Essay on the Nature of Trade in General’
In the excerpt from R. Cantillion ‘Essay on the Nature of Trade in General’ relationship between price and costs of production are being described and explained. Author emphasizes that price of a commodity is a ‘measure of the Land and Labour which enter into its Production’. In other words, price consists of labour and manufacturing costs and should reflect the quality of these two factors. In the excerpt, author makes some accurate assumptions.
Firstly, he notices the difference in value of land and labour: ‘One Acre of Land produces more Corn or feeds more Sheep than another. The work of one Man is dearer than that of another’. I am interpreting land as the quality of materials to produce a commodity and consider only labour included in manufacturing. So the fertility of land (which is equal to the quality of the good, as the more fertile land is, the tastier, nicer and bigger fruits it will produce) and quality of labour should be included in the price.
Author uses example with wool suite to illustrate his observations : ‘If the Wool of the one Acre is made into a suit of coarse Cloth and the Wool of the other into a suit of fine Cloth, as the latter will require more work and dearer workmanship it will be sometimes ten times dearer’. So the suit of fine cloth will be more expensive than the one from coarse cloth even thought the price of materials used for these suits are the same. It means that price difference of the costumes is determined by the price of labour. Fine cloth suit requires more skilled work and at the same time more expensive work.
Skilled workers, with more knowledge are more efficient so their labour costs more. Same relationship between price and quality of materials exist: ‘the price of the Hay in a Field, on the spot, or a Wood which it is proposed to cut down, is fixed by the matter or produce of the Land, according to its goodness’. Author uses phrases such as ‘land fertility’ and ‘quality of the produce of the land’, but for simplicity, let’s assumes that it is the quality of materials used for production or the quality of the good itself it is a raw material.
The price of billets is determined by the quality of timber, the price of hay is determined by the quality of the grass cut. In this case the difference between two identical piles of wood or two rolls of hay is determined by the quality of the materials. This given example proves that relationship between the price and quality of the materials do exists. Another accurate observation was made about the surplus and the shortage influence to the price. Author used an example with corns: ‘If the Farmers in a State sow more corn than usual<… gt; there are more sellers than buyers the Market Price of the Corn will necessarily fall below the intrinsic price or Value’. In other words, supply which is larger than demand will create a surplus, the price will decrease and will be below the equilibrium price. Same example with corns was used to illustrate the shortage: ‘Farmers sow less corn than is needed for consumption there will be more buyers than sellers and the Market Price of corn will rise above its intrinsic value. ’ When demand is larger than supply, a shortage will occur, causing prices to go up.
These processes were simply but accurately explained in the text. The author also noticed the government’s importance in economics. He explained how prices can be fixed: ‘the Magistrates of the City are able to fix the Market Prices of many things, like bread and meat… ’. This is simply government’s policy of price floor which enables to keep the market prices above equilibrium price to protect the producers. Despite these accurate observations, inconsequence can be found. First of all, author does not consider all factors that influence the price.
Costs of labour and materials are part of production costs but there are also price of the machinery needed for production, taxes, transportation costs and many more, according to the business. All these fixed and variable costs must be included in the price of the commodity. Profits were not considered as well but are very important as they can make up most of the price especially of brand name products. Prime cost of a designer handbag is far lower than its market price because it includes huge profits for the designer. So the main idea of the text is correct but there are still some places to be improved.
In conclusion, the excerpt from R. Cantillion ‘Essay on the Nature of Trade in General’ includes quite a few accurate examples and observations about economy and more specifically about the relationship between the price and quality of materials and labour (in author’s terminology: ‘The Price and Intrinsic Value of a Thing in general is the measure of the Land and Labour which enter into its Production‘). Essay was written in the beginning of the XVIII century so the examples and terminology of the text are quite archaic. Time of publishing might also be the reason why essay include inconsistencies.
