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1.5 The Real and Nominal Prices of Commodities

The notions of social classes, "rich" and "poor," are relative within a given community - some will, by their industriousness and frugality - inevitably obtain for themselves more of the "necessities, conveniences, and amusements of human life" than will others. As such, the mere possession of material goods, within a given society, is of little value in assessing the progress of a given community or drawing comparisons among different communities.

Instead, the measure of progress for an individual, and a standard of comparison between communities, is based on two factors: production and consumption. A person becomes rich or poor based on the value he can create by means of his labor to produce and the degree of frugality and self-discipline in his consumption of the labor-product of others.

Labor as the Basis of Value

Labor is considered the "real measure" of the exchange value of goods. In a primitive society, man toils much to earn little. In an advanced society, man toils little and gains much, largely by virtue of the division of labor and the ability to trade.

The "real price" of everything is based in large part on the "toil and trouble" of acquiring it. Especially since work is done in order to trade for goods, the manufacturer of a good considers the amount of effort he puts into producing a good when determining the price at which it is to be sold, seeking to obtain at least equal quantity. A farmer who spends a year laboring in the fields expects to obtain from his crop at least enough money to obtain those things he needs in the following year, else considers farming to have been a wasteful activity.

But while the seller is immediately familiar with the amount of labor required for him to produce a good, the buyer of the good has no such appreciation, and thinks only to his use for it or his desire to obtain it in considering whether to accept the seller's price demanded or offer a lesser price. That is, the buyer considers his own hardship in obtaining money when considering how much of it to exchange for the good, the seller considers his hardship in producing it, and the bargain struck is a negotiation between the two.

Even at this, labor is not uniform and unitary. The time spent in two different sorts of work is not considered an equal exchange. An hour's hard labor is expected to generate more value than an hour's easy labor. Likewise, there is some premium for expertise and ingenuity. An hour's work by a master craftsman is valued more than an hour's work by a notice. The more that a buyer appreciates the effort of the manufacturer, the more willing he will be to give greater value to obtain the product.

When considering the nominal money-price of things, the buyer considers the pains he undertook to obtain money and negotiates this against the seller, who considers the pains he undertook to produce or obtain trade goods. To the individual consumer, labor is unitary, in the sense that a good that requires more money (labor) seems more expensive than one that requires less, and his decision to purchase or forego the possession is based on the price, in terms of his own labor - which is ultimately the "real" price of obtaining a good by trade.

While the nominal money prices of goods vary between times and locations, it can be observed that the comparative value of goods are relatively stable. Over the broad expanse of time, and in various locations, goods tend to have relatively stable prices in comparison to one another - and this returns us to the notion that labor is the basis of value. Excepting for advances in technology that make production of a specific good more or less efficient, the value of each item is relative to the effort of producing it.

The Influence of Money

In situations of direct barter, buyer and seller are better able to represent and negotiate the amount and difficulty of producing a good when haggling over the exchange rate. However, where money is used as a common medium of exchange, the notion of labor as a basis of value becomes less perceptible - one's own labor generates a given amount of money, and the money is given to obtain other goods, but the notion of labor when purchasing goods is based more upon the effort of obtaining on money than the effort to produce the good being purchased.

Smith notes that money, itself, is made of a metal that has a value like any other commodity - the purchase of a good for a penny is the exchange of that good for a pennyweight of silver. As such, the abundance or scarcity of metal and its value in exchange is influenced to some degree by the value of metal. For example, the discovery of an abundance of gold in South America in the sixteenth century made it easier to obtain, and the exchange value of gold dropped in Europe to about a third of what it had been before. The debasement of government-issued currency also decreases the value of money (and seems to increase the price of all goods in the market).

Smith looks to a special situation: in the agricultural sector, peasants could rent land for a payment made in wheat (called "corn" in England). That is, some fraction of their harvest was paid to their landlord in exchange for the use of the land, and there was great stability in "corn rent" in terms of the portion of labor traded for use of land. This was later changed to a system of money rent, which remained only as stable as the value of money itself - and when the value of money changed, landlords or their tenants suffered from the difference (the latter more than the former, as they were land-locked to a crop that took several months to produce, and money shifted in value all the while, so they could not be certain if this year's crop would suffice to pay money rent).

(EN: There follows a fairly extensive consideration of the use of different metals as coinage: from iron to copper to silver to gold, then back to silver when trade with the Orient created a shortage of gold in Europe. He considers the amount of metal minted into coins of various denominations, and the ways in which coins of one metal are valued against coins of another metal. It's fairly interesting as a historical account, but doesn't seem to have much to do with economics in a given market.)