ADAM SMITH: Wealth of Nations (Book I: Introduction and Chapters 1-3)

There’s an old story about Milton Friedman, the American economist, on a tour of a third world country.  He saw a dozen men digging a long ditch with shovels.  Friedman asked his guide why they didn’t use a backhoe to get the ditch dug faster and more efficiently.  The guide replied that shovels required more men and helped reduce unemployment.  So Friedman said then maybe you should give them spoons; that would take even more men and reduce unemployment even more.  Adam Smith would have appreciated that story.  For Smith the goal of a nation’s economy is not necessarily to employ people; its primary goal is to produce wealth.  He states his theory in the very first sentence of his book: The annual labour of every nation is the fund which originally supplies it with all the necessaries and conveniencies of life which it annually consumes… The “fund” that each nation builds up measures its ability to feed and care for the citizens and provide them with national security.  When the fund increases life generally improves.  When the fund decreases life generally deteriorates.  So how can a nation make sure that the national fund increases so life will become better for the average citizen?  Smith says there are two main factors involved: first, by the skill, dexterity, and judgment with which its labour is generally applied; and, secondly, by the proportion between the number of those who are employed in useful labour, and that of those who are not so employed.  So the unemployment rate is important as a measure of national economic well-being but it is a secondary consideration.  The first consideration is the skill, dexterity, and judgment with which its labour is generally applied… or, in modern terms, our use of technology.  For example, one man using a backhoe can dig a ditch much faster and much better than a dozen men with shovels.  That doesn’t mean that there will then be eleven men unemployed and one employed.  For the sake of national wealth it means that one man is employed as a backhoe operator, eleven men are freed up to do or make something else, and the nation has a ditch dug in one day instead of a week.  One ditch may not be a big deal but spread across a nation of 300 million people it soon becomes a big deal.  Adam Smith uses an example of a pin-maker to explain the advantages of technology and the division of labor.  To take an example, therefore, from a very trifling manufacture, but one in which the division of labour has been very often taken notice of, the trade of a pin-maker: a workman not educated to this business…could scarce, perhaps, with his utmost industry, make one pin in a day, and certainly could not make twenty. But in the way in which this business is now carried on, not only the whole work is a peculiar trade, but it is divided into a number of branches… ten persons, therefore, could make among them upwards of forty-eight thousand pins in a day. Each person, therefore, making a tenth part of forty-eight thousand pins, might be considered as making four thousand eight hundred pins in a day. But if they had all wrought separately and independently, and without any of them having been educated to this peculiar business, they certainly could not each of them have made twenty, perhaps not one pin in a day…  Using Smith’s math we find that the use of technology can increase output from 20 units to 4800 units per worker per day.  This is truly amazing.  At this rate any country would soon become wealthy.  Good.  Then let’s roll up our sleeves and get to it.  Not so fast.  Ask yourself: do I really want to be a pin-maker?  In fact, I’m not even making a whole pin.  I’m just a worker performing one process in making a product.  Does the world really need more pins?  What do people work for?  Dostoevsky wrote Notes from the Underground about a civil servant who could probably find a job somewhere in the modern world.  But Billy Budd was a foretopman.  What’s that?  Hint: in today’s world Billy would be out of a job because ships don’t have sails.  Moses was a prince and then a shepherd.  How would he get along in today’s world?  Adam Smith knows that times change; and as the world changes so does the nature of our work.