ABSTRACT
This chapter is an exposition of Smith’s Book I, Chapter 7. I first consider the definition of natural price, and I relate the concept of costs of production to Smith’s theory of justice. For a component to be a legitimate cost, there must be a legitimate claim for compensation. This chapter explains this for profits, leaving wages and rent to a different chapter. Smith, for now, assumes that rent is on the same footing as wages and profit, an original source of value and an element of the cost of production. I argue that Smith’s value theory as presented here is a supply and demand theory, although with significant differences with neoclassical supply and demand theory. I present a graph based on Smith’s text to illustrate how market price adjusts to natural price. Natural price is a philosophical construct, but the adjustment process is a contextual model. This is relatively uncontroversial material; my main contribution is the relation between cost and justice, and the emphasis on demand as a driver of the system of resource allocation.
