The Wealth of Nations

F 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 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.

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.