What Regulates the Price of Commodities?by Adam Smith
Every commodity has two different prices which are apparently independent, but connected:
- The natural price
- The market price
These are regulated by certain circumstances.
The Natural Price
People must make as much by their employment to maintain them while they are employed. An arrow-maker must be sure to exchange as much surplus product to maintain him for the time he took to make the arrows.
But there is a big difference in the different trades.
- The trade of the tailor and weaver takes a lot time and effort to learn
- The trade of a day-labourer are learned by casual observation and a little experience
A trainee in weaving produces useless work for a long time. Therefore, his master must be compensated for his training, maintenance, and expences. When he enters the business, he must be repaid what he has spent as expenses and as apprentice fee.
His life is not worth more than 10 or 12 years’ purchase at most. His wages must be high because of his risk in not having the whole made up. But there are many arts which need more knowledge than possible during an apprenticeship. A blacksmith and weaver can learn their business without any previous knowledge of math.
But a watchmaker must know several sciences such as:
- geometry, and
- astronomy with regard to the equation of time.
His wages must be high in order to compensate the additional expense.
In general, this is the case in all the liberal arts. Because after they have spent a long time in their education, it is 10 to 1 if ever they make anything by it.
Therefore, their wages must be higher relative to their expense= the risk of not living long enough, and the risk of not having enough dexterity to manage their business.
Not 1 in 20 lawyers attains such knowledge and dexterity in his business to enable him to recoup the expenses of his education. Many of them never make the price of their gown. Lawyers’ fees are generally thought of as low. People are tempted to be lawyers because of the profession’s eminence and not because of the money made by it. Its dignity is part of what is made by it. In the same way, the prices of gold and silver are not extravagant.
In a gold or silver mine, there is a great chance of missing it altogether. If an equal number of men were employed in raising corn and digging silver, the corn men will make more than the silver miners. Of 50 employed in a mine, perhaps only 20 make anything at all. Some of the rest may make fortunes. But every corn man succeeds in his undertakings. So on the whole, there is more made in farming than in mining. The principal temptation in a mine is the ideal acquisition.
A man then has the natural price of his labour when it is sufficient to:
- maintain him during the time of labour,
- defray the expense of education, and
- compensate the risk of=
- not living long enough, and
- not succeeding in the business.
When a man has this, there is sufficient encouragement to the labourer.
The commodity will be cultivated in proportion to the demand. The Market Price The market price of goods is regulated by quite other circumstances.
When a buyer comes to the market, he never the seller what were his expenses in producing them.
The regulation of the market price of goods depends on three articles=
- The demand* for the commodity.
There is no demand for a useless thing. It is not a rational object of desire.
*This is Law 1 of Economic Superphysics
- The abundance or scarcity* of the commodity relative to the need for it.
If the commodity is scarce, its price is raised. But if the amount is more than sufficient to supply the demand, its price falls.
Thus, diamonds and other precious stones are dear. While iron, which is much more useful, is much cheaper. But this depends principally on the last cause=
*This is Law 2
- The riches or poverty* [purchasing power] of those who demand.
When there is not enough produced to serve everybody, the fortune of the bidders is the only regulation of the price.
*This is Law 2 and 4
An evidence of this is the story of the merchant in Arabia. The merchant gave 10,000 ducats for a certain amount of water. His fortune here regulated the price.
If he did not have his fortune, he could not have given them. If his fortune had been less, the water would have been cheaper. When the commodity is scarce, the seller must be content with the wealth of the buyers. The case is the same in an auction.
If two persons have an equal fondness for a book, the richer person will have it. Hence, things that are very rare always go to rich countries. Only the King of France could buy that large expensive diamond. Upon this principle, everything is dearer or cheaper according as it is the purchase of a higher or lower set of people.
Gold utensils are attainable only by persons in certain circumstances. Silver utensils fall to another set of people. Their prices are regulated by what the majority can give. Corn and beer prices are regulated by what all the world can give.
The day-labourer’s wages have a great influence on corn prices.
- When corn prices rise, wages also rise, and vice versa.
- When the amount of corn falls short, as in a sea-voyage, it always creates a famine. The price then becomes enormous.
Wheat then becomes the purchase of a higher set of people. The lower must live on turnips and potatoes. The natural and the market price are necessarily connected, no matter how seemingly independent they appear to be
If the market price of any commodity is very great, and the labour very highly rewarded, the market becomes very crowded with labour. More of the commodity is produced. It then can be sold to the inferior ranks of people.
If there were 10,000 for every 10 diamonds, they would become the purchase of everybody because they would become very cheap and would sink to their natural price.
When the market is overstocked, and there is not enough reward for its manufacture, nobody will produce it.
They cannot have a subsistence by it, because the market price falls then below the natural price.
It is alleged that as corn prices sink, the labourer’s wages should also sink since he is then better rewarded.
It is true that if food was long cheap, wages would come down because of the many people flocking to this labour.
But we find that when corn prices are doubled, the wages stay as before. Because the labourers have no other way to turn themselves. The same is the case with menial servants.
Raising The Natural Price Artificially
Whatever police tends to raise the market price above the natural, tends to reduce public opulence.
Dearness and scarcity are the same thing. When commodities are abundant, they can be sold to the inferior ranks of people. They can afford to give less for them, but not if commodities are scarce. Goods are a convenience to society.
Society thus lives less happily when only the few can have goods.
Therefore, whatever keeps goods above their natural price permanently, reduces a nation’s opulence, such as:
- all taxes on:
- industry, leather, and shoes.
- People grudge these the most.
- salt, beer, or whatever is the strong drink of the country.
- All countries have some kind of it.
- industry, leather, and shoes.
Man is an anxious animal.
It must have his care swept off by something that can exhilarate the spirits.
It is alleged that this tax on beer is an artificial security against drunkenness.
But the tax does not prevent drunkeness.
In countries where strong liquors are cheap, such as France and Spain, the people are generally sober.
But in northern countries, where they are dear, they do get with spirituous liquors, not with beer.
Monopolies also destroy public opulence. The price of the monopolized goods is raised above what is sufficient to encourage labour. Less of a commodity is imported when only certain persons can import it. Its price becomes higher.
Fewer people are supported by it. The concurrence of different labourers, always brings down the price. Monopolies can make whatever price they want. Examples are the Hudson’s Bay and East India companies. Exclusive privileges of corporations have the same effect. The butchers and bakers can raise the prices of their goods as they please, because only their  own corporation is allowed to sell in the market. Their meat must be taken, whether good or not. Because of this, a magistrate is always needed to fix the prices. For any free commodity, such as broad cloth, there is no need for this. But it is necessary with bakers.
They may agree among themselves to make whatever quantity and price. Even a magistrate is not a good enough expedient for this. He must always settle the price at the outside, otherwise the remedy would be worse than the disease. Because nobody would apply to these businesses and a famine would ensue. Thus, bakers and brewers always have profitable trades. Whatever raises the market price above the natural price reduces public opulence.
Whatever lowers the market price below the natural price raises public opulence. This can usually be done by any law only on exported manufactures.
An example is the bounty on coarse linen. It makes linen exportable when they are under 12 pence a yard. The public pays most of the price. It can be sold cheaper to foreigners than what is sufficient for encouraging the labour. In the same way, by the bounty of 5 shillings on the quarter of corn when sold under 40 shillings, as the public pays 1/8 of the price. It can be sold just so much cheaper at a foreign market. By this bounty, the commodity is rendered more comeatable. More corn is produced. But then it breaks the natural balance of industry. The disposition to apply to  produce corn is not proportioned to the natural cause of the demand, but to both that and the annexed bounty. It has not only this effect with regard to the particular commodity. but likewise people are called from other productions which are less encouraged, and thus the balance of industry is broken. In the ages of hunting and fishing, provisions were the immediate produce of human labour.
When manufactures were introduced, everything produced needed a lot of time. The weaver needed a long time before he could carry the cloth. which he bought in flax, to the market. Every trade therefore, requires a stock of food, clothes, and lodging to carry it on. Suppose that there is a stock of food, clothes, and lodging in store. The number of people that are employed must be proportional to it. If the price of one commodity is sunk below its natural price, while another is above it, there would be fewer of the stored stock left to support the whole. On account of the natural connection of all trades in the stock, by allowing bounties to one you take away the stock from the rest. This has been the real consequence of the corn bounty. The price of corn was sunk.
The rent of the farms sinks also. The bounty on corn was laid on at the time of the taxes and was intended to raise the rent. It had the effect for some time, because the tenants were assured of a price for their corn at home and abroad. It encouraged agriculture and lowered the price of corn. But it raised the price of grass, since the more the corn, the less the grass. The price of grass went up. Meat prices also went up, because of its dependence on grass. So that if the price of corn is reduced, the price of other commodities is necessarily raised. The price of corn has fallen from 42 to 35. But the price of hay has risen from 25 to near 50 shillings. This price affects horses which are not so easily kept. Therefore, the price of transportation also went up. Whatever increases the price of transportation reduces the plenty in the market.
On the whole, therefore, the best police by far is to=
- leave things to their natural course,
- allow no bounties,
- impose no taxes on commodities.