Front Page Titles (by Subject) [I.vii] CHAPTER VII: Of the natural and market Price of Commodities 1 - Glasgow Edition of the Works and Correspondence Vol. 2a An Inquiry Into the Nature and Causes of the Wealth of Nations, Vol. 1
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[I.vii] CHAPTER VII: Of the natural and market Price of Commodities 1 - Adam Smith, Glasgow Edition of the Works and Correspondence Vol. 2a An Inquiry Into the Nature and Causes of the Wealth of Nations, Vol. 1 
An Inquiry Into the Nature and Causes of the Wealth of Nations, Vol. I ed. R. H. Campbell and A. S. Skinner, vol. II of the Glasgow Edition of the Works and Correspondence of Adam Smith (Indianapolis: Liberty Fund, 1981).
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Of the natural and market Price of Commodities1
1There is in every society or neighbourhood an ordinary or average rate both of wages and profit in every different employment of labour and stock. This rate is naturally regulated, as I shall show hereafter,2 partly by the general circumstances of the society, their riches or poverty, their advancing, stationary, or declining condition; and partly by the particular nature of each employment.3
2There is likewise in every society or neighbourhood an ordinary or average rate of rent, which is regulated too, as I shall show hereafter,4 partly by the general circumstances of the society or neighbourhood in which the land is situated, and partly by the natural or improved fertility of the land.
3These ordinary or average rates may be called the natural rates of wages, profit, and rent, at the time and place in which they commonly prevail.
4When the price of any commodity is neither more nor less than what is sufficient to pay the rent of the land, the wages of the labour, and the profits of the stock employed in raising, preparing, and bringing it to market, according to their natural rates, the commodity is then sold for what may be called its natural price.5
5The commodity is then sold precisely for what it is worth, or for what it really costs the person who brings it to market; for though in common language what is called the prime cost of any commodity does not comprehend the profit of the person who is to sell it again, yet if he sells it at a price which does not allow him the ordinary rate of profit in his neighbourhood, he is evidently a loser by the trade; since by employing his stock in some other way he might have made that profit. His profit, besides, is his revenue, the proper fund of his subsistence. As, while he is preparing and bringing the goods to market, he advances to his workmen their wages, or their subsistence; so he advances to himself, in the same manner, his own subsistence, which is generally suitable to the profit which he may reasonably expect from the sale of his goods. Unless they yield him this profit, therefore, they do not repay him what they may very properly be said to have really cost him.
6Though the price, therefore, which leaves him this profit, is not always the lowest at which a dealer may sometimes sell his goods, it is the lowest at which he is likely to sell them for any considerable time; at least where there is perfect liberty,6 or where he may change his trade as often as he pleases.
7 The actual price at which any commodity is commonly sold is called its market price. It may either be above, or below, or exactly the same with its natural price.
8The market price of every particular commodity is regulated by the proportion between the quantity which is actually brought to market, and the demand of those who are willing to pay the natural price of the commodity, or the whole value of the rent, labour, and profit, which must be paid in order to bring it thither. Such people may be called the effectual demanders, and their demand the effectual demand;7 since it may be sufficient to effectuate the bringing of the commodity to market. It is different from the absolute demand. A very poor man may be said in some sense to have a demand for a coach and six; he might like to have it; but his demand is not an effectual demand, as the commodity can never be brought to market in order to satisfy it.8
9When the quantity of any commodity which is brought to market falls short of the effectual demand, all those who are willing to pay the whole value of the rent, wages, and profit, which must be paid in order to bring it thither, cannot be supplied with the quantity which they want. Rather than want it altogether, some of them will be willing to give more. A competition will immediately begin among them, and the market price will rise more or less above the natural price, according as aeithera the greatness of the deficiencyb, or the wealth and wanton luxury of the competitors, happen to animateb more or less the eagerness of cthec competition. dAmong competitors of equal wealth and luxury thed same deficiency will generally occasion a more or less eager competition, according as the acquisition of the commodity happens to be of more or less importance to etheme Hence the exorbitant price of the necessaries of life during the blockade of a town or in a famine.
10When the quantity brought to market exceeds the effectual demand, it cannot be all sold to those who are willing to pay the whole value of the rent, wages and profit, which must be paid in order to bring it thither. Some part must be sold to those who are willing to pay less, and the low price which they give for it must reduce the price of the whole. The market price will sink more or less below the natural price, according as the greatness of the excess increases more or less the competition of the sellers, or according as it happens to be more or less important to them to get immediately rid of the commodity. The same excess in the importation of perishable, will occasion a much greater competition than in that of durable commodities; in the importation of oranges, for example, than finf that of old iron.9
11When the quantity brought to market is just sufficient to supply the effectual demand and no more, the market price naturally comes to be either exactly, or as nearly as can be judged of, the same with the natural price. The whole quantity upon hand can be disposed of for this price, and cannot be disposed of for more. The competition of the different dealers obliges them all to accept of this price, but does not oblige them to accept of less.
12The quantity of every commodity brought to market naturally suits itself to the effectual demand. It is the interest of all those who employ their land, labour, or stock, in bringing any commodity to market, that the quantity never should exceed the effectual demand; and it is the interest of all other people that it never should fall short of gthat demandg .
13If at any time it exceeds the effectual demand, some of the component parts of its price must be paid below their natural rate. If it is rent, the interest of the landlords will immediately prompt them to withdraw a part of their land; and if it is wages or profit, the interest of the labourers in the one case, and of their employers in the other, will prompt them to withdraw a part of their labour or stock from this employment. The quantity brought to market will soon be no more than sufficient to supply the effectual demand. All the different parts of its price will rise to their natural rate, and the whole price to its natural price.
14If, on the contrary, the quantity brought to market should at any time fall short of the effectual demand, some of the component parts of its price must rise above their natural rate. If it is rent, the interest of all other landlords will naturally prompt them to prepare more land for the raising of this commodity; if it is wages or profit, the interest of all other labourers and dealers will soon prompt them to employ more labour and stock in preparing and bringing it to market. The quantity brought thither will soon be sufficient to supply the effectual demand. All the different parts of its price will soon sink to their natural rate, and the whole price to its natural price.
15The natural price, therefore, is, as it were, the central price, to which the prices of all commodities are continually gravitating.10 Different accidents may sometimes keep them suspended a good deal above it, and sometimes force them down even somewhat below it. But whatever may be the obstacles which hinder them from settling in this center of repose and continuance, they are constantly tending towards it.
16The whole quantity of industry annually employed in order to bring any commodity to market, naturally suits itself in this manner to the effectual demand. It naturally aims at bringing always that precise quantity thither which may be sufficient to supply, and no more than supply, that demand.
17But in some employments the same quantity of industry will in different years produce very different quantities of commodities; while in others it will produce always the same, or very nearly the same. The same number of labourers in husbandry will, in different years, produce very different quantities of corn, wine, oil, hops, &c. But the same number of spinners and weavers will every year produce the same or very nearly the same quantity of linen and woollen cloth. It is only the average produce of the one species of industry which can be suited in any respect to the effectual demand; and as its actual produce is frequently much greater and frequently much less than its average produce, the quantity of the commodities brought to market will sometimes exceed a good deal, and sometimes fall short a good deal of the effectual demand. Even though that demand therefore should continue always the same, their market price will be liable to great fluctuations, will sometimes fall a good deal below, and sometimes rise a good deal above their natural price. In the other species of industry, the produce of equal quantities of labour being always the same or very nearly the same, it can be more exactly suited to the effectual demand. While that demand continues the same, therefore, the market price of the commodities is likely to do so too, and to be either altogether, or as nearly as can be judged of, the same with the natural price. That the price of linen and woollen cloth is liable neither to such frequent nor to such great variations as the price of corn, every man’s experience will inform him. The price of the one species of commodities varies only with the variations in the demand: That of the other varies, not only with the variations in the demand, but with the much greater and more frequent variations in the quantity of what is brought to market in order to supply that demand.
18The occasional and temporary fluctuations in the market price of any commodity fall chiefly upon those parts of its price which resolve themselves into wages and profit. That part which resolves itself into rent is less affected by them. A rent certain in money is not in the least affected by them either in its rate or in its value. A rent which consists either in a certain proportion or in a certain quantity of the rude produce, is no doubt affected in its yearly value by all the occasional and temporary fluctuations in the market price of that rude produce: but it is seldom affected by them in its yearly rate. In settling the terms of the lease, the landlord and farmer endeavour, according to their best judgment, to adjust that rate, not to the temporary and occasional, but to the average and ordinary price of the produce.
19Such fluctuations affect both the value and the rate either of wages or of profit, according as the market happens to be either over–stocked or understocked with commodities or with labour; with work done, or with work to be done. A publick mourning raises the price of black cloth11 (with which the market is almost always under–stocked upon such occasions) and augments the profits of the merchants who possess any considerable quantity of it. It has no effect upon the wages of the weavers. The market is understocked with commodities, not with labour; with work done, not with work to be done. It raises the wages of journeymen taylors. The market is here under–stocked with labour. There is an effectual demand for hmoreh labour, for more work to be done than can be had. It sinks the price of coloured silks and cloths, and thereby reduces the profits of the merchants who have any considerable quantity of them upon hand. It sinks too the wages of the workmen employed in preparing such commodities, for which all demand is stopped for six months, perhaps for a twelvemonth. The market is here over–stocked both with commodities and with labour.
20But though the market price of every particular commodity is in this manner continually gravitating, if one may say so, towards the natural price, yet sometimes particular accidents, sometimes natural causes, and sometimes particular regulations of police, may, in many commodities, keep up the market price, for a long time together, a good deal above the natural price.12
21When by an increase in the effectual demand, the market price of some particular commodity happens to rise a good deal above the natural price, those who employ their stocks in supplying that market are generally careful to conceal this change. If it was commonly known, their great profit would tempt so many new rivals to employ their stocks in the same way, that, the effectual demand being fully supplied, the market price would soon be reduced to the natural price, and perhaps for some time even below it. If the market is at a great distance from the residence of those who supply it, they may sometimes be able to keep the secret for several years together, and may so long enjoy their extraordinary profits without any new rivals.13 Secrets of this kind, however, it must be acknowledged, can seldom be long kept; and the extraordinary profit can last very little longer than they are kept.
22Secrets in manufactures are capable of being longer kept than secrets in trade. A dyer who has found the means of producing a particular colour with materials which cost only half the price of those commonly made use of, may, with good management, enjoy the advantage of his discovery as long as he lives, and even leave it as a legacy to his posterity. His extraordinary gains arise from the high price which is paid for his private labour. They properly consist in the high wages of that labour. But as they are repeated upon every part of his stock, and as their whole amount bears, upon that account, a regular proportion to it, they are commonly considered as extraordinary profits of stock.
23Such enhancements of the market price are evidently the effects of particular accidents, of which, however, the operation may sometimes last for many years together.
24Some natural productions require such a singularity of soil and situation, that all the land in a great country, which is fit for producing them, may not be sufficient to supply the effectual demand. The whole quantity brought to market, therefore, may be disposed of to those who are willing to give more than what is sufficient to pay the rent of the land which produced them, together with the wages of the labour, and the profits of the stock which were employed in preparing and bringing them to market, according to their natural rates. Such commodities may continue ifor whole centuries togetheri to be sold at this high pricej ; and that part of it which resolves itself into the rent of land is in this case the part which is generally paid above its natural rate. The rent of the land which affords such singular and esteemed productions, like the rent of some vineyards in France of a peculiarly happy soil and situation, bears no regular proportion to the rent of other equally fertile and equally well–cultivated land in its neighbourhood.14 The wages of the labour and the profits of the stock employed in bringing such commodities to market, on the contrary, are seldom out of their natural proportion to those of the other employments of labour and stock in their neighbourhood.
25Such enhancements of the market price are evidently the effect of natural causes which may hinder the effectual demand from ever being fully supplied, and which may continue, therefore, to operate for ever.
26A monopoly granted either to an individual or to a trading company has the same effect as a secret in trade or manufactures. The monopolists, by keeping the market constantly under–stocked, by never fully supplying the effectual demand, sell their commodities much above the natural price, and raise their emoluments, whether they consist in wages or profit, greatly above their natural rate.15
27The price of monopoly is upon every occasion the highest which can be got. The natural price, or the price of free competition, on the contrary, is the lowest which can be taken, not upon every occasion, indeed, but for any considerable time together. The one is upon every occasion the highest which can be squeezed out of the buyers, or which, it is supposed, they will consent to give: The other is the lowest which the sellers can commonly afford to take, and at the same time continue their business.
28The exclusive privileges of corporations, statutes of apprenticeship, and all those laws which restrain, in particular employments, the competition to a smaller number than might otherwise go into them, have the same tendency, though in a less degree.16 They are a sort of enlarged monopolies, and may frequently, for ages together and in whole classes of employments, keep up the market price of particular commodities above the natural price, and maintain both the wages of the labour and the profits of the stock employed about them somewhat above their natural rate.
29Such enhancements of the market price may last as long as the regulations of police which give occasion to them.
30The market price of any particular commodity, though it may continue long above, can seldom continue long below its natural price. Whatever part of it was paid below the natural rate, the persons whose interest it affected would immediately feel the loss, and would immediately withdraw either so much land, or so much labour, or so much stock, from being employed about it, that the quantity brought to market would soon be no more than sufficient to supply the effectual demand. Its market price, therefore, would soon rise to the natural price. This at least would be the case where there was perfect liberty.17
31The same statutes of apprenticeship and other corporation laws indeed, which, when a manufacture is in prosperity, enable the workman to raise his wages a good deal above their natural rate, sometimes oblige him, when it decays, to let them down a good deal below it. As in the one case they exclude many people from his employment, so in the other they exclude him from many employments. The effect of such regulations, however, is not near so durable in sinking the workman’s wages below, as in raising them above their natural rate. Their operation in the one way may endure for many centuries, but in the other it can last no longer than the lives of some of the workmen who were bred to the business in the time of its prosperity. When they are gone, the number of those who are afterwards educated to the trade will naturally suit itself to the effectual demand. The police must be as violent as that of Indostan or antient Egypt (where every man was bound by a principle of religion to follow the occupation of his father, and was supposed to commit the most horrid sacrilege if he changed it for another) which can in any particular employment, and for several generations together, sink either the wages of labour or the profits of stock below their natural rate.18
32This is all that I think necessary to be observed at present concerning the deviations, whether occasional or permanent, of the market price of commodities from the natural price.
33The natural price itself varies with the natural rate of each of its component parts, of wages, profit, and rent; and in every society this rate varies according to their circumstances, according to their riches or poverty, their advancing, stationary, or declining condition. I shall, in the four following chapters, endeavour to explain, as fully and distinctly as I can, the causes of those different variations.
34First, I shall endeavour to explain what are the circumstances which naturally determine the rate of wages, and in what manner those circumstances are affected by the riches or poverty, by the advancing, stationary, or declining state of the society.
35Secondly, I shall endeavour to show what are the circumstances which naturally determine the rate of profit, and in what manner too those circumstances are affected by the like variations in the state of the society.
36Though pecuniary wages and profit are very different in the different employments of labour and stock; yet a certain proportion seems commonly to take place between both the pecuniary wages in all the different employments of labour, and the pecuniary profits in all the different employments of stock. This proportion, it will appear hereafter,19 depends partly upon the nature of the different employments, and partly upon the different laws and policy of the society in which they are carried on. But though in many respects dependent upon the laws and policy, this proportion seems to be little affected by the riches or poverty of that society; by its advancing, stationary, or declining condition; but to remain the same or very nearly the same in all those different states. I shall, in the third place, endeavour to explain all the different circumstances which regulate this proportion.
37In the fourth and last place, I shall endeavour to show what are the circumstances which regulate the rent of land, and which either raise or lower the real price of all the different substances which it produces.
[1 ]In the lectures and ED, the analysis of price follows directly on the discussion of the division of labour and precedes that of money. The intervening chapters of the WN do not, therefore, have any counterpart in the older work. Moreover, in both lectures and ED, while the distinction between market and natural price is used, the latter is mainly defined in terms of the supply price of labour: ‘When the wages are so proportion’d as that they are exactly sufficient to maintain the person, to recompense the expense of education, the risque of dying before this is made up, and the hazard that tho’ one lives he shall never be able to become in any way serviceable, they are then at their naturall rate, and the temptation is great enough to induce anyone to apply to it’ (LJ (A) vi.62–3). Much of the material with regard to the costs of education and of risk finds a place in I.x.b. See, for example, I.x.b.6 and II.i.17. The determinants of market price are discussed in LJ (A) vi.70, LJ (B) 227–8, ed. Cannan 176–7, and ED 3.2. This price is shown to be interrelated with natural price in LJ (A) vi.75–6, LJ (B) 229, ed. Cannan 178, and ED 3.3. In the lectures and ED Smith then proceeded directly to the discussion of policies which kept prices either above or below the equilibrium level; a theme which is also developed in the concluding paragraphs of this chapter.
[2 ]Below, I.viii and I.ix.
[3 ]Pownall comments on this passage, Letter, 13–15. He considered that Smith’s distinction between market and natural price was ambiguous.
[4 ]Below, I.xi.b.
[5 ]Hume disagreed at least with regard to rent: ‘I cannot think, that the Rent of Farms makes any part of the Price of the Produce, but that the Price is determined altogether by the Quantity and the Demand.’ (Letter 150, addressed to Smith, dated 1 April 1776.)
[6 ]The phrase ‘perfect liberty’ is used frequently; see for example I.vii.30, I.x.a.1, IV.vii.c.44. The term ‘natural liberty’ is used in the discussion of physiocracy at IV.ix.51.
[7 ]Cf. Turgot, Reflections, LXVI. Sir James Steuart used the term ‘effectual demand’ in the Principles, i. 115, ed. Skinner i. 117.
[8 ]‘If one, who is forced to walk on Foot envies a great Man for keeping a Coach and Six, it will never be with that Violence, or give him that Disturbance which it may to a Man, who keeps a Coach himself, but can only afford to drive with four Horses.’ (Mandeville, The Fable of the Bees, pt. i. 141, ed. Kaye i. 136.)
[e–e]the competitors 1
[f–f]om. 4 <corrected 4e–6>
[9 ]See below, IV.i.18. Steuart particularly emphasized the importance of competition between buyers in order to procure stocks of a commodity, and competition between sellers in order to get rid of certain stocks. This form of argument enabled him to state one of the conditions for price stability in noting that ‘In proportion . . . as the rising of price can stop demand, or the sinking of price can increase it, in the same proportion will competition prevent either the rise or fall from being carried beyond a certain length . . . ’ (Principles, i.203, ed. Skinner i.177). The discussion of the mechanics of price determination appears in II.iv, vii, viii, and x. The determinants of price are summarized in III.i.
[10 ]In Cantillon the distinction is between market price and intrinsic value, where the latter is taken to be constant, being the measure of the quantity of land and labour entering into the production of a commodity. Cantillon also refers to a ‘perpetual ebb and flow’ of market prices around this standard. See Essai, I.x.
[11 ]The example is used below, I.x.b.46 and see also I.x.c.43. It is pointed out at I.x.c.61 that the upper limits set by statute to the wages of master tailors in and around London were waived ‘in the case of a general mourning’.
[12 ]In discussing the forces which kept prices in excess of the natural or equilibrium level, Smith commented in LJ (B) 232–3, ed. Cannan 180: ‘what raises the market price above the natural one diminishes public opulence . . .’ and cited as examples taxes on necessaries, and monopolies. Cf. LJ (A) vi.84ff. He also objected to policies which kept the market price below the natural level (e.g. bounties) and endeavoured to show that both types of policy broke in effect ‘what may be called the natural balance of industry’ by artificially altering the distribution of stock between trades. See LJ (A) vi.92; LJ (B) 233, ed. Cannan 181, and ED 3.5 where it is stated that ‘Whatever tends to break this balance tends to hurt the national or public opulence.’ The argument is a feature of Smith’s critique of mercantilism, see for example IV.ii.3 and IV.vii.c.89.
[13 ]In another connection Smith noted that spatial division could be an advantage, remarking that the dispersed situation of manufacturers and dealers militated against collusion and combination. The point was frequently made: see for example I.x.c.23, IV.ii.21, IV.v.b.4, IV.vii.b.24, IV.viii.4 and 34.
[j]for whole centuries together, 1
[14 ]See below, I.xi.b.31. Smith discusses taxes on the produce of rare vines at V.ii.k.54.
[15 ]It is suggested that monopoly powers destroy frugality by artificially raising the level of profit, IV.vii.c.61. Smith also argued that monopoly was an enemy to good management at I.xi.b.5, but did however admit the usefulness of temporary monopolies at V.i.e.30 and of exclusive privileges in particular cases. See for example, IV.vii.c.95 and V.i.e.5. He also said in LJ (A) ii.35 that all forms of monopoly are extremely detrimental and that ‘Besides this, the goods are worse; as they know none can undersell them; so they keep up the price, and . . . care not what the quality be.’
[16 ]Cf. LJ (B) 306, ed. Cannan 236 ‘All monopolies and exclusive priviledges of corporations, for whatever good ends they were at first instituted, have the same bad effect. In like manner the statute of apprenticeship, which was originaly an imposition on government, has a bad tendencey.’ Cf. LJ (A) vi.88. See also I.x.c.8 and 9 where Smith comments on the limitations to which the statute of apprenticeship was subject, and on the ease with which its restrictions could be avoided.
[17 ]Smith seems to have considered that the transfer of resources between employments would be quite easy, at least in the absence of institutional impediments. See for example I.x.c.43, but cf. I.viii.31 where it is stated that man is ‘of all sorts of luggage the most difficult to be transported’.
[18 ]See IV.ix.43 and above, 25 n.1. It is pointed out in LJ (A) vi.54 that the law of Sesostris was designed to ensure that man’s ambition to ‘advance himself into what we call a gentlemanny character’ did not leave the lower trades deserted. Cf. LJ (B) 218–19, ed. Cannan 168. Montesquieu remarks: ‘Laws which oblige every one to continue in his profession, and to devolve it upon his children, neither are nor can be of use in any but despotic kingdoms; where nobody either can or ought to have emulation.’ (Esprit, XX.xxii.2.)