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Natural prices, justice and social conventions in Adam Smith's thought
Last modified: 2019-06-16
Abstract
This article proposes an original interpretation of Adam Smith’s concept of “natural price” – exposed in the Wealth Of Nations (Smith 1776: I.vi) – in light of the mechanism of moral judgment he developed in The Theory of Moral Sentiments (Smith 1759).
In Smith’s thinking, natural prices are made up of “component parts” which are revenues (namely, wages, profits and rent). According to a quite recent literature (Young 1986; 1997; Walraevens 2010; 2014), natural prices so defined would be conform to justice and could therefore be considered as an echo of the “just price” tradition. Indeed, since an “impartial spectator recognizes economic agents as proprietors (either of their own strength, capital or land), he would approve that they receive a corresponding amount of wages, profits or rent. Only in that “just” case would a commodity be sold for what it “really costs” (Smith 1776: I.vii.5). An Aristotelian metaphor of Nature endorsed by Smith could even concur with the classical principle of “reproduction” (Andrews 2014): individuals who participate in production would self-perpetuate themselves thanks to exchanges. Such contributions enlarge our awareness of the moral and philosophical dimension of Smith’s arguments dealing with the distribution of income (see Martin 2015).
Some issues however remain to be tackled. On the one hand, Smith never believed that market prices would be violations of justice (that is, “injuries” according to the vocabulary he uses in his Lectures on Jurisprudence [Smith 1978]) if they differ from such natural prices. As Salter (1994) pointed out, movements of supply and demand do not cause “injuries” to buyers or sellers which law should prevent: indeed, no one could possibly be held personally and directly responsible for a market price, which is nothing but a collective unintended consequence of private decisions. On the other hand, the discussion seems to focus on an explanation of the existence of different kinds of revenue, and not on the determination the latter’s level. Indeed, that the impartial spectator approves that one is the rightful proprietor of a product (for instance, because he has spent time to gather an apple [Smith 1978 [LJ(A)]: i.37]) and that revenues can possibly be derived from it (Witztum 2005) does not address the issue of price determination, and thus what governs exchanges between proprietors.
The interpretation I defend in this article derives from the definition of natural prices as composed of a technique of production and – supposing that there is a non-negative surplus product – of a rule of distribution of the price of surplus. To determine natural prices, surplus must be allotted throughout the price system (Sraffa 1960: 6), that is to say “parcelled out among different inhabitants of the country” (Smith 1776: I.vi.17). The mere existence of a rule of distribution supports the idea that the market is a way of coordinating private decisions which cannot be isolated from other domains of society. Some circumstances which lie “outside” (Garegnani 1984) of the economy, possibly moral standards, influence natural prices. Rates of wages and profits can indeed be considered a norm given in every “society of neighbourhood” (Smith 1776: I.vii.1). In my opinion, this gives both interest of, and justification to, having recourse to arguments contained in the TMS. Smith’s account of commercial society presupposes that social interactions are meditated by an external standpoint, a spectator which is the repository of the society’s conventions and representations. From that point, I distinguish different ways of distributing surplus – thereby engendering different natural prices – depending on what conventions are adopted by the “spectator” of a given country. Indeed, classical theory presupposes that there can be as many natural prices as ways of splitting surplus throughout the economy. As a matter of fact, scholars seem to have been led to believe that a change in rates of wages and profit could only be due to market price deviations. Yet, there is no reason to exclude cases where distribution would be unjust. The perspective I adopt here implies that justice has nothing to do with the equality or difference between market prices and natural ones; justice rather deals with the choice of distribution, and hence with what natural prices are adopted. Throughout the three sections of this article, I propose a formal statement of Smith’s arguments where I isolate, in a system of production prices, a distributive variable which is supposed to reflect a social convention.
The first section provides an interpretation of natural prices as “just” prices. The “early and rude state” of society (Smith 1776: I.vi.1-4) can represent a case without surplus – and therefore correspond to what Sraffa (1960: 3-5) would call a case of “production for subsistence” – as well as an economy with surplus. In both cases, natural prices are only made up of wages and each independent labourer earns a share part of social product. Smith considers wages the “recompense” (Smith 1776: I.viii.1; I.viii.5) of labourers’ exertions, which is an analogy with the “rewards” granted to virtue in the TMS (Smith 1759: III.5). What is considered the proper “reward” for the success of each activity depends on “public admiration” (Smith 1776: I.x.b.24-25). The wage-grid is said to be established according to “the esteem which men have for” labourers’ “talents or exceptional skills” (ibid.: I.vi.3). In such an economy, individuals of equal status but driven by self-interest, who are disseminated in different sectors, might try to influence distribution in favour of them. Justice then implies that each labourer should earn a quantity of revenue proportional to the quantity of “toil and trouble” he needed to produce his commodity. In other words, natural prices are “just” if every unit of common (unskilled) labour receives the same wage and are therefore impartially valued by the spectator.
In the advanced state, the uniformity of profit across sectors reflects the competition between the owners of stocks on the market for goods. That each unit of capital is paid with the same uniform profit rate means that no capitalist is unduly favoured. In the meantime, some agent might have an advantage against others within each sector. Indeed, an increase in wages decreases profit. As a consequence, the distribution between labourers and capitalists needs to be mediated by the impartial spectator.
The second section explains that market prices need not to be equal to “just” natural prices for the economy to reproduce itself (that is, to replace its capital) and experience growth (that is, to accumulate capital and increase gross product). The explanation can be found in Smith’s distinction between accidental (1776: I.vii.15-25) and permanent (ibid.: I.vii-26-31; IV.ii-v) differences between these two prices. When the country is subject to laws conform to justice, market prices can still accidentally differ from nautral prices. In that case however, it is not justice as such, but one’s desire to “better his condition” which is the means to equalize these two prices. Alternatively, unjust restrictions of market competition, as during the “mercantile system” (Smith 1776: IV.ii), impede the gravitational process. Yet, suppliers can still cover their costs. Smith relies upon these two cases to explain that justice is not necessary for reproduction. As his opposition to Quesnay shows, “[i]f a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered” (Smith 1776: IV.ix.28). Actually, capital accumulation priorly rests on desire to “better his condition” which cannot hindered by injustice. Such an effort is, in Smith’s thinking, “not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations” (ibid.: IV.v.b.43).
In the third section, I explain how natural prices could be deemed “unjust” in the perspective of classical theory. Given that wages are “recompenses”, they can be given, not in proportion to the skill, dexterity and productivity, but rather according to the virtue and “merit” of labourers. This implies that labourers may be rewarded for virtues they do not possess. In other words, some social standards or conventions may support granting to some labourers a reward disconnected from their normal actual exertions. In that case, units of homogeneous labour are not granted the same weight. “Unjust” natural prices can also mean that units of circulating capital used throughout the economy yield different rates of return depending on the sector in which they are used (there is no uniform profit rate). In both cases, labourers, and/or capitalists, would obviously seek to earn a greater revenue by being employed, or by accumulating capital, where revenues are higher. The gravitational process eventually levels all the rates of return. Consequently, to be the result of a market process, such “unjust” natural prices presuppose that circulating capital is confined to each sector. In that case indeed, natural prices can effectively be observed on a daily basis on the market only if the mobility of capital across sectors is forbidden, that is, that capital and labour cannot flow from one sector to another. This is an original reading of the very concept of natural price. In fact, natural prices are the unique exchange ratio which, “if adopted by the market”, enable to “restore the original distribution” of commodities used as circulating capital from one period to another (Sraffa 1960: 4). Such a definition does not imply perfect competition. Perfect competition is coherent with natural prices made of uniform rates of wages and profit, whereas, the interpretation of “unjust” prices refers to cases where natural prices do not presuppose perfect competition. Natural prices are abstract values which lay underneath daily market exchanges. They indicate what market process would “restore” circulating capital given the proportions between sectors and the rule of distribution of the society. Here, the unjust distribution is enforced by a limitation in the freedom of trade, in the sense that the number of firms is given for each sector.
Smith’s reflections on “unjust” prices can also be relied upon to reinforce our modern understanding of the relation between classical theory and the so-called “labour theory of value”. The latter is rejected by Sraffa and contemporary classical theory because labour does not play any specific role in the determination of natural prices – each commodity of the technique (including those eaten by labourers) being implied in their determination. Ricardo had already identified that, in the event of a positive profit rate, natural prices were not proportional to quantities of labour when sectors do not use identical techniques. We can arrive at the same conclusion with the alternative rule of distribution used here. By presupposing that surplus is be distributed according to a conventional social norm, natural prices are not proportional to quantities of labour despite the fact that techniques are the same in all sectors. We can therefore find arguments in Smith’s very framework to indicate why the labour theory of value has hardly any raison d’être.
In Smith’s thinking, natural prices are made up of “component parts” which are revenues (namely, wages, profits and rent). According to a quite recent literature (Young 1986; 1997; Walraevens 2010; 2014), natural prices so defined would be conform to justice and could therefore be considered as an echo of the “just price” tradition. Indeed, since an “impartial spectator recognizes economic agents as proprietors (either of their own strength, capital or land), he would approve that they receive a corresponding amount of wages, profits or rent. Only in that “just” case would a commodity be sold for what it “really costs” (Smith 1776: I.vii.5). An Aristotelian metaphor of Nature endorsed by Smith could even concur with the classical principle of “reproduction” (Andrews 2014): individuals who participate in production would self-perpetuate themselves thanks to exchanges. Such contributions enlarge our awareness of the moral and philosophical dimension of Smith’s arguments dealing with the distribution of income (see Martin 2015).
Some issues however remain to be tackled. On the one hand, Smith never believed that market prices would be violations of justice (that is, “injuries” according to the vocabulary he uses in his Lectures on Jurisprudence [Smith 1978]) if they differ from such natural prices. As Salter (1994) pointed out, movements of supply and demand do not cause “injuries” to buyers or sellers which law should prevent: indeed, no one could possibly be held personally and directly responsible for a market price, which is nothing but a collective unintended consequence of private decisions. On the other hand, the discussion seems to focus on an explanation of the existence of different kinds of revenue, and not on the determination the latter’s level. Indeed, that the impartial spectator approves that one is the rightful proprietor of a product (for instance, because he has spent time to gather an apple [Smith 1978 [LJ(A)]: i.37]) and that revenues can possibly be derived from it (Witztum 2005) does not address the issue of price determination, and thus what governs exchanges between proprietors.
The interpretation I defend in this article derives from the definition of natural prices as composed of a technique of production and – supposing that there is a non-negative surplus product – of a rule of distribution of the price of surplus. To determine natural prices, surplus must be allotted throughout the price system (Sraffa 1960: 6), that is to say “parcelled out among different inhabitants of the country” (Smith 1776: I.vi.17). The mere existence of a rule of distribution supports the idea that the market is a way of coordinating private decisions which cannot be isolated from other domains of society. Some circumstances which lie “outside” (Garegnani 1984) of the economy, possibly moral standards, influence natural prices. Rates of wages and profits can indeed be considered a norm given in every “society of neighbourhood” (Smith 1776: I.vii.1). In my opinion, this gives both interest of, and justification to, having recourse to arguments contained in the TMS. Smith’s account of commercial society presupposes that social interactions are meditated by an external standpoint, a spectator which is the repository of the society’s conventions and representations. From that point, I distinguish different ways of distributing surplus – thereby engendering different natural prices – depending on what conventions are adopted by the “spectator” of a given country. Indeed, classical theory presupposes that there can be as many natural prices as ways of splitting surplus throughout the economy. As a matter of fact, scholars seem to have been led to believe that a change in rates of wages and profit could only be due to market price deviations. Yet, there is no reason to exclude cases where distribution would be unjust. The perspective I adopt here implies that justice has nothing to do with the equality or difference between market prices and natural ones; justice rather deals with the choice of distribution, and hence with what natural prices are adopted. Throughout the three sections of this article, I propose a formal statement of Smith’s arguments where I isolate, in a system of production prices, a distributive variable which is supposed to reflect a social convention.
The first section provides an interpretation of natural prices as “just” prices. The “early and rude state” of society (Smith 1776: I.vi.1-4) can represent a case without surplus – and therefore correspond to what Sraffa (1960: 3-5) would call a case of “production for subsistence” – as well as an economy with surplus. In both cases, natural prices are only made up of wages and each independent labourer earns a share part of social product. Smith considers wages the “recompense” (Smith 1776: I.viii.1; I.viii.5) of labourers’ exertions, which is an analogy with the “rewards” granted to virtue in the TMS (Smith 1759: III.5). What is considered the proper “reward” for the success of each activity depends on “public admiration” (Smith 1776: I.x.b.24-25). The wage-grid is said to be established according to “the esteem which men have for” labourers’ “talents or exceptional skills” (ibid.: I.vi.3). In such an economy, individuals of equal status but driven by self-interest, who are disseminated in different sectors, might try to influence distribution in favour of them. Justice then implies that each labourer should earn a quantity of revenue proportional to the quantity of “toil and trouble” he needed to produce his commodity. In other words, natural prices are “just” if every unit of common (unskilled) labour receives the same wage and are therefore impartially valued by the spectator.
In the advanced state, the uniformity of profit across sectors reflects the competition between the owners of stocks on the market for goods. That each unit of capital is paid with the same uniform profit rate means that no capitalist is unduly favoured. In the meantime, some agent might have an advantage against others within each sector. Indeed, an increase in wages decreases profit. As a consequence, the distribution between labourers and capitalists needs to be mediated by the impartial spectator.
The second section explains that market prices need not to be equal to “just” natural prices for the economy to reproduce itself (that is, to replace its capital) and experience growth (that is, to accumulate capital and increase gross product). The explanation can be found in Smith’s distinction between accidental (1776: I.vii.15-25) and permanent (ibid.: I.vii-26-31; IV.ii-v) differences between these two prices. When the country is subject to laws conform to justice, market prices can still accidentally differ from nautral prices. In that case however, it is not justice as such, but one’s desire to “better his condition” which is the means to equalize these two prices. Alternatively, unjust restrictions of market competition, as during the “mercantile system” (Smith 1776: IV.ii), impede the gravitational process. Yet, suppliers can still cover their costs. Smith relies upon these two cases to explain that justice is not necessary for reproduction. As his opposition to Quesnay shows, “[i]f a nation could not prosper without the enjoyment of perfect liberty and perfect justice, there is not in the world a nation which could ever have prospered” (Smith 1776: IV.ix.28). Actually, capital accumulation priorly rests on desire to “better his condition” which cannot hindered by injustice. Such an effort is, in Smith’s thinking, “not only capable of carrying on the society to wealth and prosperity, but of surmounting a hundred impertinent obstructions with which the folly of human laws too often incumbers its operations” (ibid.: IV.v.b.43).
In the third section, I explain how natural prices could be deemed “unjust” in the perspective of classical theory. Given that wages are “recompenses”, they can be given, not in proportion to the skill, dexterity and productivity, but rather according to the virtue and “merit” of labourers. This implies that labourers may be rewarded for virtues they do not possess. In other words, some social standards or conventions may support granting to some labourers a reward disconnected from their normal actual exertions. In that case, units of homogeneous labour are not granted the same weight. “Unjust” natural prices can also mean that units of circulating capital used throughout the economy yield different rates of return depending on the sector in which they are used (there is no uniform profit rate). In both cases, labourers, and/or capitalists, would obviously seek to earn a greater revenue by being employed, or by accumulating capital, where revenues are higher. The gravitational process eventually levels all the rates of return. Consequently, to be the result of a market process, such “unjust” natural prices presuppose that circulating capital is confined to each sector. In that case indeed, natural prices can effectively be observed on a daily basis on the market only if the mobility of capital across sectors is forbidden, that is, that capital and labour cannot flow from one sector to another. This is an original reading of the very concept of natural price. In fact, natural prices are the unique exchange ratio which, “if adopted by the market”, enable to “restore the original distribution” of commodities used as circulating capital from one period to another (Sraffa 1960: 4). Such a definition does not imply perfect competition. Perfect competition is coherent with natural prices made of uniform rates of wages and profit, whereas, the interpretation of “unjust” prices refers to cases where natural prices do not presuppose perfect competition. Natural prices are abstract values which lay underneath daily market exchanges. They indicate what market process would “restore” circulating capital given the proportions between sectors and the rule of distribution of the society. Here, the unjust distribution is enforced by a limitation in the freedom of trade, in the sense that the number of firms is given for each sector.
Smith’s reflections on “unjust” prices can also be relied upon to reinforce our modern understanding of the relation between classical theory and the so-called “labour theory of value”. The latter is rejected by Sraffa and contemporary classical theory because labour does not play any specific role in the determination of natural prices – each commodity of the technique (including those eaten by labourers) being implied in their determination. Ricardo had already identified that, in the event of a positive profit rate, natural prices were not proportional to quantities of labour when sectors do not use identical techniques. We can arrive at the same conclusion with the alternative rule of distribution used here. By presupposing that surplus is be distributed according to a conventional social norm, natural prices are not proportional to quantities of labour despite the fact that techniques are the same in all sectors. We can therefore find arguments in Smith’s very framework to indicate why the labour theory of value has hardly any raison d’être.
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