The Role of Demand in Adam Smith's Theory of Natural Price

Abstract

By the use of a simple growth model, it is shown that prices are not determined purely by technological or cost considerations and the role of demand in the determination of prices is properly recognized in Adam Smith's theory of natural prices, in which the natural rate of wage is considered to be higher in an economy with a higher rate of growth and the higher wage and the higher rate of profit can coexist. Smith's theory of falling rate of profit is defended from Ricardo's criticism.