Adam Smith: The Grandfather Of Economics

this is Adam Smith Adam Smith was a Scottish philosopher and author who is probably best known for writing a book titled an inquiry into the nature and causes of the wealth of nations this book effectively marked the beginnings of economics as a separate academic discipline as Adam Smith now heralded as the father of economics lay the foundation for economic rules and principles that guide the decision-making of nations the world over today it is likely you may have heard the name Adam Smith but the impacts that this man and his writing has had on the modern world are truly hard to grasp this episode of economics explained was made possible by our fans on patreon if you would like to gain early access to these videos before they're uploaded to YouTube as well as participate in exclusive Q&A sessions please consider supporting our channel on patreon comm slash economics explained before Adam Smith and his teaching rose to popularity the world was dictated by an economic theory known as mecan't ilysm now we have discussed mechanical ISM before when we looked at the Dutch East India Company but a big takeaway was that Adam Smith hated this theory and this was probably a good time to shake things up a bit you see Adam Smith published The Wealth of Nations in 1776 just a few short years before the French Revolution and during the height of the American Revolutionary War the world had become obsessed with what good government went the policy of the past were no longer working in the time of modern industry and people were out to shake things up but AM Smith was not too concerned with what good government men but rather what wealth meant he was effectively arguing that McCampbell ISM the theory that had dictated the decisions of nations four century was as outdated as a monarchy McConnel ism was basically the idea that the world was a zero-sum game if someone was getting richer it meant someone somewhere else was getting poorer if a nation increased its wealth it's because it took that wealth directly or indirectly from another nation the only thing that was actually seen as industry that produced growth was farming and that's because it literally produced growth like right there out in the paddocks all of this was kind of easy to understand especially in a world that was only just starting to embrace modern manufacturing in feudal times the ideologies of mecan't ilysm basically held true sure there were blacksmiths and masons that would build basic tools and construct buildings but that was extremely basic and like much in the way of value adding value adding is where you take component parts say iron ore and coal and the skill hands of a blacksmith and turn it into something like a scythe or a sword or a piece of armor this end product is more valuable than the sum of all of these individual parts and therefore this whole process was said to have added value and in economics this process has a name it's called production now production was so limited in feudal societies that it didn't really register in the overall wealth of the nation so again this theory of mecan't ilysm held true where a nation was only really as good as the grains that could grow and the gold it could hoard Adam Smith realized there was more though the advent of steam power and the popularization of industrial processes that was taking place during the inception of the Industrial Revolution in the United Kingdom made a lot of very smart people rethink how they saw wealth over the course of a decade of speculation research in collaboration Adam Smith and his contemporaries came to the conclusion that manufacturing was kind of the same as farming in the sense that it grew things of value in the same way that you contribute seeds manure labor and farmland to a crop of wheat you can throw cotton labor in a textile mill to grow fabrics it's just that this process was entirely controlled by man this was a revolutionary idea and it basically meant that nations were no longer limited with their lot in life if they want to grow wealthier they didn't need to invade their neighbors they could just work on their own industry improve technologies and educate their population this understanding was potentially just as liberating for modernizing nations at the time as the steam engines were and this all also meant that people were incentivized to move from the farms and into the cities regular channel viewers would have heard me talk about the factors of production that is land labor and capital Adam Smith in the wealth of nations was the person credited with recognizing these factors alterations have been made over time to also include entrepreneurship but what was true back then is just as true today if you want to produce something you need these factors of production land and labour are easy to understand you need space to harvest and assemble and store things and you also need people to toil the fields or hammer on the anvils or write code or whatever this part of the equation actually wasn't anything new people had known for generations that the key to a wealthy nation was having lots and lots of land and lots and lots of people to toil on that land that's why wars were fought over good farmlands and nobility from across the globe try to maintain a healthy population of peasants to reap the rewards of these lands it's unknown if anybody actually wrote this down but it was kind of something that was so obvious that it wasn't going to make anybody famous for pointing it out in the same way that I wouldn't become a published academic by suggesting that Game of Thrones season 8 should not have happened I mean it's just so obvious that it doesn't count as cutting edge research Adam Smith's contribution though was this whole theory of capital and what he decided capital was capital in finance normally just means cash but capital and economics means basically anything that can contribute value that isn't land or labour cash is capital sure that so is a pickaxe or a steam engine a pair of work boots or even a patent on some revolutionary social media algorithm any material or immaterial thing that assists with the production of goods is said to be capital and this was a crazy crazy idea for the time and what made it even crazier was the way that Adams if laid out the logical progression of how people can create value The Wealth of Nations basically said that there were key steps that a nation would take to grow its wealth at first it would be an agrarian nation pretty much because it's the easiest thing to do farming can be as simple as plowing some dirt and planting some seeds and of course this is a massive oversimplification but basically if a nation had spare arable land it just made sense to set up farmland there because farms literally grow wealth from the dirt and require very very little capital investment in this step nations might also make small-scale efforts to extract precious metals like gold from basic mines as an easy way to supplement the wealth of their farmland it was theorized by Adam Smith that this was the reason the Americas had lag behind European nations in developing modern industry it's because they didn't really need to why on earth would a wealthy American in this time invest money into building a factory when they could instead just go and buy some land or better yet just claim some land and turn it into a plantation the upfront costs are way lower and if it all goes terribly wrong well at least you can still sell the land to someone else this kind of reasoning was what formed the first step of Smith's progressions of the nation but then eventually a nation would hit a problem eventually it would run out of low-hanging fruit of easy arable farmland and have to do something else to continue to grow historically countries answered this problem by invading their neighbors or subjugating some poor colony on the other side of the world and then using their farmland to continue the accumulation of wealth this way but ultimately this was limited and what was potentially a better idea was to actually use that land you already had more efficiently by developing industry you see a factory that produces oh I don't know let's say textiles take up much much less land than a farm but are able to produce the same amount of profit but they take much much more of an investment so they are not going to be the first choice of a nation to produce until they have absolutely exhausted the well that they can harvest from their soil once a nation does start building these factories though they will get very very wealthy because you can pack a lot more wealth generation into a smaller space to see this in action take the economies of China and the United Kingdom during the 1700s China was a vast lush and plentiful nation with a large population and extremely arable land it had absolutely no incentive whatsoever to build factories at this point in time because it could easily support its population with the farmland had available if someone went to get richer they would just work more farmland England on the other hand was a tiny desolate rock that had farmland sure but it was pretty lackluster in comparison and almost every square mile of the nation that was usable had been used so factories were the next logical step on getting wealthier it's not necessarily that a nation like China wasn't able to embrace this technology it's more they had no real incentive to do so - most people that hear this theory for the first time it seems pretty silly in the 21st century we see nations that transition from agriculture to industry becoming very very wealthy in a short space of time so it almost seems like this theory is wrong but it isn't nations and individuals will naturally take the path of least resistance which means Adam Smith's theory holds true even until this day nations start off farming because it is easy once they exhaust the potential of that they move on to industry and once they have finished with that they then begin to move on to a service-based economy this whole path of least resistance thing has also had a lot to do with the other major takeaway from Adam Smith's work The Wealth of Nations highlighted above all else trade as a key driver that will increase wealth in any market and on any level Adam Smith used the example of a worker in a pin Factory and postulated that if a worker woke up one day and committed his entire working day to producing a pin from scratch it is extremely unlikely that he would even be able to produce one pin he would have to dig up the ore and fire the furnace refine the metal and then machine it into a pin and this would take a long long time it would also take a lot of expertise what Adam Smith suggested instead was that one worker specialized in digging up the ore and other specialized in refining it another specialize in machining it and then even beyond that another worker specialized in going out and actually selling these pins to you and I this sounds like the most obvious thing ever but it was a pretty new idea for the ages on a local level people tended to be a jack of all trade peasants could toil fields but also build homes and do minor repairs as needed and the idea that someone would focus their entire work towards one specific task was pretty scary to a lot of people but it worked as industrial centers grew so too did specialized roles now with specialized roles came the need to trade if I worked in a newly created factory as a loom oiler or whatever well I can't eat well oiled looming machines so I need to make money from my job as a loom oiler and then use that money to buy everything else that I need as opposed to just doing it all myself now because everybody else will be specialized in other roles they will also need to trade their expertise to facilitate all their needs in life and that is ok because people are becoming so specialized that they will get really really good at what they are doing meaning that we will have more stuff over all the active trading also has its inherent benefits you see people need certain things you need food and water and shelter and clothing and if a whole lot of people are getting really good at building homes let's say but nobody is making clothes well then the supply of clothing will be lower than the demand for clothing and the price will rise savvy and logical participants in the economy will see this and decide that it is a good idea to specialize in making clothes because it is a very profitable industry and as more people move into that industry and produce more clothes the price will fall back into line once again now the same is true on a larger level between Nations Smith said that certain nations are inherently better at producing certain Goods and rather than nations trying to make everything themselves they should instead specialize and trade with each other this took a little bit longer to catch on though because well nations were still obsessed with the zero-sum ideology of McCampbell ISM where every trade had a winner and a loser and realistically it took a while for nations to realize that hey actually trades that are a win-win do exist this also sounds pretty logical to us today this whole idea was really highlighted by Adam Smith and was dubbed the guiding hand of the free market Smith loved this idea so much that he theorized that the best way to improve wealth was just to accommodate this market savvy individuals will logically do what is going to be most profitable for them and the aggregate result of very profitable individuals is a very wealthy nation to Smith the role of government was only to make sure that markets were maintained you know both jailing scammers and enforcing contracts and making sure people were safe to actually conduct this business but otherwise they should stay out of it which again was a very big deal feudal monarchies were basically command economies people got what they were given and most people leave to produce grains for the state and were housed and protected by their representative Lords suddenly everybody having the ability to pick and choose what they wanted was starting to look a lot like some of the political movements at the time at the same time the American Constitution was being penned outlining how men had the right to pick and choose their leaders Adam Smith was out lying how men had the right to pick and choose their own products capitalism was democracy with dollars popular items got voted for with money and unpopular products faded into obscurity so as hard as Smith tried to avoid getting political he may have helped lay the foundation for the democratic movement that was taking over the modern world at this time Smith's ideas sound so logical to us today because we live in a wealthy society that was afforded to us by these policies we don't think twice about using a phone imported from overseas that was made of hundreds of components produced by thousands of people from dozens of countries because we know this is the cheapest and most effective way to produce these kinds of products thanks to Smith that was not to say that Smith's ideas were perfect Oh No Smith basically invented economics but he also put a lot of faith in people you see the guiding hand of the free market and perfectly logical trades and rational participants they are all nice theories but sharknado 5 the global swarming would not exist in Adam Smith's reality from this a new brand of economics was created that accounted for people being dumb so in the next video in this series we will be looking at behavioral economics and how it addresses and explains the shortcomings of our silly silly people in an economy hi guys hope you enjoyed the latest video if you did please consider liking and subscribing this video was made possible by our patrons over on patreon if you want to have your say about what country or 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Channel: Economics Explained

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Keywords: the grandfather of economics, the economics of adam smith, adam smith, the wealth of nations, adam smith wealth of nations, the father of economics, invisible hand, free market, the wealth of nations adam smith, the wealth of nations explained, the father of economics adam smith, who is called the father of economics, who is the father of economics, adam smith explained, adam smith economics explained, economics explained

Id: NqUSDi-mvqw

Length: 17min 10sec (1030 seconds)

Published: Thu Jul 02 2020