Book I, Chapter VII, 2

Occasional and temporary fluctuations in the market price of a commodity fall chiefly on the parts of its price that resolve into wages and profit. The part that resolves into rent is less affected. A rent fixed in money is not affected at all, either in its rate or its value. A rent consisting of a fixed proportion or quantity of the raw produce is certainly affected in its annual value by every occasional and temporary fluctuation in the market price of that produce; but its annual rate is seldom affected. In settling a lease, landlord and farmer try, as best they can, to set that rate by the average and ordinary price of the produce, not by its temporary and occasional price.

Such fluctuations affect both the value and the rate of wages or profit, according to whether the market is overstocked or understocked with commodities or labor, with work already done or work still to be done. Public mourning raises the price of black cloth (of which the market is almost always short on such occasions) and increases the profits of merchants who hold a considerable quantity of it. It does not affect weavers’ wages. The shortage is of commodities, not labor; of finished work, not work yet to be done. But it raises journeymen tailors’ wages: here the market is short of labor. There is an effectual demand for more labor, more work to be done, than can be supplied. Mourning lowers the price of colored silks and cloths, and thus reduces the profits of merchants who hold a considerable quantity of them. It also lowers the wages of workers who prepare such goods, for which demand stops for six months, perhaps for a twelvemonth. In this case the market is overstocked with both commodities and labor.

Although the market price of each commodity is thus continually gravitating, so to speak, toward its natural price, particular accidents, natural causes, or particular regulations of policy can sometimes keep the market price of many commodities considerably above the natural price for a long time.

When an increase in effectual demand raises the market price of a particular commodity considerably above its natural price, those who employ their stocks to supply that market generally take care to conceal the change. If it became widely known, their large profit would tempt so many new rivals to employ their stocks in the same way that the effectual demand would soon be fully supplied, bringing the market price down to its natural price and perhaps, for a time, even below it. If the market lies far from the homes of its suppliers, they may sometimes keep the secret for several years, enjoying their extraordinary profits all that time without new rivals. Yet secrets of this kind, it must be admitted, can seldom be kept long; and the extraordinary profit can last little longer than the secrecy.

Secrets in manufacture can be kept longer than secrets in trade. A dyer who discovers how to produce a particular color with materials costing only half as much as those ordinarily used may, with good management, enjoy the advantage of his discovery throughout his life and even bequeath it to his descendants. His extraordinary gains arise from the high price paid for his own labor; strictly speaking, they are high wages for that labor. But because these gains recur on every part of his stock, and their total consequently bears a regular proportion to it, they are commonly regarded as extraordinary profits of stock.

Such increases in the market price are plainly the effects of particular accidents, though their influence may sometimes last for many years.

Some natural products require such a peculiar soil and situation that all the land suited to producing them in a great country may be insufficient to supply the effectual demand. The whole quantity brought to market may therefore be sold to buyers willing to pay more than is needed to cover, at their natural rates, the rent of the land that produced them, the wages of the labor, and the profits of the stock employed in preparing and bringing them to market. Such commodities may sell at this high price for whole centuries; in this case it is the portion of the price that resolves into land rent that is generally paid above its natural rate. The rent of land yielding such rare and valued products, like the rent of certain vineyards in France exceptionally favored by soil and situation, bears no regular proportion to the rent of equally fertile and equally well-cultivated neighboring land. By contrast, the wages of the labor and the profits of the stock employed to bring these goods to market seldom depart from their natural proportion to wages and profits in other local employments of labor and stock.

Such increases in the market price are plainly the effects of natural causes that may prevent the effectual demand from ever being fully supplied, and may therefore continue to operate forever.

A monopoly granted to an individual or a trading company has the same effect as a secret in trade or manufacture. By constantly keeping the market undersupplied, never fully meeting effectual demand, monopolists sell their commodities far above the natural price and raise their earnings, whether wages or profit, far above their natural rate.

The monopoly price is on every occasion the highest obtainable. The natural price, or price under free competition, by contrast, is the lowest that can be accepted—not on every occasion, certainly, but over any considerable stretch of time. The first is always the most that can be wrung from buyers, or that they are thought willing to pay; the second is the least that sellers can ordinarily accept and still remain in business.

The exclusive privileges of corporations, statutes of apprenticeship, and all laws that restrict competition in particular employments to fewer people than would otherwise enter them have the same tendency, though to a lesser degree. They are a kind of extended monopoly and may often, for ages and across entire classes of employments, hold the market price of particular commodities above its natural price, and maintain both labor’s wages and the profits of the stock employed in them somewhat above their natural rates.

Such increases in the market price can last as long as the policies that produce them.

The market price of a particular commodity, though it may stay above its natural price for a long time, can seldom stay below it for long. Whichever part of the price fell below its natural rate, those whose interests suffered would immediately feel the loss and withdraw enough land, labor, or stock from that employment to bring the quantity offered on the market down to what was just sufficient to supply effectual demand. Its market price would therefore soon rise to its natural price; at least this would happen under perfect liberty.

Indeed, the same apprenticeship statutes and other corporation laws that allow a worker in a thriving manufacture to raise his wages considerably above their natural rate sometimes compel him, when it declines, to accept wages considerably below it. As they bar many people from his employment in the first case, so they bar him from many employments in the second. Yet these regulations have a much less lasting effect in depressing wages below their natural rate than in raising them above it. Their operation in one direction may endure for many centuries; in the other it cannot outlast the lives of some of the workers trained in the business during its prosperity. When they are gone, the number subsequently trained for the trade will naturally adjust to effectual demand. Only a policy as severe as that of Indostan or ancient Egypt—where religion bound every man to his father’s occupation, and changing it was thought the most dreadful sacrilege—could hold either wages of labor or profits of stock below their natural rate in a particular employment for several generations.

This is all I think it necessary to say for now about the occasional or lasting deviations of commodities’ market prices from their natural prices.

The natural price itself varies with the natural rate of each of its components—wages, profit, and rent—and in every society these rates vary with its circumstances: its wealth or poverty, its advancing, stationary, or declining condition. In the four chapters that follow, I shall try to explain as fully and clearly as I can the causes of these variations.

First, I shall try to explain the circumstances that naturally determine the rate of wages and how those circumstances are affected by a society’s wealth or poverty, and by its advancing, stationary, or declining condition.

Second, I shall try to show the circumstances that naturally determine the rate of profit, and how those circumstances too are affected by similar changes in a society’s condition.

Although money wages and profits differ greatly among the various employments of labor and stock, a certain proportion commonly seems to hold both among money wages in all the different employments of labor and among money profits in all the different employments of stock. As will appear later, this proportion depends partly on the nature of the different employments and partly on the laws and policies of the society in which they are pursued. Yet, though dependent in many respects on those laws and policies, it seems little affected by the society’s wealth or poverty or by its advancing, stationary, or declining condition, remaining the same, or nearly so, in all those states. Third, then, I shall try to explain all the different circumstances that govern this proportion.

Fourth and last, I shall try to show the circumstances that govern land rent and either raise or lower the real price of all the different substances the land produces.

Short-term changes in a commodity’s market price mainly affect the parts of its price that pay wages and profit. They have less effect on the part that pays rent. A rent fixed in money does not change in either amount or value because of them. Rent paid as a fixed share or quantity of raw produce does change in yearly value when the market price of that produce changes for a short time. But its yearly rate seldom changes. When a landlord and farmer agree on a lease, they try to set that rate according to their best judgment of the produce’s usual average price, not its short-term price.

These changes affect both the amount and value of wages or profit. The effect depends on whether the market has too many or too few goods or workers, too much finished work or too much work waiting to be done. Public mourning raises the price of black cloth, which is almost always in short supply at such times. It raises the profits of merchants who have a substantial quantity of it. It does not affect weavers’ wages. There is a shortage of goods, not labor; of finished work, not work to be done. It raises the wages of journeymen tailors. Here there is a shortage of labor: paying demand for more work than the available workers can do. Public mourning lowers the price of colored silks and cloths. It thus cuts the profits of merchants holding substantial stocks of them. It also lowers the wages of workers making these goods, since demand for them stops for six months, perhaps for a whole year. Here there are too many goods and too many workers for the market.

The market price of each commodity is constantly drawn toward its natural price in this way. Yet particular events, natural causes, or specific government rules can keep the market price of many goods well above their natural price for a long time.

When increased demand from buyers able to pay drives a commodity’s market price far above its natural price, those who use their stock to supply the market usually try to hide the change. If it became common knowledge, the high profit would draw so many new competitors and their stock into the same business that paying demand would soon be fully met. The market price would then fall to its natural price, perhaps even below it for a while. If suppliers live far from the market, they may manage to keep the secret for several years and earn unusually high profits without new competitors. But secrets of this sort rarely stay hidden long. The extra profit usually lasts little longer than the secret itself.

Manufacturing secrets can be kept longer than trading secrets. Suppose a dyer finds a way to make a particular color with materials costing only half as much as the usual ones. With careful management, the dyer may benefit from the discovery for life and even pass it on to descendants. The extra earnings come from the high price paid for this specialized work. Strictly speaking, they are high wages for that work. But the earnings recur on every part of the dyer’s stock and thus bear a regular relation to the whole stock. People therefore commonly count them as unusually high profits on stock.

These increases in market price plainly result from particular events, though their effects may sometimes last many years.

Some natural products need such unusual soil and location that even all the suitable land in a large country may not produce enough to meet demand from buyers able to pay. The entire supply can therefore be sold to people willing to pay more than enough to cover rent on the producing land, wages for the labor, and profits on the stock used to prepare the goods and bring them to market, all at their natural rates. Such goods can sell at that high price for centuries. In this case, it is generally the portion of the price paid as land rent that exceeds its natural rate. Consider the rent of certain vineyards in France with especially favorable soil and locations. It has no regular relation to the rent of neighboring land that is just as fertile and just as well cultivated. By contrast, the wages and profits involved in bringing these goods to market seldom differ from the natural relation to wages and profits in other local uses of labor and stock.

These market-price increases clearly arise from natural causes. Those causes may prevent paying demand from ever being fully met, so their effects may last forever.

A monopoly granted to a person or a trading company has the same effect as a secret in trade or manufacturing. Monopolists never fully meet paying demand and so keep the market in short supply. They sell far above the natural price and push their earnings, whether wages or profit, far above the natural rate.

A monopoly price is always the highest price sellers can get. The natural price, or the price under free competition, is instead the lowest they can accept over a considerable period, though not necessarily on every occasion. One is the highest price that can be extracted from buyers, or that sellers think buyers will agree to pay. The other is the lowest sellers can ordinarily accept while staying in business.

Corporations’ exclusive privileges, apprenticeship statutes, and all laws that restrict competition in particular occupations to fewer people than would otherwise enter them have the same effect, though to a lesser degree. They are broad kinds of monopoly. For centuries at a time, across whole groups of occupations, they can keep the market prices of certain goods above their natural prices. They can also keep both wages and profits on the stock used in those occupations somewhat above their natural rates.

Such increases in market price may last as long as the government rules that cause them.

A commodity’s market price can stay above its natural price for a long time, but it can seldom stay below it for long. If any part of the price paid less than its natural rate, the people affected would immediately feel the loss. They would withdraw enough land, labor, or stock from making the commodity that the market supply would soon be no more than enough to meet paying demand. Its market price would soon rise to the natural price. This would at least happen where people were completely free to change occupations and investments.

The same apprenticeship statutes and other corporation laws that let workers raise their wages well above the natural rate when a trade prospers can sometimes force their wages well below it when the trade declines. When business is good, these rules keep many people out of a worker’s occupation. When it is bad, they keep that worker out of many other occupations. But these rules cannot keep wages below the natural rate nearly as long as they can keep wages above it. The upward effect may last for centuries. The downward effect can last only through the lives of some workers trained for the trade in its prosperous period. After those workers are gone, the number of people newly trained for it will naturally adjust to paying demand. To keep wages or profits in a particular occupation below their natural rates for several generations, a policy would have to be as severe as those of Indostan or ancient Egypt. There, religion bound each person to a father’s occupation, and changing occupations was supposed to be a terrible sacrilege.

That is all I think needs to be said here about the temporary or lasting ways market prices of goods differ from their natural prices.

The natural price itself changes as the natural rates of its components—wages, profit, and rent—change. In every society, these rates depend on its circumstances: whether it is rich or poor, growing, holding steady, or declining. In the next four chapters, I will explain the causes of these different changes as fully and clearly as I can.

First, I will explain what naturally sets the rate of wages, and how a society’s wealth or poverty and its growth, stability, or decline affect those circumstances.

Second, I will show what naturally sets the rate of profit, and how those same changes in society affect it.

Money wages differ greatly among uses of labor, as do money profits among uses of stock. Even so, there seems usually to be a fairly stable relation among the money wages of different kinds of work and among the money profits of different uses of stock. As we will see, that relation depends partly on the nature of the occupations and partly on the laws and policies of the society where they operate. Though laws and policies affect it in many ways, the relation seems little affected by whether the society is rich or poor, growing, stable, or declining. It stays the same, or nearly so, in all those conditions. Third, I will explain all the different circumstances that govern this relation.

Fourth and finally, I will show what determines land rent and what raises or lowers the real price of the various things the land produces.