Theories of Surplus Value, Part II, Chapter 10 - Part 33

When the price of a commodity falls below its natural price, for Smith, this is because the price of land, labour or capital has fallen below its natural price. For Ricardo, the market correction arises from a reallocation of capital. That is, if the price of linen falls, and of silk rises, capitalists in the former production reduce their production, lay off workers, and reduce their borrowing for materials etc. Producers of silk increase their borrowing, employ more workers, and buy more materials.

Smith's view “is more consistent than Ricardo’s, but it is wrong.” (p 221) 

For Smith, the natural price is too low because there is an abundance of one or more factors of production, whose price is then too low, and below its natural price. The consequence is that supplies of this factor are reduced, as they move to other employments, which then causes the price of that factor to rise, which raises the cost of production until it reaches the natural price of the commodity.

““Whatever part of it” (the natural price) “was paid below the natural rate, the persons whose interest it affected would immediately feel the loss, and would immediately withdraw either so much land, or so much labour, or so much stock, from being employed about it, that the quantity brought to market would soon be no more than sufficient to supply the effectual demand. Its market-price, therefore, would soon rise to the natural price. This at least would be the case where there was perfect liberty” ( [O.U.P., Vol. I, p. 69; Garnier,] l.c., p. 125).” (p 221-2) 

Both Smith and Ricardo are wrong, in this respect, therefore, but for different reasons. Smith is wrong because of his view that the natural price is only the cost-price of the commodity, comprising its costs of production. Ricardo is wrong because he equates the value of the commodity with its price of production, determined on the basis of a pre-ordained average rate of profit. But, Ricardo is correct, as against Smith, that it is this average rate of profit which alone determines the cost prices.

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