Mike's comment on the last part of this tutorial indicates that I have failed to make clear a very elementary point about the classical school of political economy. Since this is really important, I think I had better interrupt my exposition to explain this point again, in hopes that I will make it clear enough so that no one will be confused or misled.
Mike notes that in a situation in which people are exchanging goods that they did not produce, the intersection of supply and demand is sufficient to explain the relative prices of the foods -- which is to say the proportions in which they exchange with one another. He is quite correct. Indeed, since in this situation the goods are not produced [at least not by the people exchanging them], they might as well be treated, as he says, as manna from heaven. In his POW camp example, the goods are presumably introduced into the system by the Red Cross. One might also reference the World War II phenomenon of "cargo cults." [Google it.]
The classical political economists were quite aware of this fact. Ricardo, bless him, refers to wines made from grapes grown on a particular side of a hill [I guess he led a rather comfortable life.] He also references old masters, which is to say works of art which, though once produced by someone's labor, are now non-reproducible [save by forgers]. Such goods exchange in ratios that have nothing much to do with the amount of labor required to produce them, and everything to do with supply and demand. [Just imagine what it would do to the price of van Goghs if someone discovered a cache of three thousand additional authentic van Goghs.]
Why the difference? Well, if goods are reproducible [corn, iron, cloth, and so forth -- the standard commodities of the modern industrial economy, whose quantity is in effect unlimited], then a rise in demand will result in a temporary rise in price, which in turn will result in a momentarily higher profit for the entrepreneurs lucky enough to enjoy that blip in demand. Other entrepreneurs, noticing that higher profit rate, will shift their capital into that industry, with the result that there will be an increase in supply. When everything has settled down, Ricardo argues, the ratio in which goods exchange will be determined by the labor embodied in them. The one exception is of course a situation of some necessarily scarce factor of production, which is to say land. That is why he thinks he needs to show that rent is not a determinant of price, but a diversion of profits from entrepreneurs to landowners.
Note that when Leon Walras introduced the modern notion of price determination by the intersection of supply and demand, a decade after Marx published CAPITAL, he posited a pure market situation in which possessors and desirers of commodities shouted out offers until through a process of "tatonnement," an equilibrium had been reached in which no further mutually advantageous exchanges were available to them. He was not talking about production at all. Ricardo [and Marx] would not have disagreed with this theoretical result. They simply would have pointed out that it does not speak to the actual situation of the production of commodities by means of commodities [to echo the title of Sraffa's book.]
We have a long way to go before I am finished with the entire story of Marx's revision and critique of Ricardo's theory, but if we are not clear about this elementary point, the rest will just be utterly mysterious.
