This article was posted on Friday, Jul 01, 2016

The formula for progress is simple … we’ve known the three steps for 240 years. Last month, I wrote about the idiotic beggar-thy-neighbor “mercantilist” trade policies being advocated by the front-runners for the 2016 presidential nomination.

In The Wealth of Nations, Adam Smith (1723-1790), founder of the science of economics and champion of free enterprise, showed how “trade wars” are ludicrous.

It’s a great book, although I don’t recommend reading the whole thing. It’s 1,000 pages and will bust your lap or fry your Kindle. Smith is, after all, inventing economics. If you do read all of Wealth of Nations, you’re pretty much holding his hand through the entire process (which took him 10 years). Also, Smith wrote it an 18th-century English so convoluted, digressive, and slow-paced that it can produce a coma in the 21st-century brain.

But as I said, while I was berating our mercantilist pols (and as I’ve said before in The Stansberry Digest, because this is something I tend to go on about), The Wealth of Nations can be boiled down to one sentence: “Wealth is created by pursuit of self-interest, division of labor, and freedom of trade.” Trade wars don’t just oppose free trade, they invade and conquer it – which got me thinking about just how important Adam Smith’s three principles are. For instance, they’re great analytic tools for value investing.

  • Is this business pursuing self-interest? (That is, will it make a profit?)
  • Is the business practicing division of labor – dividing responsibilities so that management, workforce, and capital resources are allocated wisely?
  • And in a free market, how does the business stack up against its competitors?

Smith’s principles are also great tools for deciding whether to “invest” in supporting a political candidate. Does the candidate believe that people trying to better their economic conditions is a good thing? (Bernie Sanders – no.) Is the candidate a know-it-all who doesn’t value the knowledge, skills, and opinions of others? (Hillary Clinton – yes.) Does the candidate really believe in a free market? (Donald Trump – maybe, sometimes.)

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Adam Smith’s three principles are even great tools for a happy marriage. Are the nuptials in the best interest of both parties? Is one partner expected to do all the housework, cooking, child-raising, and also be the principal breadwinner while the other partner flops on the couch watching ESPN? (Let’s leave free trade out of this. Swapping husbands and wives is rarely a good idea.)
In The Wealth of Nations, Adam Smith’s first insight was that nothing is inherently wrong with a person pursuing his or her own self-interest (by honest means, of course). No matter how altruistic you are, your first duty in life is to take care of yourself as well as you can. You can’t take care of anybody else if you don’t. This seems obvious to modern Americans (except for a few who are still living in their parents’ basements and voting in Democratic primaries for you-know-who).

But once upon a time it didn’t seem obvious that it was a good thing for people to try to better their economic conditions. In the Middle Ages, religious leaders, philosophers, and the nobility used to tell everybody to suck it up – subjugate your ego, bridle your ambitions, sacrifice yourself, your family, and everything you own to the church or the feudal big shots.

And we bought it. Because we didn’t have any control over our self-interest anyway. We didn’t live in a free country. And if we were slaves or serfs – and most of us were – we didn’t even have a self to call our own and be interested in. Somebody owned us. In the doghouse of ancient and medieval existence, thinking that poverty was a virtue made us feel less like dogs.

But by Adam Smith’s time, in 18th-century Britain, ordinary men and women were beginning to have some control over their own destinies. This did not please a lot of religious leaders, philosophers, and political elites. And the fact that the upper classes weren’t happy about the well-being of regular folks made Adam Smith angry and sarcastic.

He said: “Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society?”
In the 18th century, prosperity for poor people was not yet considered a self-evidently good thing. Why? Because nobody had bothered to ask the poor people. (In many parts of the today’s world, nobody has bothered to ask them yet.)

Smith was pointing out that it is never a question of religious sacrilege or philosophical folly or political treason to better your material circumstances. The question is how to do it.
The answer was Smith’s second insight: division of labor – what we’d call “specialization.” Nobody before Adam Smith seemed to have realized how vitally important to economic progress division of labor is. (Adam Smith invented the term.)

Of course (and I’ve said this before, too), division of labor has been around since caveman times. The wily little fellow with the big ideas chips the spear points. The courageous oaf spears the mammoth. And the artistic type does a lovely cave painting of it all.

And this leads naturally to trade. One person makes a thing. Another person makes another thing. And everybody wants everything
That was Adam Smith’s third insight: All trades, when freely conducted, are mutually beneficial by definition. A person with a “this” got a “that,” which he wanted more, from a person who wanted a “this” more than the “that” he had.

What kind of trades people make (as long as they’re honest, transparent trades) is none of our business. Unless, of course, we make it our business by electing politicians who want to replace the free marketplace with a marketplace controlled by government regulation.

Regulation can’t be effective without coercion to enforce it. So suddenly, instead of free trade, you have coercive trade. Let me define coercive trade. A coercive trade is where I get the spear points … and the mammoth meat … and the cave painting …and the cave. And what you get is killed.

Coercion is, very simply, the lack of individual liberty. Coercion destroys the mutually beneficial nature of trade, which destroys the trading, which destroys the division of labor, which destroys progress.

You can have pursuit of self-interest, division of labor, and freedom of trade. Or you can have North Korea.

A version of this article, by P.J. O’Rourke, first appeared on April 7, 2016 in the Stansberry Digest, published by Stansberry & Associates Investment Research, an independent investment research firm.  You can visit them at