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20: Value and Riches

The notion of wealth is often considered, and there are a myriad of opinions as to what it really means to be "rich." Ricardo turns to the definition provided by Adam Smith: that a man is considered rich of poor "to the degree in which he can afford to enjoy the necessities, conveniences, and amusements of human life."

The nature of value, while related, is slightly different: a thing (no a person) has value according to the difficulty of obtaining it. It may be valued by its price, which itself is derived from the difficulty of producing it.

Time is a fundamental consideration: if during the course of a day or a year or a decade, a man can produce more value than he must consume to survive, he has gained wealth, as he may trade the excess of his production for other goods. The same principle applies to one man or a hundred or a nation of millions.

The development of skill or the application of technology improves the output of labor, such that the amount of time to produce a good is reduced - or more goods can be produced in the same amount of time.

Some rumination follows: that a technology that enables a worker to produce 20 pairs of stockings instead of 10; or he may produce 10 pairs in half as much time and then produce 5 hats (implying that rather than producing more of the same good, you can produce the same amount in less time and devote the remaining time to other pursuits).

However, because the value of things relates to the resources required to create them, the technology that doubles the output of labor then halves the value of the product of labor: producing 10 socks in a day means each pair requires 0.1 days worth of effort, and producing 20 means each pair requires 0.05 days worth of effort. (EN: Dismissing other costs such as materials and equipment maintenance and focusing entirely on labor.)

As such, when one producer has sole use of a technology, he may profit from the increased efficiency; but when all producers have the same technology, the price of the good will be reduced, by competition, to reflect its value. And at that point, the society as a whole enjoys greater consumption of that particular good at a lesser cost in terms of the cost to obtain it.

By increasing the facility of production in multiple industries, we diminish the value of commodities produced, and increase the national riches (people are able to obtain more of the necessities and conveniences of life at a lower price).

Ricardo asserts that many errors in political economy arise from a misunderstanding of this relationship: to increase the wealth of a people requires decreasing (not increasing) the price of goods.

It is very common to mistake money for a measurement of wealth, without consideration of the value (prices) of things. But money is merely a token of exchange, and having money is not the same as wealth (again, necessitates and conveniences of life). A nation may have a great deal of money, but a great poverty of things for which it can be traded.

(EN: The example that comes to my mind, but not to this author's, are the primitive tribes of the new world who had a great wealth in gold, but suffered much misery and starvation for want of more practical things.)

Returning to the thesis: a man is rich or poor according to the abundance of necessities and luxuries he can command. Money is valued only insofar as it represents a commodity others are willing to accept in exchange for the goods a man may need or want. But the money-price of a good is set according to the effort of its creation - and as such, wealth and value are dependent on one another.

In terms of commodities, it is true that a man in possession of a scarce commodity is richer, if its scarcity enables him to obtain more in exchange for it. It is also true that a man who has horded a stock of valued commodities may trade it to others to obtain things of more practical value - but each such trade diminishes his store unless he also produces sufficient wealth to replace it.

(EN: A notion overlooked is how he came by this commodity in the first place, which causes some flaws in economic theory. You cannot begin with the notion that a person is rich, but must instead back up to determine how they have become that way - a person who becomes rich has produced far more value than they consumed, enough to stop producing and live off the surplus. It does not mean they created no value, just divorces the time at which value was created and the time at which it is traded.)

Ricardo cites the example provided by Lord Lauderdale: if water became scarce, a person who has a supply of it becomes rich. People will be willing to trade considerable amounts to obtain the water they need. Where the need is sever, gold has less value than water. At the same time, those who have water will cherish it according to their own need of it - to trade all your water away is exceedingly foolish.

(EN: Water is an interesting example for crisis situations, especially considering the morality of suppliers. People who bring needed goods to crisis-stricken areas to sell at high prices are denounced as immoral, and the sentiment is they should grant it freely to those who are in desperate need. But on the other hand, if people were not willing to pay, there would be no incentive to furnish it - and if those who are charitable took action rather than merely criticizing the actions that others take, there would be no opportunity to sell it. It's an interesting paradox to meditate upon, but generally leads to emotional rather than logical debate.)

The same can be said of any commodity in any situation: once something is obtained, by production or trade, the holder considers his own needs first, then sells the excess, and the price is determined by the desire of the buyers to have it, who bid against one another for the limited supply.

There is the notion that scarcity and the high prices it creates is a form of waste: that individuals who pay a high price for something deprive themselves of greater value, and that society has lost its wealth because something of greater value is given for something of lesser value, in terms of its cost of production, and the buyer has less to spend on other things (hence less income for producers of other things.)

(EN: Ricardo rolls along without addressing the preposterousness of the statement. Unless things are taken by force, the very nature of an agreement on price is consent to the bargain, and that each party feels what they are getting is fair exchange for what they are giving in return. Complaints of this nature are generally witnessed in buyer's remorseful wishes that they had negotiated a better bargain, or some third-party's condescending opinion of the buyer's intelligence or negotiating skills.)

Comparison or markets is also misguided by the comparison of monies and exchange rates. In terms of the definition of wealth as necessities and conveniences, two nations may be said to be equal if their peoples enjoy the same quantity of the necessities and conveniences of life, for the same amount of effort, regardless of the amount of currency or its exchange rate. If the same amount of effort is required to create a yard of cloth, and the same amount is available per capita, their wealth is equal.

There is some passing mention of money as being a storage mechanism for value: that an individual with a significant stock of money can trade it for the labor of others, seemingly without having had to produce anything to exchange. However, recall that money displaces trade over time, location, and individuals - to have money to trade, the individual had to obtain it somehow, and unless it was taken illegitimately, there was a productive act at some past time, in a different place, and exchanged with a different person.

Ricardo disagrees with a definition of wealth from Adam Smith, who described it as being related to "the quantity of labor which he can afford to purchase." While it is true that all physical goods are merely the manifestation of the labor necessary to their creation, tehri value to the user is in the benefit they deliver. As such, a wealthy man cares not for the amount of labor he happens to be buying, but for the benefit he derives from obtaining the good. The distinction becomes clear when you consider the contrast between a crude society in which much labor is required to produce a sack of grain and an advanced one in which less labor is required to produce the same quantity: one is not wealthier for having purchased more labor, but for being able to purchase more goods.

He also considers the comparison of wealth among nations is rebutting Smith's definition: that the most populous markets are also often the poorest, where more individuals contribute more labor to the production of fewer goods than in smaller and wealthier nations. Thousands may toil and enjoy fewer goods than a dozen whose daily labors are less in the time and strenuousness of the activity.

Nor is it the case that capital resources necessarily create or constitute wealth, though the two tend to be interrelated. A nation that is wealthy has roads and factories and well-groomed fields, as these items facilitate greater levels of production with less labor. But a nation with the same resources that does not effectively utilize them may find itself none the better for their possession.

Ricardo then turns to Say, whom he finds to be "singularly unfortunate in his definition of riches and value" in that he muddles the two concepts together and contradicts himself: in one example, he suggests doubling production will double the income of the producer, yet in another that it will halve the value of the goods produced. (EN: Which may be reconciled if you consider the time it takes market prices to adjust. Where one supplier doubles production, he increases his wealth - though not necessarily doubles it- because the market price has not decreased to reflect the plentitude of supply, and his own doubled production doesn't mean the total supply is doubled, merely his share. When all suppliers have doubled production, the good becomes fully twice as available, and competition for buyers reduces the price of the good, but not necessarily to half its former value.)

Ricardo goes on to find a dozen such inconsistencies in Say's theory of value and belabor the point further. (EN: which is of interest to those comparing the two, or who might have considered Say's theories before reading Ricardo's, but is a bit much in terms of detail for my present purposes.)