The Wealth of Nations · Chapter
Of the Natural and Market Price of Commodities explained
Adam Smith defines the natural price of a commodity as the sum of its natural rates of wages, profit, and rent.
What happens
Adam Smith defines the natural price of a commodity as the sum of its natural rates of wages, profit, and rent. The market price fluctuates around this natural price based on the proportion between quantity supplied and effectual demand. Smith explains how competition among buyers and sellers drives prices toward the natural price, and how monopolies, corporation laws, and regulations can cause persistent deviations. He also outlines the self-correcting mechanism of the market, where excess supply or demand prompts adjustments in land, labor, and stock, drawing prices back to their natural level.
Themes in this chapter
Self-Interest and the Invisible Hand
The market's self-correcting mechanism, where individuals pursuing their own interest (withdrawing land, labor, or stock) naturally drive prices toward the natural price.
Free Trade and Market Competition
Smith contrasts perfect liberty with monopolies and regulations that distort market prices, emphasizing competition as the force that aligns market price with natural price.
Social Class and Inequality
Discussion of how regulations like statutes of apprenticeship can keep wages above natural rate for some workers but also force them below during decline, affecting different classes.
Characters to notice
- Adam Smith
Author and narrator, explaining the concepts of natural and market price.
- The Employer
Referred to as the person who advances wages and expects profit, central to the definition of natural price.
- A Workman
Mentioned in the context of wages being raised or lowered by regulations and market conditions.
- The Masters
Implied as employers who withdraw stock when market price falls below natural price.
- The Proprietors
Landlords who withdraw land when rent component of price falls below natural rate.
Key passages
“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.”
A commodity sells at its natural price when it covers exactly the average local costs of rent, wages, and profit needed to produce and deliver it.
This defines the foundational concept of 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...”
Market price depends on the balance between the amount of a good available and the number of buyers willing to pay its natural price.
Smith introduces the law of supply and demand in relation to natural price.
“The natural price, therefore, is, as it were, the central price, to which the prices of all commodities are continually gravitating.”
Natural price acts like a center of gravity that market prices constantly tend toward.
Smith uses a gravitational metaphor to describe price equilibrium.