Vianello Natural Or Normal Prices 1989

political economy Studies in the Surplus Approach\n\nvolume 5, number 2, 1989\n\n89 Fernando Vianello, Natural (or Normal) Prices: Some Pointers.\n107 Mauro Canniti, Cyclical Growth and Long-Term Prospects.\n129 Graham White, Normal Prices and the Theory of Output: Some Significant Implications of Recent Debate.\n151 Chidem Kurdas, Essays on Piero Sraffa: A Review Article.\n169 Alessandro Roncaglia, A Reappraisal of Classical Political Economy.\n181 Giorgio Gilbert, On the Meaning of Sraffa's Equations: Some Comments on Two Conferences. Natural (or Normal) Prices: Some Pointers*\nFernando Vianello\n\nAdam Smith states that a commodity is sold at its “natural price” when it yields “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” ; i.e. according to the rates which are regarded as “ordinary or average” in the place and at the time under consideration. However, Ricardo allows no place in the natural price for rent, and Marx (for reasons in part similar, in part different) follows him in this. Since these three authors are to be our guides in the enquiry we are now embarking on, to assume that natural resources are freely available seems the only way of avoiding the endless sidetracks of continual distinction. (The hypothesis will be introduced in the course of § 1).\n\nA further limitation we shall impose on our exposition, for the sake of the above criterion, will be to assume that the capital employed in the economy consists exclusively of the necessaries “advanced” to the workers.\n\n* An Italian version of this paper is being published in N. Acocella, G. M. Rey, M. Tiberi (eds.), Saggi in onore di Federico Caffe, Milano, F. Angel, vol. 2, forthcoming. Financial support from the Italian Ministry for Universities and Scientific Research is gratefully acknowledged. My thanks go to Antonietta Campus, whose suggestions and criticism I have largely drawn on (although, of course, I do not wish here to bear any of the responsibility).\n\n1 A. SMITH, An Inquiry into the Nature and Causes of the Wealth of Nations, edited by Edwin Cannan, London, Methuen, 1961, p. 62.\n\n2 Ibid., p. 63.\n\n3 Ibid., p. 62. 90\n\n1. NATURAL PRICES AS CENTRES OF GRAVITATION OF MARKET PRICES\n\nIn Adam Smith's opinion, the fact that the market price of a commodity is “either above, or below, or exactly at the same value with its natural price” depends on “the proportion between the quantity which is actually brought to market” and the “effectual demand” (or, as we shall say here, “effective\n\n4 If the workers' consumption includes agricultural products harvested yearly, such as corn (the “wage-commodity” par excellence), then the social capital must of necessity include a stock of these products sufficient to guarantee the survival of the workers from one harvest to the next. The factual basis on the classical concept of the wage as an “advance” of consumer goods to the workers is to be sought in this circumstance: not, or at least not necessarily, in the actual supply of consumer goods to workers at the start of each agricultural year in return for the labour they will perform during that year. Whether the wages are paid in kind or in money, whether in advance or not (and therefore whoever is in charge of conserving the corresponding stocks of corn: the workers themselves, their employers or some intermediaries), the truth of the fact remains that it is the social capital that must provide for the support of the workers.\n\n6 C1. Ibid., p. 57.\n\n6 As Schumpeter puts it, “Marshall’s theoretical structure, barring its technical superiority and various developments of detail, is fundamentally the same as that of Jevons, Menger, and especially Walras, but... the rooms in this new house are unnecessarily cluttered up with Ricardian heirlooms, which receive emphasis quite out of proportion of their essential importance”.\n\nJ. A. SCHUMPETER, History of Economic Analysis, New York, Oxford University Press, 1954, p. 837. demand\")\" i.e. \"the demand of those who are willing to pay the natural price of the commodity\". If a greater quantity is brought to market than the market is prepared to absorb at the natural price, then competition between sellers will cause the commodity to be sold at a lower price and it will be impossible for all three rates – of rent, wage and profits – to reach their normal levels. If it is the rent that falls short, then \"the interest of the landlords will immediately prompt them to withdraw a part of their land; and if it is wages or profit, the interests of the labourers in the one case, and of their employers in the other, will prompt them to withdraw part of their labour or stock from this employment\". As a result, production decreases and the market price rises. If, on the contrary, the quantity brought to market comes short of the quantity the market is prepared to absorb at the natural price, then competition between purchasers will cause the commodity to be sold at a higher price: above-normal rates are obtained, production increases and the market price comes down. Thus, \"the quantity of every commodity brought to market naturally suits itself to the effectual demand\" and the natural price \"is, as it were, the central price, to which the prices of all commodities are continually gravitating.\" While in the above description landlords, workers and capitalists are all in respects viewed on the same plane, Ricardo and Marx appear to see the benefits and detriments of changing market prices as going, in the first place, to the capitalists (like Smith, they hold that capitalists act as entrepreneurs and can make use of loans in addition to their own funds). It is through the decisions made on the employment of capital that, in their view, land and labour are also directed along the lines resulting from the desire, which every capitalist has, of diverting his funds from a less to a more profitable employment.\" Ricardo writes, \"that prevents the market price of commodities from continuing for any length of time either much above, or much below their natural price. One case of divergence of market from natural prices analyzed by Ricardo is that of changing fashion leading to an increase in the demand for silks and to a fall in the demand for woollens. From a position of equality with the respective natural prices, the market price of silks increases, while that of woollens decreases. As a result, the ratio of profits to the capital employed rises above the natural or general rate (\"general and adjusted rate\", as Ricardo calls it in this context) in the production of silks and falls below it in the production of woollens. The inflow of capital into the former trade and the outflow of capital from the latter result in the market price of silks falling back and the market price of woollens rising, both as it were yielding to the attraction exerted on them by natural prices (which are assumed to remain unaffected). The \"principle\", which, as Ricardo puts it, \"apportions capital to each trade in the precise amount that is required\" is thus the very same principle regulating the gravitation of market to natural prices (and of profits to their general rate). This principle asserts itself through that \"competition of capitals\" which Marx describes as continually at work to eliminate any \"disproportion in the distribution of social labour between the individual spheres of production\". Apart from variations in effective demand, a \"disproportion\" can be caused by such totally or partly unjustified inflows or outflows of capital as are bound to occur owing to the lack of coordinating investment decisions. In these inflows and outflows of capital Marx describes a manifestation of the \"anarchy\" of a social division of labour that \"brings into contact independent producers of commodities, who acknowledge no authority other than that of competition\". It is precisely because the regulating principle referred to by Ricardo does not operate as Marx stresses) on an a priori basis, i.e., according to a plan, but only a posteriori, through the competition of capitals, that the \"constant tendency on the part of the various spheres of production towards equilibrium comes into play only as a reaction against the constant upsetting of this equilibrium\" and \"proportionate production is... always only the result of disproportionate production on the basis of competition\". ACCIDENTAL VARIATIONS IN EFFECTIVE DEMAND AND IN THE QUANTITIES BROUGHT TO MARKET It is tempting to draw a parallel between the case we have been examining of a change in fashion and those \"accidental variations in the demand\" mentioned by Adam Smith, who illustrates them with the example of a public mourning leading to a rise in the price of black cloth. There is, however, an evident difference between the two cases. Accidental variations in effective demand are by their very nature transitory (after a variation of this type effective demand tends to return spontaneously to its original level: as happens in Smith's example when the period of mourning comes to an end. On the contrary, a change in fashion gives rise to a permanent variation in effective demand and in the quantities brought to market (in this case effective demand does not tend to return spontaneously to its original level). If we now sharpen our focus on the consequences of a public mourning, we shall see that these differ according to the length of the mourning period. If this period is so short in comparison with the length of the production processes of black cloth that it fails to justify an inflow of capital, then the whole matter boils down to good business for those who have a good stock of the product. If, however, the period is longer (as Smith seems to assume), we can indeed expect an inflow of capital to occur, but it will remain a transitory inflow, bound (unless new factors arise) to be followed by an outflow. Investors may either approach this as a temporary employment of their capital or prepare to conquer space for their competitors in a market that will presumably return to its original size. (The exceptional nature of the event Smith refers to is potentially deceptive. Actually, accidental variations in effective demand are continually occurring. Of these, the variations that may arise from the change in market prices are worth mentioning; consider the increase in effective demand for one commodity (e.g. potatoes) caused by the rising price of another (e.g. corn), or the influence changing market prices exert on the effective demand for the various commodities by penalising some producers and benefiting others.) Netted of its accidental variations, effective demand may be termed \"ordinary demand\", in accordance with Ricardo, or, in accordance with Marshall, \"normal demand\" 23 (not, however, as is the case in Marshallian theory, to be taken as a demand curve). 24 Among the causes of variation in normal demand — i.e. permanent variation in effective demand — Marshall lists by way of example: \"the commodity’s coming more into fashion\", \"the opening out of a new use for it or of new markets for it\", \"the permanent falling off in the supply of some commodity for which it can be used as a substitute\" and \"a permanent increase in the wealth of general purchasing power of the community\". 25 Two additional causes which it is impossible to leave unmentioned are a permanent change in the methods of production (which affects the normal demand for means of production), and a permanent change in income distribution (which affects the normal demand for consumer goods and indirectly the normal demand for means of production.) 26 The quantities of commodities brought to market are also subject to accidental variations. As Smith points out, the importance of these variations is not the same in the case of manufactured as in that of agricultural products: \"The same number of labourers in husbandry will, in different years, produce very different quantities of corn, wine, oil, hops &c. But the same number of spinners and weavers will every year produce the same or very nearly the same quantity of linen or woollen cloth... That the price of linen or 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 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.\" 27 Obviously, a scanty or abundant harvest does not in itself justify even a transitory inflow or outflow of capital. This also applies to such other factors as labour conditions or temporary difficulties in the supply of raw materials that can interfere with production plans (which, given our assumptions on capital, coincide with investment plans). Netted of its accidental variations, the quantity brought to market may be termed \"normal supply\" 28 or \"normal quantity\", 29 In the case of agriculture, Smith goes on to remark, \"only the average produce... 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 quantities of the commodities brought to market will sometimes exceed a good deal, and sometimes fall short a good deal, of the effectual demand.\" 30 Elsewhere Smith observes that, in principle, something of the sort applies to all productive activities: \"In all commodities which are produced by human industry, the quantity of industry annually employed is necessarily regulated by the annual demand, in such a manner that the average annual produce may, as nearly as possible, be equal to the average annual consumption\". 31 The concepts of average quantity (\"average annual produce\") and average effective demand (\"average annual consumption\") encountered in this passage come close to the concepts, respectively, of normal quantity and normal demand (but do not amount to precisely the same thing: cf. § 5.). A second category of causes of accidental variations in the quantities brought to market — not concerning the way production plans are carried out, but rather the way they are actually drawn up — may be discerned (although Smith makes no mention of it) in the totally or partially unjustified inflows or outflows of capital (cf. § 1), which will generally be followed by flows in the opposite direction. When accidental variations in effective demand and in the quantities brought to market are taken into account, the description of market prices gravitating towards natural prices sketched out in § 1 (on the model of the beginning of the seventh chapter of the first book of The Wealth of Nations) can be retained as an approximation only. It follows, in fact, from what has been said in the present paragraph that divergences of market from natural prices tend to be eliminated, not in one way only, but in three different ways, i.e.: a) through the spontaneous disappearance of their cause, when the latter consists in too short-lived an accidental variation in effective demand to justify (or, anyway, provoke) inflows or outflows of capital, or alternatively in an accidental variation in the quantities brought to market resulting from a scanty or abundant harvest or from other events affecting the carrying out of production plans; b) through transitory inflows or outflows of capital, preceding the spontaneous disappearance of the cause of a divergence when this cause consists in a sufficiently lasting accidental variation in effective demand; c) through permanent inflows or outflows of capital, when a divergence derives from a variation in effective demand which has caused an inflow or outflow of capital. If on the one hand the latter movement of capital tends to bring the market price nearer to the natural price (cf. above, point b), on the other hand it tends to take the quantity brought to market away from normal demand (this is why a new divergence of market from natural price may occur once the cause of the accidental variation in effective demand has disappeared). Moreover, it should not be forgotten that normal demand, too, can vary in one direction or the other. Suppose, for example, that normal demand rises at the very same time as an accidental fall in effective demand drives the market price below the natural price (assuming they previously coincided). If the accidental fall in effective demand lasts long enough (or, even mistakenly, is expected to), then the \"disproportion\" produced by the increase in normal demand tends not to be eliminated by an inflow of capital, but to be aggravated by an outflow. However, the 3. THE THEORY OF NATURAL PRICES AS THE ONLY, ALBEIT IMPERFECT, WAY TO ACCOUNT FOR MARKET PRICES\n\nHow far below the natural price the market price may be driven by a given excess of the quantity brought to market over the effective demand — and how far above it may be driven by a given excess of the latter over the former — is something that theory does not tell us and, as Ricardo points out, cannot tell us. \"Some, indeed,\" he writes, \"have attempted to estimate the fall of price which would take place, under the supposition of the surplus bearing different proportions to the average quantity. Such calculations, however, must be very deceptious, as no general rule can be laid down for the variations of price in proportion to quantity.\" 32 Much, Ricardo warns us, will depend on a factor so resistant to general rules as \"the opinions formed on the probability of the future supply being adequate or otherwise to the future demand\", 33 and thus on the probability that the divergence of market from natural price be eliminated within a certain period of time. For example, when corn is \"hurried prematurely to market by the distress of the farmers\", 34 there will be no need for a considerable fall in the market price to \"awaken the spirit of speculation\", 35 namely, to induce the intermediaries to start accumulating stocks (\"we should soon witness at the time when the producers' barns are empty and the market price once again rises. If, however, \"the cause of the low price of corn be owing to an abundant quantity in the country\", it will be necessary to \"go through the ordeal of low prices, and increased consumption, which is always in a degree consequent on low price, before the supply will adjust itself to the demand and prices become again remunerative\". 37\n\n32 D. RICARDO, On Protection to Agriculture, op. cit., p. 220. I am indebted to M. Cristina Matteuzzo for bringing this passage to my attention.\nIn order to understand Ricardo's reference to \"average quantity\" (rather than \"ordinary demand\", which he mentions on the same page, we should bear in mind Smith's observation cited above s) where the divergence of market prices of agricultural products from their natural prices is associated with the divergence of annual production from its average level, the latter being described as the only magnitude capable of being \"suited in any respect to the effectual demand\". Here Ricardo is in fact dealing with an agricultural product, namely corn. (Cf. also the reference to \"average supply\" and \"average demand\" in the passage quoted at the beginning of note 6). \n\n33 Ibid., p. 220.\n34 Ibid., p. 253.\n35 Ibid., p. 254.\n36 Ibid., p. 254.\n37 Ibid., p. 253-4.\n97