THE WEALTH OF NATIONS SUMMARY (BY ADAM SMITH) — Transcript

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1. 0:00Adam Smith was a Scottish economist, philosopher and author, and a very successful one at that
2. 0:07His masterpiece, The Wealth of Nations was released in 1776
3. 0:12and was at that time considered very controversial, but it has laid out the groundwork for pretty much all economics since
4. 0:20Smith is often referred to as "the father of economics" or "the father of capitalism" for good reasons
5. 0:28The Wealth of Nations main message is probably that we must trust in incentives
6. 0:34Adam Smith was a pragmatist who knew that people will always act in their own
7. 0:39self-interests, and therefore, every economic policy introduced must always take that into account
8. 0:46Secondary and tertiary effects must always be considered
9. 0:50A society can do no better than to set up the correct incentives so that humans will act in the best way possible
10. 0:58This is a top 5 takeaway summary of The Wealth of Nations, written by the father of economics Adam Smith
11. 1:06And this is The Swedish Investor, bringing you the best tips and tools for reaching financial freedom through stock market investing
12. 1:14... who apparently also likes to go off topic sometimes and talk economics. Well!
13. 1:22Takeaway number 1: Productivity is king
14. 1:27The people of a nation will be better supplied with all the products and services that they have occasion for
15. 1:32if one or two of the following happens:
16. 1:36First, an increase in the number of people who have a job compared to those who don't
17. 1:41And secondly, an increase in the productivity of those jobs
18. 1:46This could be said to increase their "wealth"
19. 1:48It depends much more on the latter than the former
20. 1:53Thousands of years ago, our ancestors were employed, all of them
21. 1:57Every day, everyone had the job of catching food for themselves
22. 2:01Yet today, even the poorest people of a western civilization
23. 2:06are wealthier than the kings and queens from those times!
24. 2:10Consider this story:
25. 2:11A man was handed the task of inspecting the construction of a waterway in a certain communistic land
26. 2:18When he arrived at the site, he saw a thousand people digging with spades while great digging machines stood idle nearby
27. 2:26He asked the manager of the project:
28. 2:29"Why don't you use the machines over there instead?"
29. 2:32"Well, sir, that's because these people would be unemployed in no time!"
30. 2:37The inspector thought about this for a minute and then returned home
31. 2:41The next day he went back to the site and went straight to the manager
32. 2:45He handed him a spoon
33. 2:48"Why don't you use a thousand of these instead?"
34. 2:52To the wealth of a nation, productivity is king. It is improved by three factors primarily:
35. 3:01- Dexterity or skill in doing something
36. 3:04- Avoiding loss of time changing from one task to another; and
37. 3:08- Proper use of machinery
38. 3:10The two first factors come from the division of labor
39. 3:15Instead of having everyone in a society doing everything themselves,
40. 3:19we should each do what we are best at, and then trade products and services with each other
41. 3:24The greater the extent of this trade (or the greater the market) the greater the possible division of labor and thereby
42. 3:32the greater the productivity
43. 3:34Just think about all the specialized products and services that we exchange with each other in a great city
44. 3:41You would probably not find a store like this one in a small country village, but in the great city of New York, you can
45. 3:49The division of labor increases as transportation is improved. Adam Smith gives an example from his experience in the 18th century:
46. 3:596-8 men can, by water carriage, transport the same amount of goods in the same time with a single ship
47. 4:06as 100 men with 50 broad wheeled wagons and 400 horses
48. 4:11This is why rivers and sea coast towns often develop faster. They allow a greater division of labor as they extend the market of trade
49. 4:21So ...
50. 4:22Ships were much better than horses,
51. 4:24but I think that Adam Smith would be jealous if he looked at us today, because now we have Amazon!
52. 4:38Takeaway number 2: Money: What is it, and why do we use it?
53. 4:44When the division of labor is established, every man supplies himself with but a small amount of the goods that he actually needs
54. 4:52Instead, he participates in exchanging
55. 4:55But in the beginning,
56. 4:56it must have been very inefficient to try to trade with one another when supply and demand didn't always match ...
57. 5:05Hey Franky!
58. 5:06Look at this nice spear that I just created!
59. 5:09Could I get some of that tasty meat that you have if I give you my spear?
60. 5:13No deal, Bob. I already have like 10 spears, but I could use a pound of salt
61. 5:21Hey Randy! Look at this nice spear that I just created!
62. 5:24Could I get like a pound or two of your salt if I give you my spear?
63. 5:30No deal Bob. You know that I'm too old to go hunt these days, but I could use a new shirt.
64. 5:38Hey George! Look at this nice spear that I just created! Could I get a shirt if I give you my spear?
65. 5:45Yeah, of course Bob. I'll be happy to trade a spear for a shirt
66. 5:49Nice!
67. 5:50Oh, but I think that one spear is probably worth more than one shirt. How many shirts have you got?
68. 5:57I only have one shirt to spare at the moment, unfortunately
69. 6:00Well, then no deal George!
70. 6:04This was quite inconvenient to say the least
71. 6:07Enter: Money
72. 6:10Money facilitates the exchange of commodities that we produce
73. 6:14To get back to the first takeaway, one can say that they increase the productivity of exchange
74. 6:20Quite early, metals were used as money and they have at least two qualities which make them suitable for this purpose:
75. 6:28They basically do not perish and they can be divided into many parts and then fused again
76. 6:35Some things have value in use - like spears, meat, salt and shirts
77. 6:42Other things have value in exchange - like bills, coins and metals
78. 6:48That which has high value in one, often is quite worthless from the other standpoint
79. 6:53You can't use a dollar bill for anything. I mean you can't eat it or anything
80. 6:58Similarly, a spear might be quite useful but it doesn't work well for exchange, as we just saw
81. 7:06As long as people trust that money can be exchanged for something else that they are in need of later,
82. 7:10they are happy to trade their own produce for that money
83. 7:14It all boils down to that: Trust
84. 7:17Warren Buffett has said that it is quite misleading that on the backside of every dollar bill, it says "in god we trust"
85. 7:25Because, what it should actually say is "in The Federal Reserve we trust"
86. 7:35Takeaway number 3: The three components of price
87. 7:40The real price of everything is its price in labor
88. 7:44Something that takes more time, energy or resources to bring up often has a higher real price
89. 7:51Bob didn't want to make that final deal with George because he thought that his spear had a higher real price than George's* shirt
90. 7:58However, there's also a nominal price and that is the price as measured in money
91. 8:04Because it's difficult to measure and compare labor, we've come to estimate real prices in terms of money instead
92. 8:12The price of everything that is produced resolves itself into either one or more of the following three components:
93. 8:20- A wage, to pay the labor who did the work
94. 8:23- A profit, to pay for the capital that was laid out for the work to happen
95. 8:27- And a rent, to pay the holder of the land where the work and or exchange must take place
96. 8:36We all know that wages can differ a lot between different occupations
97. 8:41Just look at the average salary of a McDonald's cashier and compare that to the salary of a neurosurgeon
98. 8:47Similarly, profits differ from industry to industry, but not as much, and also they should average out over time,
99. 8:55something that we'll get to later
100. 8:57These are the average profits measured as return on equity for different industries during the period 1999 to 2019
101. 9:07And the factor that can differ the most is of course rents
102. 9:11In New York, for example,
103. 9:13you'll have to pay about $5,200,000 per acre of land, while in the country village of Eksjö in Sweden, you'll pay only about $20,000.
104. 9:23How much you have to pay to buy land correlates well with how much rent you can get for it
105. 9:29Because of this, the proportions that make up the price of a certain product or service differs a lot depending on its type and
106. 9:37where it is bought
107. 9:39A massage for example costs $60 an hour in the previously mentioned Eksjö,
108. 9:45while it costs $105 an hour on Manhattan in New York
109. 9:50The difference in price between the two locations can pretty much fully be contributed to the difference in rents
110. 9:56And some of it in the difference in wages that are necessary to sustain someone in New York
111. 10:02The price of a certain product or service is determined by the supply and demand
112. 10:07Actually, it is determined by something called the "effectual demand",
113. 10:11which is those that demand the product at a price so that it allows for the wages of workers,
114. 10:16the profits and replacement of capital of businessmen, and often some rent for landowners
115. 10:22I mean ..
116. 10:23I want a Tesla. It's just that i'm not ready to pay $70,000 for it yet
117. 10:28Thus i'm a part of the demand, but not the effectual demand, that can actually bring the product to the market
118. 10:40Takeaway number 4: The three components of price, part II
119. 10:45Let's have a look at these three components separately
120. 10:49A worker will always demand a wage so that he can at least purchase the necessities of life for himself and his family
121. 10:57This is the bare minimum which even the simplest type of job must pay, because otherwise,
122. 11:02such workers will cease to exist over time
123. 11:06In countries where no minimum wages exist, the simplest jobs will tend to be at this level and not higher
124. 11:13This is because workers are at a natural disadvantage when trying to bargain how much of that price which was mentioned earlier
125. 11:20which should go towards their salary
126. 11:22They typically exist in abundance compared to capital and land and
127. 11:27moreover, they typically do not have much money spared so they can't afford to wait for a better opportunity
128. 11:33But salaries can differ a lot which we shall see later
129. 11:38A businessman is someone who employs his capital to earn a profit within a specific trade or industry
130. 11:44The more capital that is employed in a certain industry, the higher the competition there becomes, and the lower the profits tend to be
131. 11:53So it must be in society as a whole too. If there are no intelligent ways to employ capital anymore returns will be low
132. 12:02Over time, even though some companies can hold on for very long, returns on capital will even out across industries
133. 12:10This is because where returns are high, there will be incentives to move capital, and where returns are low,
134. 12:17there will be incentives to remove capital
135. 12:20This restores an equilibrium of sorts
136. 12:23If you want to know more about which types of industries that can withstand competition the longest, head over to my summary of "Competitive Strategy"
137. 12:33An owner of land will either try to sell his land for a profit or lend it out for a rent
138. 12:39Either way,
139. 12:40someone down the line will eventually try to lend it out for a rent,
140. 12:44or use the land themselves, and then it is they who gain the rent
141. 12:48Rents vary A LOT depending on location
142. 12:52Some types of land basically afford no rent at all. while those that people find attractive -
143. 12:57land in cities or beautiful beach properties - earn a lot of it
144. 13:03Something that should be noted is that rent is quite like a monopoly price
145. 13:08After normal wages have been paid and the businessman have been able to replace his capital with a decent profit,
146. 13:14the owner of the land will pretty much take what's left
147. 13:18Land is immovable and irreplaceable,
148. 13:21and is therefore peculiar compared to the two other types of revenues that can be earned
149. 13:31Takeaway number 5: Why some jobs pay more than others do
150. 13:36So ...
151. 13:37Profits of industries should average out over time,
152. 13:39and more rent is given to the person who holds a property in a city or at a beach, okay ...
153. 13:45But why the **** does my neighbor have a higher salary than me, even though I'm much smarter than him?!
154. 13:51The wages of labor are decided by supply and demand, like everything else
155. 13:56The following five factors tend to affect this to increase the wages of a specific job
156. 14:02- The expenses and difficulties of learning it
157. 14:05- The inconsistency of payments
158. 14:07- The trust and responsibility
159. 14:10- The improbability of success; and
160. 14:13- The hardship dirtiness and disagreeableness of the job
161. 14:17In the 18th century a blacksmith had to be an apprentice for many years before he was allowed to open his own trade
162. 14:24During this time, he earned very little or basically nothing at all
163. 14:29The higher wage that he got once finished is a compensation for those years, and the apprenticeship
164. 14:35helps in limiting the supply of such workers
165. 14:39A mason could only work during good weather conditions, and so his hourly wage had to be compensated for those idle hours
166. 14:48A greater responsibility means that fewer people are suited for that type of work and therefore wages are higher
167. 14:55Back in the days, lawyers and doctors had such roles (and they still have by the way)
168. 15:02The improbability of success is another factor that matters
169. 15:06The expected wage of a job with a very high fail rate is often even lower than normal jobs,
170. 15:12but the person who succeeds typically gets the salary of those who fail too (kind of)
171. 15:17People searching for gold or treasure belonged to that category
172. 15:22And in the 18th century the most dirty and disagreeable job one could possibly get
173. 15:28was probably that of the public executioner, and the pay was thereafter
174. 15:34Today, a difficult and expensive job to get would be that of the previously mentioned neurosurgeon
175. 15:40An inconsistent one might be that of a real estate broker
176. 15:44A job which requires a lot of responsibility. is that of a pilot
177. 15:49Improbability of success is high among elite athletes and musicians
178. 15:54And the dirtiest and most disagreeable job is probably that of a hedge fund manager!
179. 16:02This book is more than 900 pages long, so I'm definitely going to make a part 2 on this with 5 additional takeaways
180. 16:10In part 2 we'll cover topics such as globalization,
181. 16:14free trade, and the purpose of a government
182. 16:17So you'll probably get to hear more about incentives in part 2!
183. 16:22See you soon! Cheers!