Of the Wages of Labor

[Atheist]

I am currently reading Adam Smith’s “Wealth of Nations” in order to gain a basic understanding of free market economics. I understand that he is a classical economist and so there are some problems with his theory. The labor theory of value is one big problem that was corrected by Carl Menger with marginal utility theory of value. I am sure there are many other problems. However, still, I think Adam Smith is a good place to start learning more economics (I already read Economics in One Lesson by Hazlitt and Defending the Undefendable by Walter Block). I know Austrians do not really bring up Smith so much, but I think Smith deserves a lot of credit, so I choose him. Anyway, let me get to my question.

Go to chapter 8 of the first book. Adam Smith says that who leads to an increase of wages is when the laborers have an upper hand over the masters. That happens precisely when there is a growing demad for labor and so the masters compete with one another. Smith says, but does not seem to explain this, that demand for labor grows when there is marginal increase in demand for wealth. Meaning, the year before the wealth was less, the year after the wealth is more, the year after the wealth is even more. Thus, as Smith says, the reason why North America has higher wages than all of England is because America has high marginal wealth. England, though much richer, has no growth. Can someone explain why this happens?

In this same chapter he says that the prosperity of a civilizaton is most linked to its population. I remember there is a quote by Mises which says that the one statistic that refutes all the supposed evils of capitalism during the industrial age is that the population double. But if that is so, then does it not follow that China and India are the most thriving countries in the world? Adam Smith’s idea does not seem to apply to poor countries with huge population.

Thank you.

[ClaytonB]

I am currently reading Adam Smith’s “Wealth of Nations” in order to gain a basic understanding of free market economics. I understand that he is a classical economist and so there are some problems with his theory. The labor theory of value is one big problem that was corrected by Carl Menger with marginal utility theory of value. I am sure there are many other problems. However, still, I think Adam Smith is a good place to start learning more economics (I already read Economics in One Lesson by Hazlitt and Defending the Undefendable by Walter Block). I know Austrians do not really bring up Smith so much, but I think Smith deserves a lot of credit, so I choose him. Anyway, let me get to my question.

http://mises.org/books/histofthought1.pdf

Go to chapter 8 of the first book. Adam Smith says that who leads to an increase of wages is when the laborers have an upper hand over the masters. That happens precisely when there is a growing demad for labor and so the masters compete with one another. Smith says, but does not seem to explain this, that demand for labor grows when there is marginal increase in demand for wealth. Meaning, the year before the wealth was less, the year after the wealth is more, the year after the wealth is even more. Thus, as Smith says, the reason why North America has higher wages than all of England is because America has high marginal wealth. England, though much richer, has no growth. Can someone explain why this happens?

It would help if you quoted the passage in question. It seems likely that you are misunderstanding him.

In this same chapter he says that the prosperity of a civilizaton is most linked to its population. I remember there is a quote by Mises which says that the one statistic that refutes all the supposed evils of capitalism during the industrial age is that the population double. But if that is so, then does it not follow that China and India are the most thriving countries in the world? Adam Smith’s idea does not seem to apply to poor countries with huge population.

Sure it does. India and China both have enormously larger populations today than they did 100 or 200 years ago, populations that could not have been sustained with the technology available to India and China 100 or 200 years ago. While both modern China and India are weak on property rights protection*, the strength of property rights they have is sufficient to support their populations to the standard of living they maintain today. Yet stronger property rights would certainly increase the prosperity of their peoples.

Clayton -

*In some areas, India has better protection of property rights than the US. And until just a decade ago, China had secret banking which, along with sound money, forms the bedrock foundation of property rights protections.

[Atheist]

It would help if you quoted the passage in question. It seems likely that you are misunderstanding him.

"There are certain circumstances, however, which sometimes give the labourers an advantage, and enable them to raise their wages considerably above this rate; evidently the lowest which is consistent with common humanity.

When in any country the demand for those who live by wages; labourers, journeymen, servants of every kind, is continually increasing; when every year furnishes employment for a greater number than had been employed the year before, the workmen have no occasion to combine in order to raise their wages. The scarcity of hands occasions a competition among masters, who bid against one another, in order to get workmen,*17 and thus voluntarily break through the natural combination of masters not to raise wages.

The demand for those who live by wages, it is evident, cannot increase but in proportion to the increase of the funds which are destined for the payment of wages. These funds are of two kinds; first, the revenue which is over and above what is necessary for the maintenance; and, secondly, the stock which is over and above what is necessary for the employment of their masters.

When the landlord, annuitant, or monied man, has a greater revenue than what he judges sufficient to maintain his own family, he employs either the whole or a part of the surplus in maintaining one or more menial servants. Increase this surplus, and he will naturally increase the number of those servants.

When an independent workman, such as a weaver or shoe-maker, has got more stock than what is sufficient to purchase the materials of his own work, and to maintain himself till he can dispose of it, he naturally employs one or more journeymen with the surplus, in order to make a profit by their work. Increase this surplus, and he will naturally increase the number of his journeymen.

The demand for those who live by wages, therefore, necessarily increases with the increase of the revenue and stock of every country, and cannot possibly increase without it. The increase of revenue and stock is the increase of national wealth. The demand for those who live by wages, therefore, naturally increases with the increase of national wealth, and cannot possibly increase without it.

It is not the actual greatness of national wealth, but its continual increase, which occasions a rise in the wages of labour. It is not, accordingly, in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labour are highest. "