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The Natural Price Theory and Macroeconomic Model

Gonzalo P�rez-Seoane



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Abstract



The Natural Price Theory and Macroeconomic Model suggest the existence of a

natural economic order, an order which may be hidden in the very essence of

human social and intelligent behaviour, an order which would facilitate the

ultimate harmonisation of the actions of all individuals, peoples and nations, an

order which would make the world economic system, as a whole, both

understandable and rational. The Natural Price Theory and Macroeconomic

Model has its origin in the empirical analysis performed on the principal

macroeconomic variables of France, Belgium-Luxembourg, Holland, Germany,

Italy, United Kingdom, Ireland, Denmark, Greece, Portugal, Spain, United

States, and Japan.



1.- The Natural Price Theory



The natural price theory suggests that every good or service may have two

distinct values. One visible, which would be the market price and the other,

which is permanently hidden, would be the natural value (or natural price).



The difference between the natural price and the market price of every good

and service would be inflation, which would imply a generalisation of the

Fisher effect in the economy or, in other words, defining this effect in terms of

the proposed hypothesis any market price existing in the economy is composed

of its natural value plus a certain level of inflation. The principal variations

that are observed in any market price are the result of the mood of inflation

over time (Other causes can affect the behaviour of market prices in a transitory

form supply-demand).



It would seem that, to date, the generalisation of the Fisher effect has not been

proposed in the terms described, and much less as a fundamental part of a

macroeconomic model, thus, this effect will be termed universal Fisher effect.



Natural

Value

Inflation

Market Price

Universal

Fisher Effect



Gonzalo Perez-Seoane

www.macroeconomicmodel.com

The central principle of the natural price theory and model is that the natural

value of every good and service is derived from the quantity and grade of

productive capacities and skills incorporated by unit of time or, in other words,

from the labour deployed in its production. The above gives a new perspective

on the theory known as the labour value theory. This theory, with different

emphases and various levels of development was maintained by Albert the

Great, Gerard Odonis, William Petty, Adam Smith, David Ricardo and Karl

Marx.



The changes in the natural prices will occur in line with modifications in the

labour standard of value or indeed with modifications in the quantity and grade

of the existing human productive capacities and skills. On the other hand, the

labour value of every productive activity, and therefore, the natural prices, is

supposedly fixed in terms relative to the other existing capacities and skills, so

that, as suggested by Leon Walras in a different theoretical context, all prices in

the economy are interconnected.



At present, Alfred Marshalls Law of Markets is the undisputed paradigm of

Economic Science. Thus, when the markets are in disequilibrium, it is assumed

that the adjustment variable is quantity, which implies that the equilibrium

price depends on the quantity supplied and demanded of the good.



D = Demand

S = Supply

Q= Quantity

P = Market Price



Contrary to one of the basic principles of Marshalls Law of Markets, natural

price theory, convinced of the existence of a natural or original value in each

and every good or service in the economy -a value derived from the hidden but

real functioning of the labour value standard- suggests that the quantity

supplied and demanded of good or service will tend to adjust to the natural

value of every good or service.



Vt= value of labour deployed in its production



Thus, the natural price theory may be summarised in the following diagram.

Dpx = � (Qx)

Spx = � (Qx)

Qdx = � (px) ⇒ px = � (Vtx)

Qsx = � (px) ⇒ px = � (Vtx)

The Natural Price Theory

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Universal

Fisher Effect

Natural Price Theory

Equilibrium point

Qd = Qs

Qd,Qs = f (P)

P = f (inflation,

relative value of labour

incorporated)

Value

of labour

incorporated

Price

Quantity

po

Qo

Inflation

Demand(d)

Supply (s)

Market

price

Natural

value

Market Price

price derived from the

relative value of the labour

incorporated in a good;

this value is altered over

time by inflation and by

the supply and demand

Natural Value

price derived from the

relative value of the labour

incorporated in the good;

this value is altered over

time by the supply and

demand





All prices in the economy would perform and vary over time in accordance

with this theory, apart from the labour market and the price of money.



As may have been observed, the natural price theory combines three important

price theories from economic history



1.- The Labour Value Theory. The labour value theory, in a broad sense

proposes that human work is the absolute standard of value and so determines

the price of all goods and services. This theory with different emphases and

various levels of development was maintained by Albert the Great (106-180),

Gerard the Odonis (150-16), William Petty (16-1687), Adam Smith

(17-170), David Ricardo (177-18), and Karl Marx (1818-188).



.- Marshall’s Law of Markets. The theory of demand was introduced in a half-

hearted way by Richard Cantillon (174) and Adam Smith, John Stuart Mill

(1806-187) developed the theory, and Alfred Marshall (184-14) brought it

to its culmination.



.- The Fisher effect. The Fisher effect was developed by Irving Fisher (1867-

147); it is a theory on the price of money and its variation over time. Currently

it is the mainstay of global financial thought.

The combination of these three theories, in spite of appearances, arises neither

from an amusing game of chance nor from an intellectual demonstration of

Gonzalo Perez-Seoane

www.macroeconomicmodel.com 4

uniting distant economic areas. The combination arises, rather, as a result of

empirical demonstrations where the central doctrinal antecedent is Adam Smith

in his book The Wealth of Nations.



How does the natural price theory differ from Marshall’s Law of Markets, a

law which has been the mainstay of economic thought throughout the 0th

century?.



The natural price theory confirms, for every good and service, the existence of

the supply function, the demand function and the sensitive relationship existing

between these functions and the price of the good or service. However, in

addition, the natural price theory proposes that the interplay between supply,

demand and price, is just one of the three parts of the mechanism that would

seem to be capable of explaining the functioning of economics as a whole.



Thus, from the point of view of the natural price theory, Marshall’s Law of

Markets contributes an economic truth in an isolated way, it necessarily can

only give rise to a model of partial equilibrium, (just as Marshall himself

defined it). The extrapolation of Marshall’s Law of Markets as the mainstay of

a macroeconomic model, leads, inexorably, to normative macroeconomic

models, with no possibility of empirically verifying the complete

macroeconomic functioning. Marshall’s Law of Markets is correct but

incomplete.



The natural price theory tackles the problem of the functioning of any market

using an approach different to Marshall’s Law of Markets. While accepting the

existence of supply, demand and price for any market (good or service), as well

as the possible interrelationships of one market with another by reason of the

existence of complementary and substitutive products or services or as a

consequence of the income effect, the natural price theory views all these

relationships as transitory or circumstantial, when the effects are considered in

the short term.



The suggested validity of the labour standard value in the economy, a standard

which is highly stable over time, would imply that all market prices undergo

continuous corrections towards their true natural or intrinsic value, the value

derived from the hidden but real functioning of the labour standard. This

frenetic activity of market prices in the pursuit for their true natural value

would correct, over time, the transitory or short term alterations that may have

transpired. The above, if correct, means that all variables from the long term

perspective should exhibit completely rational economic behaviour over time, a

behaviour subject to the principles of the functioning of the labour standard

value, and this should be empirically demonstrable.

.- The Natural Macroeconomic Model



The Natural Price Theory

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The concept of a natural macroeconomic model is nothing new in economic

thought (Physiocratic doctrine, Adam Smith, Jean Baptiste Say). The process

of natural wealth creation may be explained in the following form



Population

Growth

Natural Circle of Economic Growth

Increase in the

aggregate

natural demand

Increase in

income per capita,

spending and saving per capita,

investmet per capita,

national capital stock

Increase in the quantity and

grade of productive

capacities and skills

Increase in the

aggregate

natural supply

Division of labor,

accumulate knowledge,

innovation increase

in productivity

Increase in Population Increase in Active Population

Increase in the basic,

convenient, and

pleasurable needs of life

Progress effect propensity

of human being to

improve his material

standard of living

Seesaw effect

() Theory of human capital

Labour

Value Standard





The natural model establishes that the economic development of each nation

depends of the concourse and iteration of the following three factors over time



1.- Population growth. The natural model suggests that population growth is

the true and principal driving force of the global economic system.



.- Productivity.



.- The black and white effect.



The suggested process of wealth creation is in agreement with tradition and

economic doctrinal logic. However its clarity and practical simplicity is only

apparent. What happens in reality?.



.- Final Note



Gonzalo Perez-Seoane

The surprising and powerful empirical capacity of the Natural Price Theory

and Macroeconomic Model opens a new door to the comprehension and

analysis of the global macroeconomic phenomenon. It must be stated that the

conclusions about the behaviour of every variable suggested by the Natural

Model are extraordinarily close to orthodox Economic Doctrine.



With the hope that the Natural Model may, in the near future, constitute a

complete and efficient tool in the sphere of economic policy and a real

academic reference on the subject



thanking you for your interest,



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