Adam Smiths An Inquiry into the Nature and Causes of The Wealth of Nations was published in 1776.

It is said to be a criticism of the economic policy in Britain during his time, which we now know as the mercantile system. It is divided into five books, each discussing a certain topic. He calls the first book, Of the Causes of Improvement in the Productive Power of Labour, and of the order according to which its Produce is naturally distributed among the different ranks of the people. On the second book, he discussed the capital stock; its nature, accumulation and the quantities of labor to put it into motion. In the third book, he explains the circumstances that established certain policies in England. On the other hand, he explained the theories of political economy in the fourth book. Lastly, in the fifth book he writes about commonwealth. In the first chapter of Book one, Smith discusses writes that,

The greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment, with which it is anywhere directed, or applied, seem to have been the effects of the division of labour.

He used the pin as an example. Even as simple as a pin could be made more efficiently if there is division of labor. He then enumerated three reasons on why there is greater productivity with division. First,

The improvement of the dexterity of the workmen, necessarily increases the quantity of the work he can perform; and the division of labour, by reducing every mans business to some one simple operation, and by making this operation the sole employment of his life, necessarily increases very much the dexterity of the workman.

Because of the division of labor, the worker develops a specialized knowledge regarding his task which makes him more dexterous.

Second, The advantage which is gained by saving the time commonly lost in passing from one sort of work to another, is much greater than we should at first view be apt to imagine it. Lastly, Everybody must be sensible how much labour is facilitated and abridged by the application of proper machinery. The division of labor increases, not only productivity, but also the opulence of the society. Smith also writes that in a well-governed society, this opulence could extend even to the lowest ranks of people. The division of labor also shows how people need to cooperate and assist each other to get even the simplest of things. Smith uses as an illustration, the coat a worker wore was made by a multitude of men. The wool use was made by a multitude of men and so on. On the second chapter, Smith talks about how division of labor came about. It is not something that is a result of human wisdom rather, it was human nature. Man has the natural tendency to truck, barter and exchange, which is unique to man. He can not produce everything he needs instead he produces what he is good at and have excess. This excess is then traded for his other needs. It is here that he writes about the famous story about the benevolence of the butcher, the brewer, or the baker. Smith writes that their motivation is self-love. By providing us with dinner, they are also provided with their needs. This self-love must not be mistaken with greed, which is what we usually associate with Smiths notion of self -love today. Here, Smith is arguing that what we are doing is done because we want to benefit and also because the other will also benefit. The extent of the market as a limitation was discussed in the third chapter of the first book. Smith writes that the division of labor is brought about by the power of exchanging; and thus, it also limited by this power. For a very small market, one is not encouraged to dedicate

his work at only one product. If he does so, there is no assurance that he could exchange with anyone given the small market. If this happens, he will have an excess of his product and a shortage of his other needs. There are some industries which will thrive only in towns. The larger the town, the greater the extent of the division of labor is. Smith also wrote that a market that is accessible to the water-carriage has a wider market and has the advantage of easier transportation of goods. This shows why the first improvements were near water bodies. On the fifth chapter, Of the real and nominal Price of Commodities, or of their Price in Labor, and their Price in Money, Smith writes that the value of commodities comes not from the price but from labor.

Labour therefore, is the real measure of the exchangeable value of all commodities. The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.

Here, Smith shows his theory of value. That labor is the real measure of exchangeable value. Labor then, is the real price of the goods while money price is just a nominal price. Whatever good we attained is attained because first, labor was used. Then, the wealth of one is determined by the labor he can command. Yet, how is labor measured? To use time is invalid since some goods are naturally faster to produce than others. Before, people settled with haggling and bargaining, which is inexact. For this issue, Smith uses money. To estimate the value of a commodity, the money price is used. This seems a better estimate that the abstract notion, quantity of labor. Yet, gold also fluctuates and thus imperfect too; but the price of a certain commodity will fluctuate reflecting its real value, which is labor. This will remain unchanged as long as the factors of production remain unchanged. This justifies Smith writing that to use corn as a measure of value from century to century is more accurate. On the sixth chapter, Smith discusses his pricing theory. The commoditys price reflects wages, profit of stock and rent of land. With the division of labor, people begin to accumulate

stock that they would have to hire someone else to work with it. These laborers add value to the capital by putting their labor. This added value is paid back as wage. On the other hand, the one who gave the capital is given the profit, which is the proportion of stock that goes to the owner. It is like his payment for risking his capital. Interest is derived from the profit of stock. This profit is different from wage of superintendence. If the owner supervises, he receives wage, not the profit of stock. The third component of price is the rent. This is the portion of price that is the payment for the land used. Smith writes that it is possible that all of the three components could be received by one person. Chapter seven is entitled, Of the natural and market price of commodities. Here, Smith writes, There is in every society or neighborhood an ordinary or average rate both of wages and profit in every different employment of labor and stock. If the price is adequate to cover all three components of the price, the commodity is said to be sold at its natural price. On the other hand, market price is different. This is the actual price of the commodity, but it doesnt always reflect the rent, wages and profit of stock. It may either be above, or below, or exactly the same with its natural price. Market price reflects more of its demand. This concept is closely related to the notion of supply and demand we have today. The market price is greater than the natural price if the demand is higher than the supply. But the price is gravitating to the natural price. Adam Smith introduces the second book by writing that before, there is no need for division of labor. What one man needs, he makes it. But with the division of labor, a mans own work cant provide for all his needs. Now, there is a need to to accumulate stock if he wishes to get the most produce of his stock. In the first chapter, he discusses about the division of stock. Ones st ock consists of the capital he could use to yield revenue and the other, for his immediate consumption. Man, would want to yield revenue from his stock if it is more than enough for his consumption. He can then derive revenue from the rest of his stock. This stock for immediate consumption consists either, for the original purpose of the stock; from his revenue; or bought in the past.

The capital he uses for revenue could be used either as a circulating capital or fixed capital. The first only yields revenue if the owner departs from it. He gives it up at one shape and receives it back in another. It maybe employed in raising, manufacturing, or purchasing goods, and selling them again with a profit. The capital employed in this manner yields no revenue or profit to its employer, while it either remains in his possession, or continues in the same shape. On the other hand, fixed capital, doesnt have to circulate to yield revenue. It may be employed in the improvement of land, in the purchase of useful machines and instruments of trade. For each trade or industry, there is a different proportion between fixed and circulating capital that is required. Smith also discusses that the stock of a society is divided into three portions too; namely: immediate consumption, fixed and circulating capital. Fixed capital consists of useful machines, profitable buildings, improvements of land and, acquired and useful abilities. On the other hand, the circulating capital consists of money, stock of provisions, materials of clothes, furniture and buildings and completed works. The third chapter of the second book is Of the Accumulation of Capital, or of productive and unproductive Labor. Smith discusses that there are two sorts of labor: productive and unproductive. The productive laborer adds value. The product of productive labor last for some time after the labor has been rendered. Unproductive labor, on the other hand, does not add value. At the instant that the labor is rendered, it perishes. An example he gives is the productive labor of manufacturer and the unproductive one of the menial servant. Yet, Smith says that the unproductive laborer actually plays an important part in the society too. The

national produce id comprised of the part destined to replace capital and the other constituting revenue. Smith also discusses that man has the natural tendency to save. It is parsimony that is the key to increase capital. This is why Smith says that though the government may be corrupt, it will not hinder the opulence of the country. Then, on chapter five, Smith discusses the different employment of capitals. He discussed that there are four ways to employ capital: procuring rude produce, manufacturing, transportation and distribution. Smith stress that each are necessary to the society and to each other. If capital is employed in either of the four,they are part of the productive labor and adds to the annual produce. Smith says that to use capital in farming is the most productive since natures labor, which is needed alongside mans labor, has no expense. Trade also has added value to the annual produce. There are three different kinds of trade: home, foreign and carrying. Home trade is trade within the bounds of a country. Foreign trade involves importation while carrying trade carries the surplus of one to the other.