Chapter 3
Measuring Wealth
In Chapters One and Two you studied why financial accounting is an important component of our financial market. Without standardized financial reporting in accordance with rules issued by an authoritative body (FASB), investors would have a difficult time comparing competing financial instruments (IOU’s), and markets would be less efficient. In the next two chapters you begin to investigate what information financial accounting is designed to record and report in a standardized format. At the dawn of the Industrial Revolution, Adam Smith observed and painstakingly documented a phenomenon with empirical evidence gathered though observation and quantitative data analysis. His findings were the basis for a new scientific paradigm devoted to studying England’s new economic culture. Wherever you live, Smith’s words from 1776 are still relevant to you today. Please read: Volume One Introduction and Plan of the Work and Book I, Chapter I Of the Division of Labor http://www.econlib.org/library/Smith/smWN.html. This reading should take no more than 30 minutes, that is if you are able to stop…
In Chapter One, you studied the “invisible hand” that moves the economy. Adam Smith described the economy’s change in focus from King and country to the motivation of each individual citizen. Whereas Socrates described the economic benefit of teaching men to work for the greater good, Smith asserted that expecting a benevolent economic architect to create a greater good was an impossible and unrealistic dream. Smith observed that a rational man acting in his own self-interest produced the greatest amount of wealth. Through specialization and division of labor, each man becomes more productive by deciding for himself how best to spend his time. In short, the paradigm can be described as thinking small, concentrating on the individual desires and motivation of men, in order to accomplish something grand, creating the greatest amount of wealth.
Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages. (Smith, 1776, Book 1, Chapter II, Paragraph 2)
The idea to provide ALL men with the knowledge and freedom to act in their own best interest was revolutionary and represented the destruction of the previous “top-down” economic paradigm and is the philosophical basis of our free market economy.
