The Dream Café

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

TWoN Book 2 Chapter 4


This chapter deals with the particular characteristics of stock (capital) when it is lent at interest.  He spends some time explaining why it should be lent to those who will invest it in productive ventures, rather than to those who will spend it; but this part doesn’t interest me a great deal.

On page 292 he says, “Almost all loans at interest are made in money, either of paper, or of gold and silver.  But what the borrower really wants, and what the lender really supplies him with, is not the money, but the money’s worth, or the goods which it can purchase…By means of the loan, the lender, as it were, assigns to the borrower his right to a certain portion of the annual produce of the land and labor of the country, to be employed as the borrower pleases.”

The point being that the amount of money that can be loaned is not determined by the value of the money, but “by the value of that part of the annual produce which, as soon as it comes either from the ground, or from the hands of the productive laborers, is destined not only for replacing a capital, but such a capital as the owner does not care to be at the trouble of employing himself.”  What strikes me about this is that, in some ways, the limiting factor becomes the resources of the lender (usually expressed in interest), but the controlling factor is the use the borrower wishes to make of it.  This is especially interesting when we consider the latter stages of capitalism, when finance capital assumes control over industrial capital.

He then goes on to discuss how certain money might be used several times, being lent, spent, lent again, spent again, and so on among different lenders and borrowers.  This seems to be intended to reinforce his earlier point about why money cannot be counted as part of nation’s wealth.

On page 294 we find: “The increase of those particular capitals from which the owners wish to derive a revenue, without being at the trouble of employing them themselves, naturally accompanies the general increase of capitals; or, in other words, as stock increases, the quantity of stock to be lent at interest grows gradually greater and greater.”   And then, further down, “As capitals increase, in any country, the profits which can be made by employing them necessarily diminish.”  These points are significant as yet another reason why capitalism, as a system, must constantly expand.  Indeed, someone could make an argument that Adam Smith predicted the World Wars without stretching the truth too awfully much.

Page 296: “Any increase in the quantity of silver, while that of the commodities circulated by means of it remained the same, could have no other effect than to diminish the value of that metal.  The nominal value of all sorts of goods would be greater, but their real value would be precisely the same as before.”   Very true.  The value of a commodity consists in the amount of labor embodied in it, and this labor may be expressed as gold, silver, paper, or in terms of other commodities.   “The wages of labor are commonly computed tye quantity of gold and silver which is paid to the laborer.  When that is increased, therefore, his wages appear to be increased, though they may sometimes be no greater than before.  But the profits of stock are not computed by the number of pieces of silver with which they are paid, but by the proportion which those pieces bear to the whole capital employed.”

He then goes on to discuss the relationship between the interest of money and the profits of stock (ie, loan rates are closely tied to return on investment from agriculture or manufacture).

It is interesting to note, at the bottom of page 298, that Smith is in favor of having a legal limit to interest rates.  He proposes that this limit be just a little above the lowest market rate.  Smith could not have predicted the volatility of the money markets; with interest rates fluctuated as they do today, such a plan is impractical.  But it is interesting that Smith proposes it.

Page 299: “No law can reduce the common rate of interest below the lowest ordinary market rate at the time when that law is made.”  Because money, being a commodity like any other, has its price (expressed, like anything else, in terms of labor), and if the law requires a rate below its cost, no one will lend it, or else they will circumvent the law (which, by increasing the risk, will increase the cost).

Still on 299, this is very interesting: “The ordinary market price of land, it is to be observed, depends everywhere upon the ordinary market rate of interest.”  Is that still true?  If so, why?  Much of this feels like a relic of the past–that is, at the time Smith was writing, we were just emerging from a feudal monarchical system where land (ownership and production) formed the entire basis of the economy; he was poised on the brink, as it were, of an economy based on commodity production.  I think this explains why he sees such importance in land.  Not long afterward, the question became: lend money at interest, or invest in manufacture?  But at the end of the 18th century, we still aren’t quite there.


Author: corwin

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


  1. This is a tangent, I know, but I’m missing something in your description of value. You write: “The value of a commodity consists in the amount of labor embodied in it […]”, and I’m having trouble understanding the concept of the labor embodied in a commodity. Consider refined boron, for a random example. Is the labor “embodied in” that boron equivalent to the labor involved in *producing* that boron — the labor underlying the machinery and fuel and other inputs used to extract and refine boron, plus the labor directly employed in using those inputs to produce the refined boron? Or is there something else beyond that?

    Here’s why I ask. Boron has some value today — leave aside for a moment how that value is arrived at. Tomorrow some scientist publishes a breakthrough new use for boron. After publication, has the value of boron changed? In my ordinary understanding of term “value”, it has — certainly, as someone not owning boron, boron seems of higher value to me once I know of its new use than it did prior — even though the process of producing boron and so the labor involved in its production has not changed.

    I can tell what I think of as the “orthodox microeconomics” story of consequences from that publication: with the new use, demand for boron increases. And it’s not just that more people want boron at its current price: some of them will now pay more than its current price. That in turn means that there are new profits to be made in supplying boron, which draws in new producers, some of which are less efficient than the old ones. Eventually the quantity of boron supplied settles out somewhere higher than it was before publication, with a somewhat higher price as well (the price that’s the economic breakeven for the least efficient supplier). I can also recount some of the caveats that ought to accompany that story, but this is already a tediously long comment.

    My point here is that for all its flaws, I kinda maybe understand how “price” in the ortho micro story corresponds to “value” in the ordinary usage of “how much it matters to me to have something”. What I don’t understand is how either of those maps to “value” in the sense of “the labor embodied in something”.

  2. With the new demand, wouldn’t increased supply also be necessary? If so, this would require increased labor throughout the supply chain, unless there is enough refined Boron just lying around against any future need.

  3. @Bawrence: I agree, increased demand will (normally) cause supply to increase, which will indeed induce increased labor throughout the supply chain. My point of greatest confusion is about the definition of value immediately after publication of the new use, at a point where demand has increased markedly but there hasn’t yet been a supply-side response to that increase in demand.

  4. That would be addressed by the “settling out” that you referred to previously

  5. Um, I guess I’m not making myself clear. I understand that after the settling out, the available boron embodies more labor and thus has greater value in that sense. What I’m struggling with is the notion of value-as-embodied-labor precisely during the period *before* the settling out occurs.

    Maybe the answer is that this definition — “the value of a commodity consists in the labor embodied by it” — applies only when supply and demand for that commodity are in equilibrium?

  6. edb: Note: the labor embodied in a commodity is not the labor that it actually took to produce that given commodity, but the labor *necessary* to produce it.

    In your example, the value of boron has not changed. The price might, temporarily, be higher, but according to Smith, the increase in demand does not change the value.

  7. Re the increase in the available quantity of silver.

    “The nominal value of all sorts of goods would be greater, but their real value would be precisely the same as before.”

    This is of course true; but it’s true to some extent because the value of silver was not based on it having any industrial use.

    If the amount of, let us say, titanium on the market increases, then, yes, the price of titanium will drop, but the overall value of the economy may increase, because more cheap titanium applications are possible than before, and those applications may lead to increased production or productivity elsewhere.

    The same thing applies even more directly to energy considered as a commodity. If cheap fusion power becomes available, then the price of electricity will drop, but the overall wealth of nations will increase, as increased energy availability and lower energy costs result in increased industrial production as well as improved living conditions (for example making desalinization more cost-effective, making fertilizer more widely available, powering irrigation, etc).

    So not all commodities are created equal in terms of the industrial and capital consequences of increasing supply. While labor is a principal component of value, for this reason I think it’s not the sole component.

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