The Wealth of Nations Chapter 5: Of the Real and Nominal Price of Commodities, or of Their Price in Labour, and Their Price in Money

As Smith promised last week, here in chapter 5 we will explore “what is the real measure of this exchangeable value; or wherein consists the real price of all commodities.” In other words, what does something really cost? Let’s take Smith’s book that we’re reading now, which you can buy in paperback for $20 (or Kindle for $1, like I did). You might say it costs $20 (plus tax), and you’d be right. But for Smith, that’s not the real price. You did not dig in the ground to mine your $20, nor did you plant and grow a money tree from which you picked your $20 (but if you did, please let me know…). Instead, you did something worth $20 for someone else, who paid you your due, and then you took your earnings to the book store (physical or otherwise).

For Smith, the real price of something is the labor we exchange for it. The twenty dollars is just the nominal price (in name only) used to exchange one person's labor for another. “Labour therefore, is the real measure of the exchangeable value of all commodities. The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.” The same is true for those on the other side of the transaction, for those selling goods and services: “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.”

So if money is the nominal price and labor is the real price, what does something really cost? i.e. What does it cost in terms of labor? To bring up our earlier pin example, purchasing a single pin costs 6 seconds of labor — but only for those earning the minimum wage of $7.25/hour. For a heart surgeon earning $750,000 per year, it would only take 1/10th of a second. One hour of one person’s labor is not necessarily worth one hour of another’s. Imagine you needed someone to install both a piece of plumping under your sink as well as a stent in your artery. Both might take about the same amount of time, but they hopefully are not worth the same to you, so you pay a lot more for the latter than the former.

Smith here applies this to personal wealth. “Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life.” In other words, we are rich or poor (financially) insofar as we can purchase the labor of others. One of the beauties of this economic system we live in is that you are only able to purchase labor from others if you first provide valuable labor yourself. It’s a system in which we must first give in order to receive.

There is much that is imperfect in our economic system, and there is much that we ought to wish were otherwise, including those without financial means to take care of their necessities. But when we realize that what occurs ultimately in financial exchange is the exchange of labor, we can start to understand, and work towards not only the wealth of our own balance sheets, but that of the nations.

Let us know

• How many hours would you be willing to work to cover your monthly expenses? Is it more or less than the 487 waking hours you have per month? More or less than the 173 hours most work per month on a typical 40 hour work week?

Until next time, happy reading!