Natural And Market Price

I give the rule which determines the quantities of goods exchanged for each other as:

• labour being the foundation of the value of commodities
• the comparative quantity of labour which is necessary to their production

In the ordinary course of events, there is no commodity which continues for any length of time to be supplied precisely in that decree of abundance, which the wants and wishes of mankind require, and therefore there is none which is not subject to accidental and temporary variations of price.

It is only in consequence of such variations, that capital is apportioned precisely, in the requisite abundance and no more, to the production of the different commodities which happen to be in demand.

With the change of price:

• profits are elevated above or depressed below their general level
• capital either enters or leaves from the particular employment

Every man is free to employ his capital where he pleases.

He will naturally seek for it that employment which is most advantageous.

He will naturally be dissatisfied with a profit of 10% if by removing his capital he can obtain a profit of 15%

The employers of stock have a restless desire to quit a less profitable for a more advantageous business.

This tends to:

• equalize the rate of profits of all.
• fix them in such proportions, as may in the estimation of the parties, compensate for any advantage which one may have, or may appear to have over the other.

It is very difficult to trace the steps by which this change is effected: it is probably effected, by a manufacturer not absolutely changing his employment, but only lessening the quantity of capital he has in that employment.

In all rich countries, there is a number of men forming what is called the monied class; these men are engaged in no trade, but live on the interest of their money, which is employed in discounting bills, or in loans to the more industrious part of the community.

The bankers too employ a large capital on the same objects. The capital so employed forms a circulating capital of a large amount, and is employed, in larger or smaller proportions, by all the different trades of a country.

There is perhaps no manufacturer, however rich, who limits his business to the extent that his own funds alone will allow: he has always some portion of this floating capital, increasing or diminishing according to the activity of the demand for his commodities.

When the demand for silks increases, and that for cloth diminishes, the clothier does not remove with his capital to the silk trade, but85 he dismisses some of his workmen, he discontinues his demand for the loan from bankers and monied men.

While the case of the silk manufacturer is the reverse: he wishes to employ more workmen, and thus his motive for borrowing is increased: he borrows more, and thus capital is transferred from one employment to another, without the necessity of a manufacturer discontinuing his usual occupation.

The markets of a large town are supplied with home and foreign commodities.

A capitalist, in seeking profitable employment for his funds, will naturally look into all the advantages which one occupation has over another.

He might be willing to forego a part of his money profit for the security, cleanliness, ease, or any other real or fancied advantage which one employment may possess over another.

If the profits of stock in one trade were 20, in another 25, and in another 30%, they would probably continue permanently with that relative difference, and with that difference only.

For if any cause should elevate the profits of one of these trades 10% either these profits would be temporary, and would soon again fall back to their usual station, or the profits of the others would be elevated in the same proportion.

Let us suppose that all commodities are at their natural price, and consequently that the profits of capital in all employments are exactly at the same rate, or differ only so much as, in the estimation of the parties, is equivalent to any real or fancied advantage which they possess or forego.

Suppose now that a change of fashion increases the demand for silks, and lessen that for woollens.

Their natural price, the quantity of labour necessary to their production, would continue unaltered, but the market price of silks would rise, and that of woollens would fall.

Consequently, the profits of the silk manufacturer would be above, whilst those of the woollen manufacturer would be below, the general and adjusted rate of profits.

Not only the profits, but the wages of the workmen would be affected in these employments. This increased demand for silks would however soon be supplied, by the transference of capital and labour from the woollen to the silk manufacture;

When the market prices of silks and woollens would again approach their natural prices, and then the usual profits would be obtained by the respective manufacturers of those commodities.

It is then the desire, which every capitalist has, of diverting his funds from a less to a more profitable employment, that prevents the market price of commodities from continuing for any length of time either much above, or88 much below their natural price.

It is this competition which so adjusts the exchangeable value of commodities, that after paying the wages for the labour necessary to their production, and all other expenses required to put the capital employed in its original state of efficiency, the remaining value or overplus will in each trade be in proportion to the value of the capital employed.

In Chapter 7 of the Wealth of Nations, this question is most ably treated.

Having fully acknowledged the temporary effects which, in particular employments of capital, may be produced on the prices of commodities, as well as on the wages of labour, and the profits of stock, by accidental causes, without influencing the general price of commodities, wages, or profits, since these effects are equally operative in all stages of society, we may be permitted to leave them entirely out of our consideration, whilst we are treating of the laws which regulate natural prices, natural wages, and natural profits, effects totally independent of these accidental causes.

In speaking then of the exchangeable value of commodities, or the power of purchasing possessed by any one commodity, I mean always that power which it would possess, if not disturbed by any temporary or accidental cause, and which is its natural price.