The Online Library of Liberty

A project of Liberty Fund, Inc.

• Preface.
• Advertisement.
• Letters, &c.
• Letter I.
• Letter II.
• Letter III.
• Letter IV.
• Letter V.
• Advertisement.
• Catechism of Political Economy; Or, Familiar Conversations On the Manner In Which Wealth Is Produced, Distributed, and Consumed.
• Chapter the First.: On the Composition of Wealth and the Use of Money.
• Chapter II.: On the Utility and Value of Products.
• Chapter III.: On Production.
• Chapter IV.: On the Operations Common to All the Species of Industry.
• Chapter V.: On Capital and Land.
• Chapter VI.: On the Formation of Capital.
• Chapter VII.: On the Manner In Which the Value of Products Is Established, and of the Charges of Production.
• Chapter VIII.: On the Profits of Industry, Capital, and Land; That Is, Income.
• Chapter IX.: On Wages, Interest, and Rent.
• Chapter X.: On Incomes Founded On Immaterial Products.
• Chapter XI.: On Consumption In General.
• Chapter XII.: On Private Consumption.
• Chapter XIII.: On Public Consumption.
• Chapter XIV.: On Public Property and Taxes.
• Chapter XV.: On Public Loans.
• Chapter XVI.: On Property, and the Nature of Riches.
• Chapter XVII.: On the Real and Nominal Price.
• Chapter XVIII.: On Money.
• Chapter XIX.: On Signs Representing Money.
• Chapter XX.: On Markets.
• Chapter XXI.: On Regulations Or Restraints of Industry.
• Chapter XXII.: On Importations, Duties, and Prohibitions.
• Chapter XXIII.: On Exportation.
• Chapter XXIV.: On Population.
• Chapter XXV.: On Colonies.
• Erratum.

CHAPTER XVII.

On the Real and Nominal Price.

Give me some just ideas on the price of things?

If you wish to form just ideas on this subject you must never confound the nominal price with the real price of things.

What do you call the nominal price of things?

The price we pay for a thing in money or in coin.

What do you call its real price?

The value we have given to obtain the money with which we purchase this thing.

Give me an example.

A potter is in want of a loaf of bread, which sells for a shilling: he is obliged, in order to obtain it, to sell a vase which is worth a shilling. If the price of the loaf should rise to two shillings; and if the potter is obliged to sell two vases in order to obtain these two shillings, which he must pay for the loaf, the dearness of the bread is real. If the potter can obtain these two shillings by the sale of a single vase, the dearness of the bread is only nominal. He has in both cases exchanged only one vase against one loaf, whatever may have been the denomination of the intermediate value. It is the value of the money which is depreciated, that of the bread has remained the same.

Is it not a real dearness to a man whose income arises from lands which are let, or from a capital lent at interest, when the loaf has risen from one to two shillings?

No: that which is real is the depreciation which has taken place in the value of the merchandise in which his income is stipulated to be paid: that is, in the fall of the money. He who pays the income, by acquiring at less expense this merchandise, gains in this case what the other loses.

You have said that if, when I am obliged to give two shillings to buy a loaf, I am able to obtain these two shillings, on the same terms that I before obtained one, the loaf has not become dearer; but if to obtain two shillings, that is, the price of one loaf, I am obliged to give two vases instead of one, then the bread will have really become dearer?

No; not if the vases as well as the money have fallen to half their value.

How can I tell whether they have fallen to half their value or not?

They have fallen if they can be obtained for half the expenses of production: that is, if means have been found to create, at the same charge of production (which consists as we know of the workmanship, interest of capital and profit) two vases instead of one.

It is then the lowering the charges of production which causes the real fall in the price of products?

Just so. Then whatever may be the value with which a product is purchased, this product, which has fallen one half, is obtained for one half less expense of production.

Explain that by an example.

If, by means of a knitting frame, I can make a pair of stockings for three shillings, instead of expending six shillings on them, he who grows wheat can obtain a pair of stockings for one half the quantity of wheat which he had before been accustomed to give for them. That is, if he was before obliged to sell thirty-six pounds of wheat in order to obtain a pair of stockings, he would now sell but eighteen. But the eighteen pounds have required on his part only one half the expenses of production which the thirty-six pounds would have required.

It is the same whatever is the production with which we are occupied. It may be said, that when an article really falls in price, not only those who produce it, but every body else, obtains it at the price of the reduced charge of production.

You have said besides that the riches of society is composed of the sum total of the values which it possesses: it appears to me to follow, that the fall of a proauct, stockings for example, by diminishing the sum of the values belonging to society, diminishes the mass of its riches.

The sum of the riches of society does not fall on that account. Two pairs of stockings are produced instead of one; and two pairs at three shillings are worth as much as one pair at six shillings. The income of society remains the same, for the maker gains as much on two pairs at three shillings, as he did on one pair at six shillings.

But, when the income remains the same, and the products fall, the society is really enriched. If the same fall takes place on all products at once, which is not absolutely impossible, society by obtaining all the objects of its consumption at half price, without having lost any part of its income, would really be twice as rich as before, and could buy twice as many things.

This does not generally happen, but it has happened to a great number of products, which have fallen from the price they were formerly at, some a tenth, some a fourth, a half, three-fourths, as silver, and even in a greater proportion as silks, and probably many other articles.

To what cause is that to be attributed?

To many causes: but principally to the progress of intelligence and industry. It is to their progress that we owe, both the discovery of countries in which there is a greater abundance of products, and also a means of transporting them less hazardous and more economical. To that progress also we are indebted for processes more simple and more expeditious, the use of machinery, and in general a better adaptation of the productive faculties of nature.

Are there any products which have really become dearer?

There are some, but very few, and only those the demand for which has increased in consequence of the progress of civilization, without the means of production having increased in the same proportion. Such as butchers’ meat and poultry, and almost all the useful animals which are raised at less expense in less civilized countries.

Are there not variations in value which are not the consequence of the charges of production?

The errors, the fears or the passions of men, or unforeseen events, cause disorder and confusion in values which are merely relative: that is, when any merchandise rises or falls with respect to others, in consequence of circumstances foreign to its production. Late frosts increase the price of the last years wines, whatever may have been the charges of their production.

Does such a dearness increase the national wealth?

No: for in exchanging another product for one which has become dearer, one must give more to receive less: he who buys, loses on his merchandise, precisely as much as the seller gains on his goods.

When the wine doubles its price, he, who, to purchase a piece of wine is obliged to sell six bushels of wheat instead of three, which should have purchased a piece of wine is poorer by all that the wine merchant is richer.

Thus these kinds of variation, which sometimes overturn private fortunes, do not affect the general riches* .

[* ]The changes in values which take from a man that property which he did not deserve to lose to give it to another who did not deserve to gain it, are nevertheless mischievous to the general prosperity. They inflict more evil on him who loses than they confer benefit on him who gains: they disappoint the wisest calculations; they discourage the most useful speculations, they divert capitals which were in full productive activity, &c. &c.