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Chapter 7


CHAPTER VII.

OF THE NATURAL AND MARKET PRICE OF COMMODITIES.

There 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 shew hereafter, 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.

There is likewise in every society or neighbourhood an ordinary or average
rate of rent, which is regulated, too, as I shall shew hereafter, 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.

These 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.

When 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.

The 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.

Though 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, or where he may change his trade as often as he
pleases.

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.

The 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; since it maybe 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.

When 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 either the greatness of the
deficiency, or the wealth and wanton luxury of the competitors, happen to
animate more or less the eagerness of the competition. Among competitors of
equal wealth and luxury, the 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 them. Hence the exorbitant price
of the necessaries of life during the blockade of a town, or in a famine.

When 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 in that of old
iron.

When 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 can not
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.

The 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 that demand.

If 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.

If, 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.

The natural price, therefore, is, as it were, the central price, to which
the prices of all commodities are continually gravitating. 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 centre of repose and
continuance, they are constantly tending towards it.

The 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.

But, 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, etc. But the same number of spinners or
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.

The 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.

Such fluctuations affect both the value and the rate, either of wages or of
profit, according as the market happens to be either overstocked or
understocked with commodities or with labour, with work done, or with work
to be done. A public mourning raises the price of black cloth ( with which
the market is almost always understocked 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 tailors. The market is here understocked with
labour. There is an effectual demand for more 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 overstocked both with
commodities and with labour.

But 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 policy, may, in many commodities, keep up the
market price, for a long time together, a good deal above the natural price.

When, 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.
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.

Secrets 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.

Such enhancements of the market price are evidently the effects of
particular accidents, of which, however, the operation may sometimes last
for many years together.

Some 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 for whole centuries
together to be sold at this high price ; 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. 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.

Such 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.

A 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 understocked 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.

The 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.

The 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. 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.

Such enhancements of the market price may last as long as the regulations of
policy which give occasion to them.

The 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 no 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.

The 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 policy must be
as violent as that of Indostan or ancient 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.

This 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.

The 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.

First, 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.

Secondly, I shall endeavour to shew 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.

Though 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, 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.

In the fourth and last place, I shall endeavour to shew 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.

Adam Smith

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