The Classical Economic theory of wages is distinct from modern analyses of the determination of the wage. First of all, the wage is not a variable determined in the system in the context of a general equilibrium model in which the level and composition of output, distribution and the prices of all commodities are all determined simultaneously. In fact, along with the technical conditions of production and the level and composition of output, the wage is taken as a datum in the determination of the variables in the model, those being the general rate of profits (r) and the prices (or exchange values) of the commodities produced in the system. In this respect, the manner in which I am treating the classical analysis follows that of P. Sraffa and P. Garegnani. This discussion of wages in Smith also closely follows that advanced by Antonella Stirati.
Since Smith’s discussion of wages is actually long and complex, I will divide the discussion into three parts. In this diary, we will discuss some terminology, Smith’s discussion of wages in the rude and early state of society and the relationship between the natural and subsistence wage. In Part II, we’ll consider the other determinants of the natural wage beyond that of the notion of subsistence, specifically, the stage of economic development in the country, the power relation between masters and workers, and the supply and demand for labour. We will consider the relationship between market wages and the natural wage in the third diary on Smith on Wages, along with Smith’s discussion of wage differentials, seasonal employment and underemployment and Smith’s discussion of poverty, its causes and his suggested remedies. I will not be publishing a diary next week as I am on holiday, but am planning to continue the series the following week.
In classical theory, the wage is treated as an independent variable, primarily determined by historical and social conditions, but it can be and will be affected by other phenomena (e.g., the power relations between workers and masters and the level of growth and accumulation in the economy). Second, in the classical theory of wages, wages change over time in response to a number of factors. This not only means that the quantities of commodities consumed by workers change, but the commodity composition of the wage basket changes as well (that is, workers will demand different commodities over time). These changes in demand for commodities by workers entail changes in the level and composition of total output. Moreover, changes in the methods of production in use in the production of wage goods will alter their prices, and this in turn will enable workers to consume a broader variety of commodities given their money wage. Smith also distinguishes between different goods consumed by different types of workers. These are called wage differentials, and he also discusses the influence of status in the commodity composition of the wage bundle and the fact that the desire for a better life will influence people to alter their circumstances to attain a better commodity composition of wages.
Some General Definitions
Before we begin our analysis of the theory of wages in Adam Smith, we need to distinguish four distinct ideas of the wage that we find in his writings. These ideas will be expanded in the discussion, but it is helpful to just have a few definitions as a starting point. The two important theoretical concepts in Smith’s analysis that we will be discussing are the subsistence wage and the natural wage. The natural wage is determined primarily by the subsistence level of wages. However, deviations of the natural from the subsistence level of wages are an essential part of Smith's analysis of wages.
These deviations, by which I am referring to the natural wage lying above the level of subsistence wages, derive primarily from two sources: 1), the power relation between the workers and the masters, which relates to the level of unemployment in the economy;
2)the level of development of the productive forces in the economy (the level of accumulation of capital and its growth).
The natural wage is seen to be a centre of gravitation, an average value of the actual wage. The natural wage emerges in the writings of Smith as an average or natural value resulting from the action of systematic and persistent forces. The subsistence wage or the real wage was seen to be determined by historical and economic circumstances.
The market wage is the actual wage paid in the market. It is not a theoretical variable, merely a description of that amount of commodities that the worker receives as payment for his labour; the money wage is the amount of market wages expressed in money terms or as a monetary unit.
The Early and Rude State of Society
In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him (Smith, 1776, I, p 82).
As in his discussion of exchange value, Smith begins his analysis of wages by discussing the "original state of things" or "the early and rude state of society." This state is a completely theoretical discussion (corresponding to the state of nature in the literature of Natural Rights moral philosophy) prior to the private appropriation of land and the accumulation of capital in the hands of a few people. In this situation, as the worker owns the capital with which he works (both tools and raw materials) and land is shared and not privately appropriated, the whole product of labour goes to the workers, so total output equals the wage.
This is totally analogous to his discussion of exchange values in that state. Smith argues in that discussion, that the total value of output equals the wage:
PY = wL; dividing both sides by w, gives us:
PY/w = L
where P = prices, Y = output, w = wages, L = quantity of labour used in production. In this case, and in this case only in Smith, the quantity of labour commanded by the product(i.e., the portion of the product going to workers) equals the quantity of labour embodied in the product (or the quantity of labour used in its production).
However, once land is privately appropriated, the owners of land demand a rent for its usage. This comes out of the product produced by labour. Moreover, once capital has been accumulated in the hands of the few, Smith notes that a workman rarely has the savings to survive the period of production (or harvest period) and borrows what he needs for his survival from those that have it. Another way to look at this is that the worker cannot afford to purchase seed, or if he does not have the tools that he needs for production and he needs to rent them from their owners. The value of seed advanced (constant circulating capital) needs to be replaced and since capital goods (e.g., tools) wear out over time (they depreciate), money needs to be put aside for this. Moreover, as the employer or master could have just earned interest on the money, he demands a recompense for it not being in the bank (at the minimum this corresponds to the rate of interest, i, but will certainly be greater). This represents the second deduction from the product of the workman, profits and the replacement of capital used up in production. As such, the worker no longer commands the total value of the product; it is now divided between wages, profits and rents.
The Subsistence Wage
"But though in disputes with their workmen, masters must generally have the advantage, there is however a certain rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labour.
A man must always live by his work, and his wages must at least be sufficient to maintain him. They must even upon most occasions be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation (Smith, 1776, I, p. 85)."
The concepts of subsistence consumption and the natural wage rate do not strictly coincide in Smith's analysis, although they are closely related (and often Smith uses them interchangeably, which has led to a lot of confusion in the literature on Smith, for example, O'Donnell argues that Smith has a subsistence theory of wages).
Unlike in the case of Ricardo, Malthus and in the writers on the wages-fund (James Mill, McCulloch, Senior and John Stuart Mill), in the work of Smith, we must distinguish between the notion of subsistence and the natural wage.
The subsistence wage is historically and socially determined and depends upon the habits and customs of a country. These habits and customs set the norms of decorum and respectability to which every one in the society must conform. Thus, subsistence not only refers to those commodities which are indispensable for the support of life, but also those which the custom of the society deems that no person should be without. Subsistence should be considered as the floor to which the natural wage can sink, so this notion of subsistence relates to that wage which is consistent with what Smith calls "consistent with common humanity (Smith, 1776, I, p. 86)."
"Thus far at least seems certain, that, in order to bring up a family, the labour of husband and wife together must, even in the lowest species of common labour, be able to earn something more than what is precisely necessary for their own maintenance (Smith, 1776, I, pp. 86-7).
This subsistence wage represents the wage that the society views as that necessary to ensure the existence and reproduction of the working classes.
The natural wage can and will deviate from this subsistence wage. Whether or not this deviation exists depends primarily upon the state of accumulation and growth in the economy, which then affects other factors. Smith argues that commensurate with the growth of the economy, the natural wage can and will deviate from the subsistence wage. That means that the workers can obtain some of the increase in their productivity deriving from new techniques of production and thereby raise the natural wage above its subsistence level. Whether they are able to do so or not depends on the level of unemployment, constant increases in accumulation and shifts in the power relationship between workers and employers.
The tendency for the natural wage to coincide with subsistence is explained by Smith to derive from specific historical and social conditions. What pushes the natural wage towards the subsistence level? Essentially, it is the declining state of the economy, the level of unemployment and the fact that the employers have more economic power than the workers.
The natural wage can also interact with the subsistence level. If the natural wage is above the subsistence level for a significant period of time this will induce a rise in the level of consumption seen to be socially considered necessary for the working class. As such, the subsistence wage will rise to the level of the natural wages , if the forces that cause the deviation of the natural wage from subsistence are sufficiently long-lasting or permanent. This gives rise to a new level of subsistence wages in that country; this can only happen if economic growth is proceeding apace for a long period of time. This can be used as an explanation of the growth of wages over time as well as explaining why the subsistence level differs between countries and differs in the same country over time.
Some additional readings
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.
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.