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Book 1, Chapter 3
Themes
Key
LitCharts assigns a color and icon to each theme in The Wealth of Nations, which you can use to track the themes throughout the work.
Labor, Markets, and Growth
Capital Accumulation and Investment
Institutions and Good Governance
Mercantilism and Free Trade
Money and Banking
Summary
Analysis
Most people obtain far more through trade than their own labor. When the division of labor is first developing, people start bartering, but they often find that they don’t need what other people have to offer in exchange. So they start trading for some commonly-used commodity (like cattle, salt, sugar, and so on). Eventually, most societies have settled on metals, which are nonperishable and easy to divide up or combine together. They generally started with metal bars, then started stamping them to guarantee their weight quality, and finally created coins. In Smith’s time, different kings, nations, and markets all minted their own coins according to their own local measurement systems. By changing the amount of metal in each coin, or coin debasing, sovereigns paid off their debts for less than they really owed.
The next portion of Book I looks at the specific dynamics of market exchange: how supply, demand, labor, and prices interact to create a complex national economy. Smith’s analysis of money—commodities whose primary functions are to store wealth and get exchanged for other commodities—is the basis for his critique of mercantilism and largely explains why his work became so wildly popular during his era. But many of his conclusions are no longer relevant in today’s economy, which is based on fiat (government-backed) money instead of precious metals like gold and silver. Nevertheless, many of his basic insights still do apply, and grasping the properties of a money system built on precious metals is essential to understanding the last several centuries of global economic history.
Themes
Money is now “the universal instrument of commerce.” When people speak of the value of goods, they really mean two separate things: the “value in use” and the “value in exchange.” These are often very different—for instance, water is extremely useful but has little exchange-value, while a diamond has little use-value but can be exchanged for a significant amount of other products. In the next three chapters, Smith will try to show what determines commodities’ real price (or exchange-value), what makes up this price, and why market prices sometimes rise above or sink below it.
The relationship between use-value and exchange-value is the basis for market demand. We don’t need the economy to make a lot of things that are already naturally abundant (like water), or things that are very rare and valuable but serve no practical purpose (like diamond jewelry). Rather, human economic activity tends to focus on producing things that are useful but difficult to come by.
Themes
