Adam Smith’s natural prices, the gravitation metaphor, and the purposes of nature
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Adam Smith’s “natural price” has long been interpreted as a “normal price” or “center of gravitation price” based on the famous gravitation metaphor of the Wealth of Nations I.vii, natural in the sense that it is the price that would result if competition were truly free, unobstructed by monopoly or government regulation, and could also therefore be called normal price, appealing to a sense of natural opposed to that which is produced artificially.
This essay has three purposes. First I criticize this interpretation of Smith’s gravitation metaphor. For Smith, it is not a Newtonian metaphor for the attractive character of natural price, but rather an Aristotelian metaphor for the pattern of movement of market prices, in which natural price serves merely as a reference point.
Second I present an interpretation of Smith’s natural price based on his understanding of nature, in the context of his assertions that the goals of nature are the self-preservation of individuals and the propagation of species, goals humans pursue with divided labor under bonds of mutual dependence, facilitated by exchange and hence prices. The natural price of a commodity is the price that supports nature’s goals by providing for the maintenance of those who participate in production and supply in a manner that is just sufficient for these activities to continue indefinitely.
Third I highlight the similarity between natural prices construed in this way and the prices of Piero Sraffa’s Production of Commodities by Means of Commodities.
Besides matters of form and emphasis in the paper – it needs some editing – the thesis, against the general consensus, that Sraffa also thought that Smith’s natural price is not the same as Marshall’s normal price is interesting but not original. However the analysis made by the author in terms of what was actually meant by Smith’s natural price as a reproduction price in contrast to Marshall’s normal price is challenging. The idea of “continuation” for Smith’s natural price and its relationship with Aristotle’s understanding of “natural” is very interesting and, in my view, could be developed further. I suggest to explore a bit further Newton’s influence on Smith’s price mechanism (for example see Montes, L. (2003) ‘Smith and Newton: some methodological issues concerning general economic equilibrium theory’, Cambridge Journal of Economics, vol. 27, no. 5, pp. 723-47). And perhaps the real influence of Newton on Adam Smith should be analyzed further, especially on the issue of gravitation. Besides I believe there is more literature on Smith’s interpretation of prices that should be properly addressed.
Given the nature and subject matter of the paper, I also suggest exploring:
Hetherington, N. S. (1983) ‘Isaac Newton’s Influence of Adam Smith’s Natural Laws in Economics’, Journal of the History of Ideas 44, 3: 497-505.
On the relationship with History of Astronomy, see:
Longuet-Higgins, H. C. (1992) ‘“The History of Astronomy”: a twentieth-century view’, in P. Jones and A. Skinner (eds), Adam Smith Reviewed, Edinburgh: Edinburgh University Press.
And on the context of Newtonianism on Adam Smith, see:
Montes, L. (2008) ‘Newton’s Real Influence on Adam Smith, and Its Context’, Cambridge Journal of Economics, vol. 32, N°4, pp. 555-76.
Taking into account these suggestions, I recommend you its publication.
Montes denies the originality of what he calls my “thesis” that “Sraffa also thought that Smith’s natural price is not the same as Marshall’s normal price”. If someone has made this argument previously, it may have some importance for my argument. Sraffa himself says something like this, without mentioning Marshall: “When A. Smith, etc. said “natural” he did not in the least mean the ‘normal’ . . . value” (D3/12/11/83 n.d. cited by Garegnani 2005: 474 and Sinha 2010: 327). But this is an unpublished note that has appeared in print as far as I know twice, cited only by Garegnani and Sinha, neither of whom took it as a criticism of Marshall. I would be grateful to know where this point has been treated previously.
In any case I would not call this a thesis of my essay. I do not explicitly state the position or present evidence in support of it. It may be correct to say that this is a plausible inference that can be drawn from my essay, but I do not draw it. My central theses are stated clearly: that Smith’s gravitation metaphor provides no basis for Marshall’s interpretation of natural prices as normal prices; that Smith’s natural prices should be understood in an Aristotelian sense as continuation prices; and that Smith’s natural prices interpreted this way are similar to the prices of Sraffa’s Production of Commodities.
The central theme of the comment is the recommendation that I discuss the influence of Newton on Smith and especially Montes’s interpretation thereof. This is complicated because I disagree with Montes’s interpretation. I believe he mistakes the influence of Aristotle on Smith for that of Newton. But whether I am right or Montes or someone else, this question is, in my view, extraneous to my argument in the essay at hand. It seems to me that a brief discussion would not do the matter justice but a longer treatment would be a distracting sideshow. The topic deserves separate consideration. For the purposes of this essay, it seems to me, the footnote already included citing several articles, including Montes 2006, is sufficient.
Finally, Montes claims “there is more literature on Smith’s interpretation of prices that should be properly addressed”. What literature is intended? I have combed the massive literature on Smith, but presumably not all of it. I hope I have not missed anything of relevance and importance, but if I have I would be most grateful to be informed of my omission.
Adam Smith does not employ two distinct methodologies in his work, a philosophical one in TMS and another, of a positive and scientific character, in WN. Rather, he always writes within the framework of an empiricist philosophy. There is, therefore, a coherence between moral phenomena and economic phenomena in his writings. As a result, the interpretation that David Andrews proposes of the relationship that exists between “natural price” and the purposes of nature in Smith is very interesting. Natural price is an economic phenomenon, discussed in WN, and which should be understood in the light of a moral phenomenon, i.e. the natural impulse to self-preservation and the propagation of the species, to which Smith refers in TMS and LD. Human beings have developed the division of labor, mutual dependence, exchange and prices on the basis of this primordial impulse. Thus, the natural price of a commodity is that which supports the purposes of nature: on the one hand it provides maintenance for those who participate in production, while on the other hand it sustains these economic activities indefinitely.
Andrews holds that Smith was influenced by Aristotle in his explanation of this relationship, an influence that he sees displayed in two principal points. First, Andrews claims that the gravitational metaphor that appears in WN, and which explains the fluctuations of market prices, does not originate with Newton, but is drawn instead from Empedocles or Aristotle. Indeed, he states, if the market price were to gravitate around the natural price according to a Newtonian conception of gravity, the attraction between them would be mutual, and the market price would make the natural price shift as well, as a result of causes alien to the purposes of nature that do not contribute to the proper functioning of the economic system. In contrast, if the market price were to move according to the ancient conception of gravity, it would do so towards a center of repose, which is the natural price. This phenomenon is explained by taking into consideration certain intentions of nature, i.e. self–preservation and the propagation of the species, which are found in all animals. However, Smith would not be the first to present a natural teleology of this sort, according to Andrews, but rather it would have first been proposed by Aristotle. I believe this affirmation is highly debatable.
Smith writes about this teleology twice in TMS, which is a treatise on ethics, once in a chapter on the moral merit of human actions, and another in a chapter on the virtue of justice; and once in ED, which is a first draft concerning his economic policies, and which were later fully developed in WN. On the other hand, the references to Aristotle that Andrews cites in order to back up his claims for the presence of this natural teleology in the Stagirite are taken from works dealing exclusively with zoology: “History of Animals” and “Generation of Animals”. The natural instinct for self-preservation, and that of the propagation of the species, which are found in human beings just as in every animal, are not elements either of the ethics or the economic policy of Aristotle, as they are for Smith.
Indeed, according to Smith, these instincts, united with another natural instinct, i.e. that of “truck and barter,” lead human individuals to develop the division of labor, exchange, prices and mutual cooperation. Natural prices promote the purposes of nature, within this process, i.e. the self–maintenance of individuals and the reproduction of the system as a whole, via the continuing of production. “All the arts, the sciences, law and government, wisdom, and even virtue itself tend to this one thing, the providing [of] meat, drink, rayment [sic], and lodging for men,” affirms Smith in LJA, as cited by Andrews.
The finality of economic activity in Smith is, therefore, the satisfaction of the basic necessities of human beings by means of an economic system that, insofar as it contributes to this purpose, maintains itself over time. In Aristotle, on the other hand, this finality is subordinated to the good or virtuous life qua primary end, which proves to mark an essential difference with Smith. Aristotle affirms the following in Politics I.4, 1253b 24–25: “the art of acquiring property is part of household–management; for both life itself and the good life are impossible without the essentials.” He distinguishes in this passage between life itself, i.e. survival, and the good or virtuous and happy life. Economic activity does not have as its end merely the satisfaction of the material necessities of the household or the polis, but rather it is principally oriented towards the good life and happiness, which are in turn the end of the polis itself. This is explained via the Aristotelian distinction between immanent and transitive actions (Metaphysics IX, 8, 1050ª 30–31). The result of an immanent action remains within the agent, as a perfection or imperfection, while that of transitive actions remains outside of the subject, as a product. The majority of actions are transitive and immanent at the same time, as in the case of economic activity, which, in addition to producing wealth, makes good or ill use of it. This latter is its immanent aspect, which, as such, is worthy of being chosen for itself. For Aristotle, the principal finality of economic activity is to use wealth well, i.e. virtuously (Nichomachean Ethics I, 1, 1094ª 9), and is not merely survival, which marks a radical difference with Smith.
Along the same lines, I think that it is not entirely accurate to affirm, as does Andrews, that “for Smith, as for Aristotle, people are inherently social, brought together by their need for each other: ‘man…can subsist only in society’ (TMS II.ii.3.1).” Society is necessary for the subsistence of individuals, according to Smith. The division of labor permits people to be more productive than animals are, but it makes them dependent on one another for their subsistence, due to the specialization that each person acquires. However, the aid of other people is not obtained by appealing to their friendship or benevolence, but rather to their self-love. For Aristotle, in contrast, society is not structured to foster the subsistence of individuals, but rather to promote the practice of the moral virtues, which lead to friendship or love between the members of society (Nichomachean Ethics, VIII, 1, 1155ª 27-28).
I suggest exploring:
Crespo, Ricardo F., 2006. “The Ontology of the ‘Economic’: an Aristotelian Analysis”, Cambridge Journal of Econonmics, 30/5, 2006, pp. 767-781.
Crespo, Ricardo F., 2008, “Aristotle’s Science of Economics”, in Samuel Gregg and Ian Harper (eds.), “Christian Morality and Market Economies: Theological and Philosophical Perspectives”, Edward Elgar Publishing Limitted, pp. 13-24.
Crespo, Ricardo F. 2008. “‘The ‘Economic’ According to Aristotle: Ethical, Political and Epistemological Implications”, Foundations of Science, Springer Verlag, 13; 3-4, pp. 281-294..
Crespo, Ricardo F. 2008. “Aristotle”, in Irene van Staveren and Jan Peil (eds.), “Elgar Handbook of Economics and Ethics”, Cheltenham and Northampton, 2009, pp. 14-20.
In many places Maria Elton’s comment summarizes my argument very nicely, but she also raises two objections. First, Elton suggests that it is a criticism of my argument to note that the purposes of nature “are not elements either of the ethics or the economic policy of Aristotle, as they are for Smith.” Second, she objects to my claim that both Smith and Aristotle thought people were inherently social on the grounds that they did not think people were inherently social in precisely the same sense.
Both objections are based on a misunderstanding for which I accept some responsibility, a matter I plan to clarify during revision. I have said that Smith’s natural prices should be understood in an Aristotelian sense as continuation prices, but I see now that this is ambiguous. It may be taken to mean (and I think it has been by Elton) that I am claiming that continuation prices appear somewhere in Aristotle’s economic or ethical thought and writings, a claim Elton rightly contradicts. But this is not my argument.
On the relationship between Smith and Aristotle’s ideas about the economic, I have made no claims. My argument makes almost no reference to Aristotle’s views on ethics or economic life as expressed in the Nichomachean Ethics and the Politics because they do not bear directly on my argument. In fact I disagree with Elton’s interpretation of relationship between Smith’s and Aristotle’s economics—I think they are closer than she does—but that is a topic for a different essay.
When I write that Smith’s natural price can be understood in an Aristotelian sense, I mean only that it is based on Aristotle’s idea of nature, purposive and focused on the continuing process of self-maintenance and reproduction, emphatically not that it follows closely the economics of Aristotle. Smith developed Aristotle’s idea of nature in an original manner with reference to human beings in a way that Aristotle did not.
This idea is expressed, perhaps poorly, in the following passage from my essay (p. 9): “Aristotle discussed at great length the nourishment and reproduction of non-human animals, so that Smith’s discussion of human reproduction represents an extension of Aristotle’s position to the human species rather than a recitation of what Aristotle wrote, but the basic approach follows Aristotle’s example.” The point evidently deserves clarification and amplification.
Likewise with respect to the innate social character of humans. Smith began from Aristotle’s idea but interpreted it in his own way. I stand by the passage quoted in Elton’s response suggesting that they are similar up to a point: “for Smith, as for Aristotle, people are inherently social, brought together by their need for each other: ‘man . . . can subsist only in society’ (TMS II.ii.3.1).” It is true for Aristotle both that people are inherently social and that the origins of society are found in mutual needs. Smith believed the same. I have made no claims beyond that. I think that Elton’s suggestion that there is an important difference between Smith and Aristotle on this point is interesting, but I am not yet persuaded. In any case it is tangential to the question of natural prices.
This paper is a definite contribution to the literature on Adam Smith. It makes a strong case for a reinterpretation of Smith’s notions of ‘natural’ and ‘market’ prices. David Andrews argues that it is incorrect to understand Smith’s metaphor of ‘gravitation’ of market-prices to natural-prices in terms of the Newtonian gravitation mechanism. It should, according to Andrews, be rather understood in Empedoclean or Aristotelian context, where the natural-price does not exert any attractive force on the market-price—it is simply in the nature of market-price to move in the direction of natural-price and settle at it. What consequences follow if Andrews’s interpretation is accepted? One would hope Andrews would give some thought to it.
Andrews argues that the natural-prices are simply the prices that ensure the historical or long-term reproduction of the given economic system, where the ‘given economic system’ is defined by the prevailing customary rates of wages, profits and rents at any historical juncture. Now, can it be shown that such data are sufficient to determine the natural-prices of commodities that would consequently reproduce those distributional data? Smith’s own treatment of this problem is rather confused and controversial (for details on this see Sinha 2010a,b). In any case, Adam Smith thought that he needed a mechanism to ensure that these customary rates are established across the industries and sectors of the economy and the idea of gravitation of the market-prices to the natural-prices is only an aspect of that mechanism. The other inseparable variable associated with this mechanism is the quantity supplied that adjusts to the predetermined effectual demand. It seems to me that Andrews has not given sufficient consideration to the quantity adjustment aspect of the gravitation mechanism in Smith.
Once we bring in the quantity supplied and the given effectual demand into the picture, we then begin to see the Newtonian aspect of the mechanism rearing its head. It is the stress created by the disparity between the quantity supplied and the effectual demand that causes the divergence of market-prices from the natural-prices to begin with. Thus the forces behind the movements of market-prices are not generated by the natural-prices but rather they are generated by the forces of effectual demands and supplies. The reason why natural-prices are not affected during this process of adjustment is simply due to an implicit assumption of constant returns to scale for the techniques in use. If we remove this restrictive assumption then the quantitative adjustments of the gravitation process would affect the natural-prices. Furthermore, Adam Smith’s gravitation process does not work on single commodity—it works on all the commodities simultaneously. Thus the forces of gravitation can be interpreted as acting on all the commodities simultaneously and the natural-prices can be interpreted as the position of equilibrium of all these forces working against each other.
This notwithstanding, I think Andrews makes a strong case that Smith’s overall philosophical make-up was not ‘mechanical’ but rather ‘naturalistic’. And his interpretation of natural-price harmonises this aspect of Smith’s theory with Adam Smith’s general position on the natural course of economic development. One consequence of Andrews’s interpretation is that it removes the gravitation process from playing any significant role in Smith’s theory of value. And this brings Adam Smith closer to Sraffa, as Andrews himself recognises: ‘I highlight the similarity between natural prices construed in this way and the prices of Piero Sraffa’s Production of Commodities by Means of Commodities’. Of course, the received interpretation of Sraffa’s prices, led by Garegnani, argues that the mechanical gravitation of market-prices to natural-prices is a central pillar of Sraffa’s theory of prices, albeit implicitly. Thus Andrews’s interpretation of Sraffa’s prices appears to disagree with the received interpretation. In my opinion, the received interpretation of Sraffa’s prices is untenable (see Sinha 2010a, 2012). I think Sraffa shows that the gravitation mechanism was an unnecessary appendage to the classical theory of value and it can easily be surgically removed without damaging the system (see Sinha 2013). In other words, Sraffa succeeds in dissolving the classical distinction between the ‘market’ and the ‘natural’ prices. Now, Andrews’s reinterpretation of Smith’s gravitation metaphor fits well with what I will call Sraffa’s ‘classical standpoint’.
Sinha, A. 2013. ‘On the Notion of Equilibrium and the Gravitation Mechanism’ in The Oxford Handbook of Post-Keynesian Economics vol.1, (eds.) G.C. Harcourt and Peter Kriesler, New York: Oxford University Press, pp. 101-122.
Sinha, A. 2012. ‘Listen to Sraffa’s Silences: A New Interpretation of Sraffa’s Production of Commodities’, Cambridge Journal of Economics, 36(6), 2012, pp. 1323-1339.
Sinha, A. 2010a. Theories of Value from Adam Smith to Piero Sraffa, London: Routledge.
Sinha, A. 2010b. ‘In Defence of Adam Smith’s Theory of Value’. European Journal of the History of Economic Thought, vol. 17(1), pp. 29-48.
Ajit Sinha’s thought provoking comment provides an opportunity to clarify an aspect of my argument.
It has been noticed at least since Cohen 1994 that the movement of market prices toward natural price during the adjustment process Adam Smith described with his gravitation metaphor does not reflect the mutually attractive movement of independent bodies subject to Newtonian gravitation, as Smith makes no mention of changes in natural price. Several writers have referred to Cohen, but as far as I know the point has not been contested.
In the essay I argue further that the gravitation of Smith’s metaphor is gravitation as understood by Empedocles and Aristotle, with market price moving toward a central point of rest as if it had an innate tendency.
Along with other evidence from the text, this indicates that Smith’s gravitation metaphor illustrates the movement of market prices only, carrying no implications for the determination or essential characteristics of natural price, which serves here merely as a geographic reference point, determined on the basis of entirely different considerations.
This contrasts with the interpretations of Alfred Marshall and Pierangelo Garegnani for whom Smith’s natural price was determined in connection with the gravitation-like adjustment process as an equilibrium price or a center of gravitation price.
Sinha evidently shares the position of Marshall and Garegnani, as he also ties natural price crucially to the adjustment process: “Clearly the notion of equilibrium is critical to Smith’s theory of value, as the conceptual legitimacy of the notion of natural price rests on it being the equilibrium market price” (Sinha 2013: 104).
Sinha defends his position, claiming that the underlying movement of market price and natural price in Smith’s account is indeed Newtonian, but that it does not appear to be so because Smith implicitly assumed constant returns to scale, thereby constraining the movement of natural prices: “The reason why natural-prices are not affected during this process of adjustment is simply due to an implicit assumption of constant returns to scale for the techniques in use.”
Sinha holds that if we release natural prices from that constraint, then we find the “Newtonian aspect of the mechanism rearing its head,” that is, we get the result contrary to Smith, Cohen and Andrews that during the adjustment process market prices and natural prices move similarly to bodies subject to Newtonian gravitation: “If we remove this restrictive assumption then the quantitative adjustments of the gravitation process would affect the natural-prices.”
This interpretation is problematic on a number of levels. Even if the premises were true, simply dropping the assumption of constant returns is not enough to generate Newtonian mutual attraction of natural and market prices. That result would require the additional and equally restrictive assumption of decreasing returns to scale in all industries, so that when the market price rose (fell) as the result of an increase (decrease) in effectual demand, natural price would rise (fall) as if attracted by it.
But “we” cannot change the assumptions, implicit or not, of Smith’s theory. To claim the power to do so strikes me as puzzling.
Moreover, the central premise, that Smith’s description of the gravitation-like movement of market prices involves an implicit assumption of constant returns to scale, holds only if we assume that Marshall’s theory is correct that the quantity produced of each commodity in isolation is functionally related to its cost of production.
Sraffa (1925, 1926) argued compellingly that Marshall’s theory is not correct: in general there is no functional relationship between the cost of production and the scale on which a particular commodity is produced. Smith’s gravitation-like process involves a single commodity, so the constant returns assumption Sinha attributes to Smith is not simply unnecessary, but logically impermissible: “the assumption becomes illegitimate, when a variation in the quantity produced by the industry under consideration sets up a force which acts directly, not merely upon its own costs, but also upon the costs of other industries; in such a case the conditions of the ‘particular equilibrium’ which it was intended to isolate are upset, and it is no longer possible, without contradiction, to neglect collateral effects” (Sraffa 1926: 539).