In the last diary we discussed the notion of subsistence or the subsistence wage found in Smith’s analysis. I argued that Smith’s notion of subsistence was not a biological one (one in which people are literally living at starvation levels). Rather, it was one that was socially, culturally and historically derived and differed between different countries and within the same country over time. That means that subsistence is not a concept that is stagnant and unchangeable; it will vary due to the level of economic development and changes in the societies’ view of what people have the right to earn as members of the society over time. Moreover, Smith was quite clear when he argued that the subsistence wage needed to cover the subsistence and reproduction of the working class.
What does that tell us? So clearly in the late 18th century (prior to the extension of the Enclosure Acts), the commodities composing workers’ subsistence differed from that of the 19th and 20th centuries (and between decades of this time) and some of what would be our subsistence commodities were unheard of in Smith’s period (e.g., telephones, refrigerators).
Today, I want to discuss exactly how natural wages can differ from the subsistence level by looking at wages and how they alter in the stages of economic development identified by Smith. We are also going to examine Smith’s discussion of the relationship between unemployment and wages; this is very different from that found in modern economic theory, as Smith does not have a full employment theory of wages, so that in the face of unemployment, wages will not drop to create full employment of labour. Next, we will discuss how the level of class struggle will affect workers’ wages. I will end today’s discussion by looking historically at worker’s wage in the 19th century to discuss the standard of living debates to see if Smith’s argument that workers can gain from economic growth actually worked in the 19th century in Britain.
Wages and stages of economic development
Smith discusses the notion of the subsistence and natural wage in the context of three phases of economic development. He postulates three distinct stages of economic development or three distinct types of economies: 1) The progressive economy; 2) the stationary economy; and 3) the retrograde or declining economy. In these three stages the relation between the natural wage and the subsistence wage differs reflecting the level of development of the forces of production in the economy.
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 (Smith, 1776, I, p. 87).
In the case of the progressive economy, the natural wage generally will be above the subsistence wage. With the growth of the economy, that is the increase of revenue and stock, the natural wage will rise commensurate with the growth of capital with which it is to be employed.
The increase of the natural wage depends on the increase in the wealth of the country and it cannot rise without the increase in wealth. Thus there is an increase in productivity of the workers arising from the increase in the division of labour or the use of machinery in production. This leads to a decrease in unemployment commensurate with the growth of the economy, this arises from the fact that with the accumulation of capital, the capital is used to employ labour and there is an increase in the demand for labour.
This means that the workers can obtain a natural wage which is greater than the wage level consistent with common humanity. Smith argues that with accumulation, there is an increased demand for labour which leads to rising employment and hence a rise in the natural wage. In this situation the workers will flourish as they can obtain a wider range of commodities than previously and they can afford to have more children. If the economy remains in a progressive state, by this I mean that there is increasing accumulation of capital, then the new natural level of wages becomes permanent and the subsistence wage will rise to the natural wage.
Though the wealth of a country should be very great, yet if it has been long stationary, we must not expect to find the wages of labour very high in it. The funds destined for the payments of wages, the revenue and stock of its inhabitants, maybe of the greatest extent [...] the numbers of labourers employed every year could easily supply, and more than supply, the number wanted the following year. There could seldom be any scarcity of hands, nor could the masters be obliged to bid against one another to get them. [...] There would be a constant scarcity of employment and the labourers would be obliged to bid against one another in order to get it. If in such a country the wages of labour had ever been more than sufficient to maintain the labourer and to enable him to bring up a family, the competition of the labourers and the interest of the masters would soon reduce them to the lowest rate which is consistent with common humanity (Smith, 1776, I p. 89).
In the case of the stationary economy, where the level of output is such as to only maintain or sustain the economy at the same level as the last production period, that is the level of capital used in the economy is not growing (but is only replacing the capital which has been used up in production -- both fixed and variable capital), the workers will receive a natural wage which is consistent with the subsistence level of wages. Thus, the stationary economy maintains the size of the working class, it ensures reproduction at the same level, and hence the natural and subsistence wages are consistent.
But it would be otherwise in a country where the funds destined for the maintenance of labour were sensibly decaying. Every year, the demand for servants and labourers would, in all the different classes of employments, be less than it had been the year before. Many who had been bred in the superior classes, not being able to find employment in their own business, would be glad to seek it in the lowest. 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 terms, but would either starve, or be driven to seek as 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 (Smith, 1776,I, 90-1).
In the case of the retrograde economy, where the level of the economy is actually shrinking, that is there is less output this year relative to last year (most probably, as a result of the consumption of capital without its replacement) then the situation of the workers is especially harsh.
In this situation the level of the market wage will for a short time fall below that of the subsistence wage. The subsistence wage will not fall, the wage received in the market or the actual wage is what will fall below the level ensuring subsistence -- it is the market wage which will fall as the condition that is causing this situation is only of a short-lived nature -- it cannot be a persistent situation and hence it is not the natural wage which is falling. This will literally starve some workers to death, leaving less workers to compete with each other for jobs, then those workers who can be employed will be able to receive the subsistence wage. At that point, the market wage will return to the level of subsistence, as the amount of capital which is available to be used for the employment of labour is consistent with the supply of labour (available working population).
This is a very important discussion and we will consider it in more detail next week when we look the relation between natural and market wages. What happens if this is not a short-run problem? Can the subsistence wage been eroded back to the biological subsistence level? The short-answer is yes, but it must be examined in detail.
The relationship of unemployment to the natural wage
The role of the labour market and unemployment in determining the natural wage in Smith unites what we spoke of earlier with respect to the three stages of economic development. In his discussion of those three stages, Smith considers the possibility of persistent unemployment which then enters as an important factor in determining the rate of natural wages. Moreover, we saw the potential of natural wages being greater than subsistence wages due to the increase in capital accumulation and the drawing in of idle workers into employment. There is no doubt that in Smith's analysis (as in Marx's) the impact of the existence of a reserve army of unemployed affects the natural wage of labour.
Most importantly, if we examine Smith's writing on wages, we will not find an adjustment mechanism which will ensure that there is a full employment of labour in the economy. In the stationary or retrograde economies, unemployment is a benefactor to the capitalist. According to Smith, workers will compete with each other to get jobs and this will push natural wages to the subsistence level. In the case of the stationary or retrograde economies, the unemployment of labour which exists tends to lower the natural wage to the subsistence level by forcing workers to compete against each other to obtain employment.
On the other hand, when there is sustained economic growth (as in the case of the progressive economy), the employers lose their advantage due to the continuous increase in the employment of labour. When the economy is growing, more and more workers are drawn into production. This creates a relative scarcity of labour that forces the employers to compete amongst themselves leading to an increase in the wage offered to the workers.
It is important to note here, that Smith did not envisage an equilibrating mechanism which linked the level of employment to the real wage rate, that is, Smith did not argue that a fall in wages would guarantee full employment of labour in the economy. This argument which argues for the flexibility of the real wage (or market wage depending on which version of the wage-fund theory we are examining) in the face of the unemployment of labour, is the argument which occurs in the wage-fund theory of Mill, McCulloch and Senior and in neoclassical economic theory.
According to Smith, there is persistent unemployment in the economy that is only alleviated when the economy is growing, in which case unemployed labour will be drawn into the production process. However, this does not guarantee full employment; labour may become fully employed if the growth in the level of capital accumulation is such that the full available labour force becomes drawn into production.
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 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 (Smith, 1776, I, p. 86)
In describing the conditions of the labour market in his three types of economies, Smith always compares the supply of labour with the demand for labour. These are discussed as given quantities. The supply of labour obviously is the available labouring population (which includes all available persons of working age and ability). The demand for labour (given the capital available to employ it) is given in each production period and it varies over time depending on the progress of accumulation. The demand for labour rises with the increase of accumulation; more workers are required to produce the increasing level of output and more capital is available to employ an increasing amount of labourers.
Thus the situation in the labour market has an impact on the natural wage. However, when we are discussing the determination of the natural wage, it is important to emphasize that the situation in the labour market in order to effect the natural wage must be a persistent situation, not one which is temporary in nature. When we are referring to persistent situations in the labour market, we mean a situation where changes in the pace of accumulation are not matched by population growth. That means that either accumulation is greater than the growth of the population, in which case, there will be a scarcity of labour and a higher natural wage relative to subsistence. In the case when population growth outstrips the growth of accumulation, then, there will be unemployment, which will force the workers to compete with each other for jobs, and this will force the natural wage down to the level of subsistence.
Temporary fluctuations in the level of employment, such as those caused by good or bad harvests can only induce temporary oscillations in the market wage around the natural wage and these will cease with the end of the accidental circumstances which caused them.
It follows that competition amongst the workers (when there is unemployment) or amongst employers ("scarcity of hands") does not lead to an indefinite reduction or increase in wages. Rather competition influences the level of the natural wage in relation to the subsistence or minimum level. Thus, competition is a process which works within definite limits, which for wages are set by social conditions and conventions as to the rights of human beings to a decent and necessary level of existence.
Class struggle and the bargaining power of workers and capitalists and its effect on the natural wage
As I said before, Smith generally believed that the natural wage was determined by four things: 1) the subsistence wage; 2) the level of economic development; 3) the role of the labour market and the level of unemployment; and 4) was the power relation between masters and the workers.
What are the common wages of labour depends everywhere upon the contract usually made between those two parties [masters and labourers], whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible (Smith, 1776, I, p 83).
Smith argued that the wages of labour were determined between workers and their employers. When circumstances were unfavourable to the worker their wages tend to fall to the level of subsistence.
Unfavourable circumstances which affect the bargaining power of workers relative to their masters were their conditions of need (workers must be employed or they starve, if they have savings, they have more leeway, if there are unions which can support them for a period of negotiations, again they have more leeway), the unfavourable institutional context (e.g., government control by the capitalists and aristocracy), and, as we examined earlier, the existence of an excess of workers relative to available employment.
Smith argued that, in general, the power lay on the side of the masters rather than the workers, and that this usually resulted in the natural wage being at the level of subsistence.
Why? If the determination of wages is the result of bargaining between two opposing forces (workers and capitalists) that have rather unequal bargaining power, then those with greater power can force those with less to accept a wage commensurate with the level of subsistence.
The workers need to be employed in order that they can earn wages with which to buy food. The capitalists have enough money that in a bargaining dispute they can wait the workers out. The workers can not hold out for a long period of time when bargaining for wages, as their savings are either very low or non-existent and combinations of unskilled workers were shall we say looked down upon (or illegal) or not strong enough to help people involved in wage negotiations in the Britain of Smith's time.
The advantage of the masters lies in terms of an institutional context in Smith's work, specifically laws outlawing workers' combinations (unions) and a government which is quick to support the employers in a wage dispute (an excellent example were the combination laws in Britain and for a lovely example of government intervention on the side of the masters, we merely have to look at capital punishment laws used against workers for destroying machinery and output). Another reason why the employers have a greater bargaining power can be found in the fact that there are fewer employers than workers and it is far easier for them to combine to hold down wages than for the larger group of workers to unite to fight them especially when they are constrained by their need to eat.
Now, I said earlier that when there is a progressive economy, the power balance shifts from the capitalist to the workers because of the increased demand for labour to be used in the production process. The decrease in unemployment increases the power of the workers and this is what allows the workers to obtain a wage that is higher than the subsistence level. Historically, was that enough? Clearly not, the organisation of workers into trade unions to protect themselves, the struggle for political enfranchisement of the working class, and the creation of political organisations to fight for workers' rights was an essential part of ensuring that workers actually obtained part of the increased growth of the economy as wages and benefits.
The Standard of Living Debate of wages in the 19th century (a short comment)
Perhaps the impact of the development of capitalism on the working class can be most clearly seen in an examination of the standards of living over the course of the first industrial revolution.
The difficulty in examining this question is that an examination of money wages just tells you approximately the amount of take-home wages, it gives you no indication of how many commodities that money could buy. In other words, the trend of money wages tells you nothing of how people are living, that is, of what their natural wage or standards of living consist. In order to examine the trend of the standards of living we need to understand the path of real wages, that is, wages deflated by prices.
A second problem is the question of whose wages we are examining. The existing data on wages does not permit us to compile a measure of overall average earnings from employment. In general, the wages of workers in industry were higher than those in agriculture, so that as the proportion of workers in industrial employment rose relative to agriculture, the average money wage probably grew. In the expanding industries, wages sometimes rose incredibly and sometimes collapsed when workers were being replaced by machinery. In cotton, for example, cotton weavers were earning 7 to 10 shillings a week in 1769 prior to the introduction of the spinning jenny. Due to the increased volume of output produced by the spinning jenny which they wove into cloth and a commensurate shortage of weavers to keep up with increased production, their wages in 1792 were 15-20 shillings per week. The high wages drew workers into the occupation and by 1815, prior to the general introduction of the power loom, wages were about 1/3 of the level in 1795. Cole's figures for the hand-loom weavers are as follows: in 1800, hand-loom weavers made about 19s a week on average, 23s in 1806, 12s in 1809, 18s in 1812, 10s in 1816, 8s in 1819-28, from 5-7s in the period from 1818 to 1840.
Taking these things into consideration, what can we say about changes in the standards of living for the working class brought about by the industrial revolution? The course of average money wages in Great Britain has been calculated by P Deane and W.A. Cole and shows a downward trend from 1810 to 1845.
There is no firm evidence for an overall improvement in the workers' standard of living between 1780-1820. Indeed, given the harvest failures, growing population, the privations of a major war and the distress of post-war dislocations, we can reasonably conclude that on balance average standards of living tended to fall rather than to rise.
According to Deane, for the period of about 1820-1840, the trend of real wages is not as definite. She argues that there is no evidence for a substantial increase in real incomes during this time, and that on the whole, the net change in either direction is relatively slight. On the other hand, G.D.H. Cole argues that there was a period of decline in real wages from 1830-40 in the three sectors of agriculture, engineering and Cotton factories (even excluding the hand-loom workers). Perhaps not coincidentally, this period of decline in both real and money wages was also a period of intense working class unrest and mobilization.
Finally, beginning in the 1840s, both Phyllis Deane and GDH Cole find much stronger evidence of an improvement in the average real earnings of the working class. Deane argues that this is not due to a rise in real wages in the 1840s, however, as a clear and demonstrable rise in real wages only becomes apparent in the 1850s and 1860s, and it was not until 1870 that incomes in agriculture began to rise, their steady increase was not apparent until the 1880s.
Deane argues that the rise in average real incomes in the 1840 stems from a change in the composition of the labour force. There was a shift in the distribution of the labour force from the traditional highly seasonal occupations characteristic of a pre-industrial economy to those characteristic of a modern industrial economy with disciplined work habits and a continuous use of capital equipment. So for example, agricultural workers earn less than industrial workers, hard-loom weavers earn less than power-loom weavers, canal-bargemen earn less than locomotive drivers. The complete extension of the industrial revolution changed the composition of the work force, more people were employed in industry, labourers who knew how to work machines were more in demand than those that did not and they earned higher wages. There was a shift in the composition of the work force in that there was a fall in the proportion engaged in low earning categories and a rise in the proportion of those in the high earning income categories. This would increase the average earning per worker even if the wage-rates in each occupation remained unchanged.
Next week, 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. In the context of the discussion of wage differentials, we will raise the use of Smith’s theory in the modern discussion of efficiency wages.
Some additional readings
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.
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.
Earlier pieces in the series
Smith and the Physiocrats on Economic Growth: http://www.dailykos.com/...
Smith on Wages, Part I: http://www.dailykos.com/...