Explaining Adam Smith's Digression on Silver

How it Leads to an Alternative to GDP

Overhauled Feb 14, 2021

The Digression on the Value of Silver in Chapter 11 of Book 1 is one of thelongest and most difficult chaptersin Adam Smith's The Wealth of Nations. I delayed publishing Book 1 of mysimplified version of The Wealth of Nationsand published Books 2 & 3 instead because paraphrasing the Digression in Book 1 would require some time and effort.

The first step is to organize the Digression which starts at Paragraph 96 and ends at Paragraph 239. For reference, I used both the 'capitalist'econlib version and the 'socialist'marxist.org version

Edit Jan 2020: I found critical mistakes in both versions above, so I would rather direct people to theGutenberg version

The first step is to organize the digression into topics as below:

  • Periods
    • First Period
    • Second Period
    • Third Period
      • Growth of Silver Demand
        • Market of Europe
        • Market of America
        • Market of Asia
  • Variations In Values Of Gold And Silver
    • Grounds Of The Suspicion That The Value Of Silver Still Continues To Decrease
  • Effects Of The Progress Of Improvement on Three Sorts Of Rude Produce
    • First Sort
    • Second Sort
    • Third Sort
  • Conclusion of Digression

The second step is to explain why Smith arranged his topics in that order:

Smith wanted to prove that gold and silver pricesare not correlatedwith the wealth or poverty of society. Instead, he wanted to prove that it isthe money price of some rude produce relative to the main food grain (such as wheat), which is the clearest indicator of a society's wealth or poverty.

To do this, he had to write about:

  • the price of wheat (rude produce) in three periods
  • the price of silver in the world and its ratio to gold
  • the nature of the price of rude produce

In the same way, we want to objectively prove that GDP (measured in dollars) isnot a proof of the wealth of a country.Instead it is the collective grain value, as purchasing power, that a society needs in order to gain possession of all the cars, iPhones, bus tickets, real estate, etc in that society for a certain timespan.

Thus, we follow Smith's methodology in getting the grain values of key rude produce to easily say whether the US or China or the EU is really wealthier and which country's wealth is based more on real value, instead of fake or nominal value. Who wouldn't want to live in a country that has more real value and is more resistant to economic crises?

The value of the Digression on Silver for SORAnomics

Finding an easy proof of a country's prosperity may be useful to the public.

Wealth of Nations Book 1, Chapter 11, Digression

SORAnomics usestwo measures combined to replace GDP as a measure of a country's wealth:

  • Purchasing Power (Supply Side)
  • Ratio of commodities to grain orGrain index(Demand Side)

Purchasing poweris the net revenue from GDP or gross revenue of a society. It is made up of the net profits that go to the wallets or vaults of business owners, and wages that goes to the wallets or bags of employees. Unlike the GDP of Economics which only measures in currency, the purchasing power of SORAnomics is measured in both money and non-money as grains.

The expenses for interest payments, fees, etc. are deducted from the computation of net revenue. For example, the GDP orgross revenueof Singapore is nominally $323.9 b. Its purchasing power would be the GDP minus tax payments to government and the cost of money used up in producing that GDP.

This cost of money is theexpense in financing the moneyto be used to circulate value in any economy. In order to buy bread, I have to work for money and then use the money to buy bread. If my work could be bartered directly for bread,then money would not be neededand all the bankers, financiers, ATMs, bank branches, etc could be freed up and made to do other things useful for society.

The riches of a country does not consist in the amount of money used to circulate commerce, but in the great abundance of life's necessaries. We would greatly increase our country's wealth if we could find a way to send the half of our money abroad to be converted into goods, and supply the channel of circulation at home, at the same time.

Lectures on Jurisprudence Chapter 9

There are three ways to arrive at Purchasing Power

  1. Directlyfrom receipts of thefair tax system  or by getting the values from fulfilled social contracts in the SORA system. This is the automated way
  2. Top Downby computing it out of the GDP. This technique will likely be used in the mainstream
  3. Bottom upby estimating the changes in the purchases of a sample population or sector. This will be done through a suvrvey of what people bought this month compared to last month and will likely be used by the societies that cannot automate. For example:
    Individual PP= Quantity and Quality of Goods and Services that can be bought by a person, pegged in either gold or grain
    National PP= Summation of Individual PP
    National PP per capita= National PP divided by population

The money which circulates the society's whole revenue among its membersmakes no part of that revenue. The great wheel of circulation is different from the goods which are circulated through it. The society's revenue is in those goods, not in the wheel that circulates them. In computing any society's gross or net revenue,we must always deduct the whole value of moneyfrom the whole annual circulation of money and goods.The value of money can never make a part of the society's gross or net revenue

Wealth of Nations Book 2

The Grain index, as stated in the Digression is theratio of the price of commodities to the price of grain.  For example:

  • If a kilo of rice in the Philippines $0.75 and a kilo of chicken is $2.50 then 1 rice : 0.33 chicken.
  • If a kilo of rice in Vietnam is $0.50 and chicken is $5, then 1 rice : 0.10 chicken.
1 kg Rice can buy:330 grams chicken100 grams chicken
1 kg Chicken can buy:3.33 kg Rice10 kg Rice

So it means that chicken is really cheaper in the Philippines, meaning that while Vietnamese enjoy cheaper rice, Filipinos enjoy luxuries better (to Smith, meat is a luxury). This is consistent if we replace chickens with cars. A Toyota Vios is 16,000 kg rice in the Philippines, but 44,250 kg rice in Vietnam. This would then guide people on which cities or countries they might want to move to, in order to match their social status, fulfilling the requirement of Adam Smith that our model must have a practical use. The rich could use this to justify moving to Singapore, while the lower classes might use it to decide to live in the Philippines or Vietnam.

$100,345 (1st place, 13x Vietnam) $8,936 (2nd place, 1.19x Vietnam) $7,510 (3rd place)
75 US cents or 1.1 SGD (2nd place or 1.5x Vietnam) 80 US cents or 40 PHP (3rd or 1.6x Vietnam) 50 US cents or 12k VND (1st place or cheapest)
4.22 kg rice (2nd place or 1.3x Philippines) 3.25 kg rice (1st place) 8.33 kg rice (3rd place or 2.56x Philippines)
73,636 kg rice (3rd place or 4.46x Philippines) 16,500 kg rice (1st place) 44,250 kg rice (2nd place or 2.68x Philippines)
206,000 kg rice (2nd place or 2.25x Philippines) 91,250 kg rice (1st place) 336,000 kg rice (3rd place or 3.7x Philippines)

The amount of the metal pieces which circulate in any country must always be of much less value than the worth of that money. But the power of purchasing or the goods which can be bought with that money, must always be the same value with that money. The revenue of those who receive that money must be of the same value with the money they receive. That revenue consists in thepower of purchasing or the goods which can be bought. It cannot consist in those metal pieces of which the amount is so much inferior to its value.

Simple Wealth of Nations, Book 2

This model can of course be used for policymaking. Both Economics and SORAnomics will conclude that Singapore is the most prosperous country and Vietnam the least prosperous of the three, from the supply side. But from the demand side, SORAnomics can reveal much more info:

  • The poor of Vietnam are 'wealthier' than the poor of the Philippines (which is really the poorest)
  • The middle class of Vietnam is the poorest of the three
  • The rich of the Philippines are more prosperous than that of Singapore
  • Because the poor benefit in Vietnam, the policies are likely pro-poor and anti-rich, consistent with Communism
  • Because the rich benefit in the Philippines, the policies are likely pro-rich and anti-poor, consistent with oligarchy

So by combining supply side GDP or Purchasing Power and demand side Grain index, we can get a more granular picture of the real economic situation of a society. By plotting the ratios of prices of different products and services relative to the Grain index annually, we can even determine theeconomic direction of a society and can better iron out kinks in a society's supply and demand. We can even use the data to plot exactlywhen the grain ratios started to change to then pinpoint specific laws that caused the problem or improvement. We can trace objectively when the oligarchy started in the Philippines and when Vietnam became anti-rich, by getting their historical annual SORAnomic Purchasing Power even without any knowledge of historical events -- this is what our machine learning is supposed to do.


The Big Mac index has some of the basic ideas of Smith's commodity-based valuation system, explained in the Digression, as it uses areal, useful thing to valuate a mere piece of paper with a number written on it.

In contrast, modern Economics measures the supply-side asgross supply or GDP (Gross product), and measures demand-side as CPI or nominal consumer prices measured in currency. This makes it difficult to value goods and services during bubbles and hyperinflation, causing a disruption in the supply chain like what happened in Zimbabwe. If a financial crisis hits a SORA system, the valuation can merely switch to the Grain index to keep the supply chain humming.

Under Economics, a country can theoretically have a single giant corporation exporting everything, having huge GDP while its workers starve to produce those exports at low cost. A GDP standard would still rate the starving country aswealthy. Our dual system, on the other hand, would properly expose the real poverty hidden by the nominal wealth just as it exposed the hiddenmiddle-class poverty in Vietnam and thereal poverty in the Philippines. In addition, our dual index eliminates the need for complicated subjective factors that are present in other indices like theHuman Development Index,Happy Planet Index,Better Life Index, etc. The subjetiveness is only in what items are pegged aganst the Grain index.

Economics

SORAnomics

GDP as Gross Domestic Product or the gross sales in a countryPurchasing Power as the net revenue in a country after taxes, or whatever goes to the wallets of employees and business owners.
Consumer Price Index or prices of year X relative to year YGrain Index or prices of different goods and services relative to grain. For basics, it is fuel, electricity, water, rent, basic medical services and common non-essentials (meat, milk). For luxuries, cars, condominiums, etc.
Arbitrary, depending on think tank (Human Development index, Happiness index, etc)Not-so-arbitrary. Measures are integrated in the items included in the Grain index. For example, a rich country might include prime beef and pork in the index, but a vegetarian country might not. In general, meat is included since Smith included it in his digression.
Difficult, needs to get accounting of all output, and various data on well-being which are difficult to getEasy, Survey the purchases done by a sample population, and get the prices of benchmark commmodities.