“Labor was the first price, the original purchase – money that was paid for all things. It was not by gold or by silver, but by labor, that all wealth of the world was originally purchased.” – Adam Smith
The greatest advantage that we have with our money is the power to earn more of it in the future. Earning our future income is our most precious financial resource and shouldn’t be taken lightly. When we take out life insurance, what are we guarding? We are protecting our family from a loss of income if we should die. The same is true for disability insurance. We are protecting our future income and our ability to earn it.
“[Value] is adjusted…not by any accurate measure, but by the haggling and bargaining of the market, according to that sort of rough equality which, though not exact, is sufficient for carrying on the business of common life.” – Adam Smith
Many times the share price of a particular company does not go up or down based on its intrinsic value like it fundamentally should. Its value is adjusted based on short term news, spikes in demand, trends, rumors, gossip, and the like. We are swayed by the 24 hour news cycle and the pundits on CNBC. But, classic finance theory tells us that a company’s share prices move over the long term based on its internal worth based on its earnings. A share price is the discounted present value of all that companies future earnings. The same short term fluctuations and spikes based on short term events were true in Adam Smith’s era, the 1700’s, as it is in today’s market.
“It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy…What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage.” – Adam Smith
Resources and labor will move to and from the country where they are have the best competitive advantage. The competitive advantage theory is the optimal utilization of resources and globalization of manufacturing and services around the world. As sad as it is, it should not be a big surprise to people that the United States no longer enjoys the competitive advantage in textile production in the South. Our cost of labor is too high. So, textile manufacturers have outsourced that trade to a country with lower labor costs. We, in turn, have written the textbook on computers and software development. That is one of our competitive advantages as a country. The competitive advantage theory and Adam Smith’s quote above states that the US should focus on what we do best and use the money we earn from that advantage to buy other countries’ advantages.
Who Is Adam Smith? Adam Smith wrote “The Wealth of Nations” which is considered the first modern work of economic theory. The Wealth of Nations discussed that the free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods needed by society by a so-called “invisible hand”. The invisible hand of the market is the term economists use to describe the self-regulating nature of the marketplace. The invisible hand is created by the combination of our economy’s self-interest, competition, and supply and demand forces, and is capable of allocating resources in society. Adam Smith is widely cited as the father of modern economics and capitalism.
Do you have your own favorite investing quote or a favorite investor that you would like to see in this series? I would love to hear it. Please drop me a line in the comment section below or e-mail me.
Note – This is a series of posts on Wednesdays with quotes on investing from famous people investors and people in finance. Check out the entire series of Famous Investors’ Quotes.