Thoughts on The Wealth of Nations: 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"

Hello everyone! This is the next post in my summer series of reviews of "The Wealth of Nations" by Adam Smith. In this article, we will be reviewing Chapter 5. If you have missed any of the previous articles, they will be linked at the bottom of this article. Anyway, let's get into the article!

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"

Smith starts out by making the point that wealth is one’s ability to afford commodities, necessities, and amusements. He then states that once the division of labor has occurred, these things must come from the labors of others. This means that the value of a commodity is derived from what you can use it to purchase. He draws the conclusion that this means that

“labour. . . is the real measure of the exchangeable value of all commodities.” - Book 1, Chapter 5, Page 43

Labor is where value lies. As Smith put it,

“The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.” - Book 1, Chapter 5, Page 43

Smith uses this point to argue that it is labor that creates the wealth of the world. All commodities do is summarize this labor.

Wealth is power?

In the next paragraph, Smith quoted Thomas Hobbes, who state that Wealth is Power. Smith went further into this. He made the point that holding a fortune does not give you immediate political power. It gives you the ability to purchase it. He uses this to make the point that wealth gives you the power to purchase labor.

One thing I thought about when I read this passage is that there is even more to be added to this statement. Wealth does give you the power to purchase. But purchasing means you lose wealth in that you can no longer purchase as much unless you sell what the labor you bought produces. So, even in the power to purchase labor, there is a necessary sacrifice.

How to measure labor

Smith then makes the point that value is not commonly determined by labor because labor is quite hard to measure. He points out than an hour of hard labor could often be considered equal to two of easy. Or that an hour of work in a field that required ten years of training could be considered equal to a month of labor that required none. Smith makes the point that the labor used to produce something has many different circumstances, which are impossible to measure easily. This, according to Smith, is where the market comes in. Through bargaining, negotiating, and precedent, the market provides an approximate for the value of labor sufficient to hold in common business. Smith then makes the points that commodities are more frequently exchanged for other commodities due to the fact that it is easier to measure. And therefore, it makes sense to measure value using commodities. This is embodied in the statement

“The one is a plain palpable object; the other an abstract notion, which, though it can be made sufficiently intelligible, is not altogether so natural and obvious.” - Book 1, Chapter 5, Page 45

The whole time that I was reading this section about measuring labor, I was thinking the exact same thing that Smith was. That the market solves the problem of measuring labor to a good extent. So, I'm glad that I wasn't thinking wrong. I believe that we can use transitive reasoning here to determine that the market is what determines the value of a commodity. If the market is what determines the value of labor, and labor is what determines the value of a commodity, then the market is what determines the value of a commodity.

Smith then makes the point that it is much more common still for an exchange to involve money and a commodity than for an exchange to involve two commodities. He then discusses that the value of commodity translates into money in the same way that the value of labor translates into commodities. He embodied this, stating, “Hence it comes to pass that the exchangeable value of every commodity is more frequently estimated by the quantity of money, than by the quantity either of labour or of any other commodity which can be had in exchange for it.” - Book 1, Chapter 5, Page 46
In the next passage, he discusses shifting values of commodities such as gold and silver. He makes the point that though the price of a commodity may go up or down, the work put into getting it will always be the same for the laborer. When discussing gold and silver, Smith discussed the mines in America which were created in the 16th century. He stated that these mines caused the price of gold and silver to be one third of what it used to be because they increased the amount of gold in the market. Though there was a lot more gold, each laborer still put in the same work to mining and creating it. The price changed because of a larger supply not because the work was easier. When I read this, I thought "Man would Smith hate the cryptocurrency market." It must have been nice to be able to tell what caused the value of a commodity to go down back in the day (that's a joke). Smith then makes the point that an employer may consider the value of labor to be different, it is only the value of the good which shifts. I think Smith is beginning to discuss what is called "production cost." I might disagree with Smith on this though. The value of labor can vary. For example, a division of labor could cause the value of labor to decrease, or a new more efficient machine. Back in the day, a chimney cleaner probably made a lot of money. Now we have machines which clean the chimney for barely anything.

Real and Nominal Prices

The next point that Smith makes is that labor, like a commodity, has a real price and a nominal price. This means that labor will always hold the same value, but this value will be translated differently by the market. The real price is the unchanging value of labor. The nominal price is the price based on things such as inflation. For example, a miner might have been paid 5 dollars an hour in the 70s for his labor. His son, now, works the exact same job but is paid 30 dollars an hour. This is not because the work is any more valuable today than it was then, it is because 30 dollars today is equivalent to 5 dollars in the 70s due to things such as inflation.

Smith makes the point that if two things have the same real price, they are equal in value. However, if two things share the same nominal price, their value (or real price) might be quite different. Smith gives an example regarding gold and silver, stating,

"When a landed estate, therefore, is sold with a reservation of a perpetual rent, if it is intended that this rent should always be of the same value, it is of importance to the family in whose favour it is reserved that it should not consist in a particular sum of money. Its value would in this case be liable to variations of two different kinds; first, to those which arise from the different quantities of gold and silver which are contained at different times in coin of the same denomination; and, secondly, to those which arise from the different values of equal quantities of gold and silver at different times." - Book 1, Chapter 1, Page 48

Smith then makes the point that the value of coins almost always decreases over time because the amount of metal in said coins also decreases. I am going to go out on a limb and say this is true of paper money too. If we think of the dollar, the value started decreasing heavily as the government stopped backing its value with gold.

As the amount of a commodity increases, the value will continue to decrease. Smith hypothesized that the mines in America caused the value of metals to decrease during the 16th century, and continue to decrease in the 18th century. This illustrates the idea of supply and demand. The supply of metals went up causing the demand to be more easily satisfied and the value to decrease. I will continue this chapter tomorrow. I am out of time to work today. Something came up, I am very sorry.

Previous Reviews

The Wealth of Nations

Book 1

• Chapter 1: "of the Division of Labor"
• Chapter 2: "of the Principle which gives Occasion to the Division of Labour"
• Chapter 3: "that the Division of Labour is Limited by the Extent of the Market"
• Chapter 4: "of the Origins and Use of Money"
• Chapter 5 Part 1: "of the Real and Nominal Price of Commodities, or of their Price in Labour, and their Price in Money"

The Confucian Analects

• Table of Contents and Statistics

The Art of War

• Table of Contents and Statistics

Schedule (hopefully)

Friday - Tuesday: "The Wealth of Nations" review
Wednesday: Break/Free write day
Thursday: Weekly7

Closing

Thanks for reading this! This chapter is quite long, and despite my efforts, I was tied up again today. So, I will finish this chapter tomorrow. Anyway, as always, feedback is always appreciated. See you later!

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.