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The Wealth of Nations | Summary

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Summary

Book 1: Of the Causes of Improvement in the Productive Powers of Labor

This book develops basic definitions for such broad concepts as "price" and "stock." Smith first describes the division of labor—the trend of increasing specialization among workers in any industry—which he regards as a primary driving force of economic growth. He attempts to clarify the role of money in an economic system, arguing that money does not represent a nation's real wealth but instead serves as a way of storing and exchanging such wealth. He takes a three-pronged approach to the analysis of prices, which he breaks down into wages (paid to the worker), profit (paid to the investor), and rent (paid to landowners). The price paid for any good, he claims, must be split up among these three. Anything not used to pay workers or pay the rent must be a profit to the seller. Smith then embarks on a detailed analysis of each of these three components, identifying factors that cause them to rise and fall relative to one another. Finally, he offers a long discussion of the price of silver, with the broad aim of showing that silver prices do not simply decline over time as more of the metal is mined.

Book 2: Of the Nature, Accumulation, and Employment of Stock

Smith provides a theoretical framework for thinking about "stock," meaning any assets that might be used in a profit-making enterprise. By dividing stock into capital and revenue, he argues that societies thrive when a large proportion of their stock is invested as capital, rather than spent on economically unproductive activities. He offers a more detailed treatment of money than in Book 1, reiterating his view that money is, essentially, not as special as people seem to think: like any other commodity, it can be "bought" by any person (or nation) with something of value to trade for it. In the book's last chapter, Smith describes three concentric types of commerce, which he terms the home trade, the foreign trade of consumption, and the carrying trade. Commerce carried on domestically (the home trade) is, he suggests, the most beneficial to the home country, while that carried on abroad (the carrying trade) does the least for domestic industry.

Book 3: Of the Different Progress of Opulence in Different Nations

This book, the shortest of the five, takes the form of an economic history lesson. Smith first proposes a "natural" model, according to which agriculture is the original and predominant economic activity, followed by manufacturing, and then by trade. This pattern, Smith says, was disrupted in medieval England, where various legal and social forces combined to give towns an economic advantage over the countryside. Oppressive landlords, for example, slammed the brakes on economic progress in their rural domains, while town-dwellers were granted considerable freedom to manage their own affairs. Consequently, urban economic growth outpaced rural growth for centuries, but eventually a surplus spilled over into the country in the form of investments by wealthy citizens. Thus, in a roundabout way, the development of towns contributed to the cultivation of the countryside.

Book 4: Of Systems of Political Economy

Although allegedly an overview of different politico-economic systems, this book is almost entirely preoccupied with mercantilism, the system of thought and policy that dictated Great Britain's trade relationships in Smith's time. According to the mercantile system, a country's wealth was determined primarily by its reserves of precious metals, and it was therefore important to encourage trades that brought currency back to the home country. Smith spends eight chapters critiquing both the assumptions of mercantilism and the policies it has promoted, including those that encourage exportation (e.g., bounties and drawbacks) and those that restrain importation of various goods (e.g., bans and tariffs). British colonial policy, something Smith views as almost entirely dictated by mercantile interests, gets a lengthy chapter of its own. The last chapter surveys an alternative system—called the agricultural system by Smith—popular among French intellectuals of the day.

Book 5: Of the Revenue of the Sovereign or Commonwealth

Finally, Smith turns his attention to the national budget. He lays out the different costs incurred in governing a kingdom, from the building of roads and bridges, to the expense of palaces and carriages for the monarch. Some of these costs, he argues, can be minimized without resorting to taxation, but most cannot. In the "tax chapter," Smith gives a catalog of different tax systems that have been tried by Great Britain and its European neighbors. None of these, he admits, are perfect, but some—such as a tax on luxury goods—are less oppressive than others, and therefore more likely to be accepted by the public. The book closes with a sobering consideration of Britain's national debt, which Smith sees as having spiraled dangerously out of control. In order to get the debt back into line, he contends, Great Britain will either have to raise additional funds, perhaps via a commodity tax, or cut back on expenses. If the latter is to be done, Smith recommends letting go of the American colonies, whose upkeep has been a continual drain on Britain's resources.

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