Commodity and Market

Petty’s contribution to economic science referred primarily to the formulation of a set of key concepts, such as commodity, market and price; we will illustrate them referring to the Dialogue of Diamonds (Petty 1899, pp. 624-30).

The dialogue has two protagonists: Mr A, representing Petty himself, and Mr B, an inexperienced buyer of a diamond. The latter sees the act of exchange as a chance occurrence, a direct encounter between buyer and seller, rather than a routine episode in an interconnected network of relationships. The problem is a difficult one because the specific individual goods included in a single category of marketable goods - diamonds in our case - differ from one another on account of a series of quantitative and qualitative elements, even leaving aside differing circumstances (of time and place) of each individual act of exchange. Thus, in the absence of a norm that might provide for definition of a single reference point for the price of diamonds, Mr B considers exchange a risky act, since it appears impossible for the buyer to avoid being cheated, in what is a unique event in his experience, by the merchant, who has a more extensive knowledge of the market.

In the absence of a web of regular exchanges, that is, of a market, the characteristics and circumstances of differentiation mentioned above operate in such a way as to make each act of exchange a unique episode, where the price essentially stems from the greater or lesser bargaining ability of seller and buyer. The existence of a market, on the contrary, allows transformation of a large part of the elements that distinguish each individual exchange from any other into sufficiently systematic differences in price relatively to an ideal type of diamond taken as reference. There is thus a relationship between the emergence of a regular market on the one hand and, on the other hand, the possibility of defining as a commodity a certain category of goods, abstracting from the multiplicity of effective exchange acts a theoretical price representative of them all.

Mr A, the expert, is in fact aware of the existence of precise quantitative relationships between the prices of different types of diamond determined by weight, dimension, colour and defects. Thus, for example, ‘The general rule concerning weight is this that the price rises in duplicate proportion of the weight’ (Petty 1899, p. 627). A similar rule applies to the dimension. The average of the prices obtained on the basis of these two rules determines the ‘political price’ (a notion to be considered later) as given by both weight and dimension. This will be the price for a diamond without defects and with good colour. Adjustment coefficients will then be applied to determine the price of diamonds exhibiting defects or less valued coloration, scales for such coefficients being provided by the market. Naturally, the blind application of these rules may lead on occasion to absurd results, correction of which will require adjustments determined by experience as well as simple common sense.

Petty’s writings thus offer a representation of the process of abstraction leading to the concepts of market and commodity from the manifold particular exchanges that occur in the economy. Two qualifications are, however, necessary. First, a diamond is a commodity whose price is determined more by scarcity than by its cost of production; we have here a market isolated from other markets, at least as far as productive interrelations are concerned. Second, Petty only implicitly specified the analytical consequences of the fact that the market and the commodity are abstractions: not atoms of economic reality, clearly individualized (as the modern axiomatic theory of general economic equilibrium assumes), but corresponding to a certain level of aggregation, where the most opportune level of aggregation is determined by the extent of the interrelationships between the various acts of exchange. Thus, for instance, we may refer to apples, or to fruit, or to food in general, as a single commodity according to the level of aggregation thought to be most adequate, taking into account the relationships that come into play within the group of producers and within the group of buyers.

As for the notion of price, Petty distinguished between natural, political, current and actual price. The natural price depends on the state of technological knowledge and subsistence required for the workers. In addition to this, the political price takes into account social costs, such as labour input in excess of necessary labour: such costs are considered waste, indicative of the fact that actual production is lower than potential production. The current price is defined as the expression of the political price in terms of the commodity used as standard of measure, so that it, too, turns out to be a theoretical variable. Finally, we should distinguish between intrinsic causes determining the political price and extrinsic causes - those variable and contingent causes that combine with the former to determine the actual price.

Petty’s ‘natural price’ thus has the meaning of an optimal price, corresponding to the best technology available and to the most efficient possible operation of the ‘body politick’. For later classical economists, the ‘natural price’ has a different meaning, corresponding to that of Petty’s ‘political price’, since it points to the price that regulates the behaviour of the market and depends on the actual conditions of production prevailing in the economic system. Petty’s distinction between these two notions, in an historical period of far from fully developed capitalism, implies a stress on the higher costs attached to the then still backward level of social organisation.

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