Chapter 8a


by Adam Smith Icon

Wages are Determined by Employers. Independent workers earn by the profit of their own work

1 The produce of labour makes up the natural wages of labour.

2 In the rude state, without the appropriation of land or stock, the whole produce of labour belongs to the labourer.

  • He has no landlord nor master to share with him.

3 Had this state continued, wages would have increased with the productivity from the division of labour.

  • All things would have gradually become cheaper.
  • They would be produced by fewer labour and be exchanged for fewer labour.

4 Everything would have become cheaper. But from another perspective, it might seem that things have become dearer.

For example:

  • In General Industry X, productivity increases 10 times
    • This means that 1 day’s labour could produce 10 times more work than before.
  • In Specialized Industry B, productivity only doubled
    • This means that 1 day’s labour could produce 2 times as much work as before.
  • If Industry A bartered its day’s produce with the day’s produce of Industry B, Industry A’s 10 units of work will only buy 2 units of Industry B’s work.
    • It would appear that each unit of Industry B’s work was worth 5 times Industry A’s work [5:1] than it was originally [1:1].
  • In reality, B’s work is twice cheaper than it was originally because had Industry B not improved, its day’s work would have cost 10 units of work of Industry A [5:1 is twice cheaper than 10:1].

*Superphysics note: If China can make 2 cars using the same capital that in America would make only 1 car, then it would appear that the American car became more expensive. In reality, it is the Chinese car that became cheaper.

5 But the rude state ended when private property was introduced* and long before productivity was increased.

*Superphysics note: This is why Supereconomics replaces private property with usufruct rights in order to reduce rent-seeking behavior and increase wealth creation.

6 The landlord demands a share of what the labourer can produce from it.

  • His rent payment is the first deduction from the produce of his labour on land.

7 An agricultural labourer seldom can maintain himself fully until the harvest.

  • He relies on his master’s stock who employs him for profit.
  • This profit makes a second deduction from the produce of his labour on land.

8 The produce of almost all other labour is liable to the like deduction from profit.

In all manufactures, most workers need material support* from their employer until their work is completed.

  • Their employer shares in the produce of their work as his profit.

*Superphysics Note: Supereconomics uses points to provide material support to reduce the cost of the deduction

9 An independent worker might have stock sufficient to:

  • buy the materials of his work, and
  • maintain himself until it is completed.

He is both master and worker. He enjoys the whole produce of his own labour as his profits and wages.

10 Such cases, however, are not very frequent.

In Europe, there are 20 employees for every 1 independent worker. The term ‘wages’ applies to employees, not independent workers.

11 Wages depend on the contract between employees and their employer, who have conflicting interests.

  • Employees want to get as much, while their employers want to give as little as possible.
  • Employees combine to raise wages, while employers combine to lower wages.

12 Employers, being fewer, can combine much more easily without going against the law.

They can have the advantage over the employees who are not allowed by law to combine. We have no acts of parliament against combining to lower wages, but there are many against combining to raise it.

In disputes between them:

  • the employers can hold out much longer on their stocks for a year
  • their employees, who do not have stocks, cannot live without employment for a week.

In the short run, the employer may not need the employee as the employee needs the employer.

In the long run, both need each other.

13 Only the most ignorant imagine that employers rarely combine.

Employers are always and everywhere in a tacit, constant, and uniform combination to:

  • not raise wages above their actual rate
  • sink wages below that rate.

Everywhere, violating this combination is:

  • a most unpopular action, and
  • a sort of reproach to a master among his neighbours and equals.

We seldom hear of this combination because it is the usual state of things that nobody ever hears of.

  • These are always conducted with the utmost silence and secrecy until the moment of execution.
  • These are frequently resisted by workers through a natural union to raise wages pointing out:
    • high prices
    • the high profits of their employers from their work.

The workers always perform the loudest clamour, sometimes violently to get a speedy decision.

The employers are just as clamorous.

  • They always ask help from the government against the workers.

The violence of the union generally ends in nothing.

  • Their ringleaders get ruined partly because of:
    • the government decision
    • the employers’ determination
    • the need of the workers to get back to work for their own subsistence.

Minimum Wages Depend on the Advancing, Stagnating, or Declining Movement of Society, Not Its Actual Wealth

14 The interest of the employers frequently prevail. But it is impossible for them to lower the wages of workers below a certain rate for prolonged periods.

15 A man must always live by his work, and his wages must at least be sufficient to maintain him.

On most occasions, his wages must be more in order to bring up a family and continue the race of workers for the next generation.

According to Cantillon:

  • The lowest worker must earn at least double his own maintenance so that he can bring up 2 children with the help of his wife.
  • His wife’s labour can only support herself.
  • Half of the children of poor families die before adulthood.

Poor couples must therefore attempt to rear at least 4 children so that 2 might live up to adulthood.

  • The maintenance of 4 children is supposed to be nearly equal to that of 1 man
  • The labour of a slave is worth double the maintenance of a slave.
  • The labour of the meanest worker cannot be worth less than the labour of a slave.

Therefore, in order to bring up a family, couples must earn more than what is necessary for their own maintenance. But I shall not determine this proportion.

16 Workers can raise their wages above the lowest rate 17 when the demand for all kinds of workers is continually increasing.

  • In this case, the workers do not need to combine to raise wages.
  • The scarcity of workers creates a competition among employers to get workers.
  • They break the natural combination of masters not to raise wages.

18 The demand for wage-earners must always be proportional to the funds for paying wages. These funds are of two kinds:

  1. The revenue in excess of the maintenance of their employers

19 When the landlord has excess revenue, he uses it to employ more menial servants.

  • Increase this surplus and his number of servants will naturally increase.
  1. The stock [capital] in excess of what is needed by their employers

20 When an independent worker has excess stock, he uses it to employ journeymen to profit from their work.

  • Increase this surplus, and he will naturally increase his journeymen.

21 The demand for wage-earners increases with the increase of a country’s revenue and stock, and cannot possibly increase without it.

  • The increase of revenue and stock is the increase of national wealth.

Therefore, the increase in national wealth naturally increases the demand for wage-earners.