Mercantilists Competition and Price

The Mercantilists, Competition, Supply and Demand, Price

The general trend not only in practice but in the theories of the economists was toward a price system determined by the forces of the market. This does not mean that controlled prices ceased to exist. The stabilizing effect of the guilds persisted. State-created monopolies controlled the amount and price of numerous products, and government regulation was still important. Never­theless, those acquainted with such matters began to show a greater appreciation of the economic forces underlying price. Jean Bodin in his Reponse aux Paradoxes de Malestroit (1569) gave a detailed explanation of price changes. The most impor­tant cause of the rise in prices, he said, was the increase in the amount of silver and gold in circulation, due to the expansion of trade and the influx of metal from America. Another important cause of rising prices was the control of products by monopolies. The emphasis upon export which caused scarcity at home, the extravagance of the nobility, and the debasement of the monetary unit, all played a part in the upward swing of prices. As a remedy for this condition, Bodin advocated free trade. Both the explana­tion and the remedy were far in advance of their time, for they were essentially the same points which Adam Smith discussed so effectively more than two hundred years later.

That Mercantilism underestimated the strength of economic forces and relied almost entirely upon rigid control was nowhere more apparent than in Thomas Mun's suggestions concerning a price policy. We might even say that Mun conceived of price as an instrument of economic warfare. On goods of which Eng­land had a monopoly, he said, prices should be kept high, but not so high as to be prohibitive. Goods which were highly com­petitive should be priced low so that England might continue to hold a large share of the market. However, a policy designed to drive competitors out of the market by extraordinarily low prices only to be followed by excessively high prices was quite unwise. He was aware, at least in domestic trade, that an increas­ing quantity of money raised prices. There is no clear indication ia his writings that Mun was aware of the close connection be­tween money, supply of goods, prices, and the amount of trade. But later economists of the classical school made much of this relationship.

Sir William Petty introduced several ideas of price which indicated the trends of thought in future years. He suggested first of all that the price of a commodity would tend in the long run to remain equal to the amount of silver that a man could mine if he worked as long as it was necessary for another man to pro­duce a unit of the commodity in question. This is how Petty him­self explained it:
Let another man go travel into a country where is Silver, there Dig it, Refine it, bring it to the same place where the other man planted his Corn; Coyne it, etc. the same person, all the while of his work­ing for Silver, gathering also food for his necessary livelihood, and procuring for himself covering, etc. I say, the Silver of the one, must be esteemed of equal value with the Corn of the other: the one be­ing perhaps twenty Ounces and the other twenty Bushels. From whence it follows that the price of a Bushel of this Corn to be an Ounce of Silver.

Hence labor, in Petty's thinking, was the basis of value, or true price. The political price, or worth in exchange, was dependent upon a number of factors: excessive competition among those supplying goods to the market; an abundance of substitute com­modities; custom; and the general relationship of supply to de­mand.

Locke and Hume increased the understanding of prices by making clear statements of the effect of the quantity of money on prices. This topic has already been discussed in an earlier chapter; it is sufficient to note that Hume believed that prices of commodities would always be influenced directly by the quantity of money available. Therefore, the actual money in circulation did not affect the exchange of goods. By using an imaginary situation Hume was able to show that with drastic reductions in the quantity of money to the extent of four-fifths of a nation's supply prices would immediately fail to accommodate the supply of goods to the supply of money. A reverse situation would pro­duce just the opposite results, indicating that prices varied with the quantity of money to effect a stable basis of exchange. Hume was careful to point out that hoards of money and plate had no bearing on this process since it was only money in circulation which mattered.

Some references to the influence of both money and the law of supply and demand upon prices were also made by Cantillon in his famous Essai sur la Nature du Commerce en General. He said, by way of illustration:

Suppose the Butchers on one side and the Buyers on the other side. The price of Meat will be settled after some altercations, and a pound of Beef will be in value to a piece of silver pretty nearly as the whole Beef offered for sale in the Market is to all the silver brought there to buy Beef. This proportion is come at by bargaining. The Butcher keeps up his Price According to the number of Buyers he sees; the Buyers on their side, offer less according as they think the Butcher will have less sale; the price set by some is usually fol­lowed by others. Some are more clever in puffing up their wares, others in running them down. Though this method of fixing Market prices has no exact or geometrical foundation, since it often depends upon the eagerness or easy temperament of a few buyers or Sellers, it does not seem that it could be done in a more convenient way. It is clear that the quantity of Produce or of Merchandise offered for sale, in proportion to the demand or number of Buyers, is the basis on which is fixed or always supposed to be fixed the Market Prices.

Through the influence of price, he believed that supply and de­mand equalized themselves. Another of Cantillon's illustrations showed a farmer with a surplus of corn and not enough wool. Reversing the ratios next year the farmer found himself with too much wool and not enough com. This alternation continued until the farmer found the correct proportion. The criterion of over-supply and under-supply is price, for the farmer with an over-supply finds his money income too small to pay his rent.
Sir James Steuart was another who anticipated the work of Adam Smith by developing a theory of price based upon supply and demand. If supply and demand balance, the resulting price will be relatively fixed, he claimed. But the balance might be disturbed by any one of a number of factors. If an over-supply existed, seller's competition would reduce prices. If an under-supply appeared, buyer's competition would raise prices. Under ordinary circumstances Steuart believed the activity of merchants themselves would maintain a price equilibrium. Should any un­usual change occur, however, he believed firmly that the Govern­ment should intervene.

The ideas of price held by the Physiocrats were not as clear as some of the writers we have discussed above. Their emphasis upon competition as the force which determined price was an obvious indication of their disapproval of fixed prices. They did have some idea of a natural price and a market price, but at no point did they give a very understandable explanation of how these prices were established.