Markets, Productivity, and Happiness in a Historical Perspective

Adam Smith’s Digression on Silver: the centerpiece of the Wealth of Nations

Paganelli Maria Pia , Trinity University

I suggest that Smith’s “Digression on Silver” should be read as his most powerful argument against mercantilism in the Wealth of Nations. For mercantilists money is wealth and they demonstrate this by showing that when money increased, prices increased, and wealth increased. But Smith instead shows that two things happened at the same time: a change in institutions that allowed wealth to grow, causing real prices to decrease, and simultaneously an increase in the quantity of silver that caused an increase in nominal prices. Overall, the nominal increase was larger than the real decrease in prices. Mercantilists focused on nominal prices, attributing a causal relation between the decrease in the value of silver and an increase in wealth. Smith shows that correlation is not causation, but just the coincidence of two simultaneous and independent events. The Digression on Silver leaves mercantilists with nothing: what seems to be is not what is. Money may seem to be wealth, but it is not.


Keywords: Adam Smith, Digression on Silver, Mercantilism

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