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Adam Smith: The Grandfather Of Economics — Transcript

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0:00this is Adam Smith Adam Smith was a
0:03Scottish philosopher and author who is
0:05probably best known for writing a book
0:07titled an inquiry into the nature and
0:10causes of the wealth of nations this
0:14book effectively marked the beginnings
0:17of economics as a separate academic
0:19discipline as Adam Smith
0:21now heralded as the father of economics
0:23lay the foundation for economic rules
0:26and principles that guide the
0:27decision-making of nations the world
0:30over today it is likely you may have
0:33heard the name Adam Smith but the
0:35impacts that this man and his writing
0:37has had on the modern world are truly
0:39hard to grasp this episode of economics
0:43explained was made possible by our fans
0:45on patreon if you would like to gain
0:47early access to these videos before
0:48they're uploaded to YouTube as well as
0:50participate in exclusive Q&A sessions
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0:54on patreon comm slash economics
0:56explained before Adam Smith and his
0:59teaching rose to popularity the world
1:01was dictated by an economic theory known
1:03as mecan't ilysm now we have discussed
1:06mechanical ISM before when we looked at
1:08the Dutch East India Company but a big
1:11takeaway was that Adam Smith hated this
1:14theory and this was probably a good time
1:17to shake things up a bit you see Adam
1:19Smith published The Wealth of Nations in
1:211776 just a few short years before the
1:24French Revolution and during the height
1:26of the American Revolutionary War the
1:29world had become obsessed with what good
1:32government went the policy of the past
1:34were no longer working in the time of
1:36modern industry and people were out to
1:38shake things up but AM Smith was not too
1:41concerned with what good government men
1:43but rather what wealth meant he was
1:47effectively arguing that McCampbell ISM
1:49the theory that had dictated the
1:50decisions of nations four century was as
1:53outdated as a monarchy McConnel ism was
1:56basically the idea that the world was a
1:58zero-sum game if someone was getting
2:00richer it meant someone somewhere else
2:02was getting poorer if a nation increased
2:04its wealth it's because it took that
2:06wealth directly or indirectly from
2:08another nation the only thing that was
2:11actually seen as industry
2:13that produced growth was farming and
2:15that's because it literally produced
2:18growth like right there
2:20out in the paddocks all of this was kind
2:23of easy to understand especially in a
2:25world that was only just starting to
2:27embrace modern manufacturing in feudal
2:29times the ideologies of mecan't ilysm
2:31basically held true sure there were
2:34blacksmiths and masons that would build
2:36basic tools and construct buildings but
2:38that was extremely basic and like much
2:42in the way of value adding value adding
2:45is where you take component parts say
2:47iron ore and coal and the skill hands of
2:49a blacksmith and turn it into something
2:51like a scythe or a sword or a piece of
2:54armor this end product is more valuable
2:57than the sum of all of these individual
2:59parts and therefore this whole process
3:02was said to have added value and in
3:04economics this process has a name it's
3:07called production now production was so
3:10limited in feudal societies that it
3:12didn't really register in the overall
3:14wealth of the nation so again this
3:17theory of mecan't ilysm held true where
3:19a nation was only really as good as the
3:22grains that could grow and the gold it
3:24could hoard Adam Smith realized there
3:27was more though the advent of steam
3:34power and the popularization of
3:35industrial processes that was taking
3:37place during the inception of the
3:39Industrial Revolution in the United
3:40Kingdom made a lot of very smart people
3:44rethink how they saw wealth over the
3:47course of a decade of speculation
3:49research in collaboration Adam Smith and
3:52his contemporaries came to the
3:53conclusion that manufacturing was kind
3:55of the same as farming in the sense that
3:58it grew things of value in the same way
4:01that you contribute seeds manure labor
4:03and farmland to a crop of wheat you can
4:06throw cotton labor in a textile mill to
4:08grow fabrics it's just that this process
4:10was entirely controlled by man this was
4:14a revolutionary idea and it basically
4:16meant that nations were no longer
4:18limited with their lot in life if they
4:20want to grow wealthier they didn't need
4:21to invade their neighbors they could
4:23just work on their own industry improve
4:26technologies and educate their
4:27population this understanding was
4:29potentially just as liberating for
4:31modernizing nations at the time as the
4:33steam engines were and this all also
4:36meant that people were incentivized to
4:38move from the farms and into the cities
4:44regular channel viewers would have heard
4:46me talk about the factors of production
4:48that is land labor and capital Adam
4:52Smith in the wealth of nations was the
4:54person credited with recognizing these
4:56factors alterations have been made over
4:59time to also include entrepreneurship
5:02but what was true back then is just as
5:05true today if you want to produce
5:07something you need these factors of
5:09production land and labour are easy to
5:12understand you need space to harvest and
5:15assemble and store things and you also
5:17need people to toil the fields or hammer
5:19on the anvils or write code or whatever
5:22this part of the equation actually
5:24wasn't anything new people had known for
5:27generations that the key to a wealthy
5:29nation was having lots and lots of land
5:30and lots and lots of people to toil on
5:32that land
5:33that's why wars were fought over good
5:35farmlands and nobility from across the
5:37globe try to maintain a healthy
5:39population of peasants to reap the
5:41rewards of these lands it's unknown if
5:44anybody actually wrote this down but it
5:46was kind of something that was so
5:47obvious that it wasn't going to make
5:49anybody famous for pointing it out in
5:51the same way that I wouldn't become a
5:52published academic by suggesting that
5:54Game of Thrones season 8 should not have
5:56happened I mean it's just so obvious
5:59that it doesn't count as cutting edge
6:00research Adam Smith's contribution
6:03though was this whole theory of capital
6:05and what he decided capital was capital
6:09in finance normally just means cash but
6:12capital and economics means basically
6:14anything that can contribute value that
6:16isn't land or labour cash is capital
6:19sure that so is a pickaxe or a steam
6:21engine a pair of work boots or even a
6:24patent on some revolutionary social
6:26media algorithm any material or
6:28immaterial thing that assists with the
6:30production of goods is said to be
6:32capital and this was a crazy crazy idea
6:36for the time and what made it even
6:37crazier was the way that Adams
6:40if laid out the logical progression of
6:42how people can create value The Wealth
6:45of Nations basically said that there
6:47were key steps that a nation would take
6:49to grow its wealth at first it would be
6:51an agrarian nation pretty much because
6:54it's the easiest thing to do farming can
6:56be as simple as plowing some dirt and
6:59planting some seeds and of course this
7:01is a massive oversimplification but
7:03basically if a nation had spare arable
7:06land it just made sense to set up
7:08farmland there because farms literally
7:11grow wealth from the dirt and require
7:13very very little capital investment in
7:16this step nations might also make
7:18small-scale efforts to extract precious
7:20metals like gold from basic mines as an
7:22easy way to supplement the wealth of
7:25their farmland it was theorized by Adam
7:27Smith that this was the reason the
7:29Americas had lag behind European nations
7:32in developing modern industry it's
7:35because they didn't really need to why
7:37on earth would a wealthy American in
7:39this time invest money into building a
7:41factory when they could instead just go
7:43and buy some land or better yet just
7:45claim some land and turn it into a
7:47plantation the upfront costs are way
7:49lower and if it all goes terribly wrong
7:52well at least you can still sell the
7:54land to someone else this kind of
7:56reasoning was what formed the first step
7:59of Smith's progressions of the nation
8:01but then eventually a nation would hit a
8:05problem eventually it would run out of
8:08low-hanging fruit of easy arable
8:11farmland and have to do something else
8:13to continue to grow historically
8:16countries answered this problem by
8:18invading their neighbors or subjugating
8:20some poor colony on the other side of
8:22the world and then using their farmland
8:24to continue the accumulation of wealth
8:26this way but ultimately this was limited
8:29and what was potentially a better idea
8:31was to actually use that land you
8:34already had more efficiently by
8:37developing industry you see a factory
8:40that produces oh I don't know let's say
8:42textiles take up much much less land
8:46than a farm but are able to produce the
8:49same amount of profit but they take much
8:52much
8:53more of an investment so they are not
8:56going to be the first choice of a nation
8:58to produce until they have absolutely
9:01exhausted the well that they can harvest
9:03from their soil once a nation does start
9:06building these factories though they
9:08will get very very wealthy because you
9:10can pack a lot more wealth generation
9:12into a smaller space to see this in
9:15action
9:15take the economies of China and the
9:17United Kingdom during the 1700s China
9:20was a vast lush and plentiful nation
9:24with a large population and extremely
9:27arable land it had absolutely no
9:30incentive whatsoever to build factories
9:32at this point in time because it could
9:33easily support its population with the
9:35farmland had available if someone went
9:38to get richer they would just work more
9:40farmland England on the other hand was a
9:43tiny desolate rock that had farmland
9:46sure but it was pretty lackluster in
9:49comparison and almost every square mile
9:52of the nation that was usable had been
9:54used so factories were the next logical
9:57step on getting wealthier it's not
10:00necessarily that a nation like China
10:02wasn't able to embrace this technology
10:03it's more they had no real incentive to
10:06do so
10:07- most people that hear this theory for
10:09the first time it seems pretty silly in
10:12the 21st century we see nations that
10:14transition from agriculture to industry
10:16becoming very very wealthy in a short
10:18space of time so it almost seems like
10:21this theory is wrong but it isn't
10:24nations and individuals will naturally
10:26take the path of least resistance which
10:29means Adam Smith's theory holds true
10:31even until this day nations start off
10:34farming because it is easy once they
10:38exhaust the potential of that they move
10:40on to industry and once they have
10:42finished with that they then begin to
10:43move on to a service-based economy this
10:46whole path of least resistance thing has
10:48also had a lot to do with the other
10:51major takeaway from Adam Smith's work
10:56The Wealth of Nations highlighted above
10:59all else trade as a key driver that will
11:02increase wealth in any market and on any
11:05level Adam Smith used the example of a
11:07worker in a pin Factory and postulated
11:10that if a worker woke up one day and
11:12committed his entire working day to
11:13producing a pin from scratch it is
11:16extremely unlikely that he would even be
11:18able to produce one pin he would have to
11:21dig up the ore and fire the furnace
11:23refine the metal and then machine it
11:25into a pin and this would take a long
11:27long time it would also take a lot of
11:30expertise what Adam Smith suggested
11:33instead was that one worker specialized
11:35in digging up the ore and other
11:36specialized in refining it another
11:38specialize in machining it and then even
11:40beyond that another worker specialized
11:42in going out and actually selling these
11:43pins to you and I this sounds like the
11:46most obvious thing ever but it was a
11:49pretty new idea for the ages on a local
11:52level people tended to be a jack of all
11:54trade peasants could toil fields but
11:57also build homes and do minor repairs as
11:59needed and the idea that someone would
12:01focus their entire work towards one
12:03specific task was pretty scary to a lot
12:06of people but it worked as industrial
12:09centers grew so too did specialized
12:12roles now with specialized roles came
12:15the need to trade if I worked in a newly
12:18created factory as a loom oiler or
12:20whatever
12:21well I can't eat well oiled looming
12:24machines so I need to make money from my
12:27job as a loom oiler and then use that
12:29money to buy everything else that I need
12:31as opposed to just doing it all myself
12:33now because everybody else will be
12:36specialized in other roles they will
12:38also need to trade their expertise to
12:40facilitate all their needs in life and
12:42that is ok because people are becoming
12:46so specialized that they will get really
12:48really good at what they are doing
12:50meaning that we will have more stuff
12:52over all the active trading also has its
12:56inherent benefits you see people need
12:58certain things you need food and water
13:01and shelter and clothing and if a whole
13:03lot of people are getting really good at
13:04building homes let's say but nobody is
13:07making clothes
13:08well then the supply of clothing will be
13:11lower than the demand for clothing and
13:13the price will rise savvy and logical
13:17participants in the economy will see
13:19this and decide that it is a good idea
13:21to specialize in making clothes because
13:23it is a very profitable industry and as
13:26more people move into that industry and
13:28produce more clothes the price will fall
13:30back into line once again now the same
13:33is true on a larger level between
13:35Nations Smith said that certain nations
13:38are inherently better at producing
13:40certain Goods and rather than nations
13:42trying to make everything themselves
13:44they should instead specialize and trade
13:47with each other this took a little bit
13:49longer to catch on though because well
13:51nations were still obsessed with the
13:54zero-sum ideology of McCampbell ISM
13:56where every trade had a winner and a
13:59loser and realistically it took a while
14:01for nations to realize that hey actually
14:04trades that are a win-win do exist this
14:08also sounds pretty logical to us today
14:10this whole idea was really highlighted
14:13by Adam Smith and was dubbed the guiding
14:16hand of the free market
14:18Smith loved this idea so much that he
14:21theorized that the best way to improve
14:23wealth was just to accommodate this
14:25market savvy individuals will logically
14:28do what is going to be most profitable
14:30for them and the aggregate result of
14:33very profitable individuals is a very
14:35wealthy nation to Smith the role of
14:38government was only to make sure that
14:40markets were maintained you know both
14:43jailing scammers and enforcing contracts
14:46and making sure people were safe to
14:48actually conduct this business but
14:49otherwise they should stay out of it
14:52which again was a very big deal feudal
14:56monarchies were basically command
14:58economies people got what they were
15:00given and most people leave to produce
15:02grains for the state and were housed and
15:04protected by their representative Lords
15:06suddenly everybody having the ability to
15:08pick and choose what they wanted was
15:10starting to look a lot like some of the
15:12political movements at the time at the
15:15same time the American Constitution was
15:17being penned outlining how men had the
15:20right to pick and choose their leaders
15:22Adam Smith was out lying how men had the
15:25right to pick and choose their own
15:26products capitalism was democracy with
15:30dollars popular items got voted for with
15:32money and unpopular products faded into
15:35obscurity so as hard as Smith tried to
15:38avoid getting political he may have
15:40helped lay the foundation for the
15:41democratic movement that was taking over
15:43the modern world at this time
15:48Smith's ideas sound so logical to us
15:51today because we live in a wealthy
15:53society that was afforded to us by these
15:56policies we don't think twice about
15:58using a phone imported from overseas
16:00that was made of hundreds of components
16:02produced by thousands of people from
16:05dozens of countries because we know this
16:07is the cheapest and most effective way
16:09to produce these kinds of products
16:11thanks to Smith that was not to say that
16:14Smith's ideas were perfect Oh No
16:17Smith basically invented economics but
16:20he also put a lot of faith in people you
16:23see the guiding hand of the free market
16:25and perfectly logical trades and
16:27rational participants they are all nice
16:29theories but sharknado 5 the global
16:33swarming would not exist in Adam Smith's
16:36reality from this a new brand of
16:39economics was created that accounted for
16:41people being dumb so in the next video
16:44in this series we will be looking at
16:46behavioral economics and how it
16:48addresses and explains the shortcomings
16:50of our silly silly people in an economy
16:53hi guys hope you enjoyed the latest
16:55video if you did please consider liking
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17:01if you want to have your say about what
17:03country or topic we explore next please
17:05consider supporting the channel like
17:06these awesome people did thanks guys bye

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