# Chapter Analysis: Natural and Market Price Mechanisms in the VSM Framework

## Chapter Summary

This chapter establishes the fundamental distinction between natural and market prices in economic systems. Smith argues that every society has ordinary or average rates of wages, profit, and rent that are naturally regulated by general societal circumstances (riches, poverty, advancing or declining condition) and the particular nature of each employment. The natural price of a commodity is defined as the price that exactly covers the rent of land, wages of labour, and profits of stock required to bring it to market according to their natural rates.

The market price, in contrast, fluctuates around the natural price based on the relationship between quantity supplied and effectual demand—the demand of those willing to pay the full value of rent, wages, and profit. When supply falls short of effectual demand, market prices rise above natural prices; when supply exceeds effectual demand, market prices fall below natural prices. Smith demonstrates that natural prices act as gravitational centers toward which market prices continually tend, despite various obstacles that may temporarily suspend them above or below this central point.

The chapter also examines how different types of commodities experience varying degrees of price fluctuation based on the predictability of their production. Commodities with stable production quantities (like manufactured goods) experience less price variation than those with variable production (like agricultural products). Additionally, Smith identifies factors that can keep market prices elevated above natural prices for extended periods, including monopolies, exclusive privileges, natural scarcity, and trade secrets.

## Entities Extracted

- **ordinary-or-average-rate**: The standard or typical level of wages, profit, or rent that prevails in a particular society or neighbourhood for different employments of labour and stock. This rate is naturally regulated by both general circumstances of the society (such as its riches, poverty, and condition of advancement or decline) and the particular nature of each employment.

- **natural-price**: The price of a commodity that exactly covers the rent of land, wages of labour, and profits of stock required to bring it to market according to their natural rates. It represents what the commodity "really costs" the person who brings it to market and serves as the gravitational center toward which market prices tend.

- **market-price**: The actual price at which any commodity is commonly sold, which may be above, below, or exactly the same as its natural price. It is regulated by the proportion between quantity brought to market and the effectual demand of those willing to pay the natural price.

- **effectual-demand**: The demand of those willing and able to pay the whole value of rent, wages, and profit required to bring a commodity to market. It is distinguished from absolute demand by the ability to actually effectuate the bringing of the commodity to market.

- **natural-rate**: The rate of wages, profit, or rent that naturally prevails in a society, regulated by general circumstances and the particular nature of employments. These rates vary according to the society's riches or poverty, advancing, stationary, or declining condition.

## VSM Mappings

- **ordinary-or-average-rate → S3 Control / Operational Management** (Strong): The ordinary or average rate functions as an emergent regulatory mechanism that System 3 would establish and maintain, setting the parameters within which System 1 (individual economic actors) operate.

- **natural-price → S3 Control / Operational Management** (Strong): Natural price serves as the central regulatory standard that System 3 would establish, representing the equilibrium point toward which the system naturally gravitates.

- **market-price → S1 Operations** (Strong): Market price represents the direct operational activity of individual economic actors buying and selling commodities in the marketplace.

- **effectual-demand → S2 Coordination** (Strong): Effectual demand functions as a coordination mechanism that regulates the flow of commodities to market by determining which demands are sufficient to effectuate market transactions.

- **natural-rate → S3 Control / Operational Management** (Strong): Natural rates represent the regulatory framework established by System 3 that governs how value is distributed among different economic activities.

## VSM Coverage

This chapter provides strong coverage of three VSM systems:

- **System 1 (Operations)**: Well represented through the concept of market price, which captures the direct operational activities of buying and selling commodities in the marketplace. Market price reflects the autonomous actions of individual economic actors responding to supply and demand conditions.

- **System 2 (Coordination)**: Adequately represented through effectual demand, which functions as a coordination mechanism that regulates which demands are sufficient to bring commodities to market. This represents the information channels and mechanisms that coordinate economic activity.

- **System 3 (Control / Operational Management)**: Strongly represented through multiple concepts including ordinary-or-average-rate, natural-price, and natural-rate. These concepts collectively represent the regulatory framework that System 3 would establish to govern economic activity, setting the parameters for wages, profit, and rent that regulate how value is distributed.

However, the chapter provides limited or no coverage of:

- **System 3* (Audit/Monitoring)**: There is no explicit discussion of audit or monitoring mechanisms that would allow System 3 to verify information from System 1 through channels other than those provided by System 2.

- **System 4 (Intelligence/Adaptation)**: The chapter focuses on established price mechanisms rather than discussing how the economic system gathers intelligence about external environmental changes or adapts to new conditions.

- **System 5 (Policy/Identity)**: There is no discussion of the overarching policy-making body or the identity and values that would define the purpose of the economic system as a whole.

## Gaps & Observations

The chapter's focus on price mechanisms provides excellent coverage of the operational and regulatory aspects of economic systems (S1 and S3) but reveals significant gaps in the VSM framework's intelligence, audit, and policy dimensions (S3*, S4, and S5).

The mapping of effectual demand to System 2 is particularly insightful, as it demonstrates how coordination mechanisms operate through the filtering of demands based on their ability to actually effectuate market transactions. This represents a sophisticated understanding of how anti-oscillatory mechanisms can regulate economic activity.

The concepts of natural price and natural rate as regulatory standards align well with System 3's function of establishing rules and constraints for operational units. However, the chapter does not address how these regulatory standards are monitored or audited, which would be the function of System 3*.

The absence of System 4 coverage is notable, as the chapter does not discuss how economic actors gather intelligence about external market conditions, technological changes, or other environmental factors that might affect price mechanisms. Similarly, there is no discussion of System 5's role in defining the overarching purpose or identity of the economic system.

To enrich future analysis, it would be valuable to examine how price mechanisms adapt to changing environmental conditions (S4), how regulatory standards are verified and enforced (S3*), and how overarching economic policies and principles guide the entire system (S5). Additionally, exploring how emergency signals (algedonic signals) might arise in price markets could provide insight into the system's response to critical situations requiring immediate intervention.