1.10 Differences in Wages and Profits
Differences arises in wages of men and the prices of goods according to the value placed on specific things: a pound of iron is less valuable than a pound of gold, a day's wages of an unskilled laborer are less than that of a master craftsman.
Every man's individual interest drives him to seek the most advantageous use of his time and resources, and to shun the disadvantageous use of the same. However, in the context of a given market, the whole of the advantages and disadvantage must balance out, or continually trend toward equality.
Were every man of an isolated village o seek the profit of the weaver, all would perish of starvation for want of any farmer. Were there to be twenty weavers and but one farmer, the abundance of clothing and the lack of bread would give incentive for some weavers to take up farming, until such time as the village had as much food and as much clothing as was needed.
And in that way, through the vast proliferation of goods and professions, does a society seek to establish, through means of self-interest and the free migration among trades, a balance in which a sufficient quantity of any necessity is produced and they are priced fairly in relation to one another given the degree to which each is demanded.
But for the machinations of those who would control the lives of others, whether for their own benefit or because they consider their fellows to be incapable of choosing for themselves the best course of action, such a balance would naturally arise, and just as naturally be sustained; and by their schemes and plotting, no-where in all the world is there a market that exists in perfect liberty, and hence in perfect balance.
Inequalities Arising from the Nature of Employments
Smith observes five principle reasons that would cause some employments to have greater revenue than others:
- The agreeableness of the activity
- The ease or difficult of training
- The constancy of employment
- The amount of responsibility they entail
- The probability of success in the endeavor
While this is generally considered in assessing the wages of employment, the same principles would apply to the profit of any endeavor in which an individual would engage for a direct profit.
Agreeableness of Activity
An individual prefers to engage in activities he finds to be more agreeable, for a variety of reasons: if the amount of toil is light, if the work is in a clean environment, or if there is some sense of honor in the actions undertaken. The more disagreeable the activity, the greater compensation must be offered for the displeasure of doing it.
A weaver will earn less than a miner in most locations, the work being easier, cleanlier, less dangerous, carried on in a more pleasant environment. A premium is offered for work done in darkness as opposed to daylight. The profession of the butcher is "brutal and odious" and the duty of the public executioner, perhaps the most detestable of employments, pays better than any common trade.
In terms of businesses, being an innkeeper or tavern owner means having little peace in one's own house and the constant exposure to the brutality of drunkards. However, there is virtually no other trade in which such a small investment yields as great a profit.
Ease of Training
The greater the amount of training and preparation is required to be competent in a profession, the greater the compensation for it, both in consideration of the expense undertaken to obtain the training and the scarcity of individuals who have the required skills. The premium of skilled workers applies both to the cost of training and the duration of it.
In the lower ranks of skilled trades, education is generally by means of apprenticeship, in which a young man capable of earning a wage in a common profession will forego his earnings and work for the sole profit of his master in exchange for learning a trade, and in some instances must pay for the privilege as well, on the expectation this sacrifice will make his labor more valuable some hears hence when he has sufficient skill to command compensation for the quality of his work. By this process, the professions of carpenter, smith, cooper, and other professions have greater value.
Those professions requiring education in the arts and sciences requires a still greater investment, such that lawyers and physicians, teachers and artists, are significantly better in pay than lesser orders of worker.
Constancy of Employment
The constancy of income is highly valued by those who choose to be employed by others: if they were comfortable with the uncertainty that comes of investing funds for materials, working without compensation, and hoping to sell their product at a later time, there would be greater income in working for their own profit. As such, any person who works as an employee gains a lesser income than one who is self-employed in the same profession.
In other instances, inconstancy of income is the nature of the profession. For example, a bricklayer cannot work in foul weather, and the source of his revenue is by virtue of working when something needs to be built and not at other times. His work, when he is productive, must earn enough to compensate him for idle times, and to carry him in periods when there is no work to be had. As such, a mason's apprentice is generally compensated better than a carpenter's - as there is other work he can do indoors when conditions are unfavorable to construction.
Level of Responsibility
Where trust must be placed in an individual, his wage must be increased in order to preserve his honesty. For example, the apprentice to a jeweler works not much harder than the apprentice to a watchmaker, but is higher compensated to give him a level of income that ensures his greater interest is in continuing in his profession than in absconding with his master's stock.
Likewise, positions of responsibility such as public officials are well-compensated to ensure they have ample income, and interest in preserving it, to refuse bribes to curry favor.
While doctors and lawyers were named as being compensated for the duration of their training, the level of trust placed in them is also a considerable factor. That we place our health in the hands of one and our freedom in the hands of the other commands a significant premium that, coupled with the cost of training, makes these among the most lavishly compensated professions.
Probability of Success
The wages of labor in different employments also vary according to the probability of success as well as the possibility of failure.
In terms of success, there are many professions where employment is certain: a man who trains to be a shoemaker will almost certainly learn to make shoes, and even if their quality is lacking, it will likely be sufficient for someone. But if he means to become an opera-singer he has substantially less chance of gaining the level of skill required and must compete with many other hopefuls for a very few positions.
In other professions, the chances of success are counterbalanced by the devastation that may come of failure. The profession of a sailor, aside of the hardship of such work, is undesirable to a great many due to the prospect of being lost at sea. The longer the journey and more treacherous the course, the greater compensation must be offered to crew a ship.
It is perhaps the idealism of youth and the arrogance in a man's estimation in his own success that draws them to such professions, though the prospect of earning great rewards attracts even those who have the benefit of greater years to mellow their perspective.
Other Causes of Disparity
Aside of the five circumstances considered above, there are additional conditions and factors that result in certain employments commanding greater compensation than others.
The novelty of a profession causes great uncertainty of its value. Any new manufacture, branch of commerce, or practice in agriculture presents an enigma, in view of which those who seek or be offered employment will have no basis for assessing the value of their labors. As men tend to be cautious, and the novelty is itself the cause of uncertainty of success, the general pattern is for the first workers to demand high wages, and for wages to be reduced as the nature of the work becomes known and it can be compared to other trades.
It's also noted that supply and demand of labor have a significant effect. Whether the demand for a certain kind of labor increases and the population remains relatively stable, the wages of a demanded profession must rise to attract workers as they are needed. In time of ware, when sailors are drawn from the merchant fleets to staff the ships of the royal navy, there arises a need for crews to continue the commerce of the merchant ships, so the wages of sailors must rise sharply to attract workmen from other areas of trade to the profession.
In situations where a man has leisure, he may seek to apply himself to productive work even though he has sufficient income to meet his needs, and in such situations will accept a lower wage than might normally be commanded for a given type of labor. Should this be common in a given market, the wages during that period will be reduced and may offset their value in general.
An example of this is cottage industry, which is common in Scotland, in which cottagers are given a small house and a stipend to occupy it as a means of securing surplus labor for periods when their help is needed (the spring planting and fall harvest) but who are otherwise unemployed. Having no pressing need to earn additional income, the cottagers would spend their spare time knitting and sell their goods very cheaply, which was done in such frequency that the price of knit goods (and the value of labor to make them) is unnaturally low. The practice of spinning yarn is so common that many weavers are supplied by cottagers, and it is not possible otherwise to earn a living as a spinner.
Another example is given of the price of apartments in London, which are extremely cheap in a location where the cost of a house is meanwhile extremely high - the reason being that a merchant will rent a house to use the ground floor as his shop, while he will reside in the garret, and the floors in-between stand vacant. AS they are of no use to him, he will let them very cheaply.
Inequalities Arising from Policy
The inequalities of the value of employment listed above occur naturally in the condition of perfect liberty. But the policy of government, both in its laws and common practices, can interfere with the order of things, such that additional inequalities arise, subverting the economic activities that would otherwise occur.
Policy that Discourages Employment
The policies of government may imbalance the supply of labor by preventing or discouraging workers from taking employment in professions they might otherwise be disposed to enter. This creates a scarcity of goods produced by certain industries, increasing the price of their output and the profit of their owners while at the same time increasing the profit of the few who are inclined or privileged to work in these same industries.
The exclusive privileges granted to companies restrains competition. Where a specific producer given exclusive rights to product, and others are prevented from competing with them, the amount of production is throttled to the output of that firm, as is the demand for employment of the trades necessary for its production. While the initial effect is to that there is a decrease in the wages of labor, as there are more workers than jobs, over the long term men are disinclined to seek employment in a restricted trade such that the skills become rare and labor commands a higher wage.
The legal requirement, rather than the practical one, of apprenticeship also decreases the supply of labor. This may be effected by policy of government or by the existence of trade unions, themselves established and supported by government to interfere in the labor supply.
For example, masters in some crafts are forbidden by law to have more than two apprentices at a time. And while in some professions it required only a few years to become sufficiently skilled to become a master craftsman, it later became law that the period of apprenticeship must last fully seven years (EN: This is still reflected in academia, where the course of study to be certified as "Master of Arts" requires six or seven years to complete).
This requirement made it impractical for a single person to become trained in multiple disciplines and was later compounded with a law that prevented any apprentice or journeyman to ply his trade except under the supervision of a master. This led to some situations that were "as foolish as can well be imagined." For example, a coach maker was forbidden to make wheels for his own coaches, but was compelled to engage a master wheelwright - such might occur by natural means, when the division of labor yielded sufficient wheelwrights to supply coach-builders with parts at a cost and quality they could not themselves achieve, but to force such a requirement in disregard of the conditions caused the virtual collapse of coach-making in England.
The support of guilds and labor unions likewise had a detrimental effect. Under normal conditions, the availability of employment would naturally gravitate toward the level of need for the product of labor and the willingness of the market to purchase a given quantity at a given price. Laws that empowered guilds to restrict the number of suppliers likewise decreased the availability of goods and increased the compensation of those employed to create them.
There is in this discussion an often-quoted passage: "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices." (EN: Ironically, it is often quoted by those who suspect industrialists to conspire to keep supply of goods low to maximize their profit, whereas the original context was of laborers acting in conspiracy to maximize their wages.) It is to that end that tradesmen form themselves into guilds and unions, and petition their government for support in their desire to gain power over the supply of labor. The notion of apprenticeship and licensing, as mentioned above, are the product of the organization of labor.
Smith takes the example of wool combers, a specialized skill that is not needed in great quantity - perhaps six combers are needed to keep a thousand spinners and weavers at work. By conspiring not to take apprentices, the combers have the power to command higher wages to themselves, and hold hostage the entire industry - the owners, their fellow workers, and all buyers are beholden to their demands.
In Smith's time, this was a considerable impediment to the economy of Europe - and while he concedes that no act of law could justly prevent workers from organizing themselves thus, the law "ought to do nothing to facilitate such assemblies, much less to render them necessary."
(EN: This is also likely a point that has been rendered moot by progress, as unions continued to flourish until the economic crisis of the 1970's, at which point their influence collapsed a number of industries, chiefly textile and automotive, and manufacture moved abroad to nations where labor was more readily available and governments less supportive of trade unions. However, it stands to note that unionism has not entirely disappeared, and that certain professions, such as primary and secondary education, still are controlled by unions, to the benefit of their members and the detriment of society.)
The economic welfare of a society is better served by an unrestricted and unregulated supply of labor. If anything, a government that seeks to improve the welfare of its people should seek to encourage people to train for professions where there is a shortage of labor - but even this is deemed unnecessary because such a shortage will create an increase in the prices paid, hence an interest in such professions, until such point as the supply of specialized labor satisfies the demand for it, and price and quantity stabilize.
Policy that Encourages Employment
It is likewise a hindrance to the order of things for any law or practice to encourage a given kind of labor in excess of the natural demand for it. This creates a surplus of skilled labor and results in a benefit to the employers in negotiating for wages in a situation where there are more workers than jobs.
Scholarships for the education and training of professions the state perceives to be beneficial and necessary. The result of such policies is to attract large numbers of apprentices to a profession that, upon completion of their training, yields little opportunity to find work. Were there sufficient employment, and sufficient compensation, men would naturally be inclined to gravitate toward such professions at their own expense.
For example, the encouragement of the study of letters arose from the invention of the art of printing. Scholarships to encourage the study of letters so glutted the industry that the separate professions of scholar and beggar became "very nearly synonymous." - the printing industry being glutted with labor, the scholars turned to teaching, decreasing the compensation and esteem of the educational profession.
The establishment of minimum wages for certain professions was likewise an ill-conceived notion to increase the production of goods by making certain fields of endeavor more attractive to workers by virtue of better wages. However, while the amount paid to laborers was legislated, the amount of output was not, hence masters paid more for their employees but did not increase production. And instead, the increased cost of labor resulted in the increased price of goods, diminishing the demand for them, so the net result was a decrease rather than an increase in production.
The payment of bounties and subsidies for production was likewise a poorly conceived notion to increase the availability of goods. While it was possible for manufacturers to increase the compensation of their workers, the uncertainty of the perpetuation of a subsidy made them reluctant to do so (a worker whose wage is increased is seldom glad to have it later diminished), but instead decreased the price of goods, but only for so long as the subsidy was granted. This also caused widespread corruption and fraud, in which manufacturers claimed to produce more goods than they did to receive the subsidy or, in some egregious instances, the subsidy was so significant and administered in such a way that goods would be produced and then destroyed rather than sold at market - the logic again being that consumers would be happy of a decrease in price, but intolerant when the price increased at the conclusion of a subsidy.
Policy that Obstructs Circulation
For the supply of labor to balance the demand of it, there must be a freedom of circulation: changes in the demand for goods will shift, changes in supply of it must shift accordingly, and labor must shift to facilitate supply. It has been considered that creating an unnatural scarcity or surplus is detrimental, and that certain policies of government are intended to create such imbalances directly, but it is also possible for a policy to merely restrict the circulation of labor and create such imbalances indirectly.
The Statute of Apprenticeships was previously mentioned as creating a direct shortage of labor by preventing men from entering a profession, but it further imbalances supply by discouraging men from leaving it, as having spent so much of their lives in preparation for one specific profession, they are unqualified for any other and are loath to abandon a profession to which they have devoted so much time in training.
Government support of any contract or agreement that binds a worker to his trade for a significant duration of time likewise obstructs the system from balancing itself. While a worker may desire to have the certainty of employment, and his master the certainty of a skilled laborer, this is based on predictions and expectations. When these predictions prove to be inaccurate, the employer may be saddled with workers he does not need, and workers bound to a job that pays less than they might gain elsewhere, and the commitment between them is undesirable and unprofitable. Should predictions bear out in reality, neither would be inconvenienced by a long-term commitment - but their mutual satisfaction would make force of law unnecessary to the perpetuation of their relationship.
Laws restricting the relocation of workers are likewise a hindrance to achieving balance. This is most commonly seen when relation would cross the boundaries of nations, but it has also been common for laws to restrict the movement of citizens within a nation. History bears witness to the juxtaposition of a parish where the poorhouses overflow with those who cannot find work, while in neighboring parishes workshops stand silent for lack of workers. The demand for labor shifts from one location to the next, and laws that prohibit the supply of labor to flow where it is demanded are not much different in their effect than those that bind a man to a profession.
There is some lengthy discussion of the manner in which migration among parishes has been restricted, and clandestinely avoided, ultimately concluding that the restrictions were eventually repealed, in recognition of the number of individuals who clandestinely relocated, the tremendous expense of the state in attempting to prevent relocation, and ultimately the recognition of the pointlessness of such endeavors: men will go where they are needed, even parting from familiar environs and the friends and family there residing, when there is financial incentive to do so, and it is to the benefit of society, including both the location they leave and the one where they seek to go, to allow this to occur without obstruction.
On The Fruitlessness of Policies
Ultimately, it has never been occasioned that any law or practice of government to encourage or discourage manufacture has succeeded in creating a lasting prosperity of its people, and more often has done more harm than good.
Producers will seek to provide as much or as little of a good as the consumers of the good will pay a price at which the producer can turn a profit, and employment in aggregate as well as in certain professions will follow.