Because the opportunity cost of a good cannot be fixed, it is impossible to know the proper exchange ratios for barter. This problem is overcome in the market by using commodities that have marketable characteristics, such as transportability, durability, and a recognized economic value, to serve as a medium of exchange. Prices of goods do not strictly follow the quantity theory of money.
IN PART ONE, AN ATTEMPT WAS MADE to prove that the real value of everything used by men is proportional to the quantity of land used for its production, and for the upkeep of those who produced it. In this Part Two, I will start by summing up the different degrees of land fertility in several countries, and the different kinds of products it can bring forth in greater abundance, according to its intrinsic quality. Then, assuming the establishment of towns and their markets to facilitate the sale of these products, it will be shown, by comparing exchanges that could be made, wine for cloth, wheat for shoes, hats, etc., and by the difficulty involved in transporting these different products or merchandises, that it was impossible to fix their respective intrinsic value. Therefore, it was absolutely necessary for men to find a substance easily transportable, not perishable, and having, by weight, a proportion or value68 equal to the different products and merchandises, whether needed or convenient. Hence there arose the choice of gold and silver for large business, and of copper for small transactions.
These metals are not only durable and easy to transport, but correspond to the employment of a large area of land for their production, which gives them the true value people seek in an equivalent [i.e., a medium of exchange].69
Mr. Locke, who, like all the English writers on this subject, has looked only to market prices, establishes that the value of all things is proportional to their abundance or scarcity, and to the abundance or scarcity of the silver for which they are exchanged [i.e., the naïve quantity theory of money]. It is generally known that the prices of products and merchandise have increased in Europe ever since a great quantity of silver has been imported from the West Indies.
However, I think we must not believe, as a general rule, that the market prices of things ought to be proportional to their quantity and to the amount of silver in circulation in a particular place, because the products and merchandise that are to be exported do not influence the prices of those which remain. If, for example, there is twice as much wheat in a market town than what is consumed there, and we compare the whole quantity of wheat to that of silver, the wheat would be more abundant, in proportion, to the silver destined for its purchase. The market price will be maintained just as if there were only half the quantity of wheat, since the other half can be, and even must be, sent into the city, and the cost of transport will be included in the city price, which is always higher than that of the town. Nevertheless, apart from the case of hoping to sell in another market, I consider that Mr. Locke’s idea is correct in the sense of the following chapter, and not otherwise.