An Inquiry Into the Nature and Causes of the Wealth of NationsBy: Adam Smith
Major Topic: Economics
Minor Topic: Politics
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Chapter Eight: On the Wages of Labor
If we imagine a time in which there were only labor and no stock or land ownership then the whole produce of labor would go to the laborer. In such a world, if the division of labor continued then all things would have become less expensive in terms of labor. However all things would have appeared to become more expensive in terms of trade. More products would be made and a smaller proportion of a worker's labor would create more and more goods. These surplus goods would then be exchanged for other goods which would have increased in supply as well. This is because it would take more of a commodity to buy other commodities as the division of labor increased. Although it would take more of a worker's produced commodity to buy other commodities the amount of time and effort required to produce the worker's own commodity would be far less in terms of labor. Therefore the exchange price in product would go up but the labor cost would go down. All workers would, over time, have much more product for a similar (or perhaps a reduced) amount of labor.
Such a world cannot survive after the saving of stock or the enclosure of land. And in reality it ended long before the benefits of the division of labor could be grasped.
Landlords, after enclosing a parcel of land, begin to demand rent for the use of their land. This is the fist claim on a laborer's remuneration. Since some workers who work on the land do not have the wherewithal to wait until the harvest, a master may advance them their sustenance and maintenance from out of his stock for a share of the produce of the laborer's labor. This is the second claim on a laborer's remuneration.
It is sometimes the case that a workman has the stock to buy his supplies and maintain himself until the payoff. In such a case he is both master and workman. If he owns the land on which he works then his is also a landlord. In such cases, his renumeration is the total of the wages of his labor and it is made up of his wages, his profit and his rent. Such cases are rare.
The wages of labor are everywhere set by a contract between the laborers and the masters of stock. The laborers want to get as much renumeration as possible and the masters want to pay as little as possible. When ever possible both sides are apt to unite and work together to try to raise or lower the wage rate as is in their interest.
The situation almost always seems to favor the masters for several reasons. (1) The masters are few in number compared to the workers and therefore it is easier for masters to unite or collude. (2) The laws are in the masters favor. With their greater wealth the masters have often influence the writing of the laws. (3) In a strike or work disruption the masters can hold out much longer than the workers. (4) the loudness of bargaining and/or resisting. The masters always collude in secret and one never hears about it; When the workers need to unite, it is done in public. However, they are often ignored unless they clash violently with the masters. Therefore the perception is often that the workers are the aggressors and the masters the victims. (5) Since workers find it harder to unite they do so less frequently but when they do unite it is usually because they have been driven to desperation. Desperate men are dangerous men and in their attempts to get attention they often break the law. This law, being on the masters side and often written with the help of the masters, is then enforced at the master's bidding.
Yet it is impossible to lower the wage, for any length of time, below subsistence. The author quotes a Mr. Cantillon who seems to think the subsistence wage is equal to double the maintenance of an adult male. The author seems to think this is too low but does not offer any more precise estimate.
There are certain occasions when luck favors the workers and they can command higher wages. (1) When the demand for labor is continually increasing at a faster rate than labor's supply, the masters will bid against one another to secure the services of the scarce labor. (2) Although even in such cases, the demand for labor is limited by the funds available to be advanced to the workmen. Therefore the demand for labor increases with the increase in the saved profit of stock or in other words with the increase in the national wealth. (Note that it is not with a great national wealth that the wages go up rather it is from an increase in the national wealth that wages go up.)
The author goes on to claim that an increase in population is the surest sign of prosperity. [this may have been true before the sharp decrease in infant mortality rates of modern times.]
If a country's national wealth is great but has not been increasing then it is likely that wages will not be high. Because the masters would have arranged their business to a set level of labor and therefore there would not be any scarcity of labor and the masters would not bid against one another. Over time the laboring class would multiply and create a scarcity of jobs which would lead to a biding down of wages by the workers.
If a country's national wealth is decreasing (that is if the fund that supplies labor is lessening) then every year the number of employed workers would be diminishing resulting in the lowest wages and the general ruining of society as those who could not get their maintenance though honest work would turn to crime.
The effects of the growth or decay of the national wealth can be compared in North America where the British constitution is honored and life is good and in the East Indies where the mercantile company oppresses and dominates and life is bad.
So one way to determine the state of the national wealth is to look at the remuneration of labor. If it is well paid then the country is moving forward. If they are paid to the level of subsistence it is an indication that the country is standing still and if the workers are starving then the country is going backwards.
On this measure the author believes that Great Britain is advancing since there are seven pieces of evidence that suggest that the British worker is well paid.
First, everywhere there is a difference between the winter and summer wages (summer wages being higher) since workers need to pay extra expenses during winter it would seem that during the summer at least they are getting paid more than subsistence.
Second, wages do not fluctuate with the price of provisions therefore in places where provisions are most expensive disposable income is lowest but it does not appear to be zero (if it were people would move out in search of better living conditions). Therefore in places of lower living costs workers must be doing better than subsistence.
Third, wages in so far as they do fluctuate from place to place do not seem to be anywhere below subsistence (if they were people would move out and there would be ghost towns in the country side). If wages are not at subsistence at the lowest end of the market then they cannot be at the average or high end of the market.
Fourth, the price of labor often moves in the opposite direction to the price of provisions and maintenance. Therefore if a poor man can keep his family in good maintenance during the worst of times, then in average or good times the family must certainly be above subsistence.
Fifth, provisions were more expensive a century ago and wages were lower a century ago therefore people today must be better off.
Sixth, the real ability of labor to purchase the necessities and conveniences of life has improved over the last century at a faster rate than the money price of labor. In other words, a day's labor can buy more stuff than a century ago.
Seventh, there was a prevalent reproach of the lower classes that they are no longer satisfied with the same food, clothing or shelter as they were in the recent past. Therefore the lower classes actually must have more disposable income than in the recent past.
Is this improvement in the lot of the lower classes a good thing for society, asks the author. Most certainly it is. The lower classes make up the majority of the population, anything that improves the lives of the greatest part of society ought always to be considered a good thing for the whole as well. Furthermore poverty although it seems to encourage the birthrate does nothing but harm the raising of children. For although poor people have more children than the upper classes, very few survive to adulthood. The upper classes on the contrary have fewer children but a better infant mortality rate.
By paying workers more, more children are born and survive to adulthood. In this way an increase in the working population is eventually effected. A corollary is that as the supply of workers overtakes demand the renumeration of the workers falls and eventually the number of children that are born and survive to adulthood will fall. In such a way there is a tendency for labor to propagate to match demand.
The depreciation of the free labor and the slave is (or ought to be) a concern of the masters. However, for slaves it is often neglected by the masters and for the free labor is it is administered by himself. The fact that free labor is more popular and can command higher wages than slavery suggests that it is more cost effective to run a society with free labor rather than slaves.
The author believes that all this is most true and most people are happiest in a state that is growing rather than in a state that is stationary or declining.
Just as a high level of wages encourages the birthrate it also encourages industry. Well paid workers are more dynamic, mindful, industrious and nimble than when they are not well paid. There is one exception: piece work which often leads to the workers burning themselves out, ruining their health and shorting their lifetime production. This problem was solved in the armed forces by limiting the total maximum that would be paid. The author believes that in all types of work with proper rest a worker can keep his health and actually produce more over the entire year than if a worker is continually pushed to the limits of his ability.
It is often the case when times are good that laborers will try to work for themselves (since then they can collect the revenue from profits and labor). In such times many laborers often remove themselves from the labor market and force the masters to bid more for the remaining laborers. The price of labor therefore often rises in good and plentiful years. The opposite is true in bad years: more laborers find it difficult to be in business for themselves and so they enter the labor market. This increase in supply forces laborers to ask less in renumeration from the masters. This is why the price of labor often drops in poor and scarce years.
The author references the work of a Mr. Messance who claimed that in France in good years more and higher quality goods were produced than in bad years. The author himself claims not to have found such a correlation in England or in Scotland. The author attributes increases or decrease in production to be determined by the demand in the foreign market; by a state of war or peace; by the state of their foreign competitors; and by the disposition of the main customers. The records that were consulted seem also to have had methodological errors in the canvasing of data.
The increase in the price of labor is often thought to increase the price of commodities. While it is certainly true that it will increase the part of the price that resolves itself into wages it is not true that the full price of the commodity will necessarily go up. The increase in the amount or quality of stock tends to increase the amount of product produced by a greater multiple than the increase in the wage rate. It is therefore possible for natural wages to go up and for natural profit to go up but for commodity prices to go down.
Chapter Nine: On the Profit of Stock
The same factors that influence the wages of labor also influence the profit of stock, however, the influence is in an altogether different way.
First, the increase of stock in the production of a commodity will increase the wages of labor but reduce the profit of stock holders. As more stock enters the market more labor is demanded so wages rise; however, as more stock holders enter the production of the commodity their profit decreases due to increased competition among the stock holders.
The actual rate of profit is very hard to determine due to the ever changing circumstances of the market. However an estimate of the average rate of profit can be formed from the interest rate of money. The author lays out an aphorism: “wherever a great deal can be made by the use of money, a great deal will commonly be given for the use of it; and that when wherever little can be made by it, less will commonly be given for it.”
Hence, as the rate of interest varies it can be assumed that the rate of profit varies in concert. As interest rates rise so do profit rates and as interest rates fall so do profit rates fall. Therefore the history of interest rates can give an indication of the history of the rate of profit. In England, it seems that as the wages of labor have increased, the profit of stock has decreased. In such situations the owners of stock will bemoan their sorry profits and claim that the industry is in decay and danger. The truth is that a reduction in profits is the natural course of a prosperous industry. The resulting hardship of the stock owners comes, not from a decaying market rather, from the competition which the increase in the use of stock in the same industry engenders and the increase in the supply of final amount produced.
The nature of stock is that the first batch is invested in the best location and often with the best labor from which the easiest profits are made. As more stock enters the production process, a second class location is selected and the labor may not not be of the same quality as the first chosen labor. As more stock is invested the value of the location and the quality of labor are reduced. Therefore later invested stock will naturally have a more difficult time in securing profits. Further all stock will have lower profits due to the increases in competition.
History has shown that as wealth, refinement and population increase interest rates decline. However, the wages of labor do not descend in concert with the profits of stock – in fact the demand for labor always increase with the increase in stock; independent of the stock's profit.
Expanding into a new territory or into a new business may raise the profits of stock and the interest rate of borrowing money. This is due to the newness of the territory or business. It is unlikely that initially there will be enough stock invested to satisfy demand; therefore, the market being under supplied the dealers will command greater profits. Additionally, in the old country or in the old business stock will be transferred out and brought into the new country or new business. This has the effect of reducing the supply of commodities and raising their price – and the profit of the stock left in their production.
This reduction in stock in the home country or in older business has the effect of reducing the wage rate of labor (stock is the source of the advance made to labor before the profit can be realized).
In rich countries with stationary economies the profits of stock and the wages of labor would be very low (however there is not any country in this category yet). [The following paragraph comes from later in this chapter but seems to better fit here after the preceding paragraph.]
In Holland, which is probably the closest country to its highest level of wealth, the rate of profit and the wage rate are low as is the interest rate. But everyone is well off because almost everyone is both a stock holder and a laborer. This is likely due to necessity.
Countries that refuse or limit international trade are at worst impoverishing themselves and at best not growing as much or as fast as they could.
The law is an important institution for the betterment of the society. Unfair, evil or defective laws hurt the whole country. When the law does not support the enforcement of contracts it puts all borrowers at the same lowest credit level. The uncertainty of the whole business of collecting forces all to demand or accept abnormally high interest rates. When interest is outlawed, lending is not stopped rather it is merely criminalized and the society suffers from lack of growth or a very expensive rate of growth.
Concerning the lowest possible rate of profit: there is a minimum that is required to cover possible losses. Any profit above this the author calls clear profit. The maximum interest that a borrower can afford to pay is in proportion to the clear profit only. The Lowest rate of interest that a lender can offer must take into account the possibility of default. This minimum rate is higher with bad laws and can shut many borrowers out of the market. This is one way that bad laws hinder progress.
[A section that seems not to fit well here was moved above to were it seems to fit with better sense.]
Within the range of what a borrower can borrow and a lender lend, the proportion of the market interest rate to the clear profits varies as profits rise or fall. High profits will raise the price of work much more than a simple increase in the wage rate. When a producer increase the renumeration of his workers the price of the work goes up by the increased renumeration divided by the output. This is carried arithmetically forward in the supply chain. However, when profits are high every stockholder will increase his profit a certain percentage. This has the effect of a geometric increase in the cost of work.
Therefore as the price of a commodity increases the increase in wages is analogous to simple interest; the increase in profits is analogous to compound interest.
The manufactures and merchants, in this regard, complain incessantly about the detrimental effects of increases in wage rates on prices and trade. However they never complain about the much greater effects of their own efforts to secure higher profits. They are silent on their own benefits and tirelessly lament the benefits to labor.
Added on: 2010-05-29 07:02:45
Text Crawl by: James McLaren
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