The Wealth of Nations

Book 1, Chapter 5

the Real and Nominal Price of Commodities, or of their Price in Labor, and their Price in Money

Download Preston's Free Checklist

Download Preston's free checklist. His checklist was developed after spending countless hours studying billionaires like, Warren Buffett, Carl Icahn, and Ray Dalio. With his checklist, you can find safe picks that protect and grow your principal. Additionally, Preston reads a lot of books and writes an executive summary for each book he reads. If you download his checklist, you will be added to his monthly e-mail list where he sends his book summaries. There are never any advertisements...ever. Here's an example of one of Preston's executive summaries, based on the book written by Billionaire Charlies Koch.

Chapter 5 Summary

An individual’s wealth is determined by his capacity to provide for the wants and needs of human life. With division of labor, an individual man’s labor provides for only a portion of these wants and needs. As such, an individual’s wealth is in fact determined by the amount of labor he can afford to purchase.

The value of a commodity to a man who owns it but does not intend to use it himself is equal to the quantity of labor he can purchase with it. Labor is the real measure of the trading value of all commodities. The value of a commodity to a man who wants either to dispose of it or trade it for something else is the labor it can save him.

Although it is said that wealth is power, it does not follow that a wealthy individual is a powerful individual. He can acquire power by purchasing either labor or the commodities produced through labor. A man’s wealth is thus determined by the amount of other men’s labor he is able to purchase.

Although labor is the true determinant of a commodity’s value, it is in fact money which ultimately determines an item’s worth. This is because a commodity’s value is calculated according to its exchangeable value; i.e, the quantity of money—as opposed to the quantity of labor—for which it can be exchanged.

The amount of labor required to purchase a commodity remains constant, although this same amount of labor may purchase a greater or lesser quantity of commodities. It is the price of the commodity that changes, not the value of the labor. Though equal quantities of labor are always of equal value to the worker, to the person who employs him, the price of labor seems to vary, like that of all other things.

Labor, like all commodities, has a real and a nominal price. Its real price relates to the quantity of needs and wants it can purchase; its nominal price relates to the amount of money. The worker is rich or poor in proportion to the real—not the nominal—price of his labor.

The real price of a commodity will remain at the same value; the nominal price may vary considerably depending on fluctuations in the value of gold and silver.

Labor is the only universal measure of value, or the only standard by which we can compare the values of different commodities, at all times, and in all places.

Since it is the nominal or money price of goods that regulates almost anything to do with price, it is not surprising that this aspect is focused on more than real price.

It is difficult to accurately equate the price of labor. On the other hand, the price of a commodity such as corn, although not regularly recorded throughout history, is generally better known and frequently referred to by historians and other writers.

Commercial nations subsequently developed coins from the metals they used as currency: gold for larger payments, silver for purchases of moderate value, and copper, or some other coarse metal, for the smallest.

The Romans are said to have initially had nothing but copper money, which appears to have continued as the measure of value in that republic. The northern nations seem to have used silver from the outset, with silver coins still used in Britain in the time of the Saxons. There was little gold coined, however, until the time of Edward III, nor any copper till that of James I.

Next Chapter

Don't get lost in the Wall Street Fee-Factory

It's taken us a few years to finally figure out the right mix of tools that get results and save money. If you click on the toolbox, you'll see an article we wrote that lays-out the brokers and research tools we personally use.

Got Questions?

The Investor's PODcast

Get a free autographed copy of the Warren Buffett Accounting Book or Warren Buffett's Three Favorite Books. Simply submit your question to The Investor's PODcast. If your question gets answered on the air, the founders of this site, Preston Pysh and Stig Brodersen, will send you a free signed copy of their book!

The Warren Buffett Forum

Ask your question at the Buffett's Books money forum and interact with other smart investors like yourself. You won't find any day traders on this forum! Here's the link to The Warren Buffett Forum.