While last week’s diary concentrated on Smith’s determination of the natural wage and the factors that could lead to rising wages or the factors that could hinder these, this week we will look at the situations that could lead to wages stagnating, falling and the discussion of poverty in Smith. I’ll conclude the diary with a discussion of national income and the standards of living during the 19th century.
For those who are interested, this is the fourth diary in a series on history of economic thought, the previous diaries were:
Smith and the Physiocrats on Economic Growth http://www.dailykos.com/...
Smith on Wages, Part I http://www.dailykos.com/...
Smith on Wages, Part II http://www.dailykos.com/...
The results of last week's poll were somewhat ambiguous, so I still do not know exactly what to write for next week. I will limit choices down to the five most popular picks and will write the diary that has the most picks.
Where are we now? Last week we considered Smith’s argument on the determination of natural wages and we found that Smith essentially had 4 determinants of the natural wage:
- the subsistence wage: The subsistence was is that bundle of commodities socially and historically determined to be that consistent with "common humanity"; as such, it forms the floor to which wages can fall and will change over time in the same country and differ between countries;
- the level of economic development: the state of the economy and whether the economy is growing, stagnant or declining; this relates to the level of capital accumulation in your economy available for the employment of labour;
- the role of the labour market and the level of unemployment: this basically considers the supply of labour (available working population, not the total population, just that of the population available to work) and the demand for labour (the capital available for the employment of labour); given that Smith recognised that there is persistent unemployment (even in the stage where there is ongoing accumulation of capital and growth), unemployment derives from the insufficient accumulation of capital to ensure full employment. Moreover, in Smith’s time, there were legal blockages to the mobility of labour; needless to say, this would also lead to unemployment in some areas combined with very high wages in others.
- the power relation between masters and the workers: the natural wage will depend on the level of class struggle and power differentials during wage-bargaining. There is an institutional bias in favour of the employers in a wage-bargaining situation (laws which favour them and hinder workers and governments that will move to protect the employers, but not the workers); there is also the fact that there are few employers and many workers which enables employers to combine to keep wages down and perhaps most importantly, capitalists can wait out workers during a bargaining process; given limited savings, workers need their wages to eat and ensure their families survival; they cannot wait out a long bargaining process.
Smith on Market wages
The contrary of this happens in a year of sudden and extraordinary scarcity. The funds destined for employing industry are less than they had been the year before. A considerable number of people are thrown out of employment, who bid ‘against one’ another, in order to get it, which sometimes lowers both the real and money price of labour. In 1740, a year of extraordinary scarcity, many people were willing to work for bare subsistence. In the succeeding years of plenty, it was more difficult to get labourers and servants.
The scarcity of a dear year, by diminishing the demand for labour, tends to low4er its prices, as the high price of provisions tends to raise it. The plenty of a cheep year, on the contrary, by increasing the demand, tends to raise the prices of labour, as the cheapness of provisions tends to lower it (Smith, 1776, I, 104).
The quote from Smith that we started this section with is dealing with a situation, where there is a problem that arises from a bad harvest, a flood, a one-short phenomenon that will lower the wage paid in the market in this specific period of production (using the idea of one year as a period of production). In this case, we can see that Smith states that if a bad period exists for a short-time, that wages that period can fall below the historical and cultural subsistence level to that of bare subsistence (which I take to mean biological subsistence). However, since that situation is not one that continues for a long time, it cannot permanently undercut the subsistence level. We just have a production period in which the wages is below the historical level and it will bounce back as it is not affecting permanently the level of accumulation of capital which would affect the natural wage.
What we want to touch on now is the possibility of wages falling below the subsistence level: that is something that is raised in Smith’s discussion of the relation between market (actual wages paid in the market) and natural wages.
In general, the natural rate of wages differs from the market wage. The market wage is the wage actually existing at the moment. It differs from the natural wage in that the market wage is affected by accidental or transitory phenomena, such as a bad or good harvest or a flood. Thus the market or the actual wage is influenced by temporary and short-term deviations as opposed to the persistent effects (growth of accumulation and the growth of population) which determine the natural wage. The market wage will tend towards the natural wage through the process of competition. The market wage, as such, oscillates around the natural wage, or the natural wage is the trend or average of actual wages.
However, there is a second type of situation that can arise and this type of situation is one that is an indicator of a declining or retrograde state. Now, formally, the natural wage cannot fall below subsistence, that is subsistence is a floor, the market wage may for a short period, fall below subsistence in the case of a declining or retrograde economy. So while the natural wage tends towards subsistence, the market wage oscillates around the natural wage reflecting the conditions of the labour market at the moment. As such, the market wage is solely governed by the supply of labour in relation to its demand, that is, it is given by capital available at the moment, to employ labour.
What about the possibility of subsistence being eroded? Can that happen in Smith’s analysis, we can certainly see it in human history (e.g., Ethiopia)? I would answer yes, and this is clearly indicated in Smith’s discussion in this section. To describe the situation, we need to extend the quote from last week to see the rest of the discussion.
But it would be otherwise in a country where the funds destined for the maintenance of labour were sensibly decaying. [...]The lowest class being not only overstocked with its own workmen, but with the overflowing of all the other classes, the competition for employment would be so great in it, as to reduce the wages of labour to the most miserable and scanty subsistence of the labourer. Many would not be able to find employment even upon these hard terms, but would either starve, or be driven to seek a subsistence either by begging, or by the perpetration perhaps of the greatest enormities. Want, famine, and mortality would immediately prevail in that class, and from thence extend themselves to all the superior classes, till the number of inhabitants in the country was reduced to what could easily be maintained by the revenue and stock which remained in it, and which had escaped either the tyranny or calamity which had destroyed the rest. This perhaps is nearly the present state of Bengal, and of some other of the English settlements in the East Indies. In a fertile country which had before been much depopulated, where subsistence, consequently, should not be difficult, and where, notwithstanding three or four hundred thousand people die of hunger in one year, we maybe assured that the funds destined for the maintenance of the labouring poor are fast decaying (Smith, 1776, I, pp. 90-91).
What we are seeing here is literally the erosion of subsistence, first back to the level of biological subsistence and then undercutting it leading to starvation, after which it goes back to the level of biological subsistence whose base or floor is that level consistent with the amount of capital that still exists available for the employment of labour; the situation may allow a recovery of part of the historical subsistence, but that depends on the specific situation.
This is a phenomenon where we are in a declining state, a catastrophe happens that lasts for more than one production period (so it is outside of the earlier market wage scenario) and that pushes things backwards. The base of the subsistence floor is biological subsistence; that can only be eroded in a tragedy of serious proportions and that will undercut all social and historical parts of subsistence wages; what can be the meaning of subsistence and reproduction in the face of a long-standing catastrophe?
What type of situation can actually lead to a decrease in the capital available for the employment of labour that is serious enough that it can undercut subsistence? One kind would be the actual physical decrease in the capital stock below its replacement; that would mean that there is actually less capital to employ labour than before. How can that arise? One answer is repatriation of profits overseas so that they are not available for further employment in the country in which they are produced (this seems to be the case of Bengal above and the East India company and is a familiar one with those who have knowledge of the history of colonialism and imperialism). Second, would be a long-lasting harvest failure (e.g., a famine) that actually undercuts the future production possibilities. Third, would be an economy that is actually in decline in which the replacement of capital cannot be done due to the fact that the money earned on goods produced is insufficient to ensure the replacement of capital used up in production.
In Smith, this could arise due to a number of factors: insufficient demand both domestically and internationally for commodities produced in the country thereby forcing you to sell at a far too low price over several production periods; domestically you have a sort of inherent circular problem: profits are low as the amount that the goods sell for is low and wages and rent payments take priority, so that could possibly undercut replacement if it is sustained for a longer-period of time, wages are low so that working class demand is low (or they are so low that they cannot sustain a varied wage basket), landlords unwilling to purchase what is produced and international demand for commodities is also low, so that the wealthy are purchasing overseas and you cannot sell your goods for a price sufficient to cover costs and profits.
One final point which is not considered by Smith, as he did not foresee it occurring, is a situation in which you have economic growth and accumulation, but investment occurs not in hiring more labour, but rather in introducing machinery that is labour saving. This discussion is then picked up by Barton in his discussion of poverty (1817). This then addressed by Ricardo (1821) in the 3rd edition of his Principles in his discussion of machinery (chapter 31), and he argues correctly, that this will lead to additional unemployment and hence the ability of employers to keep wages stagnant or at the subsistence level instead of growing along with increases in productivity.
Smith on Poverty
Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing an happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged (Smith, 1776, I, p 96).
Given the date of publication of the Wealth of Nations (1776) which is prior to Pitt's Poor Law Amendments (1795-7), we can only examine Smith's comments on the earlier Poor Law Bill. Smith's comments are pretty much confined to criticisms of the Law of Settlements. The Settlement Law of 1622 had set up barriers to migration by allowing the Parish to forcibly remove poor people, that is resettle them back to their place of birth within 40 days of their arrival, for those considered to be "vagrants," who they argued would be a burden on the parish.
He articulates two arguments: the first is an economic efficiency argument concerning the blockages to the workings of competition brought about by the immobility of labour; the second argument examines the rating of wages and profits by regulation, which again he discusses in the context of hindrances to competition (Smith, 1776, I, pp. 152-159).
In the first case, Smith argues that the Settlement Law, which prevents the full mobility of labour also prevents the full mobility of capital. As such, it creates differentials in wages and profits throughout the country as some areas have relatively more unemployment than others which can not be amended by the mobility of labour throughout the country; i.e., "the relative scarcity of hands in one parish is not counterbalanced by superabundance in others [...] (Smith, 1776, I p. 156). Moreover, Smith argues that it is a violation of the "natural liberty and justice" of the workmen, a violation which they would not accept if they understood truly what this "oppression" means (Smith, 1776, I, p. 157).
In the second case, Smith discusses the attempts to regulate wages and profits through legislation. Consistent with his discussion on wages, he notes that the institutional structure tends to favour the masters rather than the workman in times of dispute. In fact, he argues that more often than not legislation passed to protect the workers is fair and equitable, while that designed to protect the masters is not. Smith provides an example consistent with his theory of wages concerning legislation passed 1702 and 1739 which ensured that workers were paid in money rather than in kind. The assurance that workers are actually getting their subsistence, enforced by this law, is just according to Smith. Smith does not hold a laissez faire argument, he recognises the need for legislation to protect the right of subsistence of the workers.
Thus the law which obliges the masters in several trades to pay their workmen in money and not in goods, is quite just and equitable. It imposes no real hardship upon the masters. It only obliges them to pay that value in money, which they pretended to pay, but did not always really pay in goods (Smith, 1776, I, p.158).
Perhaps the most important argument articulated by Smith arises in this discussion and which forms the basis of the social welfare policy formulated by Pitt in the 1795-97 Poor Law Amendments. Smith argues:
In antient times too it was usual to attempt to regulate the profits of merchants and other dealers, by rating the price both of provisions and other goods. The assize of bread is, [...] the only remnant of this ancient usage. Where there is an exclusive corporation, it may perhaps be proper to regulate the price of the first necessity of life. But where there is none, the competition will regulate it much better than any assize (Smith, I.x.c, p. 158)
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Needless to say this was a very controversial argument. It justifies setting the price of the primary wage good to ensure that workers obtain their subsistence. In this discussion, Smith legitimises limits to the prices of consumption goods to ensure subsistence, this argument holds if a monopoly situation exists which would ensure that prices would include quasi-rents.
The extension of Smith’s argument that I will now advance is also controversial. Given Smith's conception of rent, where rent is a monopoly price deriving from the private appropriation of the land, this implies that a price subsidy on bread is legitimate to ensure subsistence, or to put it in other terms, that wages should be regulated by the price of bread. This later became known as the "infamous Speenhamland amendment" (1795-7 Poor Law Amendments) which tied the amount of relief to the size of the family and to the price of bread. Smith's argument (i.e., linking the price of bread to the price of grain) would apply if the production of bread were monopolised and/or if the production of the inputs of bread were monopolised (i.e., the production of corn). Specifically, both the ownership of land was monopolised due to the Enclosure Acts and hence the workers were unable to produce their own subsistence and hence the production of corn, their primary subsistence crop were monopolised. As such, this argument would hold in the situation brought about by the Corn Laws following the Napoleonic wars in 1814, whereby the price of corn was rising due to the tariffs on imports and a succession of bad harvests. This situation combined with war-time inflation began to undercut the real wage of workers (even though money wages were rising).
Standards of living part II
Last week, I was only able to address the question of wages due to space. I wanted to end today’s diary with a discussion of national income statistics during the 19th century to give some more idea of whether worker’s benefited from Industrialisation and in which manner.
In terms of the national-income estimates, the data is the following:
- between 1801-1851, national product per head at constant prices almost doubled. Taking into account, the pre-war period, the improvement was slightly less.
- In the period between 1821-1841, the national product per head increased by almost one-third.
However, this does not tell us how the working class fared during this period that would depend on the distribution of the national product. If the increase in incomes was entirely absorbed by the upper classes in the form of rent and profits, and if the increased output of goods and services took the form either of capital goods or of luxury goods, then it could be argued that the workers gained notion from the process of early industrialisation.
The evidence, according to Deane, indicates that there was a shift in the distribution of incomes in favour o rents and profits and a change in the composition of output in favour of capital goods, and luxury goods. But that is clearly not the whole story.
The new factories were not producing entirely for export or producing solely capital or luxury goods, and the fact is that the prices of manufactured commodities fell substantially, which means that the working class gained as consumers where they did not gain from increased wages. On balance, the evidence is strongly in favour of the view that working class standards of living improved by less than the increase in national income over the first half of the 19th century.
While there is no doubt that certain sectors of the labouring poor suffered serious deterioration in their earning power due to the fact they were made redundant by the introduction of machinery, nevertheless it would be difficult to argue that there was a overall decline in real wage per family when aggregate real incomes were growing much faster than the population.
In effect, the sustained growth of the national product which industrialisation gave rise to tended to exert an upward pressure on working-class standards of living in 3 main ways, none of which implied a rise in the real wage: 1) by creating more regular employment opportunities for all members of the family -- this meant high earnings per year and per family even without a rise in wages per hour worked; 2) by creating more opportunities for labour specialisation and hence for higher earnings of the skilled and semi-skilled work force can earn. Here average wages can rise without an increase in the wage rage because the composition of the labour force changes in favour of the higher earning group; and 3) the upward pressure on the worker's standard of living also operated through reductions in the prices of consumer goods and the widening and range of commodities which the workers can buy. To the extent that it raised real purchasing power for the workers, industrialisation expanded the market for manufactured commodities.
Some additional readings
Barton, J. (1817)Observations on the Circumstances which influence the condition of the labouring classes of society, John Hopkins, 1934.
Cole, G.D.H. (1925) A Short History of the British Working Class Movement: 1789-1927, George Allen and Unwin.
Deane, P. (1979) The First Industrial Revolution, Cambridge University Press, Second Edition.
Deane, P. and W.A. Cole (1969) British Economic Growth: 1688-1959, Cambridge University Press.
Garegnani, P. (1984) "The Theory of Value and Distribution in the Classical Economists and Marx," Oxford Economic Papers, pp. 291-304.
O’Donnell, R. (1990) Adam Smith’s Theory of Value and Distribution: A reappraisal, Macmillan.
Ricardo, D. (1821) Principles of Political Economy and Taxation, Vol. I of the Works and Correspondence of David Ricardo, ed. by P. Sraffa, Cambridge University Press, 1951.
Smith, A. (1776) An Inquiry into the Nature and Causes of the Wealth of Nations, Volume I, Liberty Fund, 1981.
Stirati, A. (1991) The Theory of Wages in Classical Economics, Edward Elgar.
Thompson, E.P. (1966) The Making of the English Working Class, Vintage.