Thoughts on The Wealth of Nations: Book 1, Chapter 5 (Part 2): "of the Real and Nominal Price of Commodities, or of their Price in Labour, and their Price in Money"

in #economics6 years ago (edited)

Here is my review and commentary on Book 1, Chapter 5 (Part 1): "of the Real and Nominal Price of Commodities, or of their Price in Labour, and their Price in Money":

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Text Source, The Wealth of Nations by Adam Smith

Book 1, Chapter 5: "of the Real and Nominal Price of Commodities, or of their Price in Labour, and their Price in Money" Continued

The first point that Smith makes in this section is about “corn rent.” He makes the point that the real value of corn is more closely related to the value of the labor used to produce it than the real value of money is related to the value of labor. He then makes the point that the real price of corn will fluctuate a lot in a year but in a century will likely remain roughly the same. The value of money will change a lot in a century but fluctuate little in a year. It is for this reason that labor is the best measure of value over time. The money value used to command labor from century to century cannot be compared in the same way that the corn value cannot be used to compare from year to year. From century to century corn will likely control a similar amount of labor, and from year to year, silver will do the same.

I don't know how I feel about these points. They sound true, but think about it like this. A hundred years ago (or so) corn would have been valuable in places where it could not be grown because it had to be transported in horrible conditions with inefficient methods. Now, a hundred years later, corn can be transported anywhere in the world quite easily. As a result, corn is probably a lot cheaper in those areas. However, I agree with Smith. A hundred years from now, corn will probably have a similar value to its current value in those places.

Proportion

Smith then makes the point that the real and nominal prices of commodities are proportionate to one another. If the money you get for a commodity drops or rises, the amount of labor which you can purchase or control will also drop or rise. This means that money is a measure, in the present and the same location, for the exact exchangeable value of a commodity.

These are good points. It makes me think of the cryptocurrency market (if you think of altcoins as commodities and bitcoin as money). As bitcoin's value rises and falls, the value of the altcoins rises and falls in a similar fashion. Generally, one bitcoin will buy a few thousand Steem. Though the proportion can change as other factors (than bitcoin's price) affect the value of Steem.

Value, Distance, and Time

Smith then talks about different values based on place of purchase. He makes the point that a merchant only cares about the difference between the amount he buys it for and the amount he sells it for (aka profit). Smith makes the point that something worth half an ounce of silver in China could be worth a full ounce in England. He then reasons that this is because the commodity is more valuable to the English and the money is more valuable to the Chinese. This is something that would later be called the subjective theory of value.

This is similar to the point I brought up about corn earlier. It holds little to no value to the farmer who farms it, but holds great value who someone in Alaska who cannot farm it. Another example I think of is Lobsters in New England. Lobsters were practically worthless because of how common they were. This changed when it became possible to transport them inland to places where they weren't common. As a result of this, lobsters are worth a lot inland and a lot less on the coast.

Smith then makes the point that the nominal price of goods changes much more frequently than the real price because it is the nominal price which is looked to and cautiously negotiated in all transactions. He then states that he will be comparing the nominal price of labor using corn for transactions which are separated over large distances and times because this is well recorded and more accurate than other commodities.

Metal and Government

Smith then noted the observation that nations will generally prioritize which ever metal they used for coins first despite the apparent value, they hold this coin above others. He gives the example of the Romans who only coined copper until right before the first Punic war. As a result, they seem to have assessed value in copper (at the base) throughout the life of the republic. Smith then gives the example of Northern nations which came after Rome (such as Britain). He says these nations first prioritized Silver and therefore afterwards assessed the value of commodities in terms of silver. He made the point that (in Britain) only silver was considered a “legal tender.” If someone was indebted to someone else, and offered to pay in gold, the transaction could be rejected, or the two had to agree about the amount of gold that would have to be paid. There was not a legal definition as to the value of gold in terms of silver. This was left up to the market to be determined. As time went on, the government began to compare and regulate the value of two metals (Y amount of metal X is equal to W amount of Metal Z). When this happens the value of the metals will move proportionally in relation to one another rather being just nominal. When the regulated rate changes, the difference is more than nominal. As a result of this, one metal will seem to fluctuate while the other remains stable. This apparent difference is only because of an adjustment on the exchange.

This was hard for me to understand. I had to read it a lot and ask my father (@remlaps). Anyway, an example he gave me is dollars and SBD. Steem tries to regulate the value of SBD to be equal to that of the USD. If the two were currently in sync, the value of SBD would fluctuate proportionally to the value of the dollar. But they are not in sync and as a result of that SBDs seem to fluctuate while USD seems to be stable. This is only because of frequent attempts at adjusting the regulation value of SBD.

Smith then makes the point that in any coin with proportions regulated the value of the most precious metal in the coin will determine the value of the coin. He then spoke about how when the government changed the values of gold and silver the real proportionate value stayed the same. Smith then lists many examples of this which I am not going to go into detail about. However, he concludes that the value of metal fluctuates according to the same factors that any other commodity would fluctuate. He ends by stating the importance of realizing the value of the metal in specific coins.

Previous Reviews

The Wealth of Nations

Book 1

The Confucian Analects

The Art of War

Schedule (hopefully)

Friday - Tuesday: "The Wealth of Nations" review (as frequently as I can)
Wednesday: Break/Free write day
Thursday: Weekly7

Closing

Thanks for reading this! I apologize for missing the last week, but this chapter was quite tedious in length and content. I also apologize in advance if I got anything wrong, this chapter was quite hard for me to understand. Hopefully, I will see you in my next post!

Also remember to check for: My weekly 7 post, As well as my composer birthday posts (Note) In order to encourage meaningful feedback on the platform, I will check comment trails of users who leave superficial comments (ie "Awesome post," or "Upvoted.") and will mute any users who exhibit a pattern of leaving "spammy" comments.

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