The Dream Café

Steven Brust: “A masterful storyteller of contagious glee and self-deprecating badassery” —Skyler White

TWoN Book 2 Chapter 2 Part 2


I have found places in this book where I respectfully differ with Mr. Smith.  They fall into two categories: 1. Those things which he couldn’t have understood simply because the information wasn’t available at the time he wrote (one cannot expect advanced metallurgy from a culture which just that morning discovered iron, or or full understanding of a market economy just as it’s gearing up), and 2. Occasional objections to his method, where it seems to me made complex, contradictory processes seem linear and mechanical (as for example when he speaks of acquiring stock coming first, then division of labor).

One trouble I’m having in this chapter is that I’m seeing what appear to be a different sort of error–false deductions and cases of ignoring significant data.  It seems to me that if I’m seeing those kinds of errors, I’m missing something; I am more likely to be mistaken about that kind of thing than he is.  All I can think of to do is try to grasp what he means, point to the mistakes I’m seeing, and hope some Smart Person can, using small words, help me figure out what I’m missing.

That said, let’s look at Page 236: “Money, therefore, is the only part of the circulating capital of society, of which the maintenance can occasion any diminution of their neat revenue.”  Doesn’t this ignore the cost of transport, payment of storage of finished commodities, and the cost of various middlemen, who, by definition, concern themselves with circulating capital?

Page 237: ” A certain quantity of very valuable materials, gold and silver, and of very curious labor, instead of augmenting the stock reserved for immediate consumption…is employed in supporting that great but expensive instrument of commerce, by means of which every individual in society has his subsistence, conveniencies, and amusements, regularly distributed to him in their proper proportion.”  Is this the answer to my point above?  That is, is he here referring to the market itself, as well as the infrastructure that supports it?

“…as the machines and instruments of trade, &c, which compose the fixed capital either of an individual or of a society, make no part either of the gross or of the neat revenue of either,; so money, by means of whichthe whole revenue of the society is regularly distributed among all its different members, makes itself no part of that revenue.  The great wheel of circulation is altogether different from the goods which are circulated by means of it.  The revenue of the society consists altogether in those goods, and not in the wheel which circulates them.

He becomes more specific about this point later.  His point is that money is the means whereby commodities circulate, and, in calculating the revenue of an individual or nation, one can count the money, OR the commodities one can purchase with the money, but not both.  As far as that goes, it makes sense.  The trouble is, money is a commodity.  Whether paper (which he discuses later) or heavy metals makes no difference.  Money in any case, has a use-value, an exchange-value, is interchangable, and was created for exchange.  That is the definition of a commodity.  What makes money unique is that it is the only commodity whose use-value is quantifiable–or, put another way, whose use-value is its exchange-value.  This permits us to exchange commodities using money as a medium, and thus it appears to be a separate thing, but it isn’t.  In actual practice, when determining the “net worth” of an individual, one takes into account the market value of that person’s possessions, AND that person’s money–no one suggests counting the possessions, the money, and what a person could buy with the money.

Smith is obviously making a point here, and it is a point I’m missing.


Author: corwin

Site administrative account, so probably Corwin, Felix or DD-B.


  1. More speculation from a non-economist:

    On page 236, I’m almost as confused. I think Smith treats transportation costs (which are paid to someone, directly or indirectly) and other middleman costs as a net wash for society, though not for the individual. But I agree that he doesn’t seem to have a way to account for spoilage, or what we would call ‘depreciation’ or ‘externalities’, as a pure reduction in the society’s net revenue. I’ve gone back through his categories, but they don’t seem to fall under either maintenance of fixed capital or maintenance of circulating capital.

    On page 237, I read him as saying that the physical money — the specie, the stamped metal bits — is essentially *infrastructure*. You have to have it (or equivalent), in the same way you have to have roads and law enforcement, but it isn’t a commodity, and doesn’t generate revenue in and of itself. Paper would serve just as well for the purpose of accounting transactions, and be less wasteful of valuable resources.

    I think he would agree that the purchase value of money is a commodity, which allows things like lending at interest and speculating on national currencies — but that this value is not a feature of the specie, but of the abstract thing it represents. It’s not that the use value and the exchange value are equal — it’s that only the exchange value matters. The use-value is what you get when you beat your farthings into nails, or melt them down to draw wires. That value should be well under the face value of the specie; there is a market for dollars, but not for dollar bills.

    So, I think it’s not just that one can count the money, or the commodities, but not both. I think it’s that counting up all the money only tells you how much metal has been wasted; it doesn’t tell you how wealthy the society is. If I’m reading it right, he’s distinguishing the money supply from the GDP, and telling people to look at the latter.

  2. A couple of things to remember here:

    -Money then was mainly backed by gold or silver, or was itself made out of fixed units of gold or silver & etc, so it was much more important to make the distinction he’s making on p.237 (i.e., that once you turn the precious metals into money, they are then different from the real goods they purchase). The distinction is now much easier to make because we use fiat money, which derives its value not from its material, but from an abstract promise to pay.

    -Today, economists refer to money as the “numeraire”: the good that values are calculated against. So, you’re right, it’s also a special good in that regard.

    -Smith also makes the point that the two circles (real goods and money) move in opposite directions because you exchange money for real goods.

    Again, as mentioned elsewhere, the theory of money will change substantially in the course of the 20th century, thanks to Lord Keynes and others. Until then, the theory of money has this very strange character where it’s appended to the theory of real goods.

  3. When they calculate GDP, economists still make much the same calculation that Smith is describing–if you add up the calculation from the spending side (all expenditures across the economy) you ought to get the same answer as if you add up from the income side (all receipts across the economy). Further, whether you do the calculation in terms of dollars or in terms of actual stuff you ought to get the same answer (with stuff converted to or from dollars at the price level, whatever it is).

    If you try to measure actual values for the real economy they don’t exactly match up due to measurement error, but this is the root insight behind the basic equations that are still used in mainstream economics to model the economy.

  4. Scott has it right. Money is not a commodity; money is an accounting concept. Various commodities are used as *tokens* for money – gold, silver, paper, cowrie shells – but when they are used as money tokens then aren’t (and cannot be) used as commodities. We don’t say “I have ten dollars of beer.”; we say “I have ten dollars *worth* of beer.” The measure is separate from the thing.

    The essential monetary equation is that the total stock of money is by definition equal to the total stock of goods and services that said stock of money represents. So a money-token-commodity can either be counted as money, or as a commodity, but not both.

  5. First, re your questioning whether Smith is referring to the market itself. I’m not sure what *you* mean, but Smith is just restating his previous sentence (he does that a lot–I blame his early years as a lecturer on rhetoric and belles lettres). Basically, gold & silver coins are bloody expensive to mint, store, move around, and keep track of. Not to mention having to deal with all that shaving and melting-down.

    Second, re money as a commodity, looks like the commenters are all thinking pretty much the same thing: being defined as a medium of exchange overrides other considerations of use or value for any commodity, and gold & silver aren’t necessarily the best way to go. It’s worth remembering, any time Smith starts one of his gold-&-silver toots, his underlying Big Thing is always to build a case against mercantilistic economic policy and the whole precious-metals-are-the-true-wealth-of-nations idea that drives it.

  6. knob_e: “re money as a commodity, looks like the commenters are all thinking pretty much the same thing: being defined as a medium of exchange overrides other considerations of use or value for any commodity”

    I’m having trouble figuring out what “overrides” means in this context.

  7. Re: “Overrides”

    For objects used as money (e.g., gold coins), you could look at the object in two ways: 1) it is a weight of gold that could be melted down and turned into a candlestick or a watch or some other real good. 2) it is a unit of currency (pound/dollar/ruble/mark) that has a nominal or notional value “twenty dollars”. The second meaning is more important than the first when we’re talking about money, so we say that the second meaning overrides the first.

  8. Scott: Or 3. It is a commodity that it is convenient for exchanging other commodities. If instead of precious metals we were using pigs, or yards of silk (both of which have been used on occasion by various societies) it wouldn’t change anything–pigs or silk would remain commodities in every way.

    Once precious metals have been turned into coins, the only thing that changes is that now that is their primary use, instead of merely an additional one. But this doesn’t fundamentally transform the nature of the item.

  9. But if you’re using pigs as your currency, you can’t double count their value as “X pigs” and “Y beers I can trade my X pigs for”, I think is what ppl are saying. Well, I hope that is what they are saying, because otherwise I still have no idea what’s going on.

  10. When pigs are currency, K, that is exactly what you can do. That’s what it means to use them as currency.

  11. Maybe I’ve been misunderstanding what you weren’t understanding–when you spoke of money as a separate commodity, I thought you were trying to assign it an intrinsic value on top of its use as compensation for labor or goods received. Having taken another look at your initial post, here’s what I think I’m getting now: you question Smith’s exclusion of money from all considerations of revenue on a societal level, on the grounds that a person’s worth includes both goods and cash, and society should be the sum of all individuals. Is that what you had in mind? If I’ve gotten it right at last, here’s my new and improved answer, and screw that other shit.

    If worth is what we’re measuring, yes, we want to add together all goods, cash, and any other assets that might be hiding under the mattress or in Swiss bank accounts (unless I get my hands on them first, in which case, dude, they are *so* gone). But Smith doesn’t want to exclude money from calculations of worth; what he says it “makes itself no part of” is revenue. And revenue, by any definition, concerns itself only with income, return, or yield over a specified period of time. For Smith’s purposes (p. 234, para. 5):

    Gross Revenue of Society = the Whole Annual Produce of Land and Labor

    Also per Smith (p. 234, para. 2):

    The Price, or Exchangeable Value, of Society’s Whole Annual Produce of Land and Labor = Wages of Labor + Profits of Stock + Rent of Land

    If we accept those two statements, it logically follows that we can measure Gross Revenue in terms of either actual units of Produce OR the Exchange Value thereof, but never as the sum of both together. And Smith makes it plain that he prefers the goods to the cash.

    If I’ve still got my head up my foot, I’m just going to go stand in the wastebasket over there until I’ve learned not to sass my betters.

  12. knob_e: I think you made that very clear, and I appreciate it. Here’s my question: should we include the precious metals we hold (remember, by revenue we are now talking coins, not banknotes) as part of our annual produce? If not, why not?

  13. My guess is that Smith would say that refined metals from the earth (precious or otherwise) are part of the annual produce, but that turning metal into coin removes it from the revenue by sequestering it from consumption. You can’t sell it or make something with it, so it’s not revenue.

  14. SKZB: [Wince.] No. When the government buys a certain weight of precious metals and converts it to legal coinage, that produce leaves the revenue stream and is reclassified as circulating capital. As DaveT and other earlier commenters have noted in assorted ways, an official medium of exchange has no ability to trade under the same market terms, or even the same terminology, as any other type of commodity. You disputed this point in your initial post, so I really, really hate tackling the proof without direct quotes from Smith to hide behind, but he seems to take it as a no-need-to-explain given. And what the hell, can’t spam-can me more than once.

    Should we consider the buying and selling of money–with money? (“Wot’ll it be, then, ser?” “Three shillin’ an’ tuppence, an’ yer ‘appen ter ‘ave sich in stock.” Roight-o, ser; that’ll be–just let me tot it up ‘ere–yep, be three shillin’ an’ tuppence. Nor wull ye be foindin’ a foiner proice anywhurs else.”) Not going to happen. What about buying money with some other commodity or service? Well, Smith’s model already covers that. As selling goods for cash. Selling money for some other commodity or service? Smith has that down as buying goods. For cash. Buying coins on credit? That would be taking out a loan. Or the ever-popular discount on bills of exchange. (And wasn’t that a day-at-the-beach bunch of paragraphs to wade through?) In the market to buy doubloons with your coins? That’s regulated as foreign currency exchange. Or possibly an investment strategy, though I doubt it had much going for it in an age where most countries had their own stashes of gold & silver coins. There just isn’t any way to make money work for us, except as the specific tool it’s been made into. Unless we melt it down and start over, but then it isn’t an official medium of exchange anymore.

    All of which gets at what I tried to sneak past you with my blanket statement about overriding normal considerations of use and value. And now maybe I can distract you by taking up your initial question about what message Smith is trying to send in the part of Ch. II.2 that got me into this mess in the first place: he’s priming us (okay, our 18th century counterparts) to look with favor on his proposals for reducing the reliance on precious metals as the official medium of exchange.

  15. No, wait, Your Honor. New evidence has just come in, and I’m almost pretty sure it includes the smoking Smith-quote. Stipulated: money is a commodity. Stipulated: all commodities have value. But NOT all commodities are a direct source of revenue. Money is a government-produced commodity, the sole function of which is to serve as an official medium of exchange. The purpose behind that function is to facilitate the process of “raising, manufacturing, or producing goods, and selling them again with a profit” (Ch. II.1, para. 4). I’ve borrowed here from Smith’s core definition of circulating capital, but he says much the same thing about money in Ch. I.4, and I don’t have a problem with his classification of the latter as a component of the former. Such capital, Smith adds, “yields no revenue or profit to its employer, while it either remains in his possession or continues in the same shape.”

    Yahtzee(tm)! Money changes hands but it never changes shape. It never becomes edible or wearable or in any way more, less, or other than a production-facilitating official medium of exchange. Its entire value, from the moment it leaves the mint, lies in the consumable goods–i.e., the true results of production–it can command. When we get cash “income” from wages, rent, or profit, those coins are simply a standardized representation of our individual share in “the whole annual produce of land and labor.” Nor, for that matter, are coins fresh-minted for every hour of labor we put in to earn them. Unlike the real produce it represents, the same stock of money keeps cycling round and round through the ecomonic system. Earn & spend. Produce & consume. It’s a new loaf of bread with each sale, but the village baker might take in–and then shell out again to replace his materials or pay his labor–the exact same coin dozens of times in the course of his career. That’s why we would never think of “buying” money, and why we shouldn’t ever think of it as produce or direct revenue.

  16. Interesting points, e_knob. k. A couple of things to consider:

    1. Money is not necessarily government issued; it doesn’t have to be to be money, and it often wasn’t in Smith’s day.
    2. Most commodities do not change shape once they reach the market.
    3. The value of ANY commodity–to the one selling it–is that of the consumable goods it can purchase (to the seller, money is a consumable good in every way, yes? He consumes it by spending it on something else). Like any commodity, it’s usefulness has not been exhausted until it is destroyed; one important reason for going to precious metals for money is that they do not destroy easily or quickly, hence they maintain their use-value.
    4. Money can, indeed, return a value: by being loaned. If instead of money, I wished to loan out a machine (say a loom to a weaver) for a given time, I would expect recompense in the same way that a banker expects recompense for the use of his money. When economists speak of interest rates, they speak of the “cost of money” and they do so for very good reason.

  17. skzb: All really cool arguments to take on over a friendly bottle of wine–or, hell, a pitcher of beer. And thanks for letting me know, however indirectly, that I didn’t “piss you off–*again*” (crap, where does the period go in a hosed-up construction like that?) But I thought we were trying to understand Adam Smith here.

    Honestly, *I* don’t understand why you aren’t having more fun with this chapter; Smith’s tactics are right up your alley (or, in some cases, maybe just up Vlad’s), and even his (uh, Smith’s, not Vlad’s) economic perspective is not always as far divorced from your own as you seem to place it. Going through these posts and comments, I sometimes feel it would be much easier to hash the whole money-mess out face-to-face while you’re in town. Then I remember our track record and smack myself smartly upside the head until all I feel is dizzy.

    And I’ve been meaning to ask, apropos of absolutely nothing, except maybe Vlad: how many people, including, perhaps, the author, have called Alastair Reynolds’ “Redemption Ark” to your attention since it first came out 7 years ago?

  18. I’m too old to have much of a memory of that. But if you want to go over this face to face, there’s always Tesla’s music party tomorrow; it would be interesting to see how much economic conversation could happen between songs. Hee hee.

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