The Natural and Market Price of Commodities

¹ Average rates of wages and profits exist in all societies. These are naturally regulated by:

• the society’s:
  • general circumstances,
  • riches or poverty,
  • advancing, stationary, or declining condition, and
• the nature of each employment in the society.

² Average rates of rent also exist in all societies. These are regulated by=

• the general circumstances of the society where the land is situated, and
• the natural or improved fertility of the land.

Natural Price = Cost + Ordinary Profit

³ These average rates are the natural rates of wages, profit, and rent, at the time and place where they commonly prevail.

⁴ The natural price is the price which contains the payment for rent, wages, and profits, according to their natural rates.

⁵ A commodity sold at its natural price is sold precisely for what it is worth or for what it really costs the seller.

The natural price is different from the prime cost.

• The prime cost does not include the profit.

A person who sells at prime cost or without a profit is a loser by that trade.

• He would lose a revenue or the fund of his subsistence.
• His profits fund his subsistence, just as wages fund his workers’ subsistence.

Without ordinary profits, he is without subsistence.

• He is not repaid what it really cost him.

⁶ The natural price is the lowest price that a dealer can sell his goods for any considerable time in the state of perfect liberty, or where he may change his trade as he pleases.

The Market Price, Effectual Demand, And Absolute Demand

⁷ The market price is the actual price at which any commodity is commonly sold. It may higher, lower, or the same as the natural price.

⁸ Market prices are regulated by the proportion between the quantity to be sold and the demand of buyers willing to pay the natural price.

Such buyers are called effectual demanders.

• Their demand is called the effectual demand because it effectuates the bringing of the commodity to market.

Absolute demand, on the other hand, is demand that can never bring commodities to the market.

For example, a very poor man may demand a luxury coach, but his demand cannot justify the manufacture of one.

⁹ When the commodities sold in a market falls short of the effectual demand, the shortage will cause some of the buyers give more for those few commodities.

This will create a competition among buyers which will raise the market price according to:

• the greatness of the deficiency,
• the wealth and eagerness of the competitors, or
• the importance of the commodity.

The more important the commodity, the more exorbitant the price will be.

This is seen in the price of food during famines or blockades.

¹⁰ When the amount sold in a market exceeds the effectual demand, the excess will remain unsold.

To dispose of it, it must be sold to those who are willing to pay less.

The low price which they give for it must reduce the price of the whole.

The market price sinks below the natural price in proportion to:

• the competition of the sellers, or
• the importance of getting rid of those goods.

There will be more competition [and bigger price changes] in getting rid of excess perishable goods, such as oranges, than durable ones, such as old iron.

¹¹ When the supply in the market is exactly sufficient to match the effectual demand, the market price naturally comes to match the natural price.

The supply cannot be disposed of for a higher price because of the competition of the dealers. But such competition does not oblige the dealers to accept of a lower price.

¹² The quantity sold in a market naturally suits itself to the effectual demand.

It is the interest of the sellers that the quantity never should exceed the effectual demand It is the interest of all others that it never should fall short of that demand.

¹³ If it exceeds the effectual demand, some of the parts of its price must be paid below their natural rate:

• If it is rent, landlords will stop using their land.
• If it is wages, workers will stop working.
• If it is profit, employers will stop using their stock.

The excess will soon be eliminated.

• The supply will then match the effective demand.
• Rent, wages, and profits will rise to their natural rate.
• The market price will rise to its natural price.

¹⁴ If it falls short of the effectual demand, some of the parts of its price must rise above their natural rate:

• If it is rent, other landlords will allocate more land to raise the commodity.
• If it is wages, workers will work more to create more of the commod
• If it is profit, employers will allocate more stock for the commodity.

The supply will soon increase to match the effective demand. Rent, wages, and profits will sink to their natural rate. The market price will sink to its natural price.

The Natural Price, or Cost + Ordinary Profits, is the Central Price

¹⁵ The natural price is the central price to which all commodity prices are continually gravitating, despite accidents and obstacles which may suspend them above it or force them below it.

Prices are constantly tending towards the natural price.

¹⁶ The whole industry of society naturally suits itself to the effectual demand of that society.

It naturally always aims to bring only the precise quantity to supply that demand.

¹⁷ In some employments, the same amount of industry will always produce the same amounts of commodities per year.

While in other employments, it will produce very different amounts per year. The same number of agricultural workers will produce very different amounts of corn, wine, oil, hops, etc. every year.

The same number of spinners and weavers will produce the same amount of linen and cloth every year. Because of this, prices of agricultural products fluctuate more than the prices of manufactured goods, even if the demand for food and manufactures may be the same.

The price of manufactured goods varies only with the variations in the demand.

The prices of agricultural products varies with the variations in:

• the demand, and
• the supply

This has greater and more frequent variations.

¹⁸ The fluctuations in the market price of any commodity affect wages and profits more than rent.

Even rent paid in goods are not so much affected by annual price fluctuations. This is because leases are set and adjusted according to long term prices and not temporary prices.

¹⁹ Such fluctuations affect both the value and rate of wages or profit, according to the supply of:

• goods, done or in-process or
• labour

A public mourning raises the price of black cloth and increases the profits of the merchants who have black cloth.

It has no effect on the wages of the weavers [regular workers] because the market is under-stocked with black cloth, not with long-term labour.

It raises the wages of journeymen tailors [contractual workers] because the market is under-stocked with short-term labour.

The mourning creates an effectual demand for more short-term labour. It stops the demand for coloured silks for 6-12 months, sinking=

• the price of coloured silks,
• the profits of merchants of those silks, and
• the wages of their workers.