Study Guide

The Wealth of Nations Book II, Chapter 5

By Adam Smith

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Book II, Chapter 5

Of the Different Employment of Capitals

  • Some people might think that storeowners or merchants don't have productive labor because they don't actually make anything. But Adam Smith sees these people as a natural part of the division of labor. If they didn't spend their time buying and selling goods, the producers of good would have to do this themselves, and that would take time away from them making their product. So merchants actually do everyone a favor by letting the producers worry only about producing.
  • For Smith, no one engages in more productive labor than a farmer, since the farmer is literally creating new valuable stuff right out of the ground. He thinks that the reason the colony of America has grown so steadily is because they put so much of their money into agriculture, which is pure productivity in his mind.
  • Whenever a country produces more of something than there is a market for, it will export the surplus to another country.
  • Adam Smith firmly believes that a country produces the most wealth when government leaves private business people alone. And why is that?
  • Because business people will always put their money and resources where there is the most demand. As more people go into business, more competition drives down prices and drives wages up.
  • That's how everyone (at least theoretically) makes better wages while prices go down. In Smith's formula, the economy is much better off when individuals all work for their private profit.

The Wealth of Nations Book II, Chapter 5 Study Group

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