If you are interested in following along here is the book I am using: The Wealth of Nations (Modern Library (Hardcover).
I skipped Chapter 3 because it is a very small chapter and I have nothing important to add or takeaway from it.
For this chapter I would suggest reading Niall Ferguson, Ascent of Money, if you want a more deeply historical grasp of money from its origins to use. Or you can read for free, The Ancient Economy by M.I. Finley. Chapter four though provides us invaluable concepts along with a keen grasp of human nature—a consistency throughout all of Smith’s writings not just Wealth of Nations.
Perhaps blinded by his own conception of the Division of Labour (DOL), Smith formulates a picture of a society that has developed the raw sources of DOL into a more finely tuned, commercialized society where, “Every man thus lives by exchanging, or becomes in some measure a merchant, and the society itself grows to be what is properly a commercial society” (p. 24).
Even the notion of a “commercial society” is newer than I think Smith realizes. It indicates a theoretical placement of economic and social mechanism of a laissez faire society rather than the ancient roots of economic necessity. Although Smith is understandably correct that exchange was and remains the centerpiece of a societal practice. People are a species of exchange; we give and take, provide and ask, make and destroy—there is no way to being fully human without the spectrum of exchanges required for us to live. My complaint rests on the value Smith give DOL. Instead I would point to the Rule of Necessity and Requirement. A person needs X and requires Y. Overtime one person or a cabal acquires enough of X and possibly even Q & R to give them leverage i.e. power and authority. However they acquired it whether by force or peace, they now have enough of it to gain a place of higher status—Kings, Rulers, Aristocratic families—the makers of the Mill, own the Mill and the river and the surrounding area so to speak. None of this come easily which Smith acknowledges, “Many different commodities, it is probable, were successively both thought of and employed for this purpose. In the rude ages of society, cattle are said to have been the common instrument of commerce… salt…dried cod…nails instead of money to the baker’s shop or the ale-house” (p.25). Exchanges turn beyond just an item for an item or a conquering of resources, but certain resources take hold as being “valuable” gold, silver, and rubies, “In all countries, however, men seem at last to have been determined by irresistible reasons to give the preference, for this employment, to metals above every other commodity” (ibid).
Through the use of raw materials a system of worth, beyond just the essentialness, developed. No longer are we just needing eighteen cows and five bushels of wheat and twelve gallons of milk to provide for my family or the community sustenance. Yes, that remains a central concern, but a value system is developing to bring about consistency in the exchange of goods and services. Smith makes a logical case for currency as a stable and measurable value system of trade versus that of the sheep or cattle or salt. We can begin to lay the foundations of currency exchanges through raw goods that then turn to precious metals and finally a currency system of coinage that formulates through a means of law and order for markets both ancient and modern alike. Brilliant when you consider that you cannot cut a cow into two and always expect it to be worth five tons of wheat. However, an exchange of precious metals and later currency based in or on those precious metals at least stabilized the process of exchange of that cow. Granted, what was .10 cents ten years ago may now be worth .60 cents today, but translating that into me needing fifty half cows ten years ago versus needing a hundred half cows today is not likely, at least, in consistency of the value of exchange. Consistency is key here. Good laws require consistency. Norms need consistency. Tradition envelopes the way people interact. Economic practices are as much sociological tradition as they are a theories of economics.
From pp. 26-28 Smith has a great little dialogue concerning rude bars—precious metals considered of “value”; a proto-currency—“the use of metals in this rude state was attended with two very considerable inconveniences; first with the trouble of weighing; and, secondly, what that of assaying them” (p. 27). I am not going to provide a historical account here due to time constraints but I was wondering when did the principle of weighing such a resource become an account for its worth? And how was its purity determined? I love investigating this because it is telling about humanity; about what we see as valuable and important.
As Smith imagines, rude bars eventually turn to coinage for a variety of reasons that range from preventing counterfeits to concerns of regulating purity. A public stamp was designed thus the origins of a coinage system, according to Smith, was born—a “public offices called mints” (ibid). From stamping official worth eventually developed a need to offer precision, weight was not enough, therefore coining took root according to Smith.
On pages 29 and 30 there is the issue of coin weight which differs from kingdom and nation alike. I simply put in my own notes the history of coinage is a reminder that like, modern times, the worth of gold or silver was never consist or stable enough to remain as the sole proprietors of determining value. Weight alone changes with age as coins contain less and less silver or gold; but also they simply lose their weight overtime as they slowly decay.
Finally the chapter ends (pages 31-32) with these rules of exchange or the nature of exchange with either money or trade of goods for goods. Smith breakdown the meaning of the word value into two different meanings, “sometimes expresses the utility of some particular object” and “sometimes the power of purchasing other goods which the possession of that object conveys” (p. 31). One type of value is the “value in use” versus the “value in exchange” (ibid). To explain this principle Smith uses the example of Water versus Diamonds explaining that the greatest value in use of water has little or no value in exchange versus Diamonds which have greater value in exchange, but little to none in use. The scale is determined by scarcity, water has immense usefulness, but “it will purchase scarce any thing; scarce any thing can be had in exchange for it” (pp. 31-32). A diamond, however, can be exchanged for a great many things, yet has little value in actual use.
My only thoughts are how, at present, water and diamonds are much more valuable in exchange and in use than in the 1700s. Their industrial usage, use for public and private services, goods, etc. Today in 2020, Water is not just scarce but its value is enormous. Technology and the desires of the market at large have transformed the way we see things like water. Bottled water companies alone make droves of cash. Smith’s value of use and exchange though reasonably applies to plenty of other goods. This is an invaluable tool of reasoning through markets even post-free markets because all goods requires a value of use and exchange
Okay, next time we will be in Chapter five. See you then!