Money & Wealth – Adam Smith

Which is more valuable, water or diamonds? Most would say water in that it is needed to sustain life, though what if you had enough water to sustain all living beings on Earth, now you opt for diamonds. What if you had equal and plentiful amounts of both water and diamonds? A person would not evaluate each as a absolute category. It depends on your own situation, as a person drowning would not opt for more water, no more than a person dying of thirst opt for diamonds. The values of an individual are unique to each person, I have my own value preferences and you have your own value preferences. These marginal values are a person’s subjective valuation of a marginal unit called marginal utility. Marginal means additional, would I prefer to consume an additional unit of water or diamonds. I choose between expected costs and benefits or expected marginal costs and marginal benefits. The French in 1700s, a decade before the Wealth of Nations by Adam Smith, Cantillon had demonstrated the vital role of entrepreneurs. Adam Smith did not consider marginal utility and viewed water to have high value in use but low value in trade, where diamonds had low value in use but high value in trade.

“water, in spite of its necessity and the multitude of pleasures which it provides for man, is not regarded as a precious thing in a well watered country; man does not seek to gain its possession since the abundance of this element allows him to find it all around him.”  (Turgot in Rothbard, 2010)

The most efficient method for the allocation of scarce goods is to the most willing to pay as they value the good at their highest marginal use. This may sound unfair and materialistic as you say only the rich would benefit, in comparison to equal distribution where the government would ration goods equally throughout society. Though, it may seem this way it is not, take the example of diabetics and their demand for insulin, how is it that the majority of diabetics are able to access insulin, why of course it is the marvel of the market place. Where insulin is made widely accessible at affordable prices, where without the method of allocating goods to the most willing to pay diabetics would not be able to access insulin. In an equal society as there would not be enough to go around, the price would increase rapidly, and people would not be able to seek more suitable substitutes. There are substitutes for almost everything, say healthy lifestyle and diet changes could be an alternative good. Is feeding the poor an action with a cost and a benefit? Is feeding the poor an action with a cost and a benefit? The benefit is feeding the poor and the cost or trade-off is of other alternative opportunities.

“The word value… has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power in purchasing other goods which the possession of that object conveys. The one may be called ‘value in use’: the other ‘value in exchange’. The things which have the greatest value in use have frequently little or no value in exchange; and on the contrary, those which have the greatest value in exchange have frequently little or no value in use.” (Smith in Rothbard, 2010)

Market prices also signal people to make trade-offs among alternative opportunities. One can only choose when they act and represents a subjective personal value preference. People can also decide to consume now or in the future demonstrating a time preference and not just a preference of alternative goods. Confirming that material wealth is a false statement. In that wealth is whatever people value. Adam Smith was wrong in that he blamed mercantilism for confusing wealth and money, as how could a merchant go about trade if they did not understand that demand for a good represented consumers value preferences, one would simply go out of business. And if issued by the government people would starve as private and public property rights are blurred no one would produce. Money is distinct from wealth in that wealth is a persons value preferences and money is a yardstick to measure prices. Money helps people to increase wealth of value preference as money allows people to calculate expected costs and benefits.


Resources

Rothbard, M. (2010). An Austrian Perspective on The History of Economic Thought (Economic Thought Before Adam Smith). Ludwig von Mises Institute. Retrieved [16/03/2016] from <https://mises.org/library/austrian-perspective-history-economic-thought>.

Featured image supplied from Unsplash.

Copyright © 2016 Zoë-Marie Beesley

Creative Commons License Licensed under a Creative Commons Attribution 4.0 International License.

Advertisements