SMITH: The Wealth of Nations [Introduction—Book I, Ch. 9]

SMITH: The Wealth of Nations [Introduction—Book I, Ch. 9]

Published 3/9/1776

Introduction

  • The annual labor of every nation is the fund which supplies all the necessaries and conveniences of life which it annually consumes.
  • The proportion between the produce and the population is regulated by two circumstances: 1) the skill, dexterity, and judgment with which the nation’s labor is applied, and 2) the proportion between the number of those employed in useful labor and that of those who are not so employed.
  • Among the savages, every person who is able to work is more or less employed in useful labor, yet these nations are so miserably poor that they find it necessary to kill their infants and their old people. On the contrary, in civilized and thriving nations, though a great number of people do not work at all, many of whom consume more than 100 times more labor than the greater part of those who work, the produce of the whole is so great that all are often abundantly supplied.
  • The causes of this improvement, and the order according to which the produce is distributed among the different ranks and conditions of men in society comprise the subject of this first book.
  • The number of useful and productive laborers is proportional to the quantity of capital stock which is employed in setting them to work, and to the particular way in which it is employed. The second book, therefore, treats of the nature of capital stock, of the manner in which it is gradually accumulated, and of the different quantities of labour which it puts into motion, according to the different ways in which it is employed.
  • Nations have followed different plans in the application of labor. Since the ruin of the Roman Empire, Europe has been more favorable to the arts, manufactures, and commerce; to the industry of towns than to the industry of agriculture and rural pursuits. The circumstances which introduced and established this policy are explained in the third book.
  • In book four, Smith explains the different theories of political economy, and the principal effects which they have produced in different ages and nations.
  • The fifth book examines the revenue of the sovereign, or commonwealth.

In the introduction to Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations, Smith summarizes the subjects which he will treat in each of the succeeding books. The most interesting part of the introduction is Smith commentary regarding the inefficient industry of the savages compared to the exceedingly efficient industry of civilized societies. Savage nations are often compelled to kill their infants and their old people because, though every able person is employed in useful labor, the nation cannot produce sufficient funds to provide for the necessities and conveniences of life. Civilized nations, on the contrary, though many people are not employed in useful labor, produce an abundance of funds to generally satisfy the necessities and conveniences of life for the entire population. The difference between the savage and civilized nations is found in the dexterity, skill, and judgment with which the nation’s labor is applied.

Chapter 1: Of the Division of Labour

  • The greatest improvement in the productive power of labor seems to be the effect of division of labor.
  • Let us consider the trade of a pin maker. Without the division of labor, a workman not educated in this business could scarce make one pin a day. With the division of labor, a group of 10 workmen can produce nearly 48,000 pins in consequence of a proper division and combination of their different operations.
  • Though the division of labor cannot be subdivided similarly in every art, nor reduced to so great a simplicity of operation, the division of labor increases the productive powers in every art proportional to the extent it can be utilized.
  • The separation of labor is generally furthest in the countries which enjoy the highest degree of industry and improvement. In every improved society, the farmer is nothing but a farmer, the manufacturer nothing but a manufacturer, etc.
  • It is impossible that one man should be constantly employed in the different sorts of agricultural labor because those tasks are seasonal. Thus, the improvement in the productive powers of agriculture have lagged behind the improvement made in manufacture. In agriculture, the labor of a rich country is not always much more productive than that of the poor.
  • The great increase in the quantity of work which the same number of people are capable of performing in consequence of the division of labor is owing to three different circumstances: 1) the increase in dexterity of each workman, 2) the saving of time which is commonly lost when moving from one task to another, 3) the invention of a great number of machines which facilitate and abridge labor, allowing one man to do the work of many.
  • By reducing every workman’s business to one simple operation, and making that operation the sole employment of his life, the division of labor necessarily increased the dexterity of the workman, and consequently increased the quantity of work that he could perform.
  • It is impossible to pass from one type of work to another that is carried on in a different place or with different tools. Furthermore, men naturally saunter a little in turning his hand from one sort of employment to another. His mind does not go to the new task keenly or heartily, but rather trifles for some time than apply it to any good.
  • Everybody is sensible to how much labor is facilitated and abridged by the application of proper machinery. No example is required. The invention of these machines are likely the result of the division of labor; for men will discover easier and readier methods of attaining any object when the whole attention of their mind is directed  towards that single object than when it is dissipated among a great variety of things. Many of these machines were the inventions of common workmen, who, being employed in some very simple operation, naturally turned their thoughts to finding out easier and readier methods of performing it.
  • Some of the improvements in machinery were made by men of philosophy – men of speculation – whose trade it is not to do anything, but to observe everything.
  • Every workman has a greater quantity of his own work to dispose than what he himself has occasion for. Thus, he is enabled to exchange a great quantity of his goods for a great quantity of others’ goods. The general plenty diffuses itself through all the different ranks of society.
  • There is a great variety of labor that goes into the making and distribution of a simple wool coat. The production of modern conveniences involves the efforts and cooperation of thousands.

Men are much more likely to discover easier and readier methods of attaining any object when the whole attention of their minds is directed towards that single object than when it is dissipated among a great variety of things.

Philosophers or men of speculation, whose trade it is not to do anything, but to observe everything.

It may be true, perhaps, that the accommodation of a European prince does not always so much exceed that of an industrious and frugal peasant as the accommodation of the latter exceeds that of many an African king, the absolute master of the lives and liberties of ten thousand naked savages.

In chapter one, Smith discusses the division of labor. He asserts that the division of labor is one of the causes for the improvement in the productive powers of labor. By reducing a workman’s task to one simple operation, and making that operation that man’s sole employment, the division of labor necessarily increases the dexterity of the workman. An increase in dexterity allows the workman to increase the quantity of his work.

The division of labor also saves time commonly lost in moving from one task to another. It is impossible not to waste time in moving from one task to another in a different area or another with different tools. Men naturally saunter when turning from one task to another. Their minds rather trifle for some time than zealously apply to it.

Finally, the division of labor has been one of the causes of the various machines that have facilitated and abridged labor. Men will discover easier and readier methods of attaining an object when their whole mind is directed towards that object than when it is dissipated among a variety of things. Many of these new machines were the inventions of common workmen, who, being employed in some very simple operation, naturally turned their thoughts to finding out easier and readier methods of performing it.

The improvements in the productive power of labor create a universal opulence in those improved societies. The common workman has a greater quantity of goods to dispose than he has occasion for. Thus, the workmen can exchange their superfluous work for others’ superfluous work. This abundance diffuses throughout the society, and improves the quality of life for all.

Chapter 2: Of the Principle which gives Occasion to the Division of Labour

  • The division of labor is not the effect of any human wisdom; it is the necessary consequence of a propensity in human nature to barter and exchange goods.
  • This propensity is common to all men, and found in no other species of animals. In almost every other race of animals each individual, when it attains maturity, is entirely independent. Man is almost entirely dependent on his brethren, and it is in vain to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favor, and to show that it is for their own advantage to do for him what he requires.
  • The division of labor arises from this propensity to exchange goods because of the realization that a man can apply himself to a specialized occupation, produce a surplus of goods, and exchange those goods and services for goods and services which he requires. A man specializes in a particular trade because his natural talents enable him to produce a greater quantity of good products, which he can subsequently trade for goods which he might not be as talented in producing.
  • The difference of natural talents in men is much less than we imagine. The different geniuses which distinguish men in certain professions are not so much the cause as the effect of the division of labor. The difference between a philosopher and door-porter does not arise from nature, but from habit, custom, and education. Without the propensity to exchange, men would have needed to be employed in all the labors which produce the necessary conveniences of life. All would be employed in the same duties, and thus no difference of employment which could give occasion to any great difference of talents.

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages.

In chapter two, Smith discusses the cause of the division of labor. Smith asserts that the concept of the dividing labor among individuals did not arise from the innovative human mind, but from a natural propensity of men to trade, barter and exchange goods with one another. Men, unlike other races of animals, are still entirely dependent on their brethren when they attain maturity. It is foolish for men to expect help from their brethren’s benevolence alone. They will prevail in obtaining the object of their desire if they can persuade their brethren that it is in their best interest to give them what they desire. When we go to the butcher to buy meat for dinner, we do not appeal to his benevolence, but to his self-interest, which we satisfy with money or other valuable goods.

This propensity to barter and exchange causes the division of labor because a man, whose unique talents enable him to produce more of a certain good than any other man, can sell or exchange the surplus of his production for other necessaries which he cannot produce as well as others. Although some might conclude that different skills are inherent in individuals, and that it is this difference which causes the division of labor, they are mistaken. On the contrary, it is the division of labor which causes the difference of skills that distinguish men from one another. Smith maintains that the genius of the philosopher and a common door-porter are not so different as some imagine. The difference arises from habit, custom, and education. If men did not have a propensity to trade with one another, then they would need to be employed in all tasks that produce the necessaries of life, which would destroy the opportunity that gives occasion to the difference of skills currently existing.

Chapter 3: That the Division of Labour is limited by the Extent of the Market

  • The extent of the division of labor is limited by the extent of the market. When the market is small, no man possesses the certainty that he can exchange the surplus of goods he produces for the goods of other men which he has occasion for.
  • Specific industries can only exist in certain markets. For example, a porter can only exist in a large town.
  • Water-carriage extends the market, which is why industry of every kind naturally divides and improves along the banks of navigable rivers and seas. Ships can transport a greater quantity of goods over a greater distance for a cheaper price and with greater security than land-based transportation vehicles.
  • The inland parts of a country can for a long time have no other market for the greater part of their goods but the country which lies around them. The extent of their market is limited to the richness and population of that country. Thus, their improvement must always be posterior to the improvement of parts near water.

In chapter three, Smith discusses the relationship between the division of labor and the market. The extent of the division of labor, and thus the extent of opulence and improvements to the productivity of labor, is limited by the extent of the market. A large market ensures men that there will be a demand for their surplus of produce. This allows men to specialize in certain industries, and hence the division of labor is greater than in a market that does not provide the same assurance, and in which every man must produce all the necessities of life lest he not be able to exchange with another for those particulars he has occasion for.

Proximity to navigable rivers and seas increases the extent of the market, and consequently the division of labor. History has demonstrated that nations along the banks of such navigable waters prosper much sooner than inland parts of nations. Egypt, the cities along the Mediterranean Sea, and the cities along the Ganges in the Far East support this argument. Furthermore, a ship can carry a greater quantity of goods over a greater distance for a cheaper rate with greater security than a wagon or other land-based transportation vehicle.

Chapter 4: Of the Origin and Use of Money

  • When the division of labor is thoroughly established, every man lives by exchanging, and in some measures becomes a merchant. The society grows to what is properly called a commercial society.
  • Inconveniences likely arose when the division of labor first took place. One can imagine a butcher trying to exchange his superfluity of meat to a baker for bread, but the baker at that time has no occasion for meat. Thus, men would naturally be induced to preserve some good which people would not likely refuse in exchange for their goods.
  • In nearly all countries, men resolved that this commodity ought to be metals. Metals are imperishable, portable, divisible, and scarce. The importance in divisibility is seen in the following example. In a country where cattle is the accepted currency of commerce, a man wishing to buy salt would be required to buy at least one entire cattle-worth of salt. If the accepted currency was metal, he could divide the metal to just the amount to acquire the requisite salt.
  • Before the institution of coined money, or stamped money, people must have been subject to the greatest frauds. There were two very considerable inconveniences: weighing and assaying the metal. A man might receive an adulterated worthless metal in exchange for his valuable goods. Hence the origin of coined money to prevent these abuses.
  • The coins were originally pressed with the exact weight of the valuable metal contained in them. However, the avarice and injustice of prince and sovereign states have by degrees diminished the quantity of real metal, which had originally been contained in coins of equal stamped value. This expedient enables sovereigns to pay their debts and fulfill their obligations with a smaller quantity of the metal than would otherwise be requisite. Such operations have always proved favorable to the debtors of society, because they can pay with the same nominal sum of the new debased coin whatever they had borrowed in the old, and have sometimes produced a greater and more universal revolution in the fortunes of private persons, than could have been occasioned by a very great public calamity.
  • Nevertheless, money has become the universal instrument of commerce by which all goods and services are bought and sold.
  • Smith will examine the rules which men observe when exchanging money for goods and services. These rules determine the relative or exchangeable value of goods.
  • Value has two different meanings: 1) the utility of an object, and 2) the power of purchasing other goods. The first is called “value in use”; the second, “value in exchange.” Those which have the greatest value in use frequently have the least value in exchange. Nothing is more useful than water, but it will scarcely purchase anything. A diamond is scarcely useful for anything, but can be exchanged for a very great quantity of goods.
  • In the next three chapters Smith will answer the following questions: what is the real measure of the exchangeable value of commodities, what are the different parts of which this real price is composed, and what are the different circumstances which hinder the market price from exactly coinciding with the real price.

The word value, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called “value in use”; the other, “value in exchange.” The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it.

In chapter four, Smith discusses the origin and use of money. The origin of money can be easily seen in the following example of an ancient nation applying the division of labor for the very first time. A butcher goes to a bakery, and offers the baker a surplus of his meat in exchange for a surplus of the baker’s bread. Though the baker has a surplus of bread, and is willing to part with it, he does not need meat at the present time, and no transaction is made. This type of market is very inefficient. Thus, men discovered that they must preserve a good that others will not likely refuse in exchange for goods and services that they might require in the future. Nearly all nations of the world chose metals to be this commodity of universal exchange.

Metals perform much more effectively as an instrument of commerce than any other conceivable good. Metals are scarce, portable, divisible, and relatively imperishable. The importance of divisibility is found in the following example. A man requires salt in a nation that has chosen cattle for its instrument of common exchange. A man must buy at least a cattle-worth of salt, though he may only require half that quantity. Metals can be divided so as to exactly purchase the quantity of good desired.

Smith makes several interesting comments about the avarice and injustice of sovereigns, who stamp money with an inflated sense of the precious metal contained within the bar or coin. He says that these operations have always proved favorable to the debtors of society, because they can pay with the same nominal sum of the new debased coin whatever they had borrowed in the old, and have sometimes produced a greater and more universal revolution in the fortunes of private persons, than could have been occasioned by a very great public calamity.

Smith makes some closing remarks on the subject of the next three chapters of this book. He states that value has two different meanings: 1) utility and 2) power of purchasing other goods. The first is called “value in use”; the second, “value in exchange.” The most useful goods frequently possess the least power of purchasing other goods. Nothing is more useful than water, but it will scarcely purchase anything. On the contrary, diamonds have little utility, but have a considerable power to purchase other goods. In the next three chapters, Smith will explain the real measure of the exchangeable value of commodities, the component parts that comprise the real price of a good or service, and the circumstances that hinder the market price from coinciding exactly with the real price.

Chapter 5: Of the real and nominal Price of Commodities, or of their Price in Labour, and their Price in Money

  • Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life. Labor is the real measure of the exchangeable value of all commodities because the value of any commodity is equal to the quantity of labor which it enable to purchase or command from another person.
  • The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.
  • As Mr Hobbes says, wealth is power. Wealth is the power to purchase and command labor.
  • It is often difficult to ascertain the proportion between two types of labor. The time spent in each does not always determine this proportion. There may be more labor in an hour of hard work than two of easy business; or in an hour of employment in a trade which costs ten years to learn than in a month’s industry at an ordinary and obvious employment. It is not easy to find an accurate measure for hardship and ingenuity. The price of labor, or of commodities, are determined, not by any accurate measure, but by the bargaining in the market, which produces a rough estimate of the real value of a commodity.
  • The value of gold and silver fluctuates; it is dependent upon the barrenness or fertility of the mines. A commodity that has a fluctuating value can never be the accurate measure of the value of other commodities.
  • Things are dear which are difficult to obtain, or which it costs much labor to obtain. Things are cheap which are easy to obtain, or require very little labor. Thus, labor alone, never varying in its value, is alone the ultimate and real standard by which the values of all commodities can at all times and places be estimated and compared.  It is their real price; money is only their nominal price.
  • To the employer, the value of labor seems to change. At one time, the labor is dear, at another it is cheap. But it is not the value of labor that changes, it is the value of goods.
  • Labor has a real and nominal price. Its real price is the quantity of necessities and conveniences of life which are given for it; its nominal price is the money given for it. The laborer is rich or poor, ill or well-rewarded, in proportion to the real, not nominal price of his labor.
  • Equal quantities of corn will, at distant times, be more nearly of the same real value than gold, silver, or any other high “value in exchange” commodity because equal quantities of corn will command the same quantity of labor more nearly than equal quantities of precious metals.
  • Labor is the only standard by which we can compare the values of different commodities at all times, and at all places.
  • At the same time and place the real and the nominal price of all commodities are exactly in proportion with each other because the more or less money you get for a commodity, the more or less it will enable you to purchase or command at that time and place. It is only so, however, at the same time and place.
  • The real price of labor is very different upon different occasions.

Every man is rich or poor according to the degree in which he can afford to enjoy the necessaries, conveniences, and amusements of human life.

Labor is the real measure of the exchangeable value of all commodities.

In chapter 5, Smith discusses the real (labor) and nominal (money) price of commodities. He apparently offers two contradictory definitions of the real price of money. Smith asserts that the real price of every commodity is the cost of its production, which is the value of labor required to produce the good or service. Thus, the value of every commodity is the value of labor required to produce it. Neoclassical economists agree with this definition.

The other definition provided by Smith is that the real value of every commodity is the labor which it can purchase or command. This definition defines the real value of a commodity as directly related to its “value of utility,” or the power it bestows upon the possessor to purchase or command the labor and produce of another man. Classical economists agree with this definition.

Besides the real value of commodities, Smith also discusses the nominal price of commodities, denoted by the relationship between a good and the accepted currency of a nation. The value of a currency fluctuates depending upon the difficulty of obtaining the standard metal. Things are valuable which are difficult to obtain. Things are cheap which are easy to obtain.

Chapter 6: Of the component Parts of the Price of Commodities

  • Before the accumulation of stock and the appropriation of land, the proportions between the quantities of labor necessary for acquiring different objects seems to be the only circumstance which can afford any rule for exchanging them with one another. If it takes twice as much labor to kill a beaver than to kill a deer, then a beaver should cost twice as much in the market.
  • The degree of severity, dexterity, and ingenuity required to produce a good or service naturally enhances its value.
  • As soon as stock is acquired, some men will employ it in setting others to work, whom they will supply with materials and subsistence in order to make a profit by the sale of their work. In exchanging the complete production of the manufacture, something must be paid to the capitalist over and above what may be sufficient to pay for the material and wages of the workmen because of the risk the capitalist undertakes by hazarding his stock.
  • The profit of stock constitutes a component part altogether different from the wages of labor, and is regulated by the extent of capital at risk, and the typical rate of return for the industry in which the capital is risked.
  • In this state of things, the whole produce of labor does not belong to the laborer. He must share it with the owner of the stock who employs him.
  • The rent of the land is the third component part of the price of commodities.
  • In the price of corn, one part pays the rent of the landlord, another pays the wages of the laborer and cattle employed in producing it, and another part pays the profit of the farmer.
  • Rent, labor, and profit are the three components of the price of all commodities.
  • Rent can be the amount of money paid to use land or a building, or it could be the amount of money paid for a fishing license.
  • Whoever derives labor, must derive it form his labor, the rent of his land, and the profit of his capital.

In chapter six, Smith discusses the component parts of the price of commodities. He asserts that there are three component parts of the price of a commodity: 1) the price of labor; 2) the price of rent; and 3) the profit of the capitalist. The price of labor has already been discussed in preceding chapters. The price of rent is the price paid to a landlord to use his land in order to produce a particular product. The profit of the capitalist is the value returned to the capitalist in recognition of the risk he undertook in employing his resources to produce the product. Though the price of some products might be the result of one or two of these components, in an improved and civilized society, the price of the vast majority of goods and services is determined by all three component parts.

Chapter 7: Of the natural and market Price of Commodities

  • There is in every society an ordinary or natural rate for labor, rent, and profit. This rate is regulated by the general circumstances of society, their riches or poverty, their advancing, stationary, or declining condition.
  • The natural price is the price of real labor, rent, and profit. The market price is the actual price at which any commodity is sold.
  • The market price is regulated by the quantity of the commodity brought to the market place, and the demand of those who are willing to pay the natural price for the commodity. Their demand is called an effectual demand, because it effectuates the bringing of the commodity to the market place. It is not the absolute demand, because a very poor man may desire a Mercedes, but that car will never be brought to the market at a price which he would be willing or able to pay.
  • When the quantity of any commodity falls short of the effectual demand, all those who are willing to pay the natural price cannot be supplied with what they want. A competition will begin among them. The degree of competition will be proportional to the importance of the commodity to those willing to pay the natural price.
  • When the quantity brought to market is more than the effectual demand, the commodity must be sold to those who are willing to pay less than the natural price. The low price which they give for it must lower the price of the whole. The degree of competition among the sellers is proportional to the excess of supply, and the importance of immediately selling the commodity. Perishable goods will occasion much greater competition than imperishable goods.
  • The quantity of every commodity brought to market naturally suits itself to the effectual demand.
  • The natural price is the central price to which any commodity is continually gravitating.
  • The temporary fluctuations in market price fall chiefly upon those parts of its price which resolve themselves into labor and profit. The fluctuations affect the value and rate of labor and profit.
  • Whenever the market price rises a good deal above the natural price, the capitalists are very careful to conceal this change. If it was commonly known, the great profit would tempt competitors to enter the market. Secrets of this kind seldom last very long.
  • Such enhancements of the market price are often the effects of accidents, but may persist for several years.
  • A monopoly can keep the market constantly under stocked, and raise their profits or wages (if they are a laborer and capitalist) greatly above their natural rate. The price of a commodity produced by a monopoly is the highest and most profitable that can be squeezed out of buyers. The price of a commodity produced in a market of free competition is the lowest price which the sellers can afford to accept and continue their business.
  • The exclusive privilege of corporations, and laws that restrain the competition of an industry to a smaller number than otherwise might go into them have the same qualities of a monopoly, only to a lesser degree. They are, in a sense, enlarged monopolies.
  • In the following four chapters, Smith will explain the causes of the variations in the natural price due to the variations in the rate of wages, rent, and profit.
  • He will explain the circumstances which determine the rate of wages and the rate of profit. He will explain that the different circumstances which regulate the proportion between the rate of wages and profit, which seem to be standardized across different states. Finally, he will explain the circumstances which regulate the rate of rent.

In chapter seven, Smith discusses the natural and market price of commodities. The natural price is the real price. In other words, it is the exact price of wages, rent, and profit. The market price is the price at which a commodity is sold in the market. The market price is determined by the quantity of the commodity brought to the market and the demand of those willing to pay the natural price of the commodity. This demand is called the ‘effectual demand’. It ought not to be confused with absolute demand. The following example will illustrate the difference: A very poor man may have a demand for a Mercedes, but he will never be willing or able to buy a Mercedes. The demand of the poor man is included in absolute demand, but not in effectual demand.

If the quantity of a commodity brought to the market is less than the effectual demand, then a competition among the buyers will immediately begin because there is not enough of the commodity to satisfy the needs of every willing buyer in the market. The degree of competition among the buyers depends on the importance of the commodity. If the commodity is of the utmost importance to survival, such as food and water, the competition will be fierce.

If the quantity of a commodity brought to the market exceeds the effectual demand, then a competition will immediately begin among the sellers. The sellers will be compelled to sell the commodity for less than the natural price to those willing to buy it for a lower price. This willingness to sell the good for a lower price will necessarily lower the price of all the commodities. The degree of competition among sellers depends upon the extent to which the supply exceeds the demand, and also to the degree of necessity to which the sellers must rid themselves of the commodity. Sellers will feel a greater sense of urgency to sell perishable goods than imperishable goods.

The market prices will continually gravitate towards the natural price because it is in every party’s interest. When the market price is a great deal above the natural price, the sellers will be very careful to conceal this fact, lest competitors enter the market and drive the market price lower. Monopolies can increase the market price to the point at which it is most profitable to them. The price of a good in an industry dominated by a monopoly is the highest and most profitable price to the monopolist which the consumer can sustain. A commodity produced in an industry of free competition will be sold for the lowest market price the sellers can afford and still maintain their business. The privileges of corporations and laws which restrain the number of competitors in a particular industry create monopoly-like conditions to a lesser extent. These few corporations are like enlarged monopolies, and can often preserve the market price above the natural price for extended periods of time. A market price can be maintained above the natural price for a long duration, but not vice versa. A market price below the natural price will quickly force sellers out of the market entirely.

Chapter 8: Of the Wages of Labour

  • Before the accumulation of stock and the appropriation of land, the whole produce of the laborer belonged to the laborer. He had neither landlord nor master to share it with him.
  • Had this state continued, all things would gradually have become cheaper because of the improvements in productivity that was occasioned by the division of labor. The same quantity of goods produced before the advent of the division of labor could be produced with less labor after the division of labor became established. As the commodities produced by equal quantities of labor are exchanged for one another, they would likewise have been purchased with the produce of a smaller quantity.
  • Goods would be cheaper, and men would not need to labor as much.
  • This original state of things could not persist after the appropriation of land and accumulation of capital. The landlord demands his share of almost all the produce the laborer can raise or collect from it. Rent becomes the first deduction from the produce of labor.
  • It seldom happens that a person who tills the ground has the wherewithal to maintain himself until harvest season, or the tools to reap a harvest. Thus, a farmer employs him, provides the necessary farming implements, and expects a profit to be given to him along with his initial capital at a future date. This profit makes the second deduction from the produce of the laborer.
  • The rate of wages is determined by the contract between the capitalist and the laborer. The capitalist desires to give as little, and the laborer desires to as much as possible.
  • The capitalists, being fewer in number, can combine much easier to lower the wages of labor. The capitalists can also hold out much longer during contractual disputes. A capitalist, because of his accumulated capital, may subsist for several years upon the stock, while the laborer could not subsist scarcely a month or even week without employment. In the long run, the laborer may be as necessary to the capitalist as he is to him, but the necessity is not so immediate.
  • Though we rarely hear of capitalists combining to lower wages, and frequently hear of laborer combining to raise wages, it is foolish to think that capitalists never collude. There is a tacit rule among capitalist to never raise the wages of labor above the actual rate. Those capitalists, who do, are severely reproached by their equals. When the capitalists impose lower wages, and the laborers yield without resistance, though severely felt by them, other people never hear of it.
  • But when the laborers unite in resistance to the rate of wages, it is always heard. There are two reasons that laborers unit: 1) the cost of previsions necessary to life are too expensive given the current wage, and 2) the exorbitant profits of the capitalist. They act with the folly and extravagance of desperate men. They must either starve or frighten their masters into an immediate compliance with their demands. These combinations seldom derive any benefit to the laborer, partly because of the interposition of the law against such combinations, partly from the superior steadiness of their masters, and partly because of the necessity which the greater part of the laborers are under of submitting for the sake of present subsistence. They generally end in nothing but the punishment or ruin of the ringleaders.
  • However, the wages of the laborer must be sufficient to maintain him and his family, otherwise the race of such laborers could not last beyond one generation.
  • There are circumstances that raise the rate of wages. When the demand for laborers is more than the supply of laborers, then the capitalists compete with one another for the scare quantity of laborers by offering higher wages. The demand for laborers cannot increase but in proportion to the increase of capital which is destined to the payment of wages. When a man has more funds than is sufficient to maintain his family, he will employ those funds to hire laborers.
  • It is not the greatness of wealth, but its continuing increase which occasions a rise in wages. In the present times, England is richer than North America, but the wages of labor are much higher in North America because its wealth is increasing, while England’s is relatively stagnant. England’s wealth, though it be great, has continued for several centuries the same. The number of laborers employed each year, therefore, could easily supply the number wanted the following year.
  • In a nation which the funds destined for the payment of wages are decreasing every year, the demand for laborers would be less every year. This would effect a decrease in wages. Many would not be able to find employment, and either beg, starve, or resort to the greatest atrocities.
  • The liberal reward of labor signifies increasing national wealth. The scanty maintenance of laborers indicates stagnation. The starving condition of the laboring class demonstrates a nation in decline.
  • The demand for laborers regulates the production of men. Are the improvements in the circumstances of the labor class to be regarded as an advantage, or inconvenience to society? An increase in the demand for labor necessarily causes an increase in the production of laborers.
  • Every species naturally multiplies in proportion to the means of their subsistence.
  • The liberal reward of labor is the effect of increasing wealth and the cause of increasing population.
  • The wages of labor are the encouragement of industry, which improves in proportion to the encouragement it receives. Laborers who are liberally paid by the task are very apt to over work themselves, thinking that they owe a duty to their employer, and also imagining a greater gain to be attained in the future from excellent performance on this task.
  • The money price of labor is regulated by two circumstances: the demand for labor, and the price of the necessaries and conveniences of life.

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily. In all such disputes, the masters can hold out much longer. A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks, which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year, without employment. In the long run, the workman may be as necessary to his master as his master is to him; but the necessity is not so immediate.

The workmen, accordingly, very seldom derive any advantage from the violence of those tumultuous combinations, which, partly from the interposition of the civil magistrate, partly from the superior steadiness of the masters, partly from the necessity which the greater part of the workmen are under of submitting for the sake of present subsistence, generally end in nothing but the punishment or ruin of the ringleaders.

Every species necessarily multiplies according to the means of its subsistence.

In chapter eight, Smith discusses the circumstances which regulate the rate of wages. He asserts that like all commodities, the rate of wages is determined by supply and demand. When there is a quantity of labor which exceeds the demand for labor, then the price of wages decreases, and vice versa. There is another circumstance which affect wages, and that is the combination of laborers and the combination of capitalists to affect the wages in their favor. Laborers naturally wish for the price of wages to increase, and capitalists desire the opposite. Worker strikes and unions are frequently heard, but collusion among capitalists is rarely if ever discovered, though one would be quite ignorant to believe that it rarely happened. In such contractual disputes, the capitalist always holds the advantage over the laborers. He can hold out longer during these disputes because of his capital reserves. He can subsist for perhaps two years on his stock, while the average laborer can scarce subsist for a month without employment. The union of laborers seldom derives any advantage from these violent and tumultuous combinations which, partly from the interposition of the law, partly from the superior steadiness of their employer, and partly from the necessity which the greater part of the laborers are under of submitting for the sake of present subsistence, generally end in nothing but the punishment or ruin of the ringleaders.

The liberal reward for labor is the effect of increasing wealth, and the cause of increasing population. A flourishing country will possess the highest wages because the revenue allocated to payment of wages is continually increasing. However, in countries which have a great amount of wealth that has not increased for several years will not have wages as high as those flourishing countries. This is because the stagnant country will not require additional labor to fulfill the unchanging demand for such labor. In a burgeoning country, the demand for labor is ever increasing.

Chapter 9: Of the Profits of Stock

  • The increase of stock, which tends to increase wages, decreases profits. When the stock of many merchants are turned to the same trade, their mutual competition lowers profits.
  • Though it is difficult to determine with precision the average profit of stock, the rate of interest can provide a guide or at least a lower limit because wherever something can be made by using money, less than that something will be given for the use of the money.
  • The progress of interest helps us determine the progress of profits.
  • The demand for labor increases with the increase of stock, regardless of the condition of the profits. A great stock with little profits increases faster than a small stock with great profits. Money makes money.
  • The decrease of stock increases profits, and decreases the rate of interest.

Money makes money.

In chapter nine, Smith discusses the profits of stock. He says that the profits of stock are indirectly proportional to the rate of wages. Because an increase in stock creates a demand for labor, and thus an increase in the wages of labor, the profits decrease because when the stock of many merchants are turned to the same trade, their mutual competition lowers profits. Though it is difficult to ascertain the average profits of stock, the prevailing interest rate of a nation provides a rough guide. The interest rate and rate of profit are directly proportional, and usually very similar.

I enjoyed reading this selection by Adam Smith. As a Finance major, I took several classes economics courses in university. Smith’s political and economic theories are very familiar to me, and it was nice to feel as if I had some sort of mastery over the topic, which is something that I have not always felt during the course of this first year of reading selections. One of Smith’s notions that I anticipate Marx will follow up on in the Communist Manifesto, the next reading on the list, is the combination of laborers to demand higher wages from their capitalist masters. I also felt pity for Marx after reading Smith’s statement regarding the fate of the leaders of such movements – i.e. severe punishment. I also expect Marx to criticize the consequences of the division of labor, whereas Smith praises it.

The Wealth of Nations (Bantam Classics)

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