As promised, here is the second part of The Wealth of Nations, one of the most influential books ever written about economics If you haven't watched the first part yet I'd advise you to do that now, as some of the takeaways here build on those from the previous part Let's continue where we left last time … Takeaway number 6: Accumulation and employment of capital What's the similarity between Michael and a country like the US, China or Sweden? It is that they get wealthy in the same way Allow me to introduce The Swedish Investor's "Stairway to Money" All copyrighted and original content, of course Each different step represents a category that an individual can spend money on To become wealthy a person wants to spend money on the higher steps and not the lower ones At the bottom, we have services meant for consumption These are the worst things that you can spend your money on, as you'll consume them instantly Vacations, dinners and video on demand all belong to this category The next worst thing to direct your money towards is products meant for consumption Products depreciating value from the time of purchase, but at least they're not as bad as services because you will still be able to sell them at a later stage, even though it may only be at a fraction of their original value Cars, clothes and phones belong to this category Then we have products that do not depreciate in value and that often keep their value through inflation Important entries in this category are collectibles and a house to live in And at the top, we have investments This is a very broad category indeed, and anything which is expected to generate more cash in the future than the outlay of money is today, plus a reasonable return, belongs here Therefore – starting a business, educating yourself, investing in the stock market, or renting out properties all belong here It's the same with countries If a country buys services from another country, money flows right out from it without being replaced with something else that is valuable If a country buys products from another country, at least some of the value is still preserved as products can be sold again at a later stage It is similar with a third step in our Stairway to Money A country gets rich by increasing its own productivity by starting businesses there, by educating its people so that their skill and dexterity increases, or by buying productive assets from other countries BUT …
… and this is unimportant but Neither people nor nations should be afraid of having expenses just because of this Both people and nations, if they want to acquire wealth, should focus on what they are naturally good at and then outsource the rest This is what we shall focus on next Takeaway number 7: Globalization – the shortcut to increased wealth Here we have. Michael Lewis, a 32 years old engineer He's working at a job where he's paid a base monthly salary, but he's also compensated for overtime For overtime hours, he nets approximately $30 per hour Given this, here comes a few questions for you: Should michael cook his own food? Should michael clean his own house? And, sorry now i'm getting a bit silly just to prove a point here, should michael build his own phone instead of buying one from apple? From a wealth standpoint the answer is no to all of these questions It makes sense for Michael to do what he is best at, earning money from that and then hire other people to do what they are best at for everything else that he demands Perhaps Michael can cook his own food, but it takes him about an hour to prep a single meal, which means that he does so at a cost of $30, because he could have spent that time working as an engineer Therefore, it doesn't make sense for him to do it as he can just buy a meal outside for $15 Similarly, he can clean his own house, but it takes him 2 hours to do So that's $60 for Michael, while he can hire someone to do it for $40 And as an engineer, he is capable of building his own phone, but it might take him something like 200 hours plus $200 in materials That's a $6,200 phone! Why not just go buy the latest IPhone for $1,000? If it doesn't make sense to do something at 6 times the price it doesn't make sense to do so at 2 times the price, and probably not at 1.5 times the price either It is the same with nations For nations to increase their wealth, they should be focusing on the things that they are really good at, and then hire other nations to do what they are best at For example ..
The US is obviously a leader in many different businesses, but among others, in the fast food and entertainment industry China is incredible at producing most products at very low prices And in Sweden, we are quite good at producing furniture … … sorry, I mean at making everyone else produce furniture for themselves, of course Now, should Sweden try to produce the same products that China can produce much cheaper? No. Should China compete head-to-head with Hollywood? Probably not. Should the US have everyone produce furniture for themselves? Definitely not! All these countries can be more productive, and in that increase their wealth, by simply doing what they are best at, and then trade goods with each other Also, to make another comparison between individuals and countries in their quest for wealth: Both of them will earn more by having rich neighbors or acquaintances People know that if they want to be rich, they should move where other people are rich And probably even more importantly – they should acquire rich friends It's the same with nations A country should want their neighbors and trading partners to be wealthy, because eventually that wealth will spill over to them, too Just look at this map But we've been getting this backwards for centuries now In the 18th century, Great Britain and France, probably the two wealthiest countries in Europe at that time, did everything they could to make business miserable for each other instead of cooperating They even went to war with each other! Today, let's hope that the two most important economies of our time, the US and China, don't make that same mistake Takeaway number 8: Why free trade is superior, and why governments shouldn't interfere As we talked about in the previous video – in a capitalistic society, money will naturally flow where the returns are higher and disappear from where their returns are lower In a society where the government does not interfere, two rules will guide capital – Capital is naturally employed where it can produce the greatest returns This is actually a good thing, because businesses like these are more sustainable than anything else They will employ people where there is demand and a real competitive advantage – Capital is also naturally employed in the home market, as this comes with less risk This is also good, because it creates working opportunities in the own country For these two reasons, it is totally unproductive when governments interfere with the market Just as an imaginary example: Say that we, in Sweden, would do something as silly as setting up a ban on movies created in Hollywood What would happen when such a ban is introduced? Excluding potential retaliation, it will yield higher profits for the film industry in Sweden than what would naturally be the case Therefore, more capital will be incentivized to flow to this industry But this business still isn't competitive on a global scale.
Everywhere else than in Sweden, people will still watch movies from Hollywood! Moreover – the capital in Sweden which goes towards the creation of film is capital that could have been directed towards something where Sweden is competitive on a global scale, like the previously mentioned furniture Generally, politicians must have a small dose of God Complex if they think that they are smarter than the aggregated thinking of the market when it comes to capital allocation decisions in businesses There are two examples when it might be necessary to introduce duties, bans and tariffs though: – For goods that are important for the defense or survival of the country – And when a tax is imposed even on such domestically produced goods You don't want to shift the favor to the foreign goods, at the very least Apart from that, governments should probably stay away from using duties, bans and tariffs on foreign goods They should not incentivize certain industries or disincentivize others, because the market is likely to do this very well on its own, thanks to the before mention two There are a few areas where a government is absolutely necessary for the wealth of a nation though, and that is what we shall cover in the next takeaway Takeaway number 9: What is the purpose of a government? According to Adam Smith, there are some tasks in a society that the market and private people have little or no interest in solving The four that Smith discusses are: – The defense of a country – The justice system – Some type of infrastructure – And basic education The defense of a country is absolutely necessary for its wealth to increase Interestingly enough, a country is more and more likely to be invaded the richer it is Or so it was in the old days at least ..
Consider the raids of Genghis Khan and his Mongolian savages of the much wealthiest cities of China Or how the vikings invaded many much more established societies in Europe The savages actually had the advantage at this time, as they were much more skilled fighters But that all changed with the invention of the firearms Firearms were expensive to make, and no matter how skilled an army of spears and bows were, it couldn't beat one equipped with firearms And so, the odds changed in the favor of the wealthy nations, who could afford these supreme weapons Anyways … A nation must be able to defend itself to sustain its wealth And as this benefits everyone in a society, it does make sense that a government has the responsibility of this task Justice, is similarly an expense that benefits everyone in a society In the old days, justice was often exercised by those in power, but one can easily understand how such a system can be very corrupt It is essential that justice and power are separated.
Otherwise – who should bring justice to those in command? Similarly, a justice system that is based on profits tend to be very corrupt too, so it doesn't lend itself well to the free markets It used to be like this too, everyone that wanted justice had to bring a gift to the judges As you can probably imagine, the person who brought the greatest gift tended to get a little bit more "justice" than everyone else … So to speak. Therefore, the task of bringing justice to its people should be paid for by a government But those that use the justice system often should probably pay extra for that Infrastructure, such as the most important roads and docks used for commerce of a country, is something that benefits everyone too But it doesn't invite the same conflict of interest as the justice system does, and should thereby often be held privately Infrastructure should be financed with revenue from the commerce which can be carried by means of it. Because in this way, money will much more seldom be wasted on infrastructure projects Some infrastructure projects can be important without being profitable, but in that case they should often come with a local tax, not a national one Without some type of basic education being free and probably also mandatory, some of the country's inhabitants, those that are born into poverty, will most likely never learn how to read write or count Such inhabitants are unlikely to increase the productivity of a nation Therefore, we want to avoid that this happens A benefit such as learning to read, write and count benefits everyone and it should be one of the purposes of the government of making sure that this is done Takeaway number 10: How should a government be financed? So ..
With defense, justice, infrastructure and education, a publicly financed government seems to be the most fair and logical solution But there are many different options of financing something, and some are definitely better than others Here are 4 principles for creating good taxes: Equality Each person should contribute in proportion to his or her abilities and in proportion to the revenue which he earns under the protection of the state It is difficult to make sure that the wages, profits and rents (the three sources of income which we discussed in the previous video) are all taxed equally, but they should at the very least be taxed equally individually Certainty Time, quantity and manner of payment must always be clear This is probably the most important principle.
A little bit of uncertainty is worse than a great deal of inequality Uncertainty leads to the potential corruption of the tax gatherer Convenience Taxes should be due when the contributor is most likely to be able to pay The consumer pays whenever he consumes a service or product, and the wage earner should pay taxes as soon as he gets the wage, not at some other time when he might already have spent it all Efficiency A tax may never be more burdensome to the people than it is beneficial to the government For instance … – As few people as possible should be required for gathering the tax – A tax should never discourage industry – And the degree of visits and examinations of the people shouldn't make them feel oppressed With these 4 principles in mind, i'd like to ask you a question: Do you think that it is a good idea for a country to have a wealth tax? In other words, a tax which is in proportion to the total assets of private people. Please comment with your answer down below! Alright, that's it for Adam Smith's Wealth of Nations Here are two unusual recommendations for further watching from other channels: You can watch me doing the Navy Seal's screening test for eight hours, if you want to watch me in a lot of physical pain Or, you could watch this summary of 79 of my book summaries Cheers guys!Read More
This was quite inconvenient to state the least Enter: Money Money helps with the exchange of assets that we generate To get back to the first takeaway, one can say that they boost the efficiency of exchange Fairly early, steels were utilized as cash as well as they have at the very least 2 top qualities which make them appropriate for this objective: They generally do not perish and also they can be divided right into lots of parts and after that merged once more Some points have worth in usage-like spears, meat, salt as well as shirts Various other things have worth in exchange-like expenses, coins as well as metals That which has high value in one, usually is rather pointless from the other viewpoint You can ' t utilize a dollar costs for anything.I indicate you can ' t consume it or anything In a similar way, a spear could be quite valuable but it doesn ' t work well for exchange, as we just saw As long as individuals trust that cash can be exchanged for something else that they are in demand of later on, they are pleased to trade their very own produce for
that money It all'boils down to that: Depend On Warren Buffett has stated that it is fairly misleading that'on the behind of every buck bill, it claims “in god we trust” Because, what it should really say is “in The Federal Get we trust” Takeaway number 3: The 3 parts of cost The real price of every little thing is its rate in labor Something that takes even more time, energy or sources to bring up commonly has a higher actual cost Bob didn ' t desire to make that final bargain with “George because he believed that his spear had a greater actual rate “than George ' s * tee shirt However”, there ' s likewise a small cost and also that is the cost as gauged in money Due to the fact that it ' s tough to measure as well as contrast labor, we ' ve come to estimate genuine rates in terms of money instead The rate of every little thing that is created settles itself right into either one or more of the complying with 3 components:-A wage, to pay the'labor that did the work-An earnings, to pay for the funding that was laid out for the work to occur -As well as a rental fee, to pay the owner of the land where the work and or exchange need to take place We all understand that earnings can differ a lot between different occupations Just look at the ordinary income of a McDonald ' s cashier and also compare that to the wage of a neurosurgeon Similarly, earnings vary from sector to market, yet not as much, as well as also they must balance out over time, something that we ' ll obtain to later These are the typical profits measured as return on equity for different sectors during the period 1999 to 2019 As well as the variable that can differ the most is of program leas In New York, for instance, you ' ll have to pay about $ 5,200,000 per acre of land, while in the nation town of Eksjö in Sweden, you ' ll pay only around$20,000. It ' s just that i ' m not all set to pay$70,000 for it yet Hence i ' m a part of the need, however not the effectual demand, that can really bring the item to the market Takeaway number 4: The three elements of cost, component II Allowed ' s have an appearance at these 3 elements independently An employee will certainly always demand a wage so that he can at the very least purchase the necessities of life for himself and his household
This is the bare minimum which also the easiest type of task have to pay, because or else, such workers will certainly discontinue to exist over time In countries where no minimum wages exist, the easiest jobs will tend to be at this degree as well as not higher This is since employees are at a natural negative aspect when trying to haggle just how much of that cost which was stated previously which should go towards their wage They usually exist in abundance contrasted to funding and also land and also in addition, they usually do not have actually much cash saved so they can ' t afford to wait for a much better possibility But incomes can vary a great deal which we shall see later on A business owner is a person who employs his capital to make an earnings within a particular trade or industry The more capital that is used in a particular sector, the greater the competitors there becomes, and also the lower the profits tend to be So it has to be in society as a whole too.If there are no smart methods to use resources any longer returns will be low Over time, even though some firms can hold on for very long, returns on capital will also out throughout markets This is since where returns are high, there will certainly be incentives to relocate resources, as well as where returns are low, there will be rewards to remove capital This recovers a balance of sorts If you desire to know more about which kinds of industries that can stand up to competition the lengthiest, head over to my summary of “Affordable Approach” An owner of land will certainly either try to offer his land for an earnings or offer it out for a rental fee Either method, a person down the line will at some point attempt to offer it out for a rental fee, or make use of the land themselves, and after that it is they who get the rent Rental fees differ A LOT depending on place Some types of land essentially manage no rental fee at all.While those that individuals discover eye-catching-land in cities or beautiful coastline residential properties- gain a great deal of it Something that need to be kept in mind is that rent is rather like a syndicate price After normal earnings have actually been paid as well as the business person have been able to replace his funding with a” suitable revenue, the proprietor of the land will quite much take what ' s left Land is immovable and irreplaceable, and is as a result strange compared to the 2 other types of profits that can be earned Takeaway number 5: Why some tasks pay more than others do So … Profits of industries should average out over time, and more lease is given to the person who holds a residential or commercial property in a city or at a coastline, all right … However why the **** does my neighbor have a higher wage than me, even though I ' m much smarter than him ?! The wages of labor are chosen by supply as well as need, like every little thing else The complying with five elements have a tendency to impact this to boost the incomes of a particular job- The expenditures as well as troubles of learning it-The incongruity of settlements- The trust and duty-The improbability of success; and- The challenge uncleanness and also disagreeableness of the task In the 18th century a blacksmith had to be an apprentice for lots of years before he was allowed to open his very own profession During this time, he earned very little or essentially absolutely nothing at all The higher wage that he got once finished is a compensation for those years, and also the apprenticeship helps in limiting the supply of such employees A mason could only work throughout good weather problems, as well as so his per hour wage had to be made up for those idle hrs A higher obligation suggests that less individuals are fit for that type of work and also as a result salaries are higher Back in the days, attorneys and also doctors had such functions (and they still have by the means )The improbability of success is an additional element that matters The anticipated wage of a task with an extremely high stop working rate is usually even lower than normal jobs, yet the individual who does well normally obtains the salary of those who fall short too( kind of )Individuals looking for gold or prize belonged to that category As well as in the 18th century the most dirty as well as unpleasant job one might possibly get was probably that of the public death squad, as well as the pay was thereafter Today, a hard as well as costly job to obtain would be that of the previously discussed neurosurgeon An inconsistent one might be that of an actual estate broker A job which calls for a whole lot of responsibility.Is that of a pilot Improbability of success is high among exclusive professional athletes and also artists And also the dirtiest and most unpleasant work is possibly that of a hedge fund supervisor! This book is even more than 900 pages long, so I ' m definitely going to make a part 2 on this with 5 added takeaways In component 2 we ' ll cover subjects such as globalization, free profession, as well as the function of a government So you ' ll probably obtain to listen to even more regarding motivations in component 2!Read More