Comments on: TWoN Book 2 Chapter 2 Part 3

By: knob_e

knob_e — Thu, 25 Jun 2009 05:38:28 +0000

Scott: re p. 240. I think you may be overlooking the broader context. In the paragraphs directly above,Smith is talking about how money shares several attributes with fixed capital. In the paragraph below, he moves on to discussing the introduction of paper money as a means of reducing capital costs. The reference paragraph, about shifting costs from fixed to circulating capital, is Smith’s way of playing on money’s fixed-capital similiarity.

skzb: re p. 241. Smith is, in fact, concerned about the risks of inflation. It just takes him a few more pages to get around to that part of his discussion. And he never does use the word itself. Also, he takes the same view as Scott, above, that inflation is a problem only under certain sets of conditions. But, still.

By: Scott

Scott — Wed, 24 Jun 2009 15:08:22 +0000

On p.239 he is talking about what will later be called the velocity theory of money, where velocity is a multiplier. As Knob_e says, each coin goes through several transactions in the course of a year, so the actual supply of money is larger than the count of monetary units would indicate. In fact, it’s much larger (you multiply m*v to get the money supply).

This is also a good piece of argument against the old view of money (i.e., that the value of money is limited to the value of gold in the coins*). The gold standard people would say that the only way to get more money out of the same amount of gold is to debase the value of the gold. Smith says no, since the pieces of money have a velocity (or money multiplier)>1, you have more money in supply than units of currency in existence.

p.240, I think he’s talking here about the connection between saving (non-consumption) and investment. That which is not consumed is saved, and that which is saved can be invested elsewhere (”the fund which puts industry into motion”).

p.241 This is not a recipe for inflation, although inflation may result. Inflation=falling price of money=rising cost of goods=change in price level. One simplified explanation for this=”too much money” following “too few goods”, or monetary oversupply. This doesn’t always happen just because there’s a velocity of money >1, as mentioned here. You can have very high velocities of money (money changes hands quickly) without having high inflation; it’s the change in the money supply vs. demand that impacts the price level.

The question of the international channel was actually more intense in Smith’s (and then Ricardo’s day). Now, we don’t have to use gold and silver to manage foreign exchange, and mercantilism is (mostly) dead. We’ve got open markets for goods and currencies, and a diversified trade model that works well for peer countries (still a bit rocky on the developing side).

*or pigs, or bolts of cloth, assuming you used these alternative substances as “money”. Feel free to email me if you’re still unclear after reading this…

By: jeff

jeff — Wed, 24 Jun 2009 14:43:21 +0000

The more significant problem, however, is that, in point of fact, that is not how capitalism works: the tendency is for more and more capital to be invested in machinery.

I have found that is often not the case anymore. Why spend money that could otherwise be considered as profit? That was something I noticed in my last venture into the world of industry. The focus is (or was) on short term profits, rather than long term growth or sustainability.

By: knob_e

knob_e — Wed, 24 Jun 2009 06:31:08 +0000

Re Smith’s p. 240 and whole capital broken down into its fixed and circulating components. His point here is, even if we can’t find any way to increase our overall stock of capital, we can still improve our net revenue by shifting resources from the fixed to the circulating side of the equation, because–at least from an 18th century perspective–it’s the latter category that really drives production.

By: knob_e

knob_e — Wed, 24 Jun 2009 06:04:01 +0000

Re Smith’s p. 239 and your comment about circulating metal pieces versus annual revenue. Smith isn’t talking about virtual versus physical (see his sentence directly before the one you’ve quoted). He’s saying that the metal pieces are doing double or triple duty–or more–moving around from person to person in the course of a year, so a single coin might literally be used to pay part of the wages of several people before the year is out. Each laborer has gotten full use out of that coin, yet if we add up all the wages earned and then compare that to the physical number of coins used to pay those wages, we come up well short on the coins. My last “Eureka” note on Part 2 didn’t make the sidebar list for some reason, but if you read down through comment #15, you’ll see where I finally figured out that it isn’t a matter of coins not having value–it’s just that they aren’t direct sources of revenue.