Literature Study GuidesThe Wealth Of NationsVolume 1 Book 1 Chapter 5 Summary

The Wealth of Nations | Study Guide

Adam Smith

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The Wealth of Nations | Volume 1, Book 1, Chapter 5 : Of the Real and Nominal Price of Commodities, or of their Price in Labor, and their Price in Money | Summary

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Summary

Here, Smith lays out his central definitions of wealth and value, arguing that "the real price of every thing ... is the toil and trouble of acquiring it." This, Smith, admits, is a counterintuitive and abstract way of thinking about value, especially since two quantities of labor may be hard to compare directly. Nonetheless, he insists, labor is "the real measure of the exchangeable value of all commodities," and other measures—such as money—are merely convenient estimates for business purposes. Consequently, although an employer may think of labor as "cheap" at some times, and "dear" (i.e., expensive) at others, it is really the wages that are cheap or expensive. The value of the labor remains the same.

The real price of any commodity, then, is the amount of labor it will buy on the open market. The money price or nominal price, in contrast, is the price as most people understand it: a loaf of bread sells for a penny, a pound of butcher's meat sells for fourpence, and so forth. This price, Smith says, is useful as an estimate, but since gold and silver prices are constantly rising and falling, the money price can never be a truly reliable guide to the value of labor. As evidence, he offers a brief history of coinage and currency, pointing out events that artificially boosted or depressed the value of coinage. When the currency is not too debased, he suggests, the money price of a commodity is an acceptable estimate of its real price in labor.

Analysis

The distinction between real and money price, although it may seem pedantic, will have serious implications for Smith's arguments later on. Throughout the latter half of The Wealth of Nations—and for almost all of Book 4—Smith will engage in a lengthy and recurring critique of mercantile system. One of the biggest problems with mercantilism, in Smith's view, is the tendency to conflate money and wealth, when money is in fact just one of the many kinds of wealth. It is thus important for Smith, near the outset of his treatise, to set forth his own ideas concerning the distinction between these two often-confused concepts. For him, the money price of a good is just one way of assessing the value of a good. Such prices are important mainly because they are customary and convenient. For the mercantilists, however, money plays a much more central role. The extent of a nation's money supply is in their view an indicator of the country's economic health, and the accumulation of money within a nation is therefore an important policy goal.

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