought had developed more or less all at the same time. He was just such a slow writer that it took him a very long time to get it all down. But if you look in Lectures on Jurisprudence, much of what later became Wealth of Nations had existed long before it was written down in that form. Well, today we're going to talk about the introduction and book one. So that's chapters 1 through 11 in book one. Smith had started working in a concentrated way on the book in 1764; he had been appointed tutor to the young Duke Buccleuch. He had traveled extensively across Europe. He had gotten as a consequence of that, a pension of 300 pounds a year, which wasn't a fortune, but it did ensure that he was quite comfortable. That was enough, that it was quite a cushion along with his salary and income from other sources.

He had spent 12 years in writing and revising that first edition of The Wealth of Nations, between 1764 and 1776 when it was published. Even though he had been lecturing on economic themes since the 1750s, it still took him an additional 12 years to finish the book and David Hume and some of Smith's friends were quite worried about that. So on April 1st though, it appears that Hume never got a full finished copy of the book, the Wealth of Nations, which was published in March of 1776. But Hume had gotten some kind of advanced manuscript copies of large portions of it, and Hume wrote on April 1st, 1776 a letter to Smith, 

Dear Mr. Smith, I am much pleased with your performance and the perusal of it is taken me from a state of great anxiety. It was a work of so much expectation by yourself, by your friends, and by the public that I trembled for its appearance, but I'm now much relieved not, but that the reading of it necessarily requires so much attention and the public is disposed to give so little that I shall still doubt for some time of its being first very popular, but it has depth and solidity and acuteness and it is so much illustrated by curious facts that it must last attract the public attention.

Then Hume goes on to offer several rather sharp criticisms. Now, Hume died not long after that. That letter was written April 1st, 1776. Hume died August 25th, 1776, that first edition when it did come out in March and in the first printing was sold at a list price of one pound 16 shillings, and that's the equivalent of something like $400 today if you just convert the currency. But if you convert it to the purchasing power of an average wage earner, it would be more like at least $2,500. So if you look at it in terms of how much of a week's wages, it would be a little more than a full week of wages even for a skilled worker or tradesman. So this was an elite acquisition, and if you look in terms of GDP per capita, that is what proportion of the GDP per capita would that one pound 16 shillings price be?

It's close to $5,000. So depending on how you do the conversion, it's either a pretty expensive book or a really expensive book. But some of the reason for that is that books were then just more expensive. Well, what was the book about Jacob Viner, the University of Chicago economist in his 1927 essay, Adam Smith and Laissez-Faire. Viner claimed that the Wealth of Nations was not simply a defense of free markets or laissez-faire economics, but it was actually a practical guide for lawmakers That is, it is a treatise on prudent, empirically grounded statecraft. And I think that view, while today, while not universally held, is largely universally held. What it means is this is a handbook for lawmakers. This is if you want to do the right thing and have a society that is growing and that's what Smith meant by opulence. If you want to grow the economy, as James Carville might say, Wealth of Nations is going to be the book for you.

So Viner said, the Wealth of Nations is in large part a treatise on economic policy directed to the legislator and the statesmen and meant to provide guidance on a host of policy questions which were actually under consideration at the time in Britain and Europe more broadly, Viner sees Smith not as an ideologue but as a pragmatist. So he believes in markets as kind of a rebuttable presumption, but there was a pragmatic awareness of the institutional context and the moral limits of markets. Viiner highlighted the fact that Smith addressed his work to men of system and in men of system on the left or the right, he was urging to have more of an understanding of the way things actually worked because many times men of system are rationalists and they're trying to kind of work from first principles rather than empirical observations. And Smith saw a wide variety of different government actions.

He was skeptical about some of them and he would say that there should be a presumption in favor of private action, but that was a rebuttable presumption. So there's a wide range of different things that Smith mentions, even if he's sometimes concerned about it, that the government might plausibly act on. So Smith's message is not laissez-faire as a dogma, but it's a set of principles that are based on Smith observing what he thinks works. People had argued that Smith was kind of a doctrinaire, proto libertarian pro-free market person, but Viner I think correctly said that's just not the way to understand. Smith was a moral philosopher who had a reformist agenda and writing a Wealth of Nations was intended to educate legislators, not trying to persuade ideal ideologues. Now, other people have written a number of things trying to talk about what Smith's goals were, and I'll put up a number of those in show notes rather than going over them here.

But one interesting one is Emma Rothschild, who thought that Smith's commitment to liberty through good governance is not just about market freedom, but the and the goal was an opulent happy society. So Emma Rothschild really is harking back to Smith's teacher, Francis Hutcheson. If people are happy and cooperative and if they have the right government policies, it is true that an opulent society will happen on its own, but the state has to create the correct context and preconditions; a happy society is not what happens when the government does nothing. Smith would've thought that that was disastrous. Well, if you look at the book itself, there are five books in Wealth of Nations. First is about labor and productivity of labor. It's pretty long. It's a little bit over 250 pages. Book two is about capital and stock. It's a little more than a hundred pages.

Book three is about growth, the progress of opulence. It's by far the shortest of the books. It's only 50 pages, and then books four and five are gigantic. Book four is the Political Economy of different systems and it's more than 250 pages. And the fifth, which was what we might think of as the first book on what would now be called public finance, the expenditures and the revenues of the Sovereign is more than 300 pages, so it's certainly the longest. There are two letters I want to read from Smith's correspondence that tells you I had described Hume’s reaction. This is some of what Smith thought about. What I wanted to do was talk a little bit about how Smith himself thought of the context of the Wealth of Nations. This letter is November 1st, 1785. It is in Smith's correspondence number 2 48 and it is a letter from Smith to the Duke Buccleuch.

I have not forgot what I promised to your grace. In an addition of the Theory of Moral Sentiments, which I hope to execute before the end of the ensuing winter, I have likewise two other great works upon the anvil. One is a sort of philosophical history of all the different branches of literature, of philosophy, poetry, and eloquence. The other is a sort of liberty and history of law and government. The materials of are in a great measure collected and some part of both is put into tolerable good order. But the instance of old age, though I struggle violently against it, I feel coming fast upon me and whether I shall ever be able to finish either is extremely uncertain. You hear the topics of those what in the world, just one of those books would occupy someone for more than a lifetime. 

So again, Smith's sense of ambition and his own capacity is remarkable, but it turned out that he was quite prescient.

(00:30:15)

Now I should say that in 1785, Smith was 62, 5 years younger than I am now. I'm not sure how I feel about that. Certainly the instance of old age is preventing me from doing things. Three years later in 1788 at the age of 65, he wrote to his publisher, Thomas Cadell: 

Sir, you have very great reason to wonder at my long silence the weak state of my health and my attendance at the custom house occupied me so much after my return to Scotland. That though I gave as much application to study as these circumstances would permit. Yet that application was neither very great nor very steady so that my progress was not very great. I have now taken leave of my colleagues for four months and I am at present giving the most intense application. My subject is the theory of moral sentiments to all parts of which I'm making many additions and corrections. The chief and the most important addition will be to the third part- that concerning the sense of duty, as I consider my tenure of this life as extremely precarious and I'm very uncertain whether I shall live to finish several other works which I have projected and in which I have made some progress. 

He's talking about the works that he has on the anvil in the previous letter. The best thing I think I can do is to leave those I have already published in the best and most perfect state behind me. I am a slow, very slow workman who do and undo everything I write at least half a dozen times before I can be tolerably pleased with it. Well, what is he doing? Why is he working in the custom house? Adam Smith had accepted the position of the commissioner of Customs in Scotland in 1778.

Now, he did have that $300 pension per year, but that was a small comfortable private pension. You certainly could live on that very comfortably, but he was also generous to friends, family, and charity. The customs post paid something like 500 to 800 pounds per year, so it really does significantly increase his income and it's not a menial position. It has very significant public responsibility and respect and prestige. So he may have taken it partly for that reason, and Smith to his credit, took the job seriously. He actually often went to the Edinburgh Customs House and drafted proposals to improve procedures. So he took it quite seriously. It may have been a gesture of loyalty to the crown and this was a reward for Smith's longstanding moderate wig sympathies. So he was a famous person. He was asked by the crown to serve and he did and he served with honor and energy.

It also gave him a kind of routine and purpose, which may have helped since he had trouble. He was having more and more trouble concentrating on these other works. He found it easier to work in the customs house and to begin just to revise his two existing works. By that time, the Wealth of Nations had been published more than 10 years earlier by the time that second letter was written. I have some friends that are far smarter and better writers than I am who've recently not published very much. They always find tasks and obligation to explain their own lack of scholarly output and their incapacity to finish things, and I certainly do this some myself, hard for us to know just what Smith had finished. The reason I'm bringing this up is that it seems like a tragedy that the two works that he had on the anvil and he said he'd done quite a bit of work on them.

We don't know anything about them because they were burned. Smith is an enigma. So many of his papers were burned. He had substantial drafts of those two more books, but there was in 1790 a bonfire of the lack of vanities. We might call it just a couple of weeks before Smith's death and the date is not known exactly, but somewhere around July 10th, July 5th, 1792 of Smith's friends and the people who were his literary executors, James Black and William Hutton, created a large bonfire and it was kind of ceremonial and Smith supervised it carefully even though he was not doing well. So at a minimum, some early drafts and revisions of the Wealth of Nations and the Theory of Moral Sentiments, the unfinished philosophical treatises, his long planned system of the sciences works on jurisprudence. All of his lecture notes, philosophical essays, he was intensely private and self-critical and he'd actually never sat for a full on portrait, which was unusual.

We do have a few portraits of him, of him, but they're not the usual full on sit for several days for a famous painter that you might expect from someone of his station. We do have the Lectures on Jurisprudence preserved from student lecture notes, not from Smith's own papers and the posthumously published Essays on Philosophical Subjects which his literary executors had edited and published with his permission. 

Well, let us turn now finally to the book itself and let's start with the introduction and plan of the work. The thesis for the Wealth of Nations is that the output of labor is the foundation of national wealth and the central variables that determine the relative prosperity or opulence of different countries is first the productivity and division of the labor that that nation has. And second, the ratio of productive to unproductive hands. Now the first of those we still talk about and people think of it as the central contribution.

The second is a little more dicey. Smith was in effect saying that service work, while it may be enjoyable for the people who receive the service, does not actually produce anything that becomes part of the stock and therefore causes the nation to grow. So Smith thought that productive labor creates tangible goods or tools and capital; unproductive labor does not add to wealth. David Ricardo took up some of the same subject about 40 years later and said that productive labor reproduces capital. Karl Marx was also concerned about productive labor. He thought that productive labor generates a surplus value and that's what is appropriated by capitalists. Alfred Marshall argued that services could also be productive. John Maynard Keynes just wasn't concerned about the dichotomy at all. He was interested in employment and demand, so what he was interested in was income. Simon Kuznets talked about the productive labor and market valued output in a way of measuring GDP, and so we have turned towards deciding what would count in GDP. Douglass North and a few other of the new economic historians were interested in the question about the size of what they call the transaction cost sector, so productive and unproductive labor.

Their question was what really counted towards GDP? So it was an interesting question for the people who were working in the national income and product accounts and then a number of feminists and post Keynesian economists have criticized the exclusion of care, unpaid labor, should we actually count those things? The reason I went off on that diversion is I'm not going to say much more about productive and unproductive labor. I'm primarily going to look at the difficulties that we have in understanding whether labor is being used efficiently in the sense that it is elaborating the division of labor. And with that, we'll look at book one, chapter one. So book one, chapter one of the Wealth of Nations. Now before on pages 10 and 11, Smith had said in the introduction and plan of the work, a very interesting thing. Basically these are my words, but in the stone age, unemployment was zero and people spent all their time trying just not to starve among civilized and thriving nations.

This is on page 10. A great number of people do not labor at all. Many of them consume the produce of 10 times, frequently of a hundred times more labor than the creator part of those who work. So what he's going to explain is why it is that we actually work less and have more and why it is that some nations are better at that than others. So book one starts on page 13 and it's worth reading the first sentence, “he 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 seems to have been the effects of the division of labor.” And then he goes through the famous pin factory example and the nice thing about the pin factory example, it's one of the most commonly cited parts of the Wealth of Nations or anything that Smith has written, is that if you had 18 people, each of whom were making as many pins as they could, but working separately, individually, each making pins on their own, they would not be able to make more than maybe 20, maybe not even that many pins in a day because it's hard for one person to make one pin in a day.

(00:40:04)

If however, the different steps in making pins and Smith says he observed that there were about 18. Well, maybe that's true, maybe it isn't. But suppose that there's 18 steps in making a pin. If we have those same 18 people instead of each of them trying to make as many pins as they can on their own, each of them carries out one of the 18 steps. Then the things that happen are the difference between those two settings is first you're not constantly having to switch activities. Second, you start to become more dexterous because it's a smaller number of facts of actions that you have to carry out. So you become really good at this one small action. It's like Frederick Taylor and the time and motion studies of scientific management; people become much better and faster if they practice. And the third is tool use the development of tools.

So those three things- tool use, dexterity, and not having to switch between tasks create what economists call increasing returns to scale. And so the 18 people working in a production line can make thousands and thousands of times as much as the same 18 people if each of them were trying to make as many pins as they could separately and no matter how hard they tried, it's not a question of effort, and in fact they could work 24 hours a day like people in the stone age, but they make less than 18 people in a production line who are working for just eight hours a day. The other example that Smith talks about in book one is the woolen coat and the advantage of having division of labor is not just that people can acquire the things that they have to have to live with less labor, but they can actually acquire things that otherwise simply would not exist.

It would be impossible to acquire something like a woolen coat. In the example of the woolen coat, which is on page 22, Smith says it is the great multiplication of the productions of all the different arts in consequence of the division of labor, which occasions in a well-governed society, that universal opulence which extends itself to the lowest ranks of the people. So it's not just for the rich, it's not that people work hard and we have stuff for the rich. The poorest people in a society with division of labor are going to be better off materially than the wealthiest people in a society that doesn't have division of labor in the sense that they will have access to more products, at least if you restrict yourself to what's produced in that country. Now obviously someone who lives in a country without division of labor might be able to buy it from a country that does have it, but in terms of what the country itself is able to produce, again on page 22, observe the accommodation of the most common artifice or day laborer in a civilized and thriving country, and you'll perceive that the number of people, his industry were a part though, but a small part has been employed in procuring him.

This accommodation exceeds all computation. The woolen coat, which covers the day laborer as course and rough as it may appear, is the produce of the joint labor of a great multitude of workmen, and I don't know who all those other workmen are and I don't have to know them. That's the genius of the system of division of labor is that thousands and thousands of different people all over the world are working for me. How much commerce and navigation ship builders, sailors, sail makers, rope makers have been employed just to bring together the different things that were used by the dyer that put together the colors that are made for the coat, what a variety of labor is necessary to produce the tools of the meanest of these workmen. Then on page 23, Smith says, right, what about those tools? I wouldn't have this wool and coat unless someone had made the shears that the shepherd had used to clip the wool from the sheep and somebody had to make that again.

On page 23, the miner, the builder of the furnace for smelting the ore, the feller of the timber, the burner of the charcoal, the brick maker, the brick layer, the workman who attend the furnace, the millwright, the forger, the smith must all of them join their different arts in order to produce those shears. In chapter two, we get two more very famous passages. The first is on the very first page of the chapter on page 25, the division of labor from which so many advantages are derived is not originally the effect of any human wisdom which foresees and intends that general opulence to which it gives occasion. It is the necessary though very slow and gradual consequence of a certain propensity in human nature which has in view no such extensive utility, the propensity to truck barter and exchange. And then he says, it's not actually clear if this is an innate propensity or it's a product of reason.

It doesn't matter for our present subject. I think if you’re reading in Theory of Moral Sentiments, he believes that this is just something that's intrinsic. Page 26, he describes the differences among dogs and says that those differences are probably more different than the differences among human beings. And yet dogs don't exchange and human beings do. Dogs, if they want something, have to become your friend. And we've all seen a dog begging for food from its master. And then on 26, says, “So compared to a dog begging for food from its master man sometimes uses the same arts with his brethren and when he has no other means of engaging them to act according to his inclinations endeavors by servile and fawning attention to obtain their goodwill, he has not time. However, to do this upon every occasion in civilized society, he stands at all times in need of the cooperation and assistance of great multitudes.”

So we've just established the wool and coat is the result of many people working for me, but it's not because I had to do like a dog begging for its dinner and do tricks for them. It's because they found it in their interest to do it because they're going to get paid because of the division of labor. Man has almost constant occasion for the help of his brethren. It is in vain for him to expect it from their benevolence only from their benevolence only. Then Smith says he this person will be more likely to prevail if he can interest the others that their self-love in his favor and show them that is for their own advantage to do for him what he requires of them. 

Whoever offers to another a bargain of any kind proposes to do this, give me that which I want and you shall have this which you want is the meaning of every such offer and it's in this manner that we attain from one another. Far greater parts of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner, but from their regard to their own interest. 

Now that last end of quote that last about the butcher or the brewer and the baker is often quoted out of context in that same paragraph. He's already said it's not from their benevolence only. So it's not that benevolence doesn't count. And in fact if we have a moral community that's great, but a moral order may be enough. We don't need to depend on their benevolence. All we need to do is depend on their commitment to justice and their own self-interest. Smith gives a description about how this might come about, that people might start to develop division of labor just out of this disposition to truck barter in exchange. On page 27, quoting, 

In a tribe of hunters or shepherds, a particular person makes bows and arrows for example with more readiness and dexterity than any other. He frequently exchanges them for cattle or for venison with his companions he finds it last. He can in this manner get more cattle and more venison than if he himself went to the field to catch them from regard to his own interest. Therefore, the making of bows and arrows grows to be his chief business and he becomes a sort of armorer, another excels in making the frames and covers of their little huts or movable houses. He's accustomed to be use in this way to his neighbor who reward him in the same manner with cattle and venison until at last he finds it in his interest to dedicate himself entirely to this employment and to become a sort of house carpenter.

So he gives more and more examples of this. Each of these individuals is better off. It's not their benevolence but their self-interest. But as a result, they acquire skills, dexterity knowledge, they develop tools and they produce without intending to a far greater amount of stuff for everyone else. And then the other thing that is famous about chapter two is the example of the street porter and the philosopher, and I'm going to read that in its entirety because it's important. The reason that this is important is that it demonstrates that Smith has a surprisingly egalitarian perspective. We think of England as being a very class-based society and class is something that's kind of immutable. It depends on who your parents are and where you were born. Smith's not so sure that that's true. Here we are on page 28, the philosopher in the street porter. 

The difference of natural talents in different men is in reality much less than we are aware of in the very different genius which appears to distinguish men of different professions when grown up to maturity is not upon many occasions so much the cause as the effect of the division of labor.

The difference between the most dissimilar characters between a philosopher and a common street porter for example, seems to arise not so much from nature as from habit custom and education when they came into the world and for the first six or eight years of their existence, they were perhaps very much alike. Neither their parents nor play fellows could perceive any remarkable difference about that age or soon after they came to be employed in very different occupations. The difference of talents comes then to be taken notice of and widens by degrees until it lasts. The vanity of the philosopher is willing to acknowledge scarce any resemblance, but without the disposition to truck barter and exchange, every man must procured to himself every necessary and convenience of life of which he wanted. All must have had the same duties to perform and the same work to do. And there could have been no such difference of employment as could alone give occasion to any great difference of talents. 

End of quote, we kind of take this for granted now, but at the time it was radical, let me give a personal illustration. In 1989, I was a consultant in the Chilean presidential election. It was the first election that had happened since the coup. I was at a cocktail party and I was talking to a person, a colonel in the army who was in uniform. And I mentioned that my father hadn't graduated from high school and that I came from a very working class family. And this colonel was just shocked. His eyes got large and he said, I would have thought you were from the upper class if I had seen you on the street in any part of Santiago, Santiago's the capital city. He turned and walked away.

(00:51:21)

He didn't talk to me the rest of the night. And I came to realize that in a class-based society, this notion that there are inherent genetic differences is really important. That's how you justify the fact that I'm rich and you are not. That's how you justify the fact that people who shower before work make a lot of more money than people who shower after work. Smith is questioning that in 1776 class might be more a consequence of division of labor than class would be caused by differences. So we look at differences between people, it's a result of specialization and practice. It need not be anything inherent. So this is an extremely radical position and it is interesting to see it argued by Smith. Elizabeth Anderson famously said in her book, Private Government, that there was a time when economics and markets were left. That is markets were a way of leveling because it meant that almost anyone could achieve prosperity.

Chapter three, which starts on page 31. In a way, the main thing to read is the title that the division of labor is limited by the extent of the market. Now if we go back to the pin factory, remember Smith said that there were about 18 different functions that were required to carry out in order to make a pin. Let's suppose that's true. Well, if I live in a small village, it makes no sense for people to specialize in different parts of those 18 functions because then we'd have way too many pins. We have nothing to do with them. So the only reason that I would make more than I myself have occasion for is if I have someone that I can exchange with. And so in most towns, and in fact most cities, there might be two or three people making pins and they divide up those 18 different functions among them.

So you get some of the advantages of division of labor, but not the full advantages of them. The title of the chapter is “The Division of Labor is limited by the extent of the market,” and the extent of the market is the number of people I can exchange with. The more people I can exchange with, the more that we can elaborate the vision of labor. Smith says there's some sorts on page 31, 

There are some sorts of industry even of the lowest kind, which can be carried on nowhere. But in a great town, a porter, for example, can find employment and subsistence in no other place in the lone houses and very small villages which are scattered about in so desert to country as the highlands of Scotland, every farmer must be butcher baker and brewer for his own family. In such situations we can expect to find a smith, a carpenter, or a mason within less than 20 miles of another trade.

He talks about the fact that specialization in areas without a very big extent of the market without many people to exchange to specializations going to be limited to the materials that you work with. So anything made with metal, the smith is going to do anything made with wood. The carpenter's going to do so. That means that the smith is going to make nails, but the smith's not very good at making nails because he is not specialized in that. The example, when you think about the problem of making nails or specialized woodcraft, it becomes obvious why specialization and the use of tools becomes so important. And interestingly, we can't blame Smith for this, but interestingly, the only kind of transportation or increase in the extent of the market that he seems to be able to imagine is water. And he gives the example of how water travel in ships is going to be so much more efficient than overland travel with wagons and says in effect that we can only expect the division of labor to be expanded in places that are either coastal or pretty close to a large port or along a navigable river because we have no other way of expanding the extent of the market.

Chapter four, which starts on page 37 here, Smith recognizes the problem with barter and begins to talk about the origins of money. And again, this is not a story of state action. This is a story about how money is likely to arise just out of the propensity to truck barter and exchange. On page 37, which is the first page of chapter four, “When the division of labor has once become thoroughly established, it has been a very small part of a man's wants which the produce one’s own labor can supply.” So I'm making pins, I have a big pile of pins, I don't need that many pins. What I want to do is be able to exchange those pins for other stuff that I want. And when I try to do that, I need to find someone else who has the same thing that I need and he to be willing to accept pins for it.

And so I made a cartoon the other day. Smith gives the example, someone who has a cow and he wants some salt. So I have a bag of salt, you have a cow, you come to me and say, I'd like to buy the salt. And I say, what have you got? And you say, do you have change for a cow? Well, no, I don't have change for a cow. And so the problem is that no exchange can happen there very well because I'm not going to be able to provide you exactly an equivalent value for one bag of salt if all I have is a cow. Reading Smith's example on page 39, the man wanted to buy salt, for example, and had nothing but cattle to give an exchange for it must have been obliged to buy salt to the value of a whole ox or a whole sheep at a time.

He could seldom buy less than this because what he has to give for it could seldom be divided without loss. If he had a mind to buy more, he must for the same reasons, have been obliged to buy double or triple the quantity, the value to wit of two or three oxen or two or three sheep. If on the contrary, instead of sheep or oxen, he had metals to give an exchange for it. He could easily proportion the quantity of the metal to the precise quantity of the commodity which he had immediate occasion for. And in this chapter, Smith goes in just wonderful detail about a possibility for the origin of the use of metal for money. It's more convenient, it's more durable, doesn't wear out, it's more divisible. And Smith also notes that there were two problems if suppose the metal we chose was silver or gold.

Two problems. We have the purity of the metal, which I cannot immediately tell by looking at it and the weight, which I cannot immediately tell by looking at it. So what I want is I want to exchange my cow for a certain weight of a certain alloy or amount of gold. So what we need to do is have some way of guaranteeing both first the quality of the metal. And so we started putting government stamps on pieces of the metal, but that didn't tell us what the weight was. The way we solved the problem of weight is that we put the stamp on a piece of metal that has exactly the same weight as the value that that piece of money has, and the stamp has to cover the entire top and bottom of the disc of coin and even the side so that they can't be cut or shaved off.

We can do those things. Then we have what looks like government fiat money. The advantage though is that now I can guarantee its value and its weight. However, there's a downside, because now once the government starts providing the currency, the government is the one that has the incentive to start reducing the amount of the weight of the coin and the quality of the metal in the coin. And so it may not be quite as good of a solution as it would seem at first glance. In this chapter, Smith also raises the difference between value in use and value in exchange. And he notes that things that have the greatest value in use are likely to have low value in exchange. And he raises the famous example. This is on page 44 and 45 of diamonds and water. So let me read it on page 44.

The word value, it is to be observed, has different meanings and sometimes expresses the utility of some particular object and sometimes the power of purchasing other goods, which the possession of that object conveys the one may be called value and use the other value in exchange. The things which have the greatest value in use have frequently little or no value in exchange. And on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water, but it will purchase scarce anything scarce anything can be had in exchange for it. A diamond on the contrary, has scarce any value in use, but a great quantity of other goods may frequently be had in exchange for it. 

Now this later example of diamonds and water was later used as an indictment of capitalism and commercial markets, saying that water, which we desperately need is cheap, and diamonds, which we don't really need, is very expensive.

(01:00:35)

Clearly the value system of markets is off. It was pointed out that we need to use marginal utility as a way of understanding that if I didn't have any water, I'd pay a lot for some. If I have a lot of water, a little bit more at the margin, I'm not going to pay much for. If I had a lot of diamonds, I wouldn't pay much for it. But it's hard to imagine that I had a lot of diamonds. And so the criticism I think is a mistake. However, Smith's discussion of diamonds in water in terms of value and use and value in exchange is actually quite important. In chapter five, Smith is groping towards solving the twin problems of value in terms of subjective price or value in terms of embodied labor. And the only tools he has to work with are a labor theory of value.

But he recognizes that prices, actual prices, nominal money, prices, may fluctuate quite a bit above or below the value of labor. And so in chapter five, he makes a very interesting observation, which I actually use as the quote that has motivated this podcast. This is on page 47, the real price of everything. 

What everything really costs to the man who wants to acquire it is the toil and trouble of acquiring it. What everything is really worth to the man who has acquired it and he wants to dispose of it, of exchange for something else, is the toil and trouble, which it can save to himself and which it can impose on other people. What is bought with money or with goods is purchased by labor as much as what we acquire by the toil of our own body. 

What that means is that even if something doesn't cost very much to make, I may pay quite a bit to acquire it because it would cost me quite a bit to make it or I would have to go far to make it.

I would've to spend quite a bit of effort. And so this suggests the importance of transaction costs. It's also interesting that he is claiming that implicitly there's a make or buy decision here. If I can buy something more cheaply than I can make it myself, then it makes sense for me to buy it. Well, turning now to chapter six, going to have to in the interest of time, I'm going to just summarize some of the important tension between chapter six and chapter eight. I think a number of people have misunderstood the tension between chapter six and chapter eight. So let me try to explain it. In chapter six, Smith outlines the component parts of price, and those are wages, which is the payment to labor rent, which is the payment to land and profit, which is the payment to stock or what we would call capital.

And in chapter six, Smith clearly treats profit as a natural and legitimate return to capital just as wages are a return to labor and rent a return to land. You can't get people voluntarily to provide you with the stock that you need to make something unless you pay them some compensation. But then in chapter eight, Smith seems to describe profit in a much more zero-sum way. What Smith says then on page 82 in chapter eight is, 

The produce of labor constitutes the natural recompense or wages of labor in that original state of things, which preceded both the appropriation of land and the accumulation of stock. The whole produce of laborer belongs to the laborer he has neither landlord nor master to share with him. Had this state continued, the wages of labor would've augmented With all those improvements in its productive power to which the division of labor gives occasion, all things would gradually have become cheaper.

But skipping a little bit though all things that would've become cheaper in reality and appearance, many things would become dearer or of exchange for a greater quantity of other goods. This original state of things in which the labor enjoyed the whole produce of his labor could not last beyond the first introduction of the appropriation of land and the accumulation of stock, it was at an end therefore, long before the most considerable improvements were made in the productive power of labor. As soon as land became private property, the landlord demands a share of almost all the produce which the laborer can either raise or collect from it. Skipping again, what are the common wages of labor? Depends everywhere upon the contract usually made between those two parties whose interests are by no means the same. The workman desires to get as much ,the masters to give as little as possible.

The former are disposed to combine in order to raise the latter in order to lower the wages of labor. It is not however difficult to foresee which of the two parties must upon all ordinary occasions have the advantage in the dispute and force the other into a compliance with their terms. The masters being fewer in number can combine much more easily in the law, which besides authorizes or at least does not prohibit their combinations. Well, it prohibits those of the workmen. We have no acts of parliament against combining to lower the price of work, but many against combining to raise it in all such disputes. The masters can hold out much longer. A landlord, a farmer, a master manufacturer or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they already have acquired. Many workmen could not subsist a week.

If you could subsist a month and scarce any a year without employment, well wait. What's going on here? Is this legitimate or not? I think this has led more than a few people to become confused about Smith's view of profit. On the one hand in chapter six, it is clear that Smith wholeheartedly approves of profit, but in chapter eight, it seems that he's saying profit is being stolen from the workman because the bargaining strength of capital is much higher. Well, both of those things can actually be true at once. So there's an interpretation that was given of this apparent paradox. The conflict between chapter six and chapter eight is really very interesting. And I have to admit, I had a very long argument with a very good friend of mine who said that there's no reason to read Smith because he's just like [Karl] Marx and he thinks propfit is wrong.

That's not true. That's not true. In chapter six, Smith says that profit is the correct and proffer recompense to holders of stock capital is not barren. As Marx claimed it earns a productive return. But then what about this stuff in chapter eight? Well, a number of people, Jacob Viner, Gavin Kennedy, Samuel Fleischacker, all of them have made the following distinction. There's an empirical description and then there's a normative judgment. The empirical description is that profits are inherently just in practice though capitalists have bargaining power that may allow them to suppress wages. Both of those things can be true at once. Now that's different from Karl Marx. Karl Marx claimed that propfits were inherently exploitative and that capital was barren. Smith absolutely does not believe that. I just categorically deny that. Smith believes that what he does believe is that because of political interference, it is much more likely that capital will be able to get its way.

So this is basically a rent seeking argument. This is an argument I've made in many places. It's about cronyism. It's much easier for capital to use the coercive powers of the state than it is for labor to take over those powers of the state. In fairness, Marx was saying that labor's power needed to be increased, but Marx's reason is different. Samuel Fleischaker especially has addressed this tension by emphasizing that Smith does not morally condemn profit. In principle, he treats the return to stock as legitimate recompense for the risk and abstinence of the capitalist. I've foregone consumption. I have saved up this stock. It is legitimate for me to earn profits. Profit therefore is a reward for providing the means of production and necessary for the functioning of commercial society. However, Fleischacker notes that Smith seems to be very aware of the power imbalance between laborers and employers.

Smith is not blind to class conflict, but he sees it as political, not economic. He doesn't center his analysis on that the way that Marx does. Capitalists may be able to suppress wages and manipulate markets for their own advantage, but so can other people. It's not capitalists he's objecting to. It's the manipulation of price. If the state manipulates price, if the state has the power to manipulate price that is going to be used by powerful interests, that's the problem, not profit. And so Smith recognized markets had a tendency to concentrate power if the state defends and protects concentration of power. So if you only read chapter eight, you're taking it completely out of context. You don't read chapter six, you're going to say, I don't need to read Smith, this is just Marxism. That's not true they’re completely different. You need to recognize that. But it is important to say that Smith does have concerns.

His concerns are about bargaining strength and using the government to manipulate price to the benefit of powerful concentrated economic interests. Well, chapters nine, 10, and 11 are about profits, wages, and rent. In the interest of time, I'm just going to talk a little bit about chapter 10 because it is an interesting illustration of the principle that I had said that Smith was so concerned about in terms of profits. Chapter 10 is largely about ways of controlling and using laws to prevent a free market in labor. So the critique that he offers is about labor, incorporation, guilds, restrictive labor policies, arguing that those institutions and those laws hinder productivity and limit individual freedom and distort market efficiency. So Smith over and over attacks the exclusive privileges of corporations or guilds. Now what he means is the incorporation of labor where there are restrictions about you can't work unless you have so many years.

(01:11:19)

As an apprentice, you can't work unless you have so many years as an assistant. So this keeps many able-bodied people who could very quickly learn a trade out. So he sees these privileges as a monopoly which benefits the people who use labor at the expense of the public. And notes that the policy of Europe has not been very favorable to the free exercise of the natural liberty of the lower ranks of people. He criticizes the statute of apprenticeship, which had been passed in 1563, which required a seven year apprenticeship before one could legally enter many trades. So he sees this as being unnecessary and harmful since many trades don't actually require long training. The law artificially restricts the supply of labor. So it drives down the price of labor for masters or people who own. Because apprentices are nearly slaves though you get an artificial increase on people who have acquired the level of master, but then you get much higher consumer prices and artificial restriction on output as a result.

Of course, the masters want to do this. Of course the owners of capital want to do this, but the state should not allow them to do it. And in this case, not only is the state allowing it, the state is actively participating by having a law that requires it. There's no way around it. So on page 135 in part two of the chapter, it's quite long and interesting. I'm just going to read a few parts of it again. On page 135, “Such are the inequalities and the whole of the advantages and disadvantages of the different employments of labor and stock, which the defect of the above mentioned requisites must occasion.” He's been talking about solutions, getting rid of them even where there's the most perfect liberty. So it might be that there would be some disadvantages for labor just because of collective action problems. And he notices the problem of if you have fewer people, you have lower collective action problems.

But the policy going back to quoting, 

But the policy of Europe by not leaving things at perfect liberty occasions, other inequalities of much greater importance. It does this chiefly in the three following ways, restraining the competition in some employments to a smaller number than would otherwise be disposed to enter into them. Secondly, by increasing it in others beyond what it naturally would be. And thirdly, by obstructing the free circulation of labor and stock, both from employment to employment and from place to place, the exclusive privilege of an incorporated trade necessarily restraints the competition in this town where it is established to those who are free of the trade. To have served an apprenticeship in the town under a master, properly qualified is commonly the necessary requisite for obtaining this freedom. So he gives many very persuasive examples, very specific, well-informed examples. Cutlers Weavers, Smiths Taylors, a University.

What began as a university is a name for an incorporation and a master was someone who was able to train and therefore basically have slaves of apprentices. And so if you're a graduate student at a university, you might think about the origins of that. You're trying to become a master or a PhD. That's where it comes from. So he talks about the different durations of the apprenticeships, talks about guilds and incorporation that protect the interest of the masters, not the workers and notes. In a very famous passage, this passage is on page 145, “That people of the same trade seldom meet together even for merriment and diversion. But the conversation ends in a conspiracy against the public or in some contrivance to raise prices.” It's impossible indeed to prevent such meetings by any law which either could be executed or would be consistent with liberty and justice.

Well, people often just stop there. That sounds pretty bad. So we've got people in the same trade, they just get together for lunch and they end in some conspiracy against the public. They're trying to have a contrivance to raise prices. Smith says there's really no way to prevent such meetings. Smith goes on to say though, and this is the part that often doesn't get quoted, though, the law cannot hinder people of the same trade from sometimes assembling together. It ought to do nothing to facilitate such assemblies, much less to render them necessary. A regulation which obliges all those of the same trade in a particular town to enter their names and places of abode in a public register facilitates such assemblies. It connects individuals who might never otherwise be known to one another and gives every man of the trade a direction where to find every other man in it.

So what's Smith saying is profits are fine. It may be important to train workers, however, given a chance the owners of capital, including human capital. So in this case the knowledge of how to be a metalsmith or silversmith might be the capital that I have. I have this knowledge and I know techniques. I'm not going to share those techniques unless someone pays me a lot. And what they have to pay me is they have to pay me for seven years of work and I'm going to pay them almost nothing. That time they're going to work as my slaves. Well, I can only get away with that if the state helps me out. And then it is likely that people who are trying to think of new contrivances, new ways, conspiracies to limit output, they're going to continue to do that. There are profitable benefits to cooperating with your competitors and agreeing not to charge a price below a certain level.

So we're going to engage in conspiracies to try to elevate price, but the state should not participate in it. And for heaven's sake, the state should not advance the interests of those owners of those businesses. So what's interesting about Smith's claim is profits are legitimate if they're honestly pursued. Illegitimate profits are problematic, but the state, if it tries to interfere, is likely to make things worse, not better. The main thing that the state should do is not interfere and certainly make sure that the state doesn't act to make the problem even worse. Well, that's what I'm going to cover for the first book. We will take up the next book, book two in September. Thanks for listening. It's been a pleasure to go on this trip through the very first part of the Wealth of Nations.