Matt Watson

The Wealth of Nations

Matt Watson

Lately, I’ve been reading The Harvard Classics when I get a chance, and I am currently on Volume 10, which is The Wealth of Nations, the foundational treatise spelling out the classical principles of free trade and commerce. Written between the years 1766 and 1776 by the English philosopher Adam Smith, The Wealth of Nations is one of those classics that remind you why you read the classics.

Going back to looking at the basic principles behind free markets spelled out in such a simple manner helps one to put many things into perspective, including current political economic debates and, more excitingly, one’s own standing in the economic food chain.

I have only read some 40 of 500 plus pages, so there’s that. But so far, the concept that is haunting me is what Smith calls the division of labor.

I’ve never been good at division — ask my students when I screw up their averages — so this is probably dangerous territory for me.1

Nonetheless, the principle of the division of labor says that free trade and commerce allow for individuals in society to supply their “necessaries and conveniences” abundantly by working one trade and selling the surplus they do not need for themselves to someone else. In other words, our labor is far more productive when concentrated to a specific task than if we were all running about the jungle having to fend for ourselves in every aspect of life from foraging for food to making our own clothes and houses.

The whole point of living in a society of free and developed trade and commerce — what Smith calls simply a “civilized country” (13) — is not to have just enough to live off of, but rather to have a surplus of wealth. Free trade and commerce is, therefore, not (supposed to be) a zero-sum game. Wealth, whether we’re talking about actual material goods or their representation in money, is created in abundance for everyone, and it’s largely due to the efficiency of the division of labor.

“Every workman,” says Smith, “has a great quantity of his own work to dispose of beyond what he himself has occasion for,” meaning he can sell the surplus and build wealth. For this reason, already by the time of Smith’s writing, he can say that “the accommodation of an European prince does not always so much exceed that of an industrious and frugal peasant” (15-17).

In a way, perhaps this is even more true today, where people living in poverty or near it use and consume much of the same stuff as presidents and CEOs — microwaves, the Internet, air conditioning, clothes, donuts, a lot of things.

However, I’m not sure most of us in the current economy are as well off, relatively speaking, as Smith’s hypothetical industrious and frugal peasant. And certainly, a great swath of the American populace does not possess anything like an abundance of wealth.


Because many do not reap the surplus produce of their labor.

And why is that?

Well, folks, the answer is as old as prostitution itself: rent and stock. Says Smith:

[T]he whole produce of labour does not always belong to the labourer. He must in most cases share it with the owner of the stock which employs him. […] As soon as the land of any country has all become private property, the landlords, like all other men, love to reap where they never sowed, and demand a rent even for its natural produce. […] In every society the price of every commodity finally resolves itself into some one or other, or all of those three parts [i.e., labor, stock and rent]. (50-51)

So according to my understanding, the laborer’s surplus produce (which is measured, essentially, by the money/wealth he brings in) is divvied up to the owner of the enterprise and the owner of the land (and these two people may or may not be the same person). This seems fair and equitable, but problems arise quickly.

Smith illustrates, over several pages, why it is that the laborer gets the short end of the stick, but the reason is basically that the laborer has less bargaining power. He often lives paycheck-to-paycheck, so to speak, and has to take whatever he can get, even if it means the great part of his surplus produce goes to the bosses. There are other factors that can also give the landowners and stockholders the edge at the negotiation table, such as laws that favor them, or their ability to conspire to fix wages.

This is a classical understanding of how wages are determined, and while it is very basic and probably doesn’t take into consideration specific present-day complexities, it can at the least present non-financially minded folk, such as myself, with a springboard to start asking questions about the work they do every day.

Specifically, are we getting any surplus wealth from our labor? This, really, is the main question. Again, the whole point of free markets in a civilized society is to create “universal opulence which extends itself to the lowest ranks of the people” (15).

It’s simply a question of how much of their own surplus wealth workers are getting from their labor. Basically, are you getting paid for what you actually do?

You should ideally be getting paid something proportional and reasonable to the wealth you create. It seems like our current system of wages and salaries are increasingly becoming smokescreens to separate you from your real produce.2 Whatever the reason for that, it seems to me to be the great illusion of our times.

Obviously, this is in the interest of your boss and not in the interest of you, and in a society of free markets, you should be able to quit and go somewhere in which you do enjoy some portion of your surplus wealth. But that’s the catch: It’s not free, because there are too many hands and special interest policies between you and your surplus wealth. If you are earning just enough to live off of month to month, which is the case for almost everyone I know, then you are either not getting paid enough (that is, in proportion to your surplus produce) or not enough people want your produce (that is, there is no demand for what you’re selling).

That’s why, in my opinion, so many people exude anger in today’s political discourse and tend to vote for candidates who promise to execute extreme measures.

Everyone is tired of feeling cheated, which is understandable. How many people work from year to year and have little to show for it but the fact that they’ve managed to stay alive? If you think of your ten closest friends, it’s likely that none of them is really able to build wealth and live comfortably without fear of losing his or her livelihood due to some sudden changing circumstance. They don’t have any money to save or invest. Life insurance, health insurance and retirement plans represent chump change savings and rarely result in a significant return for the individual, all in a lifetime’s work. And regarding taxes and government … well, I just won’t even go there, except to mention death taxes. DEATH TAXES.

What I think we should keep in mind though is that the enemy is not the process of free markets, per se, but rather the extent to which that process is subverted by certain groups that want to exploit the surplus wealth created by your average worker. These exploitations of surplus wealth are ingrained in many parts of today’s economic system. They are so common that we often don’t think about them, and they thrive under many disguises. Perhaps in future posts, I will go into further details about these wolves in sheep’s clothing.

April 27, 2016, Tuscaloosa, Ala.

  1. Just kidding. That never happens. Ever. Back

  2. There are many consumer protection laws that are meant to empower the consumer to know what they are buying. I think similar laws should be passed to protect wage and salary earners. Much like the nutrition facts on food products, our pay stubs should come with a printed percentage figure of how much of our surplus wealth our wage represents. I’m still trying to come up with a catchy name for the bill. Email me if you think of one. Back