Books for Entrepreneurs: “Wealth of Nations” by Adam Smith

Ok, ok, ok. Before we get started I know what you’re thinking, “Adam Smith? The Scottish economist and philosopher? Are you seriously going to suggest reading his book from 1776? How can that possibly be relevant to me launching and running my business in 2016?”

It’s true that 240 years ago people shat into buckets in their bedrooms and then dumped their waste directly into the street, the only electricity around came from lightning bolts, and there was no Twitter. It’s true that Adam Smith could never have fathomed the reaches of a truly globalized economy with information technology, he probably couldn’t have fathomed flying in an airplane or even riding in a motorized car. But the brilliance of Smith is that he didn’t have to predict the future. He was looking to the past to explain the present, and his lessons apply to any sort of product or service whether it be wool or Intel processors.

Adam Smith is considered the father of capitalism because of how he was able to explain the phenomenon of trade and the emergence of a moneyed economy. He was the first economist to pick apart the history of business, find the underlying reasons for why things happened, and explain the complicated relationship between money and politics.

Reading “Wealth of Nations” might seem like a waste of time to those who prefer to believe that they are independent entities that have nothing to do with history except for carrying the same color skin as their parents. We would all like to believe that we are free from the past and free to make our own decisions in our own best interests. But to believe that is to mistake the defining characteristics of one’s life as being caused by chance.

We are all made up of a very small part of everything that came before us, and we will make up a very tiny part of everything that comes after us. Each word that you’re reading right now was forged over millennia of exchange and communication, from the grunts of cave people to the structures of Latin to the seasoning of Germanic tribal languages, mangled between social classes in England, cleaned by Webster and the makers of American dictionaries, taught to me, practiced by me, influenced by all of the reading and speaking and listening that I’ve ever done until I can type just this one sentence.

What is true for language is true for societies – and economics in particular. Smith goes through the painstaking process of explaining origins of the modern economy. Where did money come from? Why does a pound not weigh a pound? How were cities formed? How do countries trade with each other? What is value? How do profits fit in?  What are the purposes of capital?

Smith’s history is so well-explained that the modern economy seems to follow a Darwinian evolution. Our economy is the way it is today because it’s the only way that an economy can be. Good ideas rise to the top, bad ideas get weeded out. It was the natural selection of business, politics, and economics that got us to here. Keep in mind, Smith was writing almost 100 years before Darwin published his first research.

Important takeaways

Smith’s theories cannot be contained in a mere blog post, but there was one idea that had a strong impact on me. Money is a placeholder for value, but the value of what exactly? Smith breaks everything back down into time, or more specifically, labor. The cost of everything is defined not by money, but by the labor that goes into its production. Supply and demand play a role in determining the price of something, but a product’s value can only truly be determined by the amount and type of labor necessary to produce it. Some types of labor are more costly than others, for example an expert who has studied for years to perfect a trade can command a higher price for their goods. But that price is only a direct extension of the time that went into producing that product, which is longer when you count the education and practice, than someone making a product for the first time.

Then there’s his famous idea of the invisible hand of the market. The invisible hand phenomenon is the natural correcting of prices and quality that choice brings to the market. The best products will be purchased more than poor products. Prices for better products will rise, but as soon as they get too high the products will stop being purchased. This natural limit on pricing keeps producers honest. It’s also why monopolies are so dangerous in a capitalist economy.

Understand the economics you are operating in

Starting a business and not understanding capitalism is like trying to operate on a kidney without understanding how the whole body works. You might be a kidney expert, but you’re constrained to the physical reality of the ecosystem that contains the kidney. It can never be separate or independent from that system. So whether your ambitions are local or global, profit-driven or social-driven, product-based or service-based, “Wealth of Nations” should be required reading.

I wish you the best of luck in all of your endeavors in 2016!