Adam Smith: First Principles

[editec]

Some of you are under the impression that capital creates wealth. And as long as there is a system in place, a society that agrees that capital (gold or fiat money, doesn't much matter) then YES capital is the expression of past labor, and YES people will accept that specie as though it represented wealth.

But why is capital (or gold) something of value to us?

Because, by mutual agreement, onecan exchange it for the fruits of somebody's past labor.

Doubt me?

You are alone on a dessert island. You have a pile of gold. You have a pile of fiat currency.

What good are they to you?

Probably nothing at all.

Why not?

There are no laborers to buy anything from, folks.

That gold has gone from a mutally agreed upon representation of wealth, to a bit of metal that may have value to you but only IF YOUR LABOR CAN MAKE IT VALUABLE TO YOU.

All human wealth is the end product of some human labor. (even if that human labor is making a horse, another worker or a machine do the actual work)

Whether it is the labor of the human imagination and the mind, or the labor the human back and hand, it is human labor that is created soemthing of wealth.

EVen an apple on a tree has NO VALUE until a human hand picks it, folks.

 

[bripat9643]

OK, you know far more than I ever will about horseshit so you win on that. What my head is stuck in is money --history and how it works.

Since the Saxons the pound sterling was silver, not gold, and while silver's trading value for food/labor jumps all over the place like gold,

That's just plain wrong. It may have started out being backed by silver, but it ended up being backed by gold.

http://www.usmessageboard.com/newreply.php?do=newreply&p=4063451

History of the Gold Standard

In 1704, the British West Indies adopted a gold standard based on the Spanish gold doubloon. In 1717, Sir Isaac Newton, master of the Royal Mint, effectively put Britain on a gold standard by establishing a new mint gold : silver ratio.

It was not until 1821 that this was formalized, following the introduction of a gold sovereign to the British currency, in 1816. Other major economies followed: Canada in 1853 (British gold Sovereign and US Eagle), Newfoundland in 1865, USA in 1873 (Eagle) followed by Germany (Gold Mark) the same year. Australia, New Zealand and the British West Indies followed the British gold standard.

Historically the use of gold as a yardstick was formalized in the currency system adopted by Europe and America until 191.

The way it operated in the United Kingdom until 1914 was that the Bank of England was legally required to exchange paper money (Pounds Sterling) [fiat] for a fixed weight of gold [specie].

The price of an ounce of gold was set at £3-17-10 1/2d (Three pounds seventeen shillings and ten pence halfpenny) in 1717. This price for gold lasted for more than 200 years.

it jumps differently. In the past four decades alone an ounce of gold could buy as little as 20 oz. of gold to as much as 90. No connection other than the fact that they're both erratic, which is why currency fixed on one precious metal saw all other prices go crazy.

It's not the price of gold that is fluctuating. It's the value of the dollar. There's no connection because the government severed the connection. Under a gold standard, the government or a private bank is required to exchange a specified weight of gold for a dollar. The price of gold cannot change because it is mandated by law.

Today we hold prices to what we actually buy --stuff like clothes, food, housing. Year/year inflation for that stuff peaked far higher before the 1930's than anything in the past half century. Worse yet the inflation peaks would be followed by horrific deflation. OK, so in the 1920's when inflation topped 25% and then plunged below -25% we came out where we started. Big deal. That's not stable, unless we're back with the kind of stable filled with horseshit.

What is "we hold prices" supposed to mean? You obviously haven't got the foggiest notion of how money or banking works. You can't even use the terminology properly.

And, no, inflation was not worse before the 1930s. It was far less. Furthermore, we went off the gold standard de facto when the federal reserve was created. That's why we had the panic of 1929. The government was printing dollars like there was no tomorrow. FDR took us off the gold standard de jure because the Fed had destroyed the dollar with its indiscriminate printing of Federal Reserve notes.

 

[sparky]

FDR took us off the gold standard de jure because the Fed had destroyed the dollar with its indiscriminate printing of Federal Reserve notes.

actually, Nixon was the most recent disconnect in '71.....

 

[bripat9643]

FDR took us off the gold standard de jure because the Fed had destroyed the dollar with its indiscriminate printing of Federal Reserve notes.

actually, Nixon was the most recent disconnect in '71.....

The US was effectively off the gold standard in 1913 when the Federal Reserve was given the authority to issue currency that didn't have to be exchanged for gold. However, until 1971 foreigners were still able to exchange notes for gold. This was done through central banks and only worked so long as all central banks inflated (debased) their currencies at the same rate. This system quickly broke down and devolved into the free floating system we have now.

 

[sparky]

uh huh, and this is a piece of paper & a rock.....>
personally, i find each a tad chewy

perhaps you could enlighten us on their worth?

 

[expat_panama]

...That's just plain wrong. It may have started out being backed by silver, but it ended up being backed by gold...

You're not following the thread.

The topic's Adam Smith and quotes from The Wealth of Nation's. He wrote it from 1766 to 1776 when the UK based the pound on silver. I said much has changed since then and your "...may have started out being backed by silver, but it ended up being backed by gold..." is exactly my point. fwiw, most sources put the official change to gold in 1816 (see "united kingdom" gold legal basis pound sterling - Google Search )

...It's not the price of gold that is fluctuating. It's the value of the dollar...

The dollar prices for food, clothing, and shelter stay about the same from month to month/year to year. If we say gold is somehow more 'TRUE' then we've seen our food/rent bills soar 10% in two days last week and while over the past two years our labor lost half its worth. We don't because in the real world we use dollars.

 

[editec]

Folks, GOLD does NOT NECESSARILY prevent inflation.

The Spanish empire was awash with gold and all that gold did was CAUSE inflation and help ruin Spains economy.

When the masters of Spain had enough gold they stopped bothering to make stuff and instead bought it from other nations.

Spain therefore, unlike England and other emerging nation of Europe, didn't really get involved in the growth of manufacturing and trade that drive old Europe into becoming modern Europe.


Gold is (usually) a effective way of putting money aside when inflation is looming.

But it, and the gold standard is NOT a panacea for all economic woes.

If anything the gold standard is a damned good way of preventing economies from advancing.

 

[Baruch Menachem]

...there was a time when the government could run out of money - that's no longer the case.

Governments have always able to make more money, and governments have always been limited by available resources that their money could buy. Smith's 1700's no longer exist and today's world is so much more interconnected with cheaper transportation, information, communication, and technology while labor's gotten far more expensive. That's why in today's world Smith's statement -

...Labour was the first price, the original purchase-money that was paid for all things. It was not by gold or by silver, but by labour, that all the wealth of the world was originally purchased...

- is well, stupid.

Smith's day had a unit of food per season by a farmer working pretty much as he had since caveman days. Today we got capital equipment and agritech increasing that farmers seasonal output by a factors of several thousands. That means today's food is 99.9% capital and information with a tenth% labor.

It is not stupid. As was the case in 1776, it is incomplete. Annual production of useful stuff that makes our work easier is still the basis for wealth. As Smith himself noted, much of the 'labor' that was the basis for wealth consisted in intellectual and other capitals. The price of coal in Newcastle in Smith's day included not just the labor of the miner, but the intellect of the engineer who built the windlass, the guys who ran the pumps (who never dug a single lump of coal themselves, but without whom the guys deep in the mine would die) and the value of labor stored as capital which did all financing of a mine for the 40 feet or so of useless soil before you got to pay dirt.

And we need to remember that Smith was making an argument here about how government tried to accumulate wealth, which back then was trying to get as much gold and silver into the country as possible. Smith noted that the Spanish had tons of precious metals but were dirt poor, while England had not had a productive precious metal mine since the end of the Roman empire managed to accumulate large amounts of precious metals because of the productivity of the british worker.

Also Smith knew about the interconnected global village. He noted that the production of the mines in Chile affected the price of copper in Japan despite the fact that Spain forbad the export of the metal and Japan forbad trade in general. And that there was no trade across the pacific from Chile to Japan.

The issue of Labor theory of value is it made value dependent on the work involved. Value, unfortunately, is entirely subjective and made the value of work dependent on the whims of politicians and philosophers.

Smith's point is that since value comes from work depriving a person from work is as much theft as if you had put a knife to his throat and stole the money directly. (Which argument is still a part of the discussion on the minimum wage.)

 

[Baruch Menachem]

uh huh, and this is a piece of paper & a rock.....>
personally, i find each a tad chewy

perhaps you could enlighten us on their worth?

The value of an item is what you can use it for. The piece of paper can be traded in for two candy bars, a pint of milk, 12 oz of soda or whatever. Or it can be given to a banker where it will breed.

The pretty rock is a pretty rock. It is a crystal form, which some folks think has medicinal properties. It also can be exchanged for various things, including pieces of paper and other cool stuff.

The value of each is dependent on the needs of the folks holding on to them. As you note, you can't eat either one, but you can trade them for things you can eat, wear, use to light fires or clean your backside.

 

[expat_panama]

...The price of coal in Newcastle in Smith's day included not just the labor of the miner, but the intellect of the engineer who built the windlass, the guys who ran the pumps (who never dug a single lump of coal themselves, but without whom the guys deep in the mine would die) and the value of labor stored as capital which did all financing of a mine for the 40 feet or so of useless soil before you got to pay dirt...

Smith wrote 'Wealth' from 1766 to 1776 when coal production grew as it had for centuries --doubling every 50 years. It wasn't until the 1800's that coal engineering tech w/ capital improvements saw production increase five-fold in 50 years. (More at Coal Mines in the Industrial Revolution)

...Smith's point is that since value comes from work depriving a person from work is as much theft as if you had put a knife to his throat and stole the money directly. (Which argument is still a part of the discussion on the minimum wage.)

These threads often see arguments for min. wages that contradict historical fact.