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 Ten: On Wages and Profit in the Different Uses of Labor and Stock
There is always an equalizing movement in wages and profits within a given region. When one employment or investment has above average returns, there is a tendency to enter into that enterprise. Likewise, if there are below average returns people leave that sector of the economy. This movement tends to equalize both wages and profits. So why are wages and profits different? There are two causes for the differences in wages and profits. (1) Differences in the particularities of the labor and/or stock; and (2) policies that reduce the perfect liberty of the market.
PART 1: Differences in the Particularities of the Labor and/or Stock
Differences of wage rate are affected by five conditions: (1) the pleasing nature or displeasing nature of the work. (2) The easy and simplicity or the difficulty and complexity of learning the work. (3) The continuousness or the seasonality of the work. (4) the high degree or low degree of faith that is placed in the worker. And (5) the prospect or lack of prospect for success in the enterprise.
First condition, anything that people find pleasing will lower the wage rate. People find things like cleanliness, easiness, honorableness etc. pleasing. Their opposites: dirtiness, difficulty, dis-honorableness etc. are displeasing and raise the wage rate. In this regard the profits of stock are affected in the same manner as labor.
Second condition, the effort expended in acquiring a skill will affect the wage rate. The more effort and/or time needed the higher the wage rate commanded. Conversely the easier and less time consuming the learning curve is, the lower the wages. The principle is that labor was spent to acquire the education needed and over the course of a life time an educated or highly skilled man must expect to command a higher wage that will afford him a reasonable return for his study time in which he was not making any wage. For the same reason that an expensive machine must be expected to secure at least the natural profits over and above its cost, so must a man expect to earn wages at least at the natural rate over and above his investment. If this were not a true principle the stockholder would not invest in the machine and the man would not invest in education.
The profits of stock are not greatly affected by the skill or learning of the worker.
Third condition, continuous work will be paid less per time period than seasonal or short duration work. Work that is only for a short time every year will command higher wages because the worker must maintain himself and his family for the whole year. Therefore it is necessary to earn enough while working to live until the next season. Additionally, for work that is temporary but not seasonal, a premium is paid for the anxiety that comes from a lack of certainty in future work.
The profit of stock is not affected by whether a particular laborer works continually or not. The profit of stock is affected, in this sense, only by whether or not it is in use or not – not the temporariness of the work per se.
Fourth condition, the degree of trust placed on a workman will increase or decrease his wage. Hence goldsmiths are paid more than most comparable work with less valuable materials. The profits of stock are not affected by the faith put in a workman.
Fifth condition, the likelihood of success in a venture will affect wages. If the likelihood is high then wages will be low. If the chances of failure are high then the wages of success will be high. In a profession where twenty enter but only one succeeds the one that succeeds ought to earn the wages of twenty. However it almost never is and yet people regularly try to enter. This is for two reasons: (1) people naturally want the recognition that comes from success in a difficult endeavor. (2) A propensity to overestimate one's own skill and luck. Evidence for this propensity is the common success of lotteries and the popularity of military service among young men.
The profit from stock is inversely related to the degree of certain success, however, it is not necessarily inversely proportional.
It seems there are five conditions that affect the wage rate and of these five only the first and the last affect the profit rate. The author believes that because there are only two conditions that affect profits, profits will be more closely related in a particular region than wages. As evidence, he asks us to consider that the best paid individual is paid proportionally much more than the average wage rate and that this proportion is much higher than the highest profit a dealer makes when compared to the average profit rate.
It is interesting to note that the profits of stock are lower in the big city relative to the countryside and yet large fortunes are commonly made in the big city but not in the countryside. This is due to the extent of the market in the big city compared to the market in the countryside. The market allows for the extension and re-investment of capital – a bigger market will be more extendable and consequently a frugal man can, over time, expand and with lower profits make a larger fortune.
As a rule great fortunes are not made in established businesses on their own virtue, great fortunes are more often made through a life-long habit of diligence, good management and meticulousness.
A quick fortune can be made through the trade of speculation. This is only possible in great towns where the intelligence can be found and put to use.
The fact that there is a large inequality of wages and profit is natural and just because a difference in remuneration is compensated for by other advantages or disadvantages which the particular employment possesses. However for the actual relative remuneration to be a just remuneration three factors must be present even when there is a most perfect freedom: (1) the various jobs must be well known and established. (2) the employment must be in a natural state; that is without some emergency or calamity. (3) the workers are professionals that is working in one field only.
In the first case: jobs must be well known. New businesses are speculations: if they are attempted they must pay a premium to labor in order to attract labor from other safe and established enterprises. If the speculative business venture succeeds it will garner higher profits. This is a temporary situation as competition will enter into the new market in time. When businesses become stable and produce enough to meet effectual demand then the wage and profit rate will be fairly distributed across the different fields of human endeavors taking into consideration the differences of the different fields of human endeavors.
In the second case: a shortage or a glut may adversely affect the just wage and profit rate. During such times it is highly unlikely that the wage or profit rate will remain at the natural rate however such situations are unbalanced and therefore short lived since owners of stock and laborers are adjusting their lives and businesses to take advantage of situations as they are presented. Consequently shortages will be alleviated and gluts will be overcome.
In the third case: professionals who only do their profession get paid very close to what they are worth, however, if they choose to moonlight they will often get less than suits the nature of the secondary employment – if this is a widespread practice it results in the whole labor market's wage rate being dislocated.
In rich counties the market is so big that a man can make a good living for himself and his family from a single job. Moonlighting is more often found in poor countries.
PART 2: Inequalities Due to Policy
Of greater importance are the policies of nations that create unjust inequalities in the wages of labor and the profits of stock. These inequalities arise from “not leaving things at perfect liberty....”
There are three polices that create unjust inequalities: (1) restricting the entry into a particular employment below what it would naturally be. (2) Increasing the entry into a particular employment more than what it would naturally be. And (3) by hindering the free movement of labor and/or stock between employment and/or location.
In the case of the first policy, when a corporation or guild is used to incorrectly control the number of people who can provide a service or a product they always seek to pass bylaws that limit the number of people who can learn or pass bylaws that force a new worker to preform a long apprenticeship for the benefit of his master. The intention is always to under stock the market. The effect is higher remuneration to the tradesman or guildsman and higher prices for the public.
The author believes that the first and sacred property of all is their labor. That to restrict a man from employing himself in a way that he sees fit and does not hurt anyone is an injustice. It is a violation both of the workman's property and liberty as well as that of the buyer of the workman's labor.
The institution of apprenticeships is a particularly egregious example. For not only do they limit the wealth created, the longevity and injustice of the service to the master without any or with few benefits to apprentice creates lazy laborers. Apprenticeships are a relatively new phenomena for they were not present in ancient societies. The author believes that the elimination of this institution would hurt the practitioners but would help all of society. Among the practitioners are the Monarchy who obtains an income from the granting of charters and the fining of (but not breaking of) 'unauthorized' guilds. Also the town councils who are often made up of the members of the various trades are practitioners. These town councils claim to work to keep the market from being overstocked but what they really do is work to keep the market perpetually understocked. All the trades in a town often collude to keep themselves enriched at everyone else's expense. In so doing, they who were part of the town council have to pay more for their immediate dealings with each other, but they gain when dealing with the vast number who are not part of their cartel, namely the countryside.
Every town pulls all its maintenance and all its industry's materials from the countryside. There are two ways for a town to pay for its imports: (1) by exporting part of its manufacture and (2) by exporting part of the town's foreign trade. In both cases the town gains by the wages of its workmen and the stock of its masters who handle the exports. Therefore, whatever regulations are made in the towns tend to increase these wages and profits. The end result is that labor in the towns buys more production than an equal amount of labor in the countryside and profit is likewise augmented. The regulations of the town serve to increase unjustly an inequality between the town and the countryside.
In the competition between the towns and the countryside the town has most of the advantages (similar to the competition between masters and laborers). The inhabitants of the towns are all in one place and can therefore more easily unite. The town's folk are more jealous of strangers; more averse to taking new apprentices; and more silent about their secrets than the countryside's people. The people in the countryside are widespread and find it hard to unite. Furthermore they are more open to talk and trade and therefore have never developed the institution of apprenticeship or the spirit of guilds in spite of the fact that the trades of the countryside require much more skill and knowledge than the trades of the town.
In a similar fashion, the town's people can impose high duties on foreign traders and/or high markups as the imports are exported to the countryside.
Everywhere these dealings are present so are the scholars of devious argumentation who are very adept at convincing all who hear them that such laws and regulations which are made for the town's betterment are really for the betterment of all.
Although this is true in Europe, interestingly enough it seems that in Britain in former times the divide between the towns and the countryside was greater. The author seems to suggest this is due to the great accumulation of stock in the towns. Its profits are low due to its excess supply and if some stock were moved to the countryside it can make relatively more profit than in the town. This may be due to Britain's relative opulence when compared with most of Europe.
“People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” this seems to be part of human nature therefore good laws should not encourage it.
When a guild forms the law becomes that of the majority, this is a step backwards. “In a free trade an effectual combination cannot be established but by the unanimous consent of every single trader, and it cannot last longer than every single trader continues of the same mind.”
“The pretence that corporations [guilds] are necessary for the better government of the trade is without foundation. The real and effectual discipline which is exercised over a workman is not that of his corporation, but that of his customers. It is the fear of losing their employment which restrains his frauds and corrects his negligences. An exclusive corporation necessarily weakens the force of his discipline.”
In the case of the second policy, when seeking to lower the rates of a particular trade a policy may seek to increase the competition in that targeted employment. This seems to be the fate of churchmen and men of letters. This inequality is perhaps overall beneficial to society as a whole.
In the case of the third policy, the hindrance in the movement of labor and stock both in terms of place and type of work exasperates inequalities. There are absurd laws that hinder the movement of workmen from one type of job to another job which may pay better and whose services or products are more sought after. One institution that does this is that of apprenticeships another unique to England is the Poor laws. These laws have become a burden on workers because they are not permitted to move from one location into another because of the fear the new location has that they may become destitute and thus a burden to the new community.
The various crazy and unjust laws that limit labor's mobility often also limit stock's mobility however not as much. Stockholder have a certain advantage in the law in that their actions are rarely checked and when they are, then very leniently. For example there have been many attempts to regulate wages but few attempts to regulate profits.
Added on: 2010-05-29 07:03:13
Text Crawl by: James McLaren
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