Clever Geek Handbook
14 October 2025

Making Six Sigma Last

Recommendation

No one knows Six Sigma, which seeks near perfect customer satisfaction, like George Eckes, the consultant who literally wrote the book on it (The Six Sigma Revolution: How General Electric and Others Turned Process into Profits). In his second book, Eckes emphasizes the importance of molding organizational culture to generate broad acceptance of a Six Sigma initiative, using illustrative examples from his workshops. He describes ways to overcome internal resistance to change, to sell the program’s benefits and to get key people as well as the masses on board. If you are launching a Six Sigma program, Eckes provides many specific suggestions of strategies you can employ. But because much of Eckes’ wisdom can be applied more generally to organizational change efforts, BooksInShort recommends this insightful book to any executive, whether or not Six Sigma is your strategy of choice.

Take-Aways

  • The Six Sigma process is intended to make businesses more effective and efficient.
  • The Six Sigma management philosophy strives for near perfection in customer satisfaction.
  • An effective program requires improved quality (including strategy and tactics) and organizational cultural acceptance.
  • The first step in launching a Six Sigma program is creating a need for it.
  • Envision the meaning of being a Six Sigma company, so employees understand.
  • The major types of resistance are technical, political, organizational and individual.
  • The people you need to create a Six Sigma program include the Quality Leader, Master Black Belt, and Black and Green Berets.
  • To measure success, rate the quality of your program and its internal cultural acceptance.
  • The formula for how well your company has instituted its program is based on facts and hard data.
  • For Six Sigma to work, top management must be committed and must communicate its benefits to employees.

Summary

Selling Six Sigma

In recent years, Six Sigma programs have become accepted as a way to make businesses effective and efficient. Several companies, including General Electric and AlliedSignal, saved billions of dollars with this approach, which led to increased profits.

Six Sigma strives for near perfection in customer satisfaction. A company with a successful Six Sigma system in place has about three bad customer experiences for every one million customer contacts. Usually, companies are at the two to three sigma level, reflected in some 67,000 to 300,000 defects for every million customer contacts.

“The management philosophy known as Six Sigma has three critical success factors: the strategic components, the tactics, and most important, the cultural component.”

To get this high level of satisfaction, improve your delivery process and customer interaction. Top management needs to support the program and must establish the necessary infrastructure to make these improvements possible. Essentially, this program has to be based on three key components: strategic, tactical and cultural. "Strategy" is defined by your objectives and "tactics" are how you plan to reach them.

“The most important equation for a Six Sigma culture is QxA=E. This equation states that the quality of the technical elements of the change multiplied by acceptance of the technical elements of change equals the excellence of the results.”

Unfortunately, most organizations focus so strongly on the tactics of improvement that they overlook the most critical component of launching a Six Sigma initiative - the cultural characteristics of the organization. Many Six Sigma consultants also fail to give culture enough attention. But culture is critical, since you must have acceptance throughout the organization for the program to work.

Steps to Acceptance

The critical steps in increasing cultural acceptance of this program in your organization are:

  1. Create a need for turning your organization into a Six Sigma company.
  2. Develop a vision for what being a Six Sigma company means, so employees understand the results and behaviors you want to achieve.
  3. Mobilize commitment so people support the program and quash any resistance to it.
  4. Create a Six Sigma culture by changing your systems and structures to support it.
  5. Measure the degree of cultural acceptance for Six Sigma steps you have achieved.
  6. Develop strong leadership to support and continue the program.

Creating the Need for a Six Sigma Culture

You can create a need for change with threats or benefits. Real or perceived threats can motivate behavior, but only for a short time. By contrast, you can motivate people over the long run by showing them their personal benefits or opportunities. Use both to create a need, choosing specific threats and benefits, and deciding which to emphasize depending on your organization. Ask employees to consider what will happen to the organization in the short and long term if you successfully implement the program (opportunity) and what will happen if you don’t (threats). For instance, increased employee frustration might be a short-term threat while a reduced customer base is a long-term threat. Greater productivity and profitability, and increased employee development are long term opportunities.

“Some of the pitfalls that await an organization in creating the Six Sigma culture include: failure to achieve quick successes, unrealistic time frames (and) poor Six Sigma cultural planning and follow-through.”

To help show employees at all levels the need for a Six Sigma program - which is critical for it to work - document your threats and opportunities. Show how employee satisfaction or profits will improve. Use only your most compelling threats and opportunities (not a long laundry list), and be ready to prove that they are real. If you can’t prove it, don’t use it. Target what you say to each stakeholder group and streamline your message.

Overcoming Six Sigma Resistance

Expect to encounter resistance when you launch a Six Sigma program, since resistance is the universal reaction to change. However, more than 80% of the time, resisters can be turned into champions of the program. To overcome resistance, follow this four-step process:

  1. Identify the key stakeholders of your initiative, such as employees and managers.
  2. Identify the level of support or resistance each group feels about your change initiative.
  3. Identify what each stakeholder wants.
  4. Develop the strategies needed to shift each stakeholder to the level of support you need.
“Once an organization commits to a Six Sigma initiative, management must use any and all communication vehicles to show their unwavering commitment to Six Sigma and provide status on its progress.”

The four major types of resistance are:

  • Technical - Resistance on technical grounds is most common, since people normally resist what they don’t understand. You can overcome technical resistance by focusing on Six Sigma’s higher level concepts and responding with information, education and involvement. For example, encourage whatever competence the resisters show and build on their small successes, so they feel less intimated.
  • Political - People dislike threats to the status quo. They feel that they may experience a loss. To combat this, identify with the loss they are feeling, and then show how they will experience future gains to compensate for that loss.
  • Organizational - This resistance occurs when people have issues about control, pride and ownership. To counter it, modify the initiative so the resistor feels more control over the process.
  • Individual - Individuals resist change when people experience fear and emotional paralysis due to high stress. Here, too, modify the change to decrease fear and increase the individual’s involvement in the process.

The Elevator Speech

Once you show the need for Six Sigma, let the people in your organization know what a changed organization will look like. Explain your vision, and results and behaviors you expect. You can start visioning by working with individuals or groups in your organization to list a series of words and phrases that express your goal for the Six Sigma initiative.

“Six Sigma is a management philosophy that attempts to improve customer satisfaction to near perfection.”

Then, turn the vision into specific goals that you can measure, such as 24-hour customer response time and first-call customer resolution. Then, specify behaviors that reflect this goal. In effect, you are creating a mission statement, envisioning the results and then describing exactly what behaviors or actions members of the organization will employ.

“A Six Sigma company has little more than three bad customer experiences for every million opportunities. This level of near-perfect performance is a significant distance from where most organizations are today.”

Once these components are thought out, top executives in the company must create and use a consistent, short message - essentially an elevator speech, short enough to tell someone in the few seconds you are in an elevator - that answers these key questions: What is Six Sigma? Why is the company choosing this as a management philosophy? What are the benefits of the program, and what are the expected behaviors of the individual. Be prepared for employees to have questions and to resist or feel honest skepticism. Be ready to show them the benefits and to overcome their fears and concerns.

Six Sigma Culture

To create the Six Sigma culture, you need the right people to lead and support it. The key leadership positions required to initiate and maintain the program are the Quality Leader, Master Black Belt and the Black and Green Berets.

“Six Sigma is, at its core, a management system based on decision making by fact and data. Measurement is a key to successful Six Sigma Q.”

The Quality Leader is commonly a vice-president and member of the executive board. Ideally, he or she should be an executive who has produced results and earned respect. This person should recognize the need for change, understand the organization’s culture, be a people person, manage strategically and know when to push and when to back off. The Quality Leader’s primary responsibility is to help the executive team create the Business Process Management System and lead it forward. The Master Black Belt is the internal quality consultant and team coach, who facilitates meetings with project teams and executives. This person assists with strategy and tactics, such as helping executives identify core processes and create sub-processes. The Black Belts are the full-time project leaders who guide three or four teams to meet their goals through process improvement or design. The project part-timers, or Green Belts, are mid-management employees with strong project management skills who lead these projects for a year or two.

“While threats are important to jump-start the need for Six Sigma, opportunities sustain the need for Six Sigma.”

You also need to select good team members, people with the greatest knowledge about the processes you are redesigning. Knowledgeable tactics or strategy consultants can also help with process management, team training, change management and facilitative leadership.

Plan a training program to develop Six Sigma people. This includes a four-to-eight hour overview and several days of training in business-process management, facilitative management and how to work as a Green Belt or Black Belt. Use a reward and recognition program to motivate managers, professionals and team members. Continually communicate to them about the program and demonstrate top management’s commitment to it. As necessary, reconfigure job structures to adapt to the new organizational changes you are making.

(Q) & (A) Measures

Finally, measure the quality of your technical Six Sigma activities and your organization’s acceptance of the program. Careful measurement will help you avoid the common pitfalls of change, since measuring your progress with facts and data is a key to making the program succeed. These quality or (Q) measures include:

  1. The degree to which the organization has created a business process management system.
  2. The degree to which training is effective and efficient.
  3. The degree to which consulting and project management have been effective.
  4. The effectiveness of the leadership team.
“The organization needs to know what a Six Sigma organization looks like in terms of vision, results and behaviors.”

The acceptance or (A) measures include measuring how well you have done in:

  1. Creating the need for Six Sigma.
  2. Shaping the vision.
  3. Getting everyone committed to the program and dealing with resistance.
  4. Measuring the level of acceptance of the new culture.
  5. Modifying the systems and structures as necessary.
  6. Leading the initiative.
“Reward and recognition is an important element in the creation of a Six Sigma culture.”

Ask employees and managers to rate these 10 quality and acceptance activities and get a combined average for each one - then add them together. The higher your score (perfect is 100), the better your company is doing. At the 81 to 100 level, your organization has become a world-class Six Sigma organization.

Launching the Six Sigma initiative will go more smoothly if you avoid the customary problems that affect organizations in transition, such as getting discouraged by the failure to achieve quick success, setting unrealistic timeframes and doing insufficient cultural planning and follow-through.

About the Author

George Eckes is the founder and principal consultant of Eckes & Associates, Inc., a consulting group specializing in Six Sigma training and implementation, results-driven continuous improvement, organizational development and managing change. His clients include GE Capital, Pfizer, Honeywell and Volvo. He has published numerous papers on the topic of performance improvement and wrote The Six Sigma Revolution about establishing Six Sigma programs.

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Making Six Sigma Last

Book Making Six Sigma Last

Managing the Balance Between Cultural and Technical Change

Wiley,
 


14 October 2025

Identifying Hidden Needs

Recommendation

Most experts fail to explore the foundation of innovation: research. Authors Keith Goffin, Fred Lemke and Ursula Koners believe most new products fail because they are not based on research that uncovers consumers’ “hidden needs.” Developing new offerings based on the data produced by outdated research methods is like trying to cook a gourmet meal with inferior ingredients. The authors try to put a human face on ethnographic research by supplying several case studies per chapter, but that does little to relieve the dry and technical nature of the subject matter. The text is not for the casual reader. For market researchers and product developers, however, BooksInShort believes this treatise will offer new, worthy ideas and methods presented in a variety of formats with charts, graphs, grids and more.

Take-Aways

  • Surveys, questionnaires and interviews form the backbone of traditional market research.
  • Traditional market research fails to uncover consumers’ “hidden needs.”
  • Products based on conventional research are often unsuccessful.
  • Focus groups often produce misleading or faulty data.
  • “Hidden needs analysis” employs “ethnographic research, repertory grid analysis and involving the user.”
  • Ethnographic research methods include “systematic observation” and “contextual interviewing.”
  • Ethnographic marketing researchers immerse themselves within the research subject’s environment.
  • The repertory grid uses a matrix to present quantitative data gleaned from interviews.
  • Innovative companies engage the user in product development and marketing.
  • Researchers utilize “conjoint analysis” to measure the market strength of different product attributes.

Summary

Innovative Flops

Why do so many products fall short of company expectations? Often it’s because manufacturers create new offerings based on traditional research methods that do not reveal what consumers really want. Because they don’t understand these “hidden needs,” companies fail to produce products that satisfy an unfulfilled market niche.

“Companies that can accurately identify the needs of customers in developing markets will be at an advantage.”

Conventional market research relies heavily on focus groups and surveys. These methods probe customers’ impressions of products and services they already use. This usually generates ideas for incremental innovations rather than identifying even the possibility of, let alone the potential for, completely new offerings. Many marketing practitioners are reluctant to try enhanced research methods because they’re either skeptical of the process or have concerns about the costs or the difficulty.

“Traditional market research...merely reflects common knowledge.”

Hidden needs are “issues and problems that customers face but have not yet realized.” Social sciences form the foundation for “hidden needs analysis” (HNA) techniques. By combining HNA methods with traditional market research, companies can gain comprehensive, reliable insights. These insights pose challenges, problems and cultural issues that manufacturers can solve with groundbreaking products and services. However, for innovation to thrive, the company’s culture must support enhanced research methods and innovation.

“Traditional market research keeps customers at arm’s length in that they are asked what type of products and services they would like but then they have no further involvement in new product development.”

Three state-of-the-art market research techniques make up HNA:

  1. “Ethnographic market research” – Researchers work in participants’ environments to understand their needs.
  2. “Repertory grid interviewing” – This method graphs subjects’ thoughts and emotions in map form.
  3. “Involving the user” – Companies encourage users to share experiences and innovations via the Internet and various other digital communication systems.

May I Ask You a Question?

Creating and conducting productive surveys requires preparation. Begin by defining the goals of the survey and the knowledge you wish to gather. Decide which method of data collection will work best. Do you want to employ face-to-face interviews, use video or conduct telephone research? Should you distribute a questionnaire by mail or the Internet? Once you choose a data collection method, consider if the data you need are “demographic, attitudinal or behavioral” so you can construct questions that best elicit each kind of information. Decide what type of question will fit the research profile. “Closed-ended” and “semi-structured” questions explore participants’ perceptions with multiple-choice questions or with rated responses on a provided scale. “Open-ended” questions allow responses that need not fit any framework. Survey designers should word questions carefully. Avoid jargon, be specific and weed out leading inquiries. Run a “pilot test” to try the survey with a small sample before launch. Beware that researchers using surveys tend to place more emphasis on quantity, so quality may suffer.

Hocus Focus

Focus groups bring several people together to discuss a topic regarding a product or service. The three steps to organizing a focus group are preparation and participant selection, running the sessions with a facilitator, and analyzing the information. As with surveys, the first step in organizing a focus group is to define the objectives. When the marketing research agency Weatherchem organized a female focus group in India, it sought to identify the spices these women used in cooking, what issues influenced their buying decisions, what types of packaging were most common, and what packaging they preferred. Contrary to the researchers’ initial assumptions, price was not the determining factor. Surprisingly, packaging proved most important. The focus group revealed that the women would pay a higher price for spices in resealable dispensers.

“Casual observation and informal discussions with customers are unlikely to lead to breakthrough products.”

A focus group moderator works not as an interviewer but as a facilitator of the discussion. He or she manages the group dynamics to ensure that every participant provides input and that the group stays on task. After the group disbands, analysts go through videos and transcripts to code the content and to make notes about nonverbal interactions.

“Involving users in the early phases of new product development ensures that customers’ needs are met and market acceptance is faster.”

The efficacy of focus groups is limited because the data may be hard to evaluate, individual participants may not feel comfortable speaking honestly, or people with strong personalities sway the group. The moderator may ask leading questions or lose control of the discussion. Focus groups don’t always represent the target market. Surveys and focus groups are also inadequate because customers may not articulate, understand or even recognize their hidden needs. People’s true behavior may not correspond to what they say in focus groups. These traditional research methods are much more effective when conducted in combination with ethnographic research.

Ethnographic Analysis

Cultural and social scientists pioneered ethnographic analysis, which uses “systematic observation and contextual interviewing” research techniques. In systematic analysis, analysts watch an interaction, (such as a customer trying a product) record their observations and then code the data to uncover causal meanings and motivations. Contextual interviews are conversations that take place in the respondent’s environment, such as interviewing an employee in his or her workplace. Ethnographers employ seven strategic tenets of contextual interviews:

  1. Researchers conduct studies on site.
  2. Ethnographers immerse themselves in the participants’ natural environment.
  3. Researchers participate to varying degrees, from observing respondents to interacting with them.
  4. Data collected for the “ethnographic record” include “field notes, recordings, photographs and interview transcripts.”
  5. A more profound understanding of the study group produces a “thick description of social behavior.”
  6. Ethnographers delve beyond subjects’ responses to detect underlying meanings and feelings.
  7. Researchers reflect on all the collected data before drawing conclusions.
“As researchers immerse themselves in the data, they will start to become aware of patterns, such as the way behaviors are linked to activities and, from these reflections, generate hypotheses.”

When an Italian company, Lucci Orlandini Design, decided to create kitchens for disabled people, its managers conducted ethnographic research in the field. They observed patients cooking in the Niguarda Hospital in Milan to “get their impressions first hand.” After researchers collected data through systematic observation and contextual interviewing, they coded the data and wrote a “thick description.” This two- to three-page summary identified patterns and contradictions and interpreted the data in the cultural context of the survey group. The next step is to test the hypothesis or build a prototype. In this case, Lucci Orlandini Design tested its prototype at a different hospital. Its designers retested and made adjustments before launching the final product, which won prestigious design awards and the high praise of disabled users.

The Repertory Grid

The repertory grid is a flexible research method that allows participants to convey their feelings or opinions about products, services or processes. Researchers using this technique cull quantitative information from structured interviews and place it in a matrix – the repertory grid. Market researchers normally use repertory grid interviews for investigative purposes. The interviews identify “constructs or service attributes” that analysts can use to generate ideas for product and service innovations.

“The most appropriate combination of techniques needs to be chosen for each market research project.”

Researchers conducting a study for an information technology (IT) service provider asked participants to name six IT services they used. The researchers showed the participants three services and asked a question such as, “Why is using two of these services similar and different from the third?” The responses provided a construct. After each construct, researchers asked participants to rate all the services on a five-point scale. Later, the researchers placed this data on the repertory grid. They employed tailored software to analyze the elements and constructs, and to produce a “cognitive map” – a visual representation of the participants’ feelings and observations. When analyzing several grids in sequence, the researchers could organize the constructs into categories ranked by significance.

The Innovative User

In 1998, Lego introduced Mindstorm, bricks that can be used to build programmable devices, such as robots or machines. Users can program the machines to perform a complex range of activities, such as solving a Rubik’s Cube. When Lego wanted to update Mindstorm, its product developers contacted Mindstorm enthusiasts. Lego used the contributions of four top users to formulate new robot-building blocks. After the release of the well-received new version, a hacker “reverse-engineered” the software and published his findings on the Internet. In keeping with its interactive spirit, Lego now allows hacking of its products in order to involve customers further.

“Adopt the culture of innovation, develop a deep understanding of your customers and their hidden needs, and turn these insights into breakthrough products and service features.”

Mindstorm presents a good example of engaging users in product design and marketing. Virtual user communities, blogs, photo and video sharing, and social networks allow consumers to share their thoughts and opinions. They provide a window into the mind of the consumer, a valuable resource for ethnographic researchers. In the late 1990s, the term “user-generated content” (UGC) became part of the marketing vernacular. A popular example is “open source code” such as the Linux operating system, which volunteer programmers developed by collaborating online.

“When hidden needs are addressed by product design, customers are surprised and delighted.”

Consumers provide “ideation” input – that is, ideas for new offerings, “design and development,” “modification and novel use,” “market launch,” and ways to use or change a product. Corporations such as Lego turn to lead users and early adopters for feedback and suggestions. “The Internet has significantly increased the opportunities for companies to forge close links to large numbers of their customers or consumers.” The trend toward UGC will continue to grow.

Decisions, Decisions

Marketers and product developers must understand how consumers perceive the importance of one attribute over another (for instance, high-quality versus affordability), and how much this influences their purchasing decision. “Conjoint analysis” is the research method that measures the strength of different attributes. Research participants choose among a range of realistic alternatives, each with different attributes. Analysts study the resulting data using a mathematical model to identify which key attributes influence the purchasing decision. Conjoint analysis enables researchers to pinpoint the trade-offs consumers are willing to make and the value they place on various product characteristics.

“Involving the user is still in its infancy, but new opportunities will continue to arise.”

The Swedish furniture maker IKEA wanted to know whether customers valued the use of sustainable wood in its products. IKEA researchers conducted a conjoint analysis asking participants to rate how important they considered the attributes of “price, type of wood and eco-label.” The firm learned that customers in England would pay up to 16% more for products with the eco-label, but that customers in Norway would pay only 2% more.

Hidden Needs Detectives

Creating a culture that uses HNA research to generate successful products and services requires an open attitude and a commitment to training. If you understand what consumers really want, you can create groundbreaking, innovative products.

About the Authors

Keith Goffin teaches innovation at the UK’s Cranfield School of Management. Fred Lemke teaches marketing at the US’s Alliant International University, where Ursula Koners is a visiting research fellow.

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Identifying Hidden Needs

Book Identifying Hidden Needs

Creating Breakthrough Products

Palgrave Macmillan,
 


14 October 2025

The Wealth of Nations

Recommendation

BooksInShort believes that no serious economist can do without this exhaustive work, originally published in five volumes as An Inquiry into the Nature and Causes of the Wealth of Nations. This classic is a pragmatic and accessible milestone in the history of economics. Its author, Adam Smith, is woven into every economics textbook. However, Smith’s theories, which today often are recounted mostly in fragments, frequently incorrectly, reveal their entire social and economic innovative power only in context. Smith burst onto the scene at a time when absolutist national states monopolized the world’s precious metal reserves and tried to increase their own wealth through stringent export policies. These states were motivated by an entirely new concept about national wealth: that it stemmed from the work of the country’s people, not from gold. Based on that idea, economic markets should balance themselves as if guided by an “invisible hand,” impelled by each individual’s self-interest. The state has to provide only an orderly framework and specific public goods and services. Even though Smith’s image of idealized economic and social harmony may have developed a few cracks over the course of time, his ideas have inspired many well-known economists during the past 250 years, including David Ricardo, Vilfredo Pareto and Milton Friedman.

Take-Aways

  • In 1776, Adam Smith laid the cornerstone of classic economics with his seminal work, An Inquiry into the Nature and Causes of the Wealth of Nations.
  • He criticized mercantilism’s economic intervention and rejects protective duties and other measures which hinder free trade.
  • Mercantilism protects producers, but discriminates against consumers.
  • Smith said that the efficient production of goods requires the division of labor.
  • He believed that the exchange of goods requires public desire to trade and a market.
  • The larger the market, the better the exchange of goods will function. Agreement between suppliers and customers creates the market price.
  • Using accepted, durable currency as a means of exchange cuts transaction costs.
  • A commodity’s real value is the labor it represents; this real price does not fluctuate, whereas the nominal price is subject to change.
  • The more freely people can act economically, the more productive they will be.
  • Government should not interfere with economic events, but should provide only defense, legislation and specific public institutions.

Summary

Progress through Division of Labor

The division of labor has improved productivity enormously. Instead of an individual worker producing a product from beginning to end, production now can be divided into individual steps. For example, manufacturing one pin requires 18 different steps. An untrained worker may be able to produce only a few pins per day. However, if 18 workers each execute just one step, they can produce several thousand pins by the end of the day. In fact, the division of labor is one of the greatest achievements of progressive society. It developed because people have a natural propensity for exchanging goods. Each individual has different talents and, given the assistance of a barter economy, people can specialize: The baker bakes bread, the butcher supplies meat, and so on.

The Market and the Invention of Money

For trade to work, suppliers and consumers must have a market where they can meet. The size of the market has a direct influence on the scale of the division of labor: If the market is very small, specialization cannot function. In a small village, for example, nobody needs a porter; however, in a large city, porters are in demand. Where waterways exist, carts become unnecessary. Ships transport goods more quickly and more efficiently over greater distances, so trade gains momentum.

“The division of labor, by reducing every man’s business to some one simple operation, and by making this operation the sole employment of his life, necessarily increases very much the dexterity of the workman.”

But better transport creates a problem for traders: What can they do if they are unable to find partners to trade with, other parties who want their goods? The invention of money as a means of trade solved this dilemma. At first, currency took the form of natural goods (for instance, cattle or salt) but, eventually, people started to use precious metals, which neither decayed nor lost value. To prevent fraud, states calibrated and officially embossed the precious metals, giving birth to coined money.

Natural Price and Market Price

However, the real value of a commodity is expressed in terms of what it costs to produce, not in terms of money. The value of each commodity equals the labor needed to create it. For example, if killing a beaver requires twice as much effort as killing a stag, then one beaver is worth two stags. The real value is the labor as expressed by the exchange rate.

“All the different nations of Europe have studied, though to little purpose, every possible means of accumulating gold and silver in their respective countries.”

Calculated this way, the value of a commodity does not fluctuate, since it always involves the same amount of labor. The labor is the real price of that commodity. The nominal price, however, can fluctuate, perhaps due to a decrease in the value of gold or silver, for example. Depending on whether a society is poor or wealthy, commodities develop typical – or natural – prices, which approximately equal their labor cost.

Supply and Demand

Usually, the seller of a commodity wants to make a profit. If the seller cannot realize a profit, he must sell his goods at the so-called purchase price – the amount he paid for them. Of course, he suffers the lost profit and the aggravation of knowing that he could have invested his money in other goods instead.

“Labor, it must always be remembered, and not any particular commodity or set of commodities, is the real measure of the value both of silver and of all other commodities.”

The market price is the price that a seller can actually achieve. It depends on the relationship between supply and demand in the market. If there is a large supply, prices will fall. Conversely, prices will rise if a commodity is in short supply. If supply and demand are balanced, the commodity probably will sell for its natural price. If a supplier can establish a monopoly, he can keep the supply of a commodity artificially low and, thus, get paid the highest price for it.

The Remuneration of Labor

Before land became private property and wealthy people accumulated large amounts of capital, the whole proceeds of a man’s labor belonged to him. But, today, those who use property have to give part of the proceeds of their labor in exchange. This also applies to those who are employed by other people: The entrepreneur always retains part of the proceeds of his workers’ labor. Of course, employers and employees can dispute the amount of remuneration, though it should never fall below the subsistence level. The labor market exists alongside the commodity market. If the demand for labor increases, suppliers will outbid each other to employ the best manpower.

Composition and Use of Capital

Before the division of labor, nobody needed capital or stockpiled supplies. When they got hungry, people went hunting. When they needed clothing, they used animal fur. But as soon as the division of labor was established, people had to stock necessities, such as raw materials for their work, and food and clothing for their families. Once people store goods, some of them will accumulate more goods than they need and will try to sell the surplus to generate revenue. Hence, it becomes their capital. Goods that are produced and sold are called “circulating capital.” Machines, tools or property are called “fixed capital” or “capital assets.”

“What is the real measure of this exchangeable value; or, wherein consists the real price of all commodities?”

Except for that part of a country’s wealth that is used immediately and doesn’t produce a profit, the definitions that apply to individual capital also apply to national capital. A country’s capital assets include its machinery, businesses, properties and even the skills of its citizens. The nation’s circulating capital is comprised of all the money in circulation, its stock of supplies and its goods, whether they are semifinished or finished. Nations find it easier to produce and maintain monetary capital as paper money instead of gold and silver coins. Paper money is as efficient, convenient and secure as coinage, as long as its purchasing power remains stable.

The Demise of Agriculture

A natural order controls the use of capital. People who make a living from their labors in the fields should invest most of their wealth in agriculture. Trade and commerce or even foreign trade would, therefore, appear to be of secondary importance to them. But this order was turned around during the development of the modern European states. At that time, foreign trade stimulated commerce and led to enormous improvements in agriculture. However, after the fall of the Roman Empire, the occupations of tilling the ground and husbanding animals began to falter in Europe. The marauders who destroyed the empire also destroyed the fertile trade between the cities and the rural population. In consequence, cities withered and farmers left their fields.

Freedom and Possession

Western Europe fell victim to poverty, and a few great landowners took possession of the fallow fields. The land lost its meaning as a way to insure an individual’s livelihood and instead became a symbol of the landlords’ power and protectionism. The farmers on this land became subordinate to their feudal lords, the landowners, in many ways: The landlords possessed the land, the seeds and the animals. Basically, the farmers were no more than slaves. And they worked just like slaves, that is, they never did more work than necessary. People only make an effort to ensure a rich harvest if they are going to enjoy the fruits of their labor. Every additional degree of freedom granted to the farmer leads to more productivity, a better harvest, and, in short, more wealth.

The Rise of the Cities

City dwellers attained freedom and independence a lot earlier than the rural population. Their protectors granted privileges to urban craftsmen and tradesmen by exempting them from bridge tolls, passage tolls, poll taxes and other dues. Citizens in the city were also “free” in another respect: They were able to elect a town council, merge into communities, and decide on their own who would inherit their goods and chattels. The city dwellers were allowed to erect walls and build up their defenses, while farmers lacked protection and were, therefore, at the mercy of any assault. And yet, the rise of the cities also benefited the rural population because the cities provided suitable markets for agricultural goods. City dwellers bought fallow land and cultivated it. They also spread the cities’ order, laws and security to the surrounding villages.

The Flaws of the Mercantile System

The mercantile economic system includes two fundamentally flawed views. Nevertheless, various nations follow it almost blindly. First, a nation is considered wealthy if it owns large amounts of gold and silver. Hence, many countries make it their goal to accumulate enormous quantities of precious metal. To retain the nation’s wealth, people were strictly prohibited from exporting these metals or, at least, high duties inhibited such exports. Fortunately, merchants made the British government understand that although they might first pay for goods with gold, reselling the goods to other countries brought even more gold back to England. Therefore, England removed export bans on precious metals.

“The scarcity of money is not always confined to improvident spendthrifts. It is sometimes general through a whole mercantile town and the country in its neighborhood. Over-trading is the common cause of it.”

The second flaw of the mercantile economic system involved maintaining a positive balance of trade. For example, the British consistently worked to export more than they imported. To serve this purpose here and elsewhere, merchants were not allowed to import any goods that their own country could produce or to bring in any goods from countries that had a negative balance of trade with their own nation. At the same time, states found various ways to foster exports:

  • They granted reimbursements to exporters whose goods originally were subject to government duties.
  • They provided subsidies for some trades.
  • Special state trade agreements granted privileges for home country goods.
  • States founded colonies where their merchants could have monopolies.
“The wealth of a neighboring nation, however, though dangerous in war and politics, is certainly advantageous in trade.”

This entire mercantile system is a deceptive, highly dangerous construct. It serves only producers and traders, and neglects consumers. In the end, consumers would benefit if local goods competed with imported products.

The Tasks of the State

The state’s attempts to boost or restrict its economy in various sectors are damaging; Instead of promoting progress, they thwart it. The state’s goal should be the free development of all market participants. As long as these participants comply with the laws and rules, they should be subject only to the free play of market forces. Of course, the state has specific tasks which private individuals can never fulfill. These tasks are:

  • National defense – The state’s first obligation is to protect its citizens from hostile assaults. Therefore, it must maintain an army or, at least, a militia.
  • Justice – To enforce the rule of law and to prevent violence between citizens, the state has to provide courts, a judicial administration and police.
  • Public institutions – The state has to take over all institutions where private individuals cannot expect to make a profit. These include schools and universities, churches, streets, bridges and channels.
“The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities.”

The state depends on revenue from taxes to fulfill these tasks. Taxes on pensions, profits and salaries are permissible. The highest taxation principle is that taxes have to be assessed based upon a predetermined and logical rate of the citizen’s means. The state can only tax that part of a person’s income that was earned under the protection of the sovereign.

About the Author

Adam Smith, the son of a jurist, was born on June 5, 1723, in Kirkcaldy in Scotland. He learned moral philosophy from Francis Hutcheson, whose teachings combine the ideas of the philosophers John Locke and David Hume. After studying in Oxford and Glasgow, and teaching for some time, Smith was appointed professor of logic at Glasgow University in 1751, and professor of moral philosophy one year later. During this time, he was in close contact with David Hume, whose ethical and economic ideas influenced him substantially. In 1763, Smith left Glasgow for a two-year educational journey through France and Switzerland as a young duke’s private teacher. From his encounters with the French physiocrats Turgot and Quesnay, Smith developed the idea for his main work, The Wealth of Nations. However, he did not finish and publish it until 1776. In 1779, Smith was appointed duty controller in Edinburgh, where he died on July 17, 1790. Shortly before his death, he ordered his friends to destroy all of his unfinished writings.

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The Wealth of Nations

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