chapter 5

Core Ideas and Summary

I. Labor is the only true measure of a commodity’s real value

• The real value of any commodity originates from the labor required to obtain it—the amount of toil and trouble involved.

• All wealth in the world was originally acquired through labor, not through gold or silver.

• Ultimately, a commodity’s value depends on the quantity of labor it can purchase or command.

II. The difference between Real Price and Nominal Price

• The Real Price, not the nominal price, determines the true wealth or poverty of the laborer.

III. Why do people prefer money as a measure of value?

• Measuring value directly by labor is practically difficult because labor intensity, skill, and hardship are not easily quantifiable.

• Money becomes the practical measure because people are accustomed to trading goods using money.

• The value of money itself (like gold and silver) constantly fluctuates, making it suitable only as a short-term measure rather than a stable, precise, long-term standard.

Important points illustrated with examples in the text

① Wealth is power

• Wealth provides a power to command or purchase the labor of others.

• A wealthy person can command greater labor output or services from others, thus equating wealth to the power over others' labor.

② Variability of labor value

• The value of different types of labor can vary significantly depending on its difficulty and complexity.

• For example, an hour of skilled craftsmanship may surpass the value of several days of ordinary labor.

③ Fluctuation in gold and silver prices

• The value of gold and silver varies depending on the productivity of the mines.

• The discovery of mines in America in the 16th century drastically reduced the price of gold and silver in Europe (to about one-third of its previous value).

• Therefore, measuring commodity value in gold or silver is inherently unstable.

④ Long-term stability using grain instead of currency

• Long-term rents based on grain rather than money better retain their real value.

• Grain prices fluctuate less significantly over long periods compared to gold or silver, whose values fluctuate more due to factors like mining productivity.

Practical implications in daily life

• Personal finance decisions:

  • When purchasing goods, one should consider their real labor value, not merely their monetary cost.

  • When evaluating long-term investments (e.g., land or property), real value should be considered rather than nominal monetary values.

• Policy making:

  • Governments should differentiate between real value and nominal value in economic policymaking to prevent negative impacts from inflation and currency depreciation.

Simple modern interpretation and examples

• When you spend $10 on coffee, you are actually paying with your labor—the effort and time required to earn that $10 (real price).

• If your salary increases, but prices increase faster, your real income hasn't improved (gap between nominal price and real price).