An observation: Despite the common claim that economics is about money, it’s not until Book 2, Chapter 2 of Wealth of Nations that we get a chapter dedicated to money. Maybe there’s other stuff that matters too? (II.ii) #WealthOfTweets#SmithTweets
#AdamSmith kicks it off by comparing individual estates to nations. Individual estates have “gross rent” which is what is paid to the landlord & “neat (net) rent” which is what remains once expenses and circulating capital are deducted. (II.ii.1–4) #WealthOfTweets#SmithTweets
The gross revenue of a nation is ALL our grosses combined. The neat (net) is all our expenses and circulating capital deducted from the gross. The real wealth of nations (That has a ring to it!) is in proportion to the neat, not the gross. (II.ii.5) #WealthOfTweets#SmithTweets
You don’t get to count the stuff you use to maintain your fixed capital (machines, etc.) as part of the net either. But that’s okay because properly maintained machinery → more production. (Is anyone else having flashbacks to shop class?) (II.ii.6) #WealthOfTweets#SmithTweets
This is why innovation is so important, though! Better, simpler, cheaper machinery enables more productivity with less loss to net revenue. (SmithTweets were a lot more expensive when we had to hand set the type, you know.) (II.ii.7) #WealthOfTweets#SmithTweets
You don’t have to deduct all the expenses of maintaining circulating capital, though, because you can move it into the stock that supports society if you’re not circulating it to make a profit at the moment. (II.ii.9) #WealthOfTweets#SmithTweets
Money (💰finally!💰) is the only part of circulating capital whose maintenance expenses have to be deducted from the net revenue of the nation. (II.ii.11) #WealthOfTweets#SmithTweets
Why? Remember: in this section, money isn’t #bitcoin or #EFT or even paper. It’s coin. And so money is sort of like a machine. You have to “collect and support it.” (II.ii.13) #WealthOfTweets#SmithTweets
Smith does understand and know about paper money. He’s not a moron. But he’s clearly talking about coins here. (II.ii.13) #WealthOfTweets#SmithTweets
He's living in a time where money still means coin. You have to specify if you mean paper money. Later, you can just say "money" and mean bills. Our grandkids will say "money" & mean #bitcoin and #EFT. It's like phone/wall phone/cell phone. (II.ii.13) #WealthOfTweets#SmithTweets
Anyway. The point is that our wealth is about the goods that circulate, not about the money that helps them circulate. Money is just the wheel that makes them easier to move. (II.ii.14) #WealthOfTweets#SmithTweets
Sometimes we conflate those, though, “when we talk of any particular sum of money, sometimes we mean nothing but the metal pieces of which it is composed and sometimes we include in our meaning…the power of purchasing.”(II.ii.16) #WealthOfTweets#SmithTweets
So what your pay is worth can mean both “The physical money” or “What you can buy with it.” The ambiguity irritates Smith because he is the sort of person who spends fifty pages trying to clarify it. (II.ii.15–17) #WealthOfTweets#SmithTweets
So, we don't know if you know this, but if you’re paid in paper instead of coin, the value of your pay is NOT the trivial value of the paper. It’s the value of what you can BUY with it. (II.ii.19) #WealthOfTweets#SmithTweets
OBVIOUSLY, right? This is such a hard concept for modern people to talk about because, for us, of COURSE the value of paper money isn’t the value of the paper and ink! But it was a major mental shift in the 18th century. (II.ii.19–21) #WealthOfTweets#SmithTweets
Imagine being the first person who was expected to take a piece of paper instead of literal gold and silver! (II.ii.19–21) #WealthOfTweets#SmithTweets
This all cashes out (ha!) to mean that the wealth of a nation is NOT about the amount of money circulating. That's only important to the amount of economic activity it can support. Wealth is a much bigger issue. (II.ii.22) #WealthOfTweets#SmithTweets
Coins pass from person to person, and the same coins are used to purchase goods over and over and over. National wealth does not equal national money supply. (II.ii.22) #WealthOfTweets#SmithTweets
Every time you decrease the costs of producing and maintaining money or machinery (because money’s like a machine) you increase purchasing power and we get wealthier. (II.ii.25) #WealthOfTweets#SmithTweets
Paper money is great because it’s a cheaper way to store purchasing power. It’s a less expensive machine than coins. (II.ii.26) #WealthOfTweets#SmithTweets
But you do have to be able to trust your banks and your bankers for paper money to function properly. (II.ii.28) #WealthOfTweets#SmithTweets
And...actually, Smith is about to talk about banks a lot. So, having established the role of money in the stock of a commercial society, let's leave it here for today. Tomorrow...banks with paper money: how do they work? (II.ii.29–fin) #WealthOfTweets#SmithTweets
The second half of #WealthOfNations Book 2, Chapter 2 is all about banks. Once you invent money, you have to have somewhere to put it, I suppose. #WealthOfTweets#SmithTweets
Banks. You give 'em paper money for the very first time and crazy things can happen! Like what, you ask? Oh, we're so glad you asked. (II.ii.29) #WealthOfTweets#SmithTweets
Or maybe...not so crazy? A lot of what Smith’s explaining here seems super obvious to us now—you can charge interest on paper money! Fractional reserve banking is a thing! Just like paper money, huge mental adjustments for the 18thC. (II.ii.29–30) #WealthOfTweets#SmithTweets
First! A quick review: without division of labor, every person must provide everything they need. No one accumulates or stores up stock. You do what you can with what you have when you have it. (II.intro.1) #WealthOfTweets#SmithTweets
But once the division of labor develops (remember, it’s the secret sauce!) we have so many wants that we can’t provide for them all ourselves. Most of them are provided for by others, and we purchase their labor with our own. (II.intro.2) #WealthOfTweets#SmithTweets
Improvements make things cheaper, but they also raise the rent of land, which makes landlords richer, and lets them purchase more labor. Neglect and decay, though, make everyone poorer. (1.xi.p.2–6) #WealthOfTweets#SmithTweets
Smith says landowners won't mislead the public about what’s in the public interest, because their interest aligns with the public interest. Also they're lazy and kind of dumb, because they don't have to do anything to make their money. (I.xi.p.8) #WealthOfTweets#SmithTweets
Improvements make things cheaper—better machinery, higher skilled labor, better division of labor all drive prices down. (1.xi.o.1) #WealthOfTweets#SmithTweets
OMG, it’s the Conclusion of the Digression concerning the Variations in the Value of Silver!! (with bonus digression about 🐄🐄💩 that digressed from the digression on silver.) (I.xi.n) #WealthOfTweets#SmithTweets
We have to stop thinking about national wealth in terms of the amount of gold and silver we have. Precious metals are just one kind of commodity. (I.xi.n.1) #WealthOfTweets#SmithTweets
(And if the past 65 pages didn't convince you, says Smith, you just wait til Book IV.) (I.xi.n.1) #WealthOfTweets#SmithTweets
The third sort of rude produce is the kind where human attempts to cultivate and improve it produce unpredictable results. Examples include wool and animal hides. (I.xi.m.1) #WealthOfTweets#SmithTweets
It seems like the price of these should rise right along with the price of meat, but Smith says “Not so fast!” (I.xi.m.3) #WealthOfTweets#SmithTweets