Adam Smith: wealth is a product of hard work

Adam Smith is considered by many to be the father of modern economics. His treatise An Inquiry into the Nature and Causes of the Wealth of Nations is one of the bedrock texts of economic thought. At over 1,000 pages, it covers a multitude of economic and financial topics, such as: the division of labour, the origin of money (e.g., gold and silver), manufacturing, international trade, mercantilism, public debt, bounties, etc.

Interestingly, however, there is no chapter on “bailouts” in it. In fact, the term is never even mentioned.

Why is this? Well, such a notion would have been nonsensical to him. Here’s why.

Modern-day, central bank bailout funds are the equivalent of trying to get something for nothing. These central banks – be it the Federal Reserve or the European Central Bank – have the power of the printing press and nothing more. Where did the Federal Reserve get $900 billion to implement its second round of quantitative easing? Or how is it that the ECB now has €489 billion to lend to European banks? The Fed and the ECB did not work for this money that they have and are now “injecting” into the system.

No, they did not work for this money, and that’s why Smith would balk at such an idea. To Smith, not only was money a commodity – such as gold and silver – but it represented work. In book I, chapter V, Smith stated it like this:

‘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. What every thing is really worth to the man who has acquired it, and who wants to dispose of it or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. What is bought with money or with goods is purchased by labour, as much as what we acquire by the toil of our own body. That money or those goods indeed save us this toil. They contain the value of a certain quantity of labour which we exchange for what is supposed at the time to contain the value of an equal quantity. Labour was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased; and its value, to those who possess it, and who want to exchange it for some new productions, is precisely equal to the quantity of labour which it can enable them to purchase or command.’

Smith is making the common-sense observation that money, and that which you can purchase with money can only be acquired by work and by production. For if money can easily be created, either by central banks or the counterfeiter in his basement, what meaningful value can that money have? None.

Hence, these bailouts are not the answer for our economic troubles. Bailouts do not create wealth; only work and increasing productivity creates wealth.

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