Saturday, December 11, 2010

I Want to Make Money: Adam Smith (1723 – 1790)

Plaque commemorating the house in which Adam S...Image via Wikipedia
When Adam Smith published his textbook An Inquiry into the Nature and Causes of the Wealth of Nations, little did he know that he had written the bible of the economic system now called ‘capitalism.’
As if it was an omen of things to come, Smith published his landmark book (Wealth of Nations, for short) precisely in the year of 1776—the same year of the declaration of independence of the United States of America.

The three basic doctrines that Adam Smith espoused in his economic textbook are (1) The invisible hand theory (2) Laissez-faire, and (3) Division of labor.

The invisible hand theory is a metaphor for the invisible forces that is competition and selfishness. Competition brings out the best in individuals, and if individuals see to their own survival and comfort they will prosper. In the end, the cumulative individual efforts will spill over to the community. And everyone will benefit. For example, when students seeking their own advantage (selfishness) go beyond high school on to college and get college degrees, those same individual will during their lifetimes be more productive. Not only will they be professionals and well educate, but they will represent their communities and become respected spokespersons. In addition they will surely earn higher incomes pay more taxes, thereby improving their communities and the entire nation.

Laissez-faire (from the French ‘leave it alone’ or ‘hands off,’ means that the government should not interfere with the citizens private lives and businesses. The less government is the best for the people. So, government should have a minimum role in guiding of the life of the country. That is why in the United States it is anathema for the Government to own private enterprises. Adam Smith’s laissez-faire capitalism almost floundered during the Great Depression, and the government had to step in and rescue and resuscitate the moribund system.

The division of labor doctrine argues for specialization. In the olden times a ‘jack of all trades, master of none’ was a revered figure and much sought after. Today, a jack with no trade will starve. A GP—a general practitioner medical doctor will not earn 1/20th of what a plastic surgeon earns. That is why colleges and universities force students to declare a major, which is a way of saying: ‘you must specialize, if you want to make a good living.’ In this section of the Wealth of Nations, if one looks closely, one could learn the secret of wealth creation: either you sell your skills or you sell a product. Individuals that sell both will inevitably accumulate wealth.

In sum, let’s not ignore the wisdom of Adam Smith’s legacy, appropriate what he taught in the Wealth of Nations, and make your own wealth. Conversely: if you wish to be poor, disregard the above points.

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