A. The normal case is constant cost of production, perfectly
elastic supply curves (our terminology, not his).
- 1. Where cost is the sum of wages, rent, and profit .
- 2. Wages tend towards a natural wage-the level at which
the working class just reproduces itself.
- a. Which depends not merely on what it costs to stay
alive but on how much workers must be getting to be willing and able to
marry and bring up children.
- b. Wages will be above the natural wage if the demand
for labor (which is roughly proportional to the amount of capital, although
a little more complicated than that) is increasing, below if it is decreasing,
at if it is constant.
- c. Since a major input to workers is food, the natural
wage is roughly equal to the price of some fixed amount of corn.
- d. Smith is somewhat unclear as to whether the reason
for the natural wage is
- i. an implicit conspiracy among employers, which cannot
force wages below the natural wage for long, due to common humanity and
(perhaps) running out of workers, and ...
- ii. Breaks down when the demand for workers is increasing
and employers are bidding against each other. Or ...
- iii. population equilibrium--wage below natural wage
means fewer workers means higher capital/labor ratio, means higher wages--etc.
3. Rent is a "monopoly price"--meaning that
it is not determined by the cost of production of land.
- a. What is it determined by?
- b. What is left of the return from selling the output
of the land after paying for agricultural inputs, profit of the farmer,
etc.
- c. But that depends on the price of corn, which is itself
supposed to be partly determined by rent! The argument appears circular.
- d. It becomes less circular if we remember that wages,
in Smith's system, are at least roughly proportional to the price of corn-i.e.
equal to the price of a particular amount of corn, so ...
- e. If you take the amount of corn a piece of land produces,
subtract the amount necessary to pay the workers, subtract the profit rate
times the amount necessary to pay the workers (since the farmer's circulating
capital will largely go to advance the workers' wages), what is left is
roughly equal to rent.
- f. Here and elsewhere, Smith is not thinking very carefully
about what determines how much corn it is worth producing from a given
piece of land or which land is worth farming--both of which, as Ricardo
will point out, depend on the price of corn.
- g. Implicitly, much of his argument takes both of those
as fixed--which he signals with the phrase "in the state of the tillage,"
meaning that the amount of land being cultivated and the intensity of cultivation
are held fixed.
4. Capital is mostly circulating capital--the stock that
a merchant or farmer must have available so as to pay his employees now
when he is not going to be able to sell his output until some future date
- a. Smith sometimes takes it for granted that all production
periods are one year--presumably because that is the production period
in agriculture--and occasionally makes mistakes as a result.
- b. The more (circulating) capital there is, the more
prices are driven down and wages up by competition, hence the lower the
profit rate.
- c. Smith has a theory of capital market equilibrium,
but not a very clear theory of what determines how productive capital is.
- d. Oddly enough, he doesn't seem to think of capital
increasing or decreasing in response to the interest rate. At one point
he even argues that high profit rates turn merchants into spendthrifts,
reducing the amount of capital accumulation!
- e. Although he does think of capital accumulation as
a central force determing what happens to a society--improving, stationary,
or declining state.
B. So everything has a natural price equal to cost of
production
- 1. If effectual demand--i.e. quantity demanded at the
natural price--is greater than quantity produced, the price will rise above
the natural price, quantity produced will increase, until equilibrium is
reached at the natural price.
- 2. Similarly the other way if effectual demand is lower
than quantity.
- 3. Smith recognizes that these processes take time, so
prices may be out of equilibrium when there are sudden changes--such as
the demand for black cloth during a public mourning.
- 4. Notice that Smith is using qualitative arguments,
not quantitative ones--one point on the demand curve is sufficient for
his purpose, since all he has to establish is the equilibrium.
C. All of this is taking technology--i.e. division of
labor, specialized machinery, etc.--as fixed.
- 1. In the longer run, Smith believes that typically production
cost falls as quantity increases.
- 2. In part because of increased division of labor, invention
of machinery, etc., and ...
- 3. In part because of increased competition.
- 4. Which sometimes means "competitive price instead
of cartel price"
- 5. And sometimes means "excess supply driving down
prices"--in this case the former meaning.