Study Guide

The Wealth of Nations Book II, Chapter 2

By Adam Smith

Advertisement - Guide continues below

Book II, Chapter 2

Of Money Considered as a Particular Branch of the General Stock of the Society, or of the Expence of Maintaining the National Capital

  • Now Smith wants us to understand the difference between gross and net revenue. Let's say you own an apartment building that earns two million in rent every year.
  • But the annual repairs of this building cost two hundred thousand dollars and management of the building costs another two hundred thousand. The net revenue of the building is the gross (two million) minus the costs (repairs and management), which leaves you with 1.6 million dollars net revenue. The same is true with the revenue of entire countries.
  • Another thing Smith wants us to understand is that people's wealth isn't measured in money, even though we might think this is true.
  • That's because money only has value insofar as it's able to purchase goods. So let's say you make fifty thousand dollars a year, and the price of stuff in your country suddenly rises 500%. You might keep making the same wage, but the purchasing power of that money has shrunk by 500%. That's why money is only valuable insofar as it has purchasing power, and purchasing power is measured by the amount of goods you're able to buy with your money.
  • When you put this all together, a country's wealth can only be judged by the amount of stuff it is capable of controlling.
  • In short, you don't make a country richer by bringing more and more capital into it, but by making sure you use as much of the preexisting capital as you can. Employ more workers who buy more products and your business makes more money and the cycle goes on and keeps growing. Once you start firing people and shutting down factories though, there are fewer people to buy your products and the whole thing starts to shrink.
  • And here's one thing that you probably didn't know about Adam Smith: He was hugely in favor of imposing strict government regulations on banks. The way he puts it, banks are in a unique position to cripple an economy if they get too risky or too greedy. Just look at the American financial crisis of 2008-2012 and you'll see why this is true.
  • For Smith, there is just too much of a chance for fraud in banking for governments to let banks do whatever they want.
  • And the fact that the entire economy is dependent on banks means that banks have to be strictly regulated.
  • Plus, banks should be open to lots of competition in order to keep lending rates low. If too much power gets put in the hands of only a few banks, things can go sideways really quickly.

The Wealth of Nations Book II, Chapter 2 Study Group

Ask questions, get answers, and discuss with others.

Tired of ads?

Join today and never see them again.

This is a premium product

Please Wait...