Weekend Economists Enumerate the Wealth of Nations, February 10-12, 2012

[Demeter]

13. Synopsis: The Wealth of Nations

Book I: Of the Causes of Improvement

Of the Division of Labour: Division of labour has caused a greater increase in production than any other factor. This diversification is greatest for nations with more industry and improvement, and is responsible for "universal opulence" in those countries. Agriculture is less amenable than industry to division of labour; hence, rich nations are not so far ahead of poor nations in agriculture as in industry.

Of the Principle which gives Occasion to the Division of Labour: Division of labor arises not from innate wisdom, but from humans' propensity to barter. The apparent difference in natural talents between people is a result of specialization, rather than any innate cause.

That the Division of Labour is Limited by the Extent of the Market: Limited opportunity for exchange discourages division of labor. Because "water-carriage" extends the market, division of labor, with its improvements, comes earliest to cities near waterways. Civilization began around the highly navigable Mediterranean Sea...

Of the Origin and Use of Money: With division of labor, the produce of one's own labor can fill only a small part of one's needs. Different commodities have served as a common medium of exchange, but all nations have finally settled on metals, which are durable and divisible, for this purpose. Before coinage, people had to weigh and assay with each exchange, or risk "the grossest frauds and impositions." Thus nations began stamping metal, on one side only, to ascertain purity, or on all sides, to stipulate purity and amount. The quantity of real metal in coins has diminished, due to the "avarice and injustice of princes and sovereign states," enabling them to pay their debts in appearance only, and to the defraudment of creditors.

Of the Real and Nominal Price of Commodities, or of their Price in Labour, and their Price in Money: In the first two passages Smith gives two conflicting definitions of the relative value of a commodity. Ricardo responded to one of Smith's inconsistencies in the Preface of his "Principles":

The writer, in combating received opinions, has found it necessary to advert more particularly to those passages in the writings of Adam Smith from which he sees reason to differ; but he hopes it will not, on that account, be suspected that he does not, in common with all those who acknowledge the importance of the science of Political Economy, participate in the admiration which the profound work of this celebrated author so justly excites.

Adam Smith defines the value of commodities by the labour embedded and also by the labour a good commands. Ricardo agrees with the first definition:

"The real price of every thing," says Adam Smith, "What every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it. What every thing is really worth to the man who has acquired it, and who wants to dispose of it, or exchange it for something else, is the toil and trouble which it can save to himself, and which it can impose upon other people. That this is really the foundation of the exchangeable value of all things, excepting those which cannot be increased by human industry, is a doctrine of the utmost importance in political economy."

For Ricardo, the value of reproducible commodities and services reflects the relative difficulties of production counted in labour units: direct labour plus the dated labour of the past embedded in inputs (capital) and corrected by interests. This differs from Smith's second definition of value:

"The value of any commodity … is equal to the quantity of labour which it enables him to purchase or command. Labour, therefore, is the real measure of the exchangeable value of all commodities."

Ricardo disagrees:

"Adam Smith, who so accurately defined the original source of exchangeable value … speaks of things being more or less valuable, in proportion as they will exchange for more or less of this standard measure. … Not the quantity of labour bestowed on the production of any object, but the quantity which it can command in the market: as if these were two equivalent expressions…"

Smith's second definition pleases neoclassical economists, who determine value by the utility that a commodity provides a person rather than cost of production as do classical economists.

Of the Component Parts of the Price of Commodities: Smith argues that the price of any product reflects wages, rent of land and "...profit of stock," which compensates the capitalist for risking his resources.

Of the Natural and Market Price of Commodities:

"When the quantity of any commodity which is brought to market falls short of the effectual demand, all those who are willing to pay... cannot be supplied with the quantity which they want... Some of them will be willing to give more. A competition will begin among them, and the market price will rise... When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid in order to bring it thither... The market price will sink..."

To paraphrase Smith, and the first part of this Chapter, when demand exceeds supply, the price goes up. When the supply exceeds demand, the price goes down.