# natural-rate

## Definition

The natural rate refers to the ordinary or average rate of wages, profit, or rent that prevails in a society or neighbourhood under normal conditions. These rates are naturally regulated by general circumstances of society (riches or poverty, advancing or declining condition) and by the particular nature of each employment. Natural rates serve as benchmarks for determining natural prices and represent the equilibrium levels toward which actual rates tend.

## Source Chapter

Book 1, Chapter 7: "OF THE NATURAL AND MARKET PRICE OF COMMODITIES."

## Context

Smith establishes natural rates as the foundational component of natural prices. He explains that these rates vary across different employments and societies, and that they form the basis for determining whether market prices are above or below their natural levels. The concept appears throughout his analysis of price determination.

## Economic Domain

General Theory

## Smith's Original Wording

"There is in every society or neighbourhood an ordinary or average rate, both of wages and profit, in every different employment of labour and stock. This rate is naturally regulated, as I shall shew hereafter, partly by the general circumstances of the society, their riches or poverty, their advancing, stationary, or declining condition, and partly by the particular nature of each employment."

## Modern Interpretation

Natural rates function as Smith's equilibrium concepts for factor returns - the rates that would prevail in competitive markets when all adjustments have occurred. These rates provide the foundation for understanding long-run price determination and factor market equilibrium in classical economics.