Written in 1776, this book remains true in every word.

The Timeless Wisdom of this book

Today, I want to talk about one of my favorite books that simplifies the understanding of economics. This book, "The Wealth of Nations," was penned by Adam Smith who is known as father of modern capitalism. Smith wrote this masterpiece in 1776. The amazing thing about this is that the insights he shared in “1776” still remain TRUE in our modern world TODAY.

Source: Trust me 😄

1. Trust in Incentives: The Power of Economic Policies

At the heart of Smith's teachings is the idea that INCENTIVES play a crucial role in guiding how people act. In simpler terms, he believed that if you want people to behave in a certain way, you need to give them a good reason (Incentive) to do so.

Basically he is saying that people are selfish.

That's why many countries structure their tax policies to encourage businesses to innovate, leading to economic growth. This practical perspective underscores the need for policies that align with human nature, ensuring that all potential outcomes are considered.

2. Productivity: The Cornerstone of Wealth

Smith emphasized that the wealth of a nation is all about its PRODUCTIVITY. He argued that the division of labor, where individuals specialize in specific tasks, enhances productivity. The rise of automation and technology in factories is a testament to this principle. Machines taking over repetitive tasks allows humans to focus on more specialized roles. This division, Smith argued, increases as transportation improves, leading to greater productivity. For instance, the advent of global shipping and e-commerce giants like Amazon has revolutionized trade, echoing Smith's insights from centuries ago.

3. Money: Facilitating Trade in Modern Economies

Smith explored the role of money as a medium of exchange, highlighting its importance in facilitating trade in a world driven by the division of labor. In our globalized era, tools like credit cards or digital wallets have streamlined transactions. These modern innovations embody Smith's idea of money, emphasizing the underlying trust that sustains economic exchanges. As an example, consider the early bartering systems where a spear might be traded for meat or salt. Such direct exchanges were often inefficient, leading to the adoption of metals or coins or notes or crypto as a common medium, simplifying trade.

4. Components of PRICE

Smith broke down the PRICE of any product or service into three components: WAGES, PRFOITS, and RENTS. Every purchase we make reflects these components. Consider the real estate market in cities like San Francisco or New York. The high property prices aren't solely due to construction costs but also the premium location. Smith's insights shed light on the complex factors that determine the price of goods and services.

Diving Deeper into Price Components

Each component of price has its nuances:

• Wages: Determined by the supply and demand of labor. Factors like the difficulty of learning a job, inconsistency of payments, and the level of responsibility can influence wages. For instance, tech jobs in Silicon Valley offer high salaries due to the specialized skills required and the cost of living in the area.
• Profits: Profits across industries tend to average out over time. Streaming services like Netflix invest heavily in original content, expecting high returns as their subscriber base grows. Smith believed that high returns in one sector attract more capital, leading to increased competition and reduced profits.
• Rents: Vary significantly based on location. Vacation rentals in tourist hotspots like Hawaii command higher prices due to their prime location and demand. Smith noted that land is immovable and irreplaceable, making its revenue unique compared to wages and profits.

6. Unraveling the Wage Puzzle

Smith identified factors that influence why certain professions earn more than others. For example, the high earnings of movie stars can be attributed to the improbability of success in the entertainment industry. On the other hand, jobs in hazardous environments, like deep-sea diving or mining, pay more due to the associated risks. Smith's factors, from the expenses of learning a job to the nature of the work, provide a lens through which we can understand wage disparities in our modern world.

In Conclusion

Take some time. Think about this, there is this one guy in 1776, who made a whole thesis about human psychology and everything about modern capitalism. CRAZY

The central thesis of Smith's The Wealth of Nations is that our individual need to fulfill self-interest results in societal benefit. He called the force behind this fulfillment the INVISIBLE HAND.

Talking about invisible hand is a bigger story. So I will explain it later in other blogs.