by Bobby Akart
• First, some professions may be easier, cleaner, or more respectable than others. A weaver earns more than a tailor because the work is harder, a smith more than a weaver because the work is dirtier. A collier earns still more because that work is dark, dirty and dangerous. Butchers are well paid because the work is brutal and odious; and in the case of public executioners, even more so.
• Second, some professions are difficult or expensive to learn. The time and effort spent in learning them has to be recovered through the price of the work done. Hence a skilled labourer is better paid than an unskilled one.
• Third, some trades are seasonal. A builder cannot work in frost or hard weather, and has to earn enough in good seasons to provide for the dearth of work in the bad. Common labourers earn four or five shillings a week, but, for this reason, builders earn seven or eight shillings a week during the seasons when they can work.
• Fourth, earnings are higher in trades that require a large degree of trust, such as goldsmiths, lawyers or doctors. Their honesty and competence commands a premium from their customers.
• Fifth, earnings reflect the probability of success in any profession. Lawyers are well paid because very few of those who go into the law actually succeed in it. Their customers are paying the costs of those who fail, along with those who succeed. The exorbitant rewards of actors, singers, dancers and so on reflect not only this, but the rarity and beauty of their talents – and the discredit of employing them in such professions.
Other special circumstances can also make a difference to wage and profit rates. For example:
• First, it depends on how established the trade is. Entrepreneurs will have to pay more to attract workers from established trades into new ones. Employment in the new trade may be seen as less secure, or more dependent on the fickleness of fashion.
• Second, there might be a particular shift in supply or demand. In time of war, for example, merchant sailors' wages rise from twenty-one or twenty-seven shillings a month to more like forty or sixty shillings. And in different years, harvests of wheat, wine, hops, sugar, tobacco and other crops can vary greatly, and the profits made by the dealers will necessarily vary too.
• Third, pay can vary when people have more than one job: cottagers in Scotland commonly receive an acre or two of land, and two pecks of oatmeal a week in return for their occasional labour to the farmer. This they consider as their salary: and they are willing to work for others in their spare time for very little.
Wages and politics
It is not just the economic character of different employments that can lead to discrepancies in wages and profits. Political factors can be critical too.
First, there are regulations that restrict entry into certain professions. The fewer people who are allowed to practise in a particular trade, the more they can charge for their services. And the professions have exploited this by promoting various rules governing apprenticeships. Bye-laws forbid master cutlers in Sheffield, for example, from having more than one apprentice at a time, while Norfolk weavers, English hatters and London silk weavers are not allowed more than two. Apprenticeships are also very long, usually seven years. This is supposed to protect the public from shoddy work. In fact it does no such thing, but like the limit on apprentice numbers, it again serves to keep up the wages of the relevant professions. Unfortunately, this gain for the producers is achieved only by forcing the public to pay more, and by denying others the right to use the sacred property of their own labour as they choose.
It is perfectly natural that the professional guilds should try to expand their markets and limit the competition – and thereby promote their own interest against that of the general public. Unfortunately, they have been aided in this by the law, which grants them special privileges. The establishment of a public register of a profession's members, for example, makes it easier for them to come together (and, of course, talk about how to raise their prices or restrict the market still further). Laws that allow professions to levy compulsory welfare funds for the benefit of their own members make it inevitable that they have to come together. And allowing trades to decide policy by a majority vote will limit competition more effectively and durably than any voluntary collusion whatever.
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. The only truly effective discipline over businesses is their fear of losing customers. A competitive market in which customers are sovereign is a surer way to regulate their behaviour than any number of official rules – which so often produce the opposite of their avowed intention.
Secondly, public policy can sometimes depress the earnings of a trade by over-encouraging entry into them. Public pensions, scholarships, bursaries and so on may have this effect.
Third, the law obstructs the circulation of labour and capital from trade to trade and from place to place. For example, the arts of weaving linen, silk and wool are not very different. If one of these industries faced hard times, its members could quickly re-train and move into another. But the other trades have secured legal powers, such as rules on apprenticeships, that enable them to exclude these workers. Similarly, the poor laws, which made each parish responsible for the support its own poor, made parishes unwilling to allow poor people to move in from other areas, even if they were willing to look for new work.
Land and Rents
The third factor of production is land, and rent is what is paid for its contribution to the national product. Rent is different from wages, which must be laboured for, or the profits of capital, which must be carefully accumulated and managed. It is derived merely on account of ownership, rather than any care and effort of the landlord. Indeed, rent is charged even on unimproved land.
Scottish landlords whose estates are bounded by kelp shores charge a rent to those who harvest this useful seaweed that washes up naturally – just as surely as they charge a rent for their wheat fields.
In his discussions of landlords, Smith has principally in mind the Scottish chiefs and nobles who dominated huge tracts of land there. Much of it was being enclosed; and forfeited Jacobite estates were being handed over to new owners. Hence, perhaps, Smith's scornful view of landlords as an avaricious class who 'love to reap where they never sowed'.
Landlords take as much rent as they can get; when wages or profits are high, rents naturally follow. Fortunately for them, almost any land can produce more food than is required for the subsistence of those who work it. Even the deserted moors of Norway and Scotland produce pasture for cattle, which provide more than ample milk and meat for the few people who are needed to tend them. In other words, land always produces some surplus that can provide a rent to the landlord. Land that is very fertile, or well situated (close to a town and its markets, for example) will produce an even higher rent.
As well as food, of course, land provides clothing and living space. Once again, land can always provide a surplus of clothing, from the skins of animals, for example. The natives of North America probably had so many pelts that they would be thrown away as being of no value – until the Europeans arrived, eager to trade these things for blankets, guns and brandy.
A rich family consumes no more food than a poor one – though it may be of better quality. But the landowners who have command of more food than they can eat – either through growing it themselves or in the form of rent from tenants – nevertheless seem to have a boundless appetite for clothing, housing and showy equipage.
Compare the spacious palaces and great wardrobes of the rich with the hovels and the few rags of the poor. The rich are always willing to exchange their surplus for luxuries of this kind, and the poor are equally willing to supply this demand in order to get the basics that they need by way of exchange. The poor compete and specialise to supply the rich, which boosts the efficiency of production, raises incomes, and creates a growing demand for buildings, dress, furniture, f
uel, minerals, precious stones – every convenience that the land can produce. But still the landlords take their share, of course, because all those farms, forests and mines produce a rent for them.
On the basis of his principle that every part of a nation's production reflects rent, wages and profits, Smith has shown that all the various actors in an economy – landowners, workers and employers – are in fact interdependent. Indeed, their interdependence goes beyond production: since goods are produced to be exchanged, they are all crucially involved in the valuation and distribution of that product too. In other words, they are parts of a seamless system of flows in which goods are created, valued, exchanged, used and replaced – and resources are pulled to their best use – all quite automatically, within a functioning economic system. This is, essentially, the modern understanding that we call the market economy. It was a huge theoretical innovation.
Nevertheless, this interdependence does not prevent some economic agents from trying to take advantage of others, as Smith now goes on to explain.
Self-interest of the different factors
Laws and regulations, as we have seen, can promote or damage the interests of particular groups, and indeed, of the public. But it is the employers of capital who do best out of this. Landlords are unlikely to understand the consequences of such measures: the fact that income derives from mere ownership, rather than the application of physical or mental effort, leaves them too idle and ignorant to think about such things.
As far as those who live by wages are concerned, the general interest of society is crucial. Labourers suffer most cruelly when business is in decline. They benefit when society prospers. But as a result of poor education and their lack of access to information, they are incapable of understanding how society's interests affect their own. Struggling merely to survive, they have no time or energy to spend thinking about public policy. And the voice of the common people does not carry far in the public debate.
Those whose income derives from capital, however, are quite different. Their interests do not coincide with those of other people, because their profits are squeezed when the economy flourishes. Their interest lies in widening the market and narrowing the competition, and they are skilled at achieving this end. Since planning and management is fundamental to their business, they have the knowledge, contacts and mental acuity to promote measures that they know will benefit them.
But this private benefit comes at the expense of the public, who suffer when markets are distorted and competition is reduced. When the owners of capital propose a new regulation, therefore, it should be given the utmost scrutiny. It comes from a group whose interest does not coincide with that of the public, and who can and do gain by deceiving them.
The proposal of any new law or regulation of commerce which comes from this order, ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.
Book II: The accumulation of capital
In an advanced economy, most of our needs are supplied not through what we make ourselves, but through our voluntary exchange with others. But this means that we have to produce, and sell, our own surplus before we can acquire the products we need in return. Weavers, for example, need sufficient capital to buy or rent their weaving frame, for tools and materials, and to have enough to live on until their cloth is finished, transported to market and sold.
Capital has to be accumulated, in other words, before people can embark on specialist trades – and capture the large gains in productivity that result from it. And the greater the specialisation in the economy, the more capital is required to maintain it. The accumulation of capital thus feeds economic growth. It is a virtuous circle: the growth of capital promotes specialisation, which creates even larger surpluses, and these in turn can be reinvested into new equipment that makes yet further specialisation and growth possible.
Division of capital
Capital has two parts to it. One is that part which is expected to produce future income. This can be fixed capital, which stays with the owner, or circulating capital, which does not. The other part is that which supplies immediate consumption: this includes stocks of goods that are intended for consumption, income from whatever source, and stocks of goods such as clothes or furniture, which are not yet completely consumed.
Smith in fact says 'stock' is divided into 'capital' and the other 'stocks'. It is not easy to render this in modern terminology; 'capital' seems the best general term. Also, Smith's definition includes revenue, which modern economists would not, though cash in hand, work in progress and fixed and moveable assets are regarded as capital items today.
Money
Though we commonly express a person's income in money terms, as a particular quantity of gold or silver pieces, money itself has no intrinsic value. Money is only a tool of exchange, a highway that helps get the nation's product to market, but produces none itself. Real wealth resides in what that money can buy, not in the coins themselves.
The fact that wealth and money are separate things can be shown quite easily. After all, a person who receives a guinea of income today may spend that same guinea tomorrow, thus providing the income of a second; and that person may spend the same guinea on the next day, providing the income of a third. So the amount of money in circulation is clearly much less than the total income of the nation. National income is the quantity of goods bought and sold, not the metal pieces that happen to be used to facilitate the exchange of that product.
Smith is again taking on the mercantilists here, and trying to dispel the myth that money is wealth. This, he believes, causes many policy errors as nations try to limit the outflow of money by restricting trade, while in fact wealth is increased when trade is vibrant and free.
Yet money does have some important effects. It renders capital active and productive. The cash which dealers are obliged to keep aside for occasional needs is dead capital, which produces nothing. But efficient banking can make it move faster and work harder. Where banks substitute paper banknotes for gold and silver, it allows this dead capital to be brought back to life and into use more easily than before – speeding up the commercial highway and increasing the productivity of the country's industry.
There may be a temptation among banks to over-issue their notes beyond what their stocks of gold and silver will bear. This risk can be reduced if banks are not allowed to issue small notes. Otherwise, competition between banks safeguards the public, forcing banks to be careful about the scale of their note issue, limiting the possibility of a run on any one bank doing widespread damage, and focusing them on the needs of their customers to avoid them defecting to others.
Smith was writing in an age before fiat currency – notes and coin that governments simply declare to be legal tender and (somehow) get the public to accept as such. In his day, banks could issue notes as receipts for customers' gold, and using those in transactions was far more efficient than having to move around the real metals. The banks could even issue more notes than they had gold in their vaults, relying on the probability that not all the note holders would demand their bit of gold all at once. If a bank over-issued notes beyond this comfortable level, however, it could lead to a run on the bank as note holders rushed to cash in their notes before the bank's reserves ran out. There was a major Scottish banking crisis of this sort shortly before Smith wrote: hence his sensitivities on the matter. He believes that competition will generally keep banks prudent, but that there still needs to be regulation to protect the public. He has no problem with a general regulation in the public interest: it is just regulations that favour special interest that he objects to.
Productive and unprod
uctive labour
Some labour adds to the value of what is worked on – the labour of a manufacturer, for example, works to add value to an item which can then be sold at a profit. This we can call productive labour. It produces something marketable that lasts for some time afterwards. Other labour – such as the labour of a menial servant – does not add value to anything. It is consumed immediately, and leaves nothing vendible behind. This we can call unproductive labour.
A man grows rich by employing a multitude of manufacturers: he grows poor by maintaining a multitude of menial servants. This kind of labour still has value, which is rewarded accordingly. The army and judiciary, for example, serve the public, and their professions are honourable, but their labour of today purchases nothing tomorrow. This year, the army may maintain security in some hostile region; but next year they still have to be there to continue the same task. In the same category of unproductive workers are churchmen, lawyers, physicians, actors, buffoons, musicians and dancers. What they do expires as soon as they do it, leaving nothing saleable behind. Unproductive labour is supported mostly from the rent of land and the profits of stock. Common workmen have scant wage, and little time to spend on them.
