Literature Study GuidesThe Wealth Of NationsVolume 1 Book 1 Chapter 6 Summary

The Wealth of Nations | Study Guide

Adam Smith

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The Wealth of Nations | Volume 1, Book 1, Chapter 6 : Of the Component Parts of the Price of Commodities | Summary

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Summary

Smith proposes a three-part model for discussing the price of any commodity. The money paid for any good, he says, can be divided into wages, profit, and rent. Wages go to the laborers who produce the commodity—the farmhand who plants the crop, for example, or the weaver who makes the cloth. Profit goes to the people, usually investors or merchants of some sort, who supply the funds and materials to carry out the work. And rent goes to the landowners, who expect a positive financial return on the use of their land.

Smith admits it is not always possible to separate these categories completely. A farmer, for instance, will sometimes supply the land, the tools, and part of the labor to bring a crop to harvest, making it hard to draw a precise border between wages and profit, or between profit and rent. In such a case, Smith concedes, the three parts of the price are "confounded," or mixed together.

Analysis

Like the "real price/money price" distinction in the previous chapter, the division of revenue into three discrete parts may seem artificial. In fact, Smith concedes as much. Despite its awkwardness, however, this tripartite division comes in handy several times throughout the subsequent four books. For example, Smith is often interested in pointing out the opposite effects of some policy on two different groups of people. He identifies many laws that increase the profit of the merchant at the expense of the laborer's wages, or that drive up the rent of land but decrease the profits of manufacturers. In these cases, what seems to be an economic gain for Great Britain turns out to be a mere reallocation of wealth from one group of British subjects to another.

More fundamentally, wages, profit, and rent are important conceptual categories because they reflect the interests of three different sets of economic actors: wage-earning laborers, profit-earning merchants, and rent-collecting landowners. Although an individual may sometimes belong to two, or even all three, of these groups, they more often represent distinct social classes. This becomes apparent in Book 5, for example, when Smith offers a discussion of tax policy. There, he advises against taxes based on wages, since these will disproportionately hurt the poor. He is more comfortable with the idea of taxing rent, since the ownership of real estate is concentrated in the hands of the rich.

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