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"The Wealth of Nations" (English: The Wealth of Nations), fully titled "An Inquiry into the Nature and Causes of the Wealth of Nations," is an economic treatise by Scottish economist and philosopher Adam Smith. The first Chinese translation was by the translator Yan Fu, titled "Original Wealth."

Adam Smith (English: Adam Smith, June 5, 1723 (baptized) (Gregorian calendar June 16) – July 17, 1790) was an 18th-century Scottish philosopher and economist, regarded as one of the founders of modern economics. His work "The Wealth of Nations" is the first attempt to explain the history of industrial and commercial development in Europe and is considered a milestone in economics. This work introduced many classic theories, including the concepts of free market economy, division of labor, and spontaneous market regulation, profoundly influencing the development of economics, political science, and moral philosophy.

These three sciences can be classified from two perspectives:

• One is whether they are abstract or have entities;
• The other is whether the research object of the entire science acts on the world.

Formal sciences are essentially abstract studies of the world. Their advantage is that when you abstract a very simple law from things, by exploring this law, it can serve as a framework to help you understand the world and even predict things we have not yet observed.

However, the disadvantage of this abstraction is that we can never fully model the world; it will lose some information, and our abstraction of the world is always incomplete.
Moreover, the higher the complexity of things, the harder they are to abstract well.

Now, I am preparing a series of videos on economics, starting with "The Wealth of Nations."

My plan is to discuss part of the book's content, trying to help everyone understand "The Wealth of Nations," avoiding misinterpretation and not reading with preconceived notions; part of it will involve some extended thoughts based on the book's content, sharing my own reflections after reading.

I hope the content will be lively and interesting, presented in a casual talk format. Additionally, I will incorporate knowledge from other fields during the teaching process, as Adam Smith's entire "The Wealth of Nations" also mixes economic philosophy, history, political theory, and practical plans; personally, I also enjoy drawing on various references to enhance understanding.

Then, I will tidy up the visual effects and won't wear my cotton coat. I hope this can increase your interest in learning.
After all, this book is not difficult; if you can listen, you will definitely understand.

The first video of the first episode will be a simple introduction.

First, an important point about the choice of translations. I have seen three versions of "The Wealth of Nations" offline, and I have checked the information of more than a dozen translators on WeChat Reading online. If you can buy a physical book, I recommend choosing the one translated by Yang Jingnian; if you are reading an e-book, then Tang Risong's translation is better than the others.

Tang Risong is an economics professor at Peking University. Other translators are either professors at ordinary universities or famous translators, but not specialists in economics. The main criticism of Tang Risong's version is that it is too textbook-like, with a very rigid translation, giving off a stiff professor vibe, but it has relatively less missing information.

Another version is a free translation, rated as the easiest to understand, but that version is somewhat too free; how should I put it, it doesn't even have the "invisible hand," which is a classic concept in "The Wealth of Nations," and it has been omitted in translation.

Personally, I think when reading such books, we shouldn't care whether the translation has literary quality; it's not poetry, and we shouldn't care how stiff it is. After all, the threshold for understanding this book is not in the words, and even if it's stiff, I can explain it clearly to you.

So, I won't recommend a version I saw offline that had illustrations but was edited down; all illustrated versions have been edited. They removed parts that were hard to understand to help readers better grasp the book's content, adding many illustrations, successfully turning it into a children's recommended picture book. We adults don't need pictures, right? That's all for children.

There is also a version published by the Commercial Press that is really a pile of garbage; I won't even mention the content, but its layout made me feel like they treated me like a fool. I was really angry when I bought it. That book has half of its pages left blank, the text is all cramped together, and the pages look worse than mine, with particularly small text. Whoever wants to read it can read it.

I compared Yang Jingnian's and Tang Risong's translations, and I personally think Yang Jingnian's translation is better and more refined. First of all, he is Chinese, so there are no issues with his native language; secondly, he studied in the UK, specifically studying political science, philosophy, and economics at Oxford University, and then returned to become an economics professor at Nankai University. I believe his English and economics level are also fine. He was 90 years old when translating this book, so he doesn't have the situation of young people being restless and seeking fame. However, I couldn't find an electronic version of his; I can only present Tang Risong's version, but it should be similar. If possible, I still recommend buying a physical book; having a physical book at home acts as an anchor point, always reminding you of the impulse to finish learning it, and it might remind you of me, which is not important.

Adam Smith is the father of economics and holds an almost god-like status in the field of economics. However, the world only knows half of Adam Smith. Regarding this issue, we cannot avoid mentioning the "Smith Mystery," nor can we overlook Adam Smith's other book, a monumental work that consumed as much of his time and energy as "The Wealth of Nations," titled "The Theory of Moral Sentiments."
In "The Theory of Moral Sentiments," he discusses the ethical view of altruism based on the sympathy inherent in humans; in "The Wealth of Nations," he discusses the self-interest perspective of egoism. This contradiction in the history of economics is referred to as the "Smith Mystery." Without understanding "The Theory of Moral Sentiments," one cannot truly grasp a complete Adam Smith. Adam Smith was deeply influenced by his best friend David Hume's theory of human nature, using human nature as the starting point for all his theories. Adam Smith's research is fundamentally based on constructing a social order that aligns with human nature. His philosophical views stem from the natural philosophy of his contemporary Newton and the order of nature. Newton discovered the law of universal gravitation that unified the physical world, and similarly, Adam Smith proposed several theorems, attempting to unify moral and social interaction norms in the same way, which can help people distinguish right from wrong and choose the correct actions. Such actions will choose between self-interest and altruism, establishing a perfect balance that contributes to social welfare.
This is quite interesting; in any era, if there is a great philosophical idea, as an advanced intellectual of that era, you cannot be unaffected by it. For example, since Einstein published the theory of relativity, many educated people have changed their perspective on the world. When you know that time and space are relative rather than absolute, our past ideas about absolute things or measurable things will shift. Unfortunately, Adam Smith's "The Wealth of Nations" has received high attention from the world; people even regard "The Wealth of Nations" as the Bible of economics, treating the "invisible hand" as the eternal fundamental principle of market economy, the "crown jewel" of economics.
Foreigners love to use this metaphor, "crown," "queen," "pearl"; every preface of a number theory book will write that Gauss said, "Mathematics is the queen of sciences, and number theory is the crown of mathematics," and many unresolved conjectures in number theory are the pearls on the crown. I have bought several number theory books, preparing to make a video course on number theory, and I can see this sentence in each book.
Oh, and India is the "pearl on the crown" of the British queen because the largest jewel on the queen's crown was mined from India. Yet, people completely forget about Adam Smith's other book, "The Theory of Moral Sentiments," which he valued even more. Smith certainly favored the free market system, but people overlook the essence of the market in society. "Sympathy" is the foundation of moral behavior; if society lacks this foundation, it will lose its direction. When understanding Adam Smith, if you only know "The Wealth of Nations" and not "The Theory of Moral Sentiments," you only know half of Adam Smith. If you misinterpret "The Wealth of Nations" because of this, your understanding of Adam Smith will be less than half; similarly, if you only know "The Theory of Moral Sentiments" and not "The Wealth of Nations," you also only know half of Adam Smith. Unfortunately, due to the limitations of economic development levels, humanity places more emphasis on economic interests rather than moral sentiments. Therefore, the world only cares about Adam Smith's "The Wealth of Nations" while neglecting Adam Smith's "The Theory of Moral Sentiments." They mistakenly believe that Adam Smith only advocates for human self-interest, even thinking that Adam Smith himself is an extremely selfish person. In fact, this is completely wrong. Adam Smith is primarily a compassionate moral philosopher and only secondarily an insightful and analytical economist.
Many naive young people say that after reading "The Wealth of Nations," they know Adam Smith is a very selfish person, but I think those who say this generally haven't read it; very few people can persist in reading a book of hundreds of thousands of words while disliking the author. Right? They say Smith is for the bourgeoisie, legitimizing the oppression of the people. There is a saying that when we are born, we are merely ignorant, and as we grow, we become foolish.

If people are very young when they come into contact with these doctrines, we can probably view them from a relatively neutral perspective and appreciate how the author conceived this viewpoint. However, as we grow, we become foolish; we develop many preconceived notions, and our context and materials are colored. When we talk about words like "self-interest," it gives you an uncomfortable feeling, making it impossible to discuss the topic normally.

What you see is merely what you have fished out of your thinking's dye vat, and you cannot get closer to the truth.
In China, we often exaggerate the negative aspects of ignorance. When I was young, I read Sherlock Holmes; he didn't know many common sense facts about life, but he could recite case files from a hundred years ago. Sometimes we might overstate the negative effects of ignorance. Ignorance is too negative in our eyes; ignorance is not that negative because there is too much knowledge in this world. Each of us lives and works in our respective fields of expertise; ignorance is absolute, while knowledge is relative, and ignorance is inevitable. I remember once wanting to play a soccer game, and a friend laughed at me, asking if I knew how many people played soccer. What kind of person is my friend? He loves soccer, can name any star, enjoys movies, likes Hong Kong stars, and knows a lot about the Three Kingdoms. From his perspective, I seemed ignorant; at that time, I really didn't know how many people played.

But a basic fact is overlooked: in almost any field in this world, if you spend two years, you can learn to a level far beyond the average person, even if you have never encountered something like the subway or used electronic products. If you go to Wuhan to study for two years, you will also learn to take the subway and use a computer. We overestimate the horror of ignorance; no matter how ignorant you are, if you spend two years on anything, you can do better than the average person. Even if you are a bumpkin, if you learn piano for two years, you will play decently.

When you talk about not knowing certain things, you don't need to be too shy; not knowing is just not knowing. There is no information with a high learning threshold. When your friend talks to you about some insider information in a field you don't know, you don't need to feel anxious. For example, when a friend from an insurance company tells you some industry insider information, thinking he understands the truth of the world, but in fact, no information is hard to obtain. In this age of information overload, any knowledge a regular person wants to acquire is easy to get. In the past, the information threshold was high; for instance, in the era when we could only obtain information through television, if you wanted to watch Yi Zhongtian discuss the Three Kingdoms, you had to wait every week. If you were a bit late, you wouldn't see similar programs, and if you missed that program, you couldn't find a substitute.
But in our current age of information overload, ignorance is the least scary thing; anything you want to learn, you can always find and learn it. So what truly stops us is ignorance; ignorance makes us blind to the truth. Even if we invest multiple times the effort, we may only get the opposite result.

I hope everyone can maintain a state of ignorance while watching my course.

Just like I find that many people who are not good at physics are not stupid; they just always carry biases when looking at problems. Our observations often deceive us; we feel the Earth is not rotating, and we feel that an object not under force does not move.

Adam Smith's understanding of human nature is comprehensive and profound.
I don't quite agree with this view; it's like the theory of unification. Einstein wanted to unify quantum mechanics and relativity. Everyone knows that quantum mechanics and relativity are incompatible, but both are correct, and it's hard to find something that unifies them.
Human experience tells us that truth is never at the endpoints of two extremes.

My thought is that "The Theory of Moral Sentiments" is not valued as much as "The Wealth of Nations." One reason is that "The Wealth of Nations" is an economic work, and people are more interested in economics; another reason, which I think may be more important, is that Smith successfully abstracted an economic framework in "The Wealth of Nations." This framework can be verified, and on this framework, other things can be constructed. However, "The Theory of Moral Sentiments" has not formed a stable framework; it only explains part of the phenomena but does not provide a systematic explanation. It's very similar to indigenous religions in China, which provide more accessible explanations for supernatural phenomena that were not understood at the time, but they do not form a system. Therefore, at most, it presents itself as a decentralized religion rather than an institutional religion. If "The Theory of Moral Sentiments" could find a universal framework for human moral sentiments like "The Wealth of Nations" and serve as a foundation for the category of moral sentiments, allowing others to continue developing on it, I believe it would also gain high recognition. In reality, we do not have a very persuasive framework in ethics and morality; at least I don't know of one, or there may be one, but it is definitely not "The Theory of Moral Sentiments." It still lacks the foundational role to become a pillar of a discipline. However, "The Wealth of Nations" has become a pillar of economics, so we cannot say that people do not value moral sentiments.

Adam Smith's influence in the field of economics is the greatest. Adam Smith's surname "Smith," according to current translation norms, should be translated as "史密斯."

There is no interesting story behind this.

The following is an introduction to the book.

Today's China has returned to a market economy, which requires economic theories that are compatible with a market economy, and the theoretical foundation of the market economy is Adam Smith's "The Wealth of Nations." As mentioned earlier, Adam Smith's economics is as important as Newton's theories in physics. His "invisible hand" is like Newton's law of universal gravitation, a great concept that Adam Smith offered to humanity. The market economy system nurtured by this concept, despite various shortcomings, is so far the only economic system that has been proven successful in organizing economic activities with all of humanity's wisdom. We have long denied Adam Smith's wisdom, even calling the "economic man" and the "invisible hand" a blatant defense of "private ownership." Fortunately, we have now accepted Adam Smith's main viewpoints. Specifically, the significance of Adam Smith's "The Wealth of Nations" in today's China is mainly reflected in the following two points:

The most authentic portrayal of ignorance. You can deceive a person for a long time, and you can deceive many people for a short time, but you cannot deceive many people for a long time; lies cannot do this, but ignorance can.

This means that the self-interested mentality of people in economic activities is self-evident, just like we all hope to buy things cheaply and sell things at a higher price; this is a very natural mentality that China has been unwilling to admit in the past few decades, or rather, unwilling to accept human self-interest, labeling it as immoral.

But in fact, this is a very moral behavior, which I will discuss later. However, he does not specify which decades he is referring to.

So there is a viewpoint here that we believe the assumption of self-interest should become the cornerstone of economic analysis. If you exclude self-interest, how can you conduct economic research? This viewpoint is very similar to Hayek; the market economy requires a small government. Our ancestors also had the idea of a small country with few people, but it's not quite the same, so I won't elaborate on that.
To be fair, planned economies are not bad; they are too good to be implemented immediately. We believe that humanity will eventually embark on a path primarily based on planned economies. We hope that the conditions for humanity to adopt planned economies will mature soon, and by then, Adam Smith's "The Wealth of Nations" may indeed become outdated and be sent to the museum of economic theory. However, we believe that even in the museum, Adam Smith's "The Wealth of Nations" will still be the most valuable theoretical exhibit.

Here you can see the translator's philosophical view; first, he is a dualist, so he is looking for a third book, seeking a golden balance point. Secondly, his philosophical framework does not consider the limits of things; his philosophical view is heavily dualistic. He believes that planning can govern everything, but from my perspective, planning has extremes.

I think planning is a process of using formal sciences to guide our daily lives because planning itself is a logic, or something close to logic, akin to mathematics. We use this formal science to guide our daily lives. This is where planning and the market differ significantly. One emerges from the laws of social sciences, while the other is a form of planning we apply to society in a formal scientific manner.

When we talk about market economies, we hope for a small government to establish a general framework for the market to grow within this framework.

The logic of planned economies is that we hope to find a particularly perfect formal scientific law and use it to guide us once and for all.

In summary, I believe planning belongs to formal sciences, and using formal sciences to guide the world will have flaws.

Why will there be flaws? It's like we cannot find a perfect circle in the world. You see something that looks good; it is impeccable in the abstract world, but it cannot perfectly project into the real world unless you ignore its precision. If you ignore enough precision, there are indeed circles in the world.

Our physical world is governed by entropy; a perfect circle is perfect, equivalent to infinitely low entropy, so such a perfect thing cannot be found. Therefore, everything in the world has errors; it's just a matter of how much error there is.

If you do not consider the real physical world, in mathematics, the speed of an object can be infinitely large, but in the real world, it cannot exceed the speed of light.

Everyone knows about Heisenberg's uncertainty principle, which is the principle of indeterminacy. You think that as long as you can observe all the values, you can calculate them using mathematics, but you can never observe all the values. Moreover, you cannot create a perfect machine; you know some energy is lost, but you cannot prevent it from being lost. The perpetual motion machine that amateur scientists often talk about is feasible in a perfectly abstract world, in the mathematical world. However, in reality, it is not feasible; it has nothing to do with technology. No matter how advanced your technology is, this matter cannot be realized in the philosophy of physics.

I believe a complete plan is the same as a perpetual motion machine; it does not mean that technology reaching a certain height can achieve it. Just like Marx said, in a communist society, all members of society possess a high degree of communist consciousness and moral quality. I think this is the moral version of a perpetual motion machine. I do not believe in perfect human nature. I do not believe that moral development can evolve into perfection. The final society is one where everyone is selfless; he certainly has not studied physics and does not know how low entropy "everyone being selfless" is. This assumption is a terrifying assumption, and it is no different from suddenly having a perfect circle or a perpetual motion machine in the world. If my theory allows for a perpetual motion machine, my theory is also invincible.
To add a concept, entropy is a measure of chaos, a measure of disorder. The greater the entropy, the more disordered the system; the smaller the entropy, the more ordered the system. Everything you can see and think of has entropy. What does entropy manifest in our world? A room that is not tidied up becomes more and more chaotic; a cup of water left on the table will always get closer to room temperature; electronic products become older with use; people become lax without noticing; these are all caused by entropy increase. Any closed system, without external forces doing work, will continuously tend toward chaos and disorder, ultimately leading to death. So when the room is messy, you tidy it up; when the water cools, you heat it; when electronic products can be repaired, you repair them; when you become lazy, you remind yourself to be disciplined. All of these are ways to combat entropy increase. Schrödinger's cat once said, "Life feeds on negative entropy; the meaning of life is the process of constantly combating entropy increase." However, you can only combat limited entropy increase.

You cannot create a system without loss; entropy constrains you. Energy cannot be created or destroyed, and entropy makes it impossible for you to create a machine with a 100% conversion rate; hence, there is no perpetual motion machine.

Entropy is a universal law.
The translator's introduction in Yang Jingnian's version also discusses "The Theory of Moral Sentiments," with viewpoints similar to Tang Risong's, so I won't elaborate further.
Scholars have long debated this issue.
I personally dislike dualistic views; I believe the inherent flaws of dualistic views are significant.

Many translators, not just Tang and Yang, emphasize "The Theory of Moral Sentiments." I thought about it and realized there might be this layer of reason: they are all translators, and their works are written for Chinese readers. We Chinese have our own culture and context. This means they can only do linguistic translations, but we still lack a cultural translation. You need a book in the humanities and social sciences to understand its culture. Otherwise, when you read "The Wealth of Nations," you only have a linguistic translation and cannot understand its culture.

For example, early Qing Dynasty people viewed the French Revolution as just an ordinary civil uprising. In the 19th century, our ancestors would not have used the word "revolution" to describe that period; instead, they would have understood it as a simple change of dynasties. In the early 19th century, there was a saying circulating in the country about the great chaos in France, describing the French Revolution as a popular uprising, with the result not being a change in society but a new king taking the throne. They said that after the North American War, France fell into crisis, and the king had to convene a meeting. The people loyally participated in the meeting, but unexpectedly, there were treacherous ministers and evil people who incited the masses to kill King Louis XVI. Fortunately, a new son of destiny, Napoleon, saved the situation, replaced the rebels, stabilized order, and became the new monarch.
In other words, at a certain period, in the eyes of our ancestors, it was not called the French Revolution but rather the French Rebellion or the Great Chaos in France. Our historical perspective is cyclical; we segment our country's history based on the changes of dynasties: the Three Sovereigns and Five Emperors, Xia, Shang, and Zhou, the Spring and Autumn and Warring States periods. Qin, Han, the Three Kingdoms, the Eastern and Western Jin, the Southern and Northern Dynasties are oppositional. The Sui, Tang, Five Dynasties, and Ten Kingdoms, Song, Yuan, Ming, and Qing emperors rest. Right? Our segmentation of history is based on the change of dynasties, simply put, based on which family is the emperor, which is a cyclical historical view.
However, Western history is generally divided into classical times, the Middle Ages, the Renaissance, the Enlightenment, and the Industrial Age.

Their historical segmentation usually cuts based on major social changes, economic developments, and cultural trends.

The huge cultural differences can lead us to observe facts without understanding them.

Many Western countries, including the United States, have taken different paths from us. Their development first had great ideas, which were then applied to the world, forming new productive forces and changes in production relations. However, many times, when we learn, we only learn their results and do not learn their ideas.

Now, many people who have received a bit of education have problematic philosophical views, and they may not even realize the issues with their philosophical views. Because if we do not study additionally, our scientific worldview is almost built during the process of learning Newtonian mechanics.

Newtonian mechanics believes that the universe is composed of isolated atoms, and the only inherent connection between them is the interaction between atoms. Atoms exist in definite spacetime positions, and motion follows definite trajectories. In such a conceptual background, studying these things involves using mathematical equations to solve one trajectory after another, assuming that our universe follows and must follow the local causality.

This scientific view translates into a philosophical perspective: if you agree with the scientific view of Newtonian mechanics, then the universe is entirely predictable in your eyes. This is mechanism; if you go online, you will find that 80% of people are mechanists. Because as long as you know the position, velocity, and momentum of an atom, and know what kind of dynamic equation it satisfies, you can predict its state at any time. This way, human thought has gone down a one-way street; as long as there is information, it directly seeks results.

There is a hypothetical deity called Laplace's Demon, which emerged based on this theory. If Newton's equations can predict the trajectories of all things, everything can be calculated, then there would be a super invincible computer that could calculate everything in the future. (It calculated that the answer is 42!) Not to mention, just from the perspective of economics, there can be nothing predictable in a market economy; otherwise, the market would not exist.
However, Newton's laws are successful, and the world changes significantly under his guidance. However, the deterministic atomic worldview of Newtonian mechanics is incompatible with the worldview of quantum mechanics in the new era.

Everyone has learned about the double-slit interference experiment with single electrons, which is very counterintuitive. The concept that an atom exists at a specific point in spacetime (let alone having a definite trajectory) does not hold in quantum mechanics. Therefore, our observations of the world will always be limited; we will never have universally applicable truths or definite laws. Many people are obsessed with finding patterns and truths, love to see those famous quotes, and apply them everywhere. Including many naive investors, they always want to find a certain method to make money, but trying to find an unchanging law to guide your investment operations in an ever-changing market is itself a foolish act, hence they are called naive investors.
The realism of Newtonian mechanics does not violate Bell's inequality, while quantum entanglement does violate Bell's inequality. Once the existence of quantum entanglement is proven, the non-local holistic realism of quantum mechanics should replace the former.

However, in this series of videos discussing "The Wealth of Nations," the realism of Newtonian mechanics is sufficient, as "The Wealth of Nations" is deeply influenced by Newton's natural philosophy.
First, Newtonian mechanics provided a rational and systematic worldview for the Enlightenment of the 18th century, demonstrating that the laws of nature can be explained through mathematics and experimental methods. This scientific method and rationalist thinking indirectly influenced economists of the same era, including Adam Smith. Although Smith directly studied economic phenomena, he also employed similar logic and analytical methods when analyzing market mechanisms and human behavior. This methodological resonance partly stems from the influence of Newtonian mechanics on the thinking of intellectuals at the time.

Secondly, Newton's works and subsequent developments in physics inspired 18th-century scholars to seek "social laws" beyond natural laws. Economists like Adam Smith attempted to apply the methods of natural sciences to the study of social and economic phenomena, hoping to find rules and principles to guide economics and policy-making. Therefore, although "The Wealth of Nations" does not directly apply the formulas or laws of Newtonian mechanics, Smith's way of thinking and his methods of analyzing economic systems were undoubtedly influenced by the scientific methodology of the time.

The term "invisible hand" appears in the fourth book, second chapter of "The Wealth of Nations," when he discusses how the market economy self-regulates to meet social needs. Smith explains that even if individuals act out of self-interest, they inadvertently promote the overall interests of society through the market mechanism. This is the principle of the "invisible hand," meaning that individuals pursuing their interests indirectly promote the economic welfare of society as a whole.

This concept illustrates why, in a market economy, individuals and businesses can inadvertently promote economic efficiency and effective resource allocation while pursuing their interests. This has become a cornerstone of later free market economic theory.

Smith emphasizes the importance of the "invisible hand" in market mechanisms and free competition for resource allocation, opposing excessive government intervention. This idea has a significant impact on modern free market economics. Although today's economic policies and practices differ in many ways, many fundamental principles are still respected.

Ten Principles of Economics#

• People face trade-offs.
• The cost of something is what you give up to get it.
• Rational people think at the margin.
• People respond to incentives.
• Trade can make everyone better off.
• Markets are usually a good way to organize economic activity.
• Governments can sometimes improve market outcomes.
• A country's standard of living depends on its ability to produce goods and services.
• When a government prints too much money, the prices rise.
• Society faces a short-run trade-off between inflation and unemployment.

Marginal Utility of Money#

• Marginal Utility
  Also known as marginal effect, it refers to the additional satisfaction or utility gained from the increase (or decrease) of one unit of a good or service, which is the slope of the "utility vs. quantity of goods or services" graph.

• Diminishing Marginal Utility
  Economists generally believe that as the quantity of a good or service increases, the marginal utility will gradually decrease, known as the law of diminishing marginal utility.

• Total Product (TP): The top curve shows how total output changes as the amount of labor (Labor) increases. Total output typically increases rapidly when labor is low, slows down after reaching a certain point, and may eventually decline. This trend occurs because initially, additional labor can effectively utilize fixed capital (such as machines), but as labor input continues to increase, fixed capital becomes a limiting factor, leading to diminishing returns for each additional unit of labor.

• Marginal Product (MP): The bottom red curve represents marginal product, which is the additional output gained from adding one unit of labor input. Marginal product initially increases with labor input, reaches a maximum (point α, MP_MAX), and then begins to decline. When marginal product drops to zero, total output reaches its maximum. The decline in marginal product begins due to the limitations of fixed capital, making it difficult for each additional unit of labor to effectively combine with existing capital, resulting in a decrease in the output gained from each additional unit.

• Average Product (AP): The bottom gray curve represents average product, which is the average output per unit of labor input. When marginal product is greater than average product, average product rises; when marginal product is less than average product, average product falls. Average product reaches its maximum (point β, AP_MAX) when it equals marginal product.
  In the graph, α, β, and Y mark the levels of labor input at which marginal product is maximized, average product is maximized, and total product is maximized (or where marginal product is zero). These points mark the efficiency and productivity levels at different stages of the production process.

• α: The maximum marginal product, indicating the most efficient use of labor in the production process.

• β: The maximum average product, indicating the point at which the average output per worker is maximized.

• Y: The maximum total product, or the point where marginal product is zero, indicating the amount of labor input at which total output is maximized. Beyond this point, total output will begin to decline.

Marginal Utility of Money#

Refers to the additional satisfaction or utility gained from each additional unit of money as income increases. This concept helps explain why the same amount of money has different meanings for people at different income levels and why individuals with lower incomes often value each unit of money more highly than those with higher incomes.

Diminishing Marginal Utility of Money#

• The marginal utility of money typically follows a diminishing pattern. This means that as an individual's total income or wealth increases, the satisfaction or utility derived from each additional unit of money gradually decreases. For example, for a person with a monthly income of only $1,000, an extra $10 may mean being able to buy more basic necessities, thus having relatively high value and utility. In contrast, for someone with a monthly income of $10,000, the satisfaction gained from an additional $10 is relatively low.

Applications of Marginal Utility of Money

• Social Welfare Policies: Understanding the marginal utility of money helps in formulating effective tax and social transfer payment policies. For instance, imposing higher tax rates on high-income individuals and using those resources to support low-income groups can increase overall social welfare since low-income groups derive higher marginal utility from each unit of money.

• Consumption Decisions: Individuals often consider the marginal utility of additional spending when making consumption decisions. This can explain why people may choose to save or invest rather than increase consumption once their basic needs are met.

• Price Theory: When understanding and setting product prices, businesses need to consider consumers' sensitivity to price changes, which largely depends on the marginal utility of money. Small changes in price may have different impacts on consumers at different income levels.

The Money Chapter#

1. The Historical Evolution of Money (Chapter 4 of The Wealth of Nations: The Origin and Function of Money)
2. Early Forms of Money
   a. Barter: Early human societies conducted transactions through direct exchange of goods, but faced the problem of "double coincidence of wants."
   Double Coincidence of Wants: 1. Matching value scales
   2. Time matching
   3. Space matching

Commodity Money: Items such as salt, shells, and livestock gradually became used as exchange tools, possessing intrinsic value.
2. The Emergence of Metal Money
a. Precious metals like copper, silver, and gold became important forms of money, offering advantages of portability, divisibility, and durability.
b. The invention of coinage: Standardized coins minted by governments and empires ensured the quality and face value of money.
3. The Rise of Paper Money and Credit Money
c. Paper Money: The earliest was invented in China during the Tang and Song dynasties, gradually spreading worldwide. Government-issued paper money represented a stock of precious metals, solving the difficulty of carrying large amounts of metal money.
d. Banknotes and Checks: Banks introduced the concept of credit money, issuing notes that could be exchanged for metal money at any time.

2. Modern Forms of Money:
   a. Fiat Money: No longer backed by precious metals, but rather a currency system guaranteed by government credit.
   b. Electronic Money: New forms of money such as electronic payments, credit cards, and e-wallets are gradually becoming popular, reducing the use of paper money and coins.

Definition of Money:
● A set of assets that people frequently use to purchase goods and services in the economy.
Money: You can use it for transactions without paying interest.

2. Levels of Money Supply:
   ● M0: Usually refers to cash in circulation, i.e., currency, excluding deposits in the banking system. It is the most basic form of money.
   ● M1: Includes currency (cash) and demand deposits, which can be used for payments and transactions at any time, having high liquidity.
   ● M2: Includes M1 plus short-term deposits, such as time deposits and savings deposits. Although its liquidity is lower than M1, it can still be converted into currency in the short term.
   In currency, it is also categorized by physical form into coins, paper bills, digital currency, etc.

3. The Three Basic Functions of Money:
   ● Medium of Exchange: Money serves as a tool for transactions, reducing the hassle of barter.
   ● Store of Value: Money can retain its value, allowing people to save wealth for future use.
   ● Unit of Account: Money provides a unified standard for measuring the value of goods and services.

4. Types of Money
   Source of Value
   Commodity Money: Money in the form of goods with intrinsic value.
   Fiat Money: Money without intrinsic value, determined by government decree to be used as currency.
   Bonds: Pay positive interest but cannot be used for transactions.

5. Bonds

6. Bonds are debt securities issued by governments, municipalities, or companies, paying interest periodically and returning the principal at maturity, making them a stable investment choice.

7. Like other financial assets, bond prices and yields are directly affected by interest rates and economic conditions, but their volatility is often lower than that of cryptocurrencies and stocks.

8. The bond market and its relationship with interest rates can provide insights into current and future economic conditions, influencing investor sentiment towards cryptocurrencies, stocks, and other markets.

Introduction
Bonds are financial instruments that provide a way for governments and businesses to raise funds, offering investors a relatively stable investment choice.

Types of Bonds

1. Government Bonds: Issued by governments, e.g., U.S. Treasury bonds, UK government bonds, and German government bonds.
2. Municipal Bonds: Issued by local governments or municipalities to fund public projects such as schools and highways.
3. Corporate Bonds: Companies issue bonds to raise funds for expansion, operations, or other business activities.
4. Savings Bonds: Typically small-denomination bonds issued by the government to small investors.

Issuance and Pricing
After issuance, bonds have a face value, coupon rate, and maturity date. The face value is the amount due to bondholders at maturity, and the coupon rate is the interest rate the issuer will pay to bondholders. Bonds are sold in the primary market, then traded in the secondary market.
The primary market is where investors buy bonds directly from the issuer (such as the government or a company). After the initial sale, bonds are traded among investors in the secondary market, with prices fluctuating based on interest rates, economic conditions, and the issuer's creditworthiness. The secondary market provides liquidity, allowing investors to buy and sell bonds before maturity.

Interest Payments
Bondholders receive interest payments regularly, typically semi-annually or annually. These interest payments are a fixed percentage of the bond's face value. For example, a bond with a face value of $1,000 and a coupon rate of 5% pays $50 annually. For U.S. Treasury bonds, for instance, a 10-year bond with a coupon rate of 2% pays $20 annually for a $1,000 bond.

Maturity
The maturity date is when the issuer must repay the bond's face value to the bondholder. Bonds are classified as short-term (up to 3 years), medium-term (3 to 10 years), or long-term (over 10 years). For example, a short-term corporate bond issued by Apple might have a maturity of 2 years, while a medium-term municipal bond in Los Angeles might have a maturity of 7 years. Long-term bonds, such as 30-year U.S. Treasury bonds, mature after thirty years.

The Role of Bonds in Financial Markets
Safe-Haven Asset
Bonds, especially government bonds, are often seen as safe-haven assets. Compared to cryptocurrencies and stocks, they tend to have lower volatility and more predictable returns. During periods of economic uncertainty or market volatility, investors often turn to bonds.

Portfolio Diversification
Including bonds in a portfolio helps diversify risk. While stocks can offer high returns, they also tend to be riskier. Bonds can provide balance, reducing the overall financial risk of the portfolio.

Interest Rate Indicators
Bond prices and yields are influenced by interest rates. When interest rates rise, bond prices fall, and vice versa. This inverse relationship makes bonds key indicators of interest rate trends and monetary policy.

6. Monetary Theory

7. Neutrality of Money Theory
   ● The neutrality of money is an important assumption in classical economics. It posits that changes in the money supply only affect nominal variables in the economy, such as price levels or nominal wages, but do not affect real variables like real output, employment, consumption, and productivity.
   ● According to this view, an increase in the money supply leads to rising prices, i.e., inflation, but this is merely a change in nominal price levels and does not alter the actual purchasing power or productive capacity of the economy. For example, nominal wages may rise, but real purchasing power remains unchanged because prices are also rising.

8. State Theory of Money
   Also known as the state currency theory or national currency theory, it is a monetary theory that asserts that the value and legitimacy of money derive from the authority of the state rather than from the intrinsic value of the money itself (such as the value of precious metals). According to this theory, money is a credit tool issued and enforced by the state, and its value depends on the state's support and its mandatory use in taxation and payments.

9. Core Ideas of the State Theory of Money
   ● The authority of the state determines the value of money: The state theory of money posits that the value of money is not determined by its intrinsic value (e.g., gold or silver) but is conferred by the state's decrees and power. In other words, the value of money comes from the trust and coercive power of the state, especially the requirement for citizens to use specific currency to pay taxes.
   ● Money as a Debt and Credit Tool: According to this theory, money can be viewed as a debt issued by the state, providing society with a universally accepted means of payment. Citizens and businesses accept this money because the state mandates it as the only legal currency and requires its use for tax payments or other legal obligations.

10. Historical Origins of the State Theory of Money
    ● The ideas of the state theory of money can be traced back to the late 19th and early 20th centuries with German economist Georg Friedrich Knapp. In his 1905 work "State Theory of Money," Knapp systematically proposed this viewpoint, asserting that the essence of money is a payment tool issued and enforced by the state.
    ● Knapp's theory emphasizes that the legitimacy of money derives from the state's coercive power, which can enforce its currency's circulation domestically through legislation and taxation, independent of the money's intrinsic value.

11. Main Characteristics of the State Theory of Money
    ● The Legal Nature of Money: In the state theory of money, the circulation and use of money are enforced by the state through law. The state issues currency and designates it as the only legal means of payment, which citizens and businesses must use to fulfill their debts and tax obligations.
    ● Taxation as the Key to Money's Value: The state theory of money posits that the state confers value on money through the tax mechanism. The state requires citizens to pay taxes in currency, making money valuable because it is the only means to fulfill legal obligations (such as tax payments). Tax demand creates the impetus for money's circulation, endowing it with exchange value.
    ● Money is not determined by intrinsic value: The state theory of money opposes the monetary theories under the gold standard, which assert that the value of money depends on its link to precious metals. In contrast, the state theory of money argues that the value of money is entirely determined by the state's decrees and its management of the monetary system.

12. The State Theory of Money and Modern Monetary Theory (MMT)
    ● The state theory of money is closely related to Modern Monetary Theory (MMT). Scholars of MMT largely build upon the ideas of the state theory of money to further develop the understanding of money.
    ● According to MMT, the state is the issuer of money, not the user. The state can regulate the economy by issuing currency, and under the modern monetary system, the state does not need to worry about fiscal deficits because it can create money to pay its debts. The key is that the state manages the money supply through taxation and government spending, ensuring the stable operation of the economy.
    ● In the framework of MMT, the role of taxation is not directly to finance the government but to control the circulation of money, ensuring that money is in demand and maintaining its value.

13. The State Theory of Money Compared to Other Monetary Theories
    ● Gold Standard (Commodity Money Theory): Traditional monetary theories like the gold standard assert that the value of money should be determined by its intrinsic value (such as gold or silver). In contrast, the state theory of money completely discards this view, emphasizing that the value of money is determined by the state's decrees rather than being backed by any physical asset.
    ● Credit Money Theory: The credit money theory shares some similarities with the state theory of money, particularly in viewing money as a debt or credit tool. Both theories consider money a tool operating through a credit system rather than a commodity determined by intrinsic value. However, the state theory of money emphasizes the central role of the state in the monetary system, especially in creating and maintaining the value of money through taxation and legislation.

14. Real-World Applications of the State Theory of Money
    ● Modern Fiat Money: The ideas of the state theory of money have profoundly influenced the fiat money systems in modern economies. Today, almost all countries' currencies are fiat money, no longer linked to precious metals but entirely relying on the legal authority of the state and monetary policy to maintain their value.
    ● The Role of Central Banks: Modern central banks manage the economy by regulating the money supply, controlling inflation, and setting interest rates, which aligns with the ideas of the state theory of money. In this framework, the state maintains the stability of money through the operations of the central bank, ensuring the healthy functioning of the economy.

15. Limitations of the State Theory of Money
    ● Risks of Inflation and Excessive Money Printing: Critics of the state theory of money and MMT point out that the state's ability to create money through printing could lead to severe inflation or hyperinflation. If the state excessively issues money while the supply of goods and services in the economy cannot keep pace with the growth of money, the purchasing power of money will rapidly decline, leading to soaring prices.
    ● The International Acceptance of Money: While the state theory of money emphasizes that the value of money is determined by the state, in international trade and global financial markets, the value of money is also influenced by other factors, including market confidence in the country's economy, foreign exchange reserves, and international credit ratings. Therefore, a country's currency's acceptance in the global market may not be entirely determined by the state's coercive power.

16. Modern Monetary Theory (MMT) posits that the state has complete control over the currency it issues, allowing the government to pay its expenses by creating money without relying on taxes or borrowing. Proponents of MMT argue that the government need not worry about fiscal deficits as long as it can meet its needs through currency issuance while keeping inflation within controllable limits. MMT challenges traditional economic views on fiscal deficits and government debt, suggesting that government deficits are not a problem but a necessary means of providing liquidity in the economy. MMT emphasizes the government's role in fiscal policy, arguing that the government should not manage its budget like a household; government deficits can be a source of surpluses in the private sector.

The Trilemma#

The trilemma is a theory in international economics that posits that it is impossible to achieve monetary policy independence, exchange rate stability, and capital mobility simultaneously. You can only choose two:

• If you choose exchange rate stability and capital mobility, you will sacrifice monetary policy independence because the central bank must prioritize maintaining exchange rate stability.
• If you choose monetary policy independence and capital mobility, you must give up exchange rate stability, allowing the exchange rate to float freely.
• If you choose monetary policy independence and exchange rate stability, you must implement capital controls to restrict capital flows.

2. Differences Between MMT and Traditional Economics
   a. Fiscal Deficits and Debt

• Traditional economics holds that government fiscal deficits lead to debt accumulation, which could ultimately trigger a government debt crisis. However, MMT argues that countries with their own currency can repay debt indefinitely through central bank currency issuance, so deficits do not constitute a crisis.
• In traditional economics, excessively high fiscal deficits lead to rising interest rates and "crowding out," meaning government borrowing occupies funds in the market, suppressing private sector investment. However, MMT proponents argue that as long as there are idle resources and unemployment in the economy, government spending will not crowd out; instead, it will stimulate economic growth by increasing overall demand.

b. The Role of Government

• Traditional economics advocates that the government should maintain fiscal discipline, reduce deficits, and rely on the market to achieve efficient resource allocation. In contrast, MMT argues that the government is the issuer of money, possessing the initiative to regulate the economy through monetary and fiscal policies to achieve social goals (such as full employment and price stability).

c. Risks of Inflation

• Traditional views worry that excessive government spending and money issuance could trigger severe inflation or even hyperinflation. However, MMT proponents acknowledge the risk of inflation but argue that the government can control inflationary pressures through increased taxation and reduced spending. As long as inflation remains within controllable limits, government spending does not harm the economy.

Stagflation#

Stagflation is a rare economic phenomenon characterized by stagnant economic growth (or slow growth) occurring simultaneously with inflation and high unemployment rates. Stagflation breaks the traditional economic theory, which typically posits a negative correlation between inflation and unemployment, meaning rising inflation usually accompanies economic growth and declining unemployment.

Key Features of Stagflation

1. Economic Growth Stagnation: During stagflation, overall economic growth nearly halts, with GDP growth slowing or entering recession.
2. High Inflation: Price levels continuously rise, with inflation rates remaining high, leading to rising prices and declining purchasing power.
3. High Unemployment: Despite high inflation, unemployment rates do not decrease but remain elevated, with unemployment and inflation coexisting.

Differences Between Monetary Policy and Fiscal Policy#

Liquidity Trap: Refers to a situation where nominal interest rates are lowered to the point where they cannot be reduced further, even approaching zero. Due to the effect of a certain "https://baike.baidu.com/item/%E6%B5%81%E5%8A%A8%E6%80%A7%E5%81%8F%E5%A5%BD/2463211?fromModule=lemma_inlink," people prefer to hold wealth in cash or savings rather than investing it as capital or consuming it for personal enjoyment. Any increase in the money supply by the state will be absorbed as "idle funds," as if it has fallen into a "liquidity trap," thus having no impact on overall demand, income, or prices.

Qualitative Easing (QE) and Quantitative Easing (QE) are a series of unconventional monetary policies adopted by central banks when traditional monetary policy tools become ineffective (such as when interest rates approach zero). Although both aim to inject liquidity into financial markets to stimulate the economy, their methods and focuses differ.

1. Quantitative Easing (QE)
   ● Definition: Quantitative easing refers to the central bank injecting funds into the market by purchasing large amounts of government bonds and other high-quality financial assets (such as mortgage-backed securities) to increase the money supply, stimulate economic growth, and lower long-term interest rates.
   ● Focus: The core of quantitative easing is "quantity," meaning increasing the total amount of assets purchased to boost the money supply in the market and lower borrowing costs, thereby promoting consumption and investment.
   ● Implementation:
   ○ The central bank purchases large amounts of government bonds and other financial assets in the open market, injecting funds into banks and financial institutions, increasing their reserves, and providing them with more funds for lending.
   ○ By purchasing large amounts of assets, prices of these assets are pushed up, lowering their yields (i.e., long-term interest rates), encouraging businesses and consumers to borrow and spend.
   ● Example: After the 2008 global financial crisis, the Federal Reserve, European Central Bank, and Bank of Japan implemented large-scale quantitative easing policies to help economic recovery and control financial market instability.

2. Qualitative Easing
   ● Definition: Qualitative easing focuses on changing the types and risk levels of assets purchased by the central bank, rather than just increasing the scale of asset purchases. By purchasing a broader range of financial assets, including higher-risk assets, the central bank aims to influence the prices and risk premiums of different types of assets in the market, further stimulating economic activity.
   ● Focus: The core of qualitative easing is "quality," meaning changing the types and quality of purchased assets. The central bank may purchase not only government bonds but also higher-risk assets such as corporate bonds, business loans, and even stocks to stabilize financial markets, especially those under pressure.
   ● Implementation:
   ○ The central bank purchases a wider variety of assets, especially riskier ones, to lower the risk premiums of different asset classes, thereby supporting broader market stability and economic recovery.
   ○ Qualitative easing can lower financing costs for corporate bonds and high-risk assets, helping businesses obtain funds more easily and promoting activity in capital markets.
   ● Example: After 2013, the Bank of Japan gradually expanded the types of assets it purchased in its monetary policy, buying not only government bonds but also corporate bonds, commercial paper, and even exchange-traded funds (ETFs). This policy is seen as a typical application of qualitative easing.

3. Differences Between Quantitative Easing and Qualitative Easing
   | Characteristics | Quantitative Easing (QE) | Qualitative Easing |
   |------------------|--------------------------|--------------------|
   | Focus | Increase the total amount of money in the market ("quantity") | Change the types and quality of purchased assets ("quality") |
   | Assets Purchased | Mainly government bonds and other high-quality assets | A broader range of assets, including corporate bonds, stocks, mortgage-backed securities, etc. |
   | Goals | Lower long-term interest rates, increase market liquidity, stimulate investment and consumption | Lower financing costs across a broader market, especially for high-risk segments |
   | Risk | Relatively low risk, as most assets are government bonds | Higher risk due to the purchase of higher-risk financial assets |
   | Applicable Scenarios | When interest rates are close to zero, to further increase the money supply and stimulate the economy | When structural issues are severe, liquidity is already ample, but support is still needed for high-risk segments |

4. Common Goals of Qualitative and Quantitative Easing
   ● Increase Market Liquidity: Whether through qualitative or quantitative easing, the core goal is to inject large amounts of liquidity into the market, reducing the risk of credit tightening and promoting the flow of funds.
   ● Lower Financing Costs: By purchasing different types of assets, both policies aim to lower financing costs in the market, driving corporate investment and consumption growth, helping the economy recover from downturns.
   ● Address Economic Crises: Both policies are typically used when interest rates are already close to zero and traditional monetary policy tools are ineffective, serving as unconventional tools for central banks during economic crises or extreme economic conditions.

5. Challenges and Risks in Implementation
   ● Asset Price Bubbles: Whether through quantitative or qualitative easing, a large influx of funds into the market may push up asset prices, leading to excessive speculation in financial markets and creating asset bubbles. If the central bank halts easing policies, the bubble may burst, causing market turmoil.
   ● Expansion of Central Bank Balance Sheets: Long-term large-scale asset purchases can significantly expand the central bank's balance sheet, increasing the risks it bears. If the purchased high-risk assets lose value, the central bank may face financial risks.
   ● Inflation Risks: If easing policies are overused, it may lead to excessive money supply in the market, triggering inflationary pressures and undermining economic stability.

☆ Reserves
Refers to the funds that commercial banks must hold at the central bank according to legal or regulatory requirements to ensure that banks have sufficient funds to meet customer withdrawal demands and other unexpected funding needs. Reserves are an important financial stability mechanism in the banking system, aimed at preventing excessive lending by banks and maintaining the stability of the financial system.

Reserves are typically divided into two types: required reserves and excess reserves.

1. Required Reserves
   ● Required reserves refer to the portion of deposits that banks must keep at the central bank according to the ratio set by the central bank. This ratio is called the reserve requirement or deposit reserve ratio, determined by the central bank and used to control the lending capacity of banks.
   ● Role: The primary role of required reserves is to ensure that there is sufficient liquidity in the banking system, preventing the risk of bank runs (i.e., when many depositors simultaneously demand withdrawals). It helps prevent excessive lending or disruptions in the funding chain during financial crises.
   ● Example: If the central bank sets a reserve requirement of 10%, then after a commercial bank receives $1 million in deposits, it must deposit $100,000 at the central bank as required reserves. The remaining $900,000 can be used for loans and investments.

2. Excess Reserves
   ● Excess reserves refer to the portion of funds that commercial banks hold at the central bank beyond the required reserves. Commercial banks may choose to keep more funds at the central bank as an additional safety buffer.
   ● Role: Excess reserves provide banks with additional liquidity, helping them respond to unexpected funding needs or uncertainties. While banks can choose to use this portion of funds for loans or investments, they may prefer to hold excess reserves to reduce risk during periods of economic uncertainty.
   ● Impact of Negative Interest Rates: In certain economic conditions, the central bank may implement negative interest rates on excess reserves, meaning banks must pay fees on excess deposits at the central bank. This is intended to encourage banks to invest excess funds into the economy, increasing credit and promoting consumption and investment.

3. The Regulatory Role of Reserve Requirements
   ● Monetary Policy Tool: The central bank influences banks' lending capacity and the money supply by adjusting reserve requirements. If the central bank raises the reserve requirement, banks must hold more funds at the central bank, reducing the funds available for lending, thus suppressing the money supply and credit activity in the economy. Conversely, lowering the reserve requirement releases more funds into the market, stimulating economic growth.
   ● Impact on Bank Lending: Required reserves directly affect the amount of funds available for banks to lend. When the reserve requirement is high, the funds available for lending decrease, restricting lending activities; when the reserve requirement is lowered, banks have more funds available for loans, increasing credit expansion.

4. Significance of Reserves
   ● Preventing Financial Risks: The existence of reserves helps banks respond to unexpected withdrawal demands and uncertainties in financial markets, preventing banks from facing crises due to insufficient liquidity and ensuring the stability of the banking system.
   ● Monetary Policy Regulation Tool: The central bank controls the money supply in the market by adjusting reserve requirements, influencing economic growth, inflation, and other economic indicators.
   ● Maintaining Financial Confidence: The reserve system increases the safety of the banking system, enhancing public confidence in the financial system and reducing the likelihood of mass withdrawals and financial crises.