During the last third of the 19th century and the early years of the 20th century, Dr. Charles W. Eliot served as the president of Harvard University. In speeches and classroom lectures he was oft quoted as claiming that a liberal arts education could be obtained by anyone who was willing to spend 15 minutes per day reading from an appropriate collection of classics which could fit on a 5-foot shelf.
This assertion reached the ears of publisher P. F. Collier and Sons who saw an opportunity for profit. Eliot’s contention and Collier’s desire for publishing profits gave birth to the now famous 51-volume set known as the Harvard Classics. The first edition was published in 1909. During the following 20 years more than 350,000 sets were sold.
A couple of decades ago I bought an original set. Since then I have enjoyed many hours of reading from this collection of wisdom first compiled at the dawn of the 20th century.
When the books first arrived in the mail some 20 years ago, I eagerly opened the 51 volumes to see what had been included in this 5-foot edition to our growing library. To my surprise (shall I say shock?), Eliot had chosen Adam Smith’s “The Wealth of Nations” as the entire volume 10.
I had read parts of “The Wealth of Nations” in college as an undergraduate economics major. Yet I had never considered that someone of the stature and standing of Charles Eliot would consider this essential reading for one’s liberal arts education.
This raises a useful question. What is contained in Adam Smith’s book, which warrants such a worthy endorsement? In short, Adam Smith is the undisputed Father of Economics. The theory of modern markets has its origins in Smith’s masterpiece, the full title of which is “An Inquiry into the Nature and Causes of the Wealth of Nations.”
The task before us is nearly insurmountable. How does one explain such a profound work in such a few words of newsprint? We must cut to the chase by highlighting a few pertinent takeaways.
Prior to Smith, the prevailing premise behind the wealth of nations was the gathering of gold. The so-called mercantilist philosophy (not so dissimilar from the behavior of modern-day China) espoused the notion that the accumulation of gold through foreign trade was necessary for the health of a nation.
Smith took a completely different view. His insight, which seems so obvious today, and yet oft forgotten, was that the wealth and economic health of a nation is manifested in the supply of goods and services that economy can produce and distribute to its citizens. A stockpile of gold is of little use if people have insufficient food, shelter, and clothing.
Smith went on to describe the mechanisms through which nations can prosper. First and foremost is his description of the market mechanism. Although he well understood the higher motivations of altruism and selflessness, he recognized the stronger and, perhaps, more ubiquitous mover of men and women, namely self-interest.
Smith’s observation, unique in his day, showed how individual self-interest could yield an outcome in which the greatest social good or welfare for all is achieved. He observed that a driving force within the soul of most individuals is the desire to advance one’s own economic condition.
This desire drives a person to, for example, open a restaurant in Boothbay Harbor when he notes the need. When certain items on the menu fail to delight and others are received with wide acclaim, this desire drives the restaurateur to alter the menu. Put simply, the desire to turn a profit motivates a person to provide the very things that will most please others.
Even more importantly, should there be a good or service which might bring more enjoyment (and profit) than a restaurant, the desire to get ahead will move a person to provide that good or service rather than a restaurant to our peninsula.
If self-interest propels a person to provide the very products most desired by the populace, what prevents him or her from holding the public at ransom once those products are put into place? Smith’s answer: competition.
If a producer of some product begins to operate as a monopoly, thereby accruing unreasonable profits (which economists call “rent”), other producers will rush into the industry and drive prices of that product down to “normal” profit levels.
Smith spoke of an “invisible hand,” which encompasses a competitive market combined with self-interest, that regulates an economy. In addition to his remarkable insights into markets, Smith also understood the process of economic growth.
Division of labor coupled with proper capital equipment allowed mankind to increase worker productivity. In Smith’s day, nearly everything a family could buy was produced by three or four men at the most. He spent many pages laboriously describing the production of pins in a pin factory in England. Several men with the right machines and the proper division of labor could produce in a day more pins than the group of them individually could produce in a lifetime.
I sometimes wonder what fascination Smith would have studying the iPhone with its specialized parts coming from Germany, Switzerland, the U.S., Korea, Japan, and elsewhere, all to be assembled in China.
Another feature of Smith’s analysis included the need for the accumulation of capital. He recognized the importance of plant and equipment in the advancement of worker productivity. Workers were to be paid according to what they produced. What they produced depended on their skills and what equipment they had at their disposal. Equipment, in turn, could only be built and purchased through the accumulation of capital.
There are so many other important contributions to the field of economics found in “The Wealth of Nations.” For instance, Smith was well aware of the logic behind higher and lower wages for various jobs. He reasoned that jobs which required special training, disagreeable conditions, poor job security, or especial trust should offer higher wages than other jobs of a more generic nature.
As an aside, while Smith is often associated with a laissez-faire approach to economic management, we should rightfully acknowledge that he saw many important needs for public action, production, and regulation. He argued that education, roads, security, property rights, and other economic services logically fall under the jurisdiction of the public sector. And he was writing in 1776, long before our day of modern society!
At 15 minutes per day, it will take the average person quite some time to absorb volume 10 of the Harvard Classics. But one will emerge from the experience enlightened. Yet, I advise beginning with volume one featuring good old Benjamin Franklin, going on to the next ones including the golden sayings of Epictetus.
Next week, we continue marching forward in our history of economic thought.
(Marcus Hutchins, MA, M. Phil, economics, Columbia University, NYC, is a former economist, treasury bond arbitrage trader and hedge fund manager. He retired to Southport in 1997 where he resides with his wife Andrea and his youngest daughter Abbey. He welcomes feedback at coastaleconomist@me.com.)
