Friday, September 05, 2008

Gold Was Not Wealth to Adam Smith

Al Robinson, 5 September, The Daily Reckoning (Australia) writes “Gold is the Oldest Form of Wealth” (HERE):

Well, gold has meant 'wealth' for ages. Before the economic revolution in the 18th Century, the two ideas were inseparable. If you wanted wheat you went and found some wheat. If you wanted wealth you went and found some gold.
This was before economists began to toss around other ideas of wealth. The new ideas varied in quality. Adam Smith said a man's real wealth came from accumulating capital and investing it. Karl Marx said capitalist wealth only ever came at the expense of workers. Craig James said shares always go up, so buy them and you'll be wealthy.

Some ideas are better than others. But before Smith's idea, gold held sway as wealth. Everyone agreed on this. Even Isaac Newton was a part-time alchemist. Between inventing calculus and gravity, he'd pop out to the back shed to whip up a batch of gold.

That's the funny thing about alchemy though. What if you actually could make gold from other metals? Gold would be worth about the same as those other metals. Basically worthless. It wouldn't be rare any more. It wouldn't be precious.
Yet today we have an economic system founded on this fallacy. Paper money is 'wealth' backed by the government. The government employs alchemists like Glenn Stevens and Ben Bernanke to create more money. And that means the whole stock of money is worth less.

Meanwhile, no-one's printing gold yet. We've tried every combination

Al Robinson’s views on gold being ‘wealth’ – a common enough belief – are his entitlement, as are the equally common belief that currency notes are wealth, but this was not the case with Adam Smith (as for Karl Marx, his notions were ideological – exploitation was not invented by capitalism, nor in the case of the Soviet Union did exploitation end with socialism).

Adam Smith never said that “a man's real wealth came from accumulating capital and investing it” in relaiton to gold.

Wealth for Smith was defined precisely as the “annual output of the necessaries, conveniences, and amusements of life”. Spain owned far more gold and silver than Britain – and the rest of Europe – but it was poorer than Britain or France, or what became The Netherlands – its GDP (in modern terms) was smaller than its European rivals.

Smith said that “a man's revenue came from accumulating capital and investing it” and, depending on whether he applied his revenue to productive (frugal) or unproductive (prodigal) employment he would become richer or poorer. Prodigality, and failed enterprises, or an iron box full of gold under the bed, was no route to riches.

The pursuit of gold, silver, and precious stones was illusory wealth – the successful pirates who buried their treasure were still poor until they swapped their gold, etc., for the ‘necessaries, conveniences, and amusements of life’ (depleting their future claims); gold bars in a desert will not quench thirst, nor did all the gold in Pompeii keep the hot ash from embalming anybody it touched, or stem the icy waters of the North Atlantic from flushing through the Titanic. ‘A horse, a Horse; my kingdom for a horse’ cries a king as the enemy swept on towards him.

Gold, and printed currency, is a store of future claims on the real wealth expressed as the output of economic resources. If there are fewer resources available from a real economy, gold will increase the prices of the remaining resources. Whether an economy stores gold and silver or consumes real resources (the necessaries, conveniences, and amusements of life) determines which is the wealthier.

Now Al Robinson is in the business of talking up the value of hoarding gold (what it can exchange for) and, like all other economic goods, there would be excess demand for gold if it was at zero price, but without markets in all real goods (those with prices), a particular good is worth whatever it will exchange for, including both what it may exchange for a particular ‘monetised’ good like gold or a printed amount on a carefully patterned piece of chemically treated paper.

Chasing gold or whatever in a world of limited real goods is making a fetish out of something that may be perfectly useless. For Al Robinson, his particular fetish has ‘value’ only because the world, including Australia, is awash with read goods. It may not buy him survival among the Yanomamö Amazionians.


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