Saturday, January 15, 2011

Was Adam Smith Wrong on Rising Real Wages And the Spread of Opulence"?

Jeff Weintraub, a professor at the Universities of Pennsylvania and Haifa, opens a helpful discussion on a “theoretical conundrum” that two of his (undoubtedly bright) students raised with him about Adam Smith’s “optimism” on the market raising real wages among the poor as an outcome of “progress towards opulence” (HERE).

“Adam Smith on poverty, progress, wages, and "universal opulence" — A theoretical conundrum

Jeff Weintraub direct his responses at the apparent ‘conundrum’ raised by his students, Daniel Albornoz and David Kanter.

[However, his longer postscript reports on David Ricardo’s views on the same issues and Ricardo always tends to obfuscate Smith’s meaning, IMHO]:

[Jeff] ‘As we all know, Smith believes that the long-term process of socio-economic development, driven by the dynamics of the market and the division of labor, will steadily increase the overall productivity, prosperity, and "opulence" of societies over time. He also believes that the benefits of this increasing prosperity will be spread throughout the society (though, of course, unequally). In particular, he expects that, given the "natural progress of opulence," the standard of living of the poor—by which he means the great majority of people in society—will increase steadily and significantly (as long as the market is allowed to operate unhindered). From Smith's point of view, that consequence is one of the strongest justifications for the whole market system and its long-term developmental logic (e.g., WN pp. 22-24, 95-96, etc.).

After all, "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable" (WN p. 96).

“Smith further believes that, broadly speaking, he has plenty of historical evidence for expecting an ever-increasing "universal opulence that extends itself to the lowest ranks of the people" (p. 22). Smith “appears confident that this conclusion follows plausibly from the overall logic of his theory. However, it's fair to raise the question of whether or not Smith has provided an adequate and convincing theoretical account to explain how and why this happy outcome should occur.”

His students ask: “On what does Smith base this claim? Is it that prices will continue to drop as production becomes more efficient? Is it that wages will rise as there is more and more competition among capitalists?” In our discussion we struggled to flesh out Smith’s reasoning here. In light of how simple Smith envisions most tasks to be when the division of labor has reached an advanced state, what sort of incentive would capitalists have to pay labor more than survival wages? Smith seems to think that most anyone can do most any super-specialized job (hence his worry about “pinheadism”). If that is the case, any laborer could be replaced by any other laborer. And if that is the case, wouldn’t the equilibrium wage just settle at the wage necessary to keep the laborer and a few of his offspring alive? That sort of existence does not sound all that appealing.”

Jeff replies: “The first key point is that, according to Smith, one feature of the long-term process of socio-historical development is that the great majority of the population will "naturally" and necessarily become wage-laborers (or the wives and children of wage-laborers). That is, they will gain their livelihood, not by selling the products of their labor, but by selling their labor itself as a commodity. Labor, like every other commodity, has an exchange-value determined (more or less, and in the long run) by market processes and expressed in its price. So the material well-being of the vast majority of the population depends on the price of labor, which is to say the level of wages.

Rates of wages, like the prices of all other commodities, are "naturally regulated" (WN p. 72). How does that work? Like every other commodity, labor has both a "natural" price and an actual market price, and in the long run market forces (supply & demand, etc.) will push the actual price of a commodity toward its natural price. At any given moment, the actual price of a commodity may fluctuate above or below its natural price, but the natural price is "the central price to which the prices of all commodities are continually gravitating" (WN p. 73) as long as the market is allowed to operate without serious interference or distortion. Basically, the natural price corresponds to the cost of producing the commodity (relative to the costs of producing all other commodities in the system). If more efficient production techniques, technological improvements, and/or other factors allow that commodity to be produced at lower cost, then its natural price will go down—and vice-versa.

If we follow that logic, the "natural" price of labor in a particular society at a particular moment would be determined by the overall cost necessary to produce & reproduce laborers (including children who will become future laborers) and to maintain their capacity to go on working—i.e., a subsistence wage. So why should we expect wages (i.e., the price of labor) to keep increasing? Why wouldn't the "equilibrium wage," as you put it, "settle at" a subsistence wage? (And why shouldn't cheaper prices for food and other necessities simply lower the "natural" price of labor, and thus the level of a subsistence wage?)”.

[GK:] As I said, these are bright students. They have identified what could be a “conundrum”. And Jeff point I think is the base of a misunderstanding.

[Jeff] ‘As you also point out, this problem should be further sharpened if in fact, as Smith predicts, the "progress of the division of labor" means that the work performed by most workers, "the great body of the people," becomes increasingly narrow, specialized, simple, and mindless (WN pp. 781-782).

[GK:] Smith makes two distinct statements on the effects of the division of labour, those in Book V, so to speak, are aimed at a different audience for a different purpose to Book I. It is a common misreading not to bear the two separate audiences in mind, as I state regularly on Lost Legacy.

In Book V, Smith’s concern is with the general and socially deplorable ignorance of the common people, induced by scarce educational provision for their education as children. This is a serious social problem, not recognized by the upper orders (major landholders and place holders in society, who people the legislature and their influencers).

Smith had in mind the different traditions in Scotland (where he lived) and England (the larger partner in the Union that since 1707, made up the United Kingdom of Great Britain,). In Scotland, Protestant Church pressure since the 16th century had promoted ‘little schools’ in each parish, funded by local taxes, charities, and negligible fees from parents, to provide elementary schooling in ‘reading, writing, and account’ (arithmetic) from age 6 years for as long as parents permitted attendance (mainly boys). In England such provision was sparse and grossly ianadequte (after all, there were 60,000 parishes,).

Smith’s suggestion called for such ‘little schools’ to be set up generally in Britain to tackle the appalling ignorance (WN p 785-6), which dulled further the children of the poor when sent to work by parents (‘with little time for education’ and parents with ‘scarce able to afford the maintain’ ‘to earn their subsistence’ (WN p 784-5).

He bolstered his case with dire warnings of the consequences of not educating the poor in order to frighten the decision-makers to pay-for the necessary remedy. This can be see in WN p 788 in graphic terms relating to likely work in modern trades, subjected to the intensity of the division of labour in simplifying tasks. Ignorance plus simplicity in their working lives made for political instability; education plus necessary simplicity created a barrier to the influence of ‘the interested complaints of faction and sedition’ (WN p 788).

Moreover, on a broader point, relevant to the gist of Daniel Albornoz and David Kanter’s questions, is that the importance of the division of labor in WN is not confined to ‘pinheading’. Smith goes on to describe the complexity involved in the day labourers ‘common woolen coat’, which is the real import of WN. Supply chains were complex, even in the 18th century. As their complexity grew, so would the demand for labour, both locally and nationally, and worldwide.

But significantly, a day labourer’s wage had to cover both necessary subsistence – the biological requirements – and, increasingly since the 17th century, his purchase of the necessary ‘conveniences of life’ (which in total was the ‘annual output' of society and the cause of its growing employment, and growing, albeit, minimal requirements for higher (marginally), but ‘normal’ living standards as represented in the real wages of common labourers, and other trades people.

I think Jeff, plus Ricardo and the Marxists, narrowed their focus too much on biological subsistence, which favours pessimistic ‘immiseration’ and drifts away from Smith’s historical approach of taking into account the much wider range of ‘necessaries and conveniences of life’, which was a key difference of Europeans compared to the lives of African and Indian hunter-gatherers (the First Age of Man), when compared to common labourers in commercial society (the Fourth Age of Man; see Adam Smith Lectures in Jurisprudence, [1762-3] 1978, Liberty Find). See also how Smith documents to rising annual output of ’necessaries and conveniences of life’ for ordinary people in WN from Julius Caesar’s visit to Britain 50 BC, through to ‘the restoration of Charles II’ in 1660 and then to mid-18th century in WN , p 344.

He states this clearly: ‘The money price of labour is necessarily regulated by two circumstances; the demand for labour, and the price of the necessaries and convenience of life’ (WN p 103).

The changing components of ‘subsistence’ must be borne in mind when working abstractly with models that denude themselves of realism, as Ricardo was apt and proud to do – he certainly cleared the way for the pessimism of Marx, whose own models lead to ‘immiseration’ conclusions, which are contrary to the rising real incomes of labourers, in skilled, supervisory and new technology occupations - what some Marxists call the ‘aristocracy of labour’ - itself a product of ever more complex divisions of labour among supply chains, supplying rising populations, benefitting from deepening productivity.

Professor Mike Munger has shown how one or two companies today (in place of thousands in the 18th century) employ automated pin-making batteries of computer-driven machines to supply all UK pin output (and a couple of others in the US), which is a far cry from ever-greater immiseration of pin–making by chronically stupid, even ‘brain-dead’, labourers.

This can be integrated into Smithian concepts of ‘increasing-returns’ optimism, freed from Ricardo’s negative pessimism (see A. Young, Economic Journal, 1928).

One last thought on Jeff’s condition on Smith’s vision: “as long as the market is allowed to operate unhindered”.

Part of the theoretical problem is that modern economists (and Ricardo, etc.,) ignore Smith’s historical approach to political economy, and judge his statements absent any context of what was actually happening around him.

No markets in the real world of 18th-century Britain were “allowed to operate unhindered”. It was the absence of “unhindered” operation in markets, including that for labour that, IMHO, characterizes the source of much of the uncertainty, described as a “conundrum” by Daniel Albornoz and David Kanter, and not addressed by Jeff.

Labour was far – very far – from being free in any meaning of the word. To the one-sided Combination Acts applying to labour but not to employers, were added the settlement of wages by local Magistrates, backed by jails, transportation, and public whipping of ring leaders of ‘riotous labour’, not forgetting the Settlement Acts, the Statute of Apprentices, the Trade Guilds, chartered monopolies, patent laws, the Poor Laws, and the oppressive religious environment (leading to migration to the colonies).

Mercantile Britain was in no way the home of perfectly competitive markets, and in the purer analysis that followed Smith, I think much of this context was lost. It bedevils proper understanding and creates its own demand for purer models, instead of questioning their realism. Predicting what happens in a pure theory is wide of the mark when looking at and understanding the real world.

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Blogger michael webster said...

Henry Ford found that he had to pay his workers essentially a tedium premium - otherwise men wouldn't stay working in his factory for any length of time.

He covered this up be claiming that by providing the working man a decent living they would be able to purchase his automobiles.

7:44 pm  
Blogger Gavin Kennedy said...

Hi Mike
He did indeed, but he needed to stop too rapid turnover of employees, especially new immigrants who spoke poor English (if at all) and who were not yet socialised into American working practices. The costs of constant replacement recruitment were unacceptably high and constant production lines were too frequently interrupted.

The spin he put on it was, well, spin. $5 was a good wage too. Productivity paid for the high wages.

Wage differentials both across a locality and across the country were detailed by Adam Smith in Wealth Of Nations, which contradicts the equalisation-at-biological- subsistence themes that Marx et al developed for his doomsday under capitalism.

Ricardo et al got it wrong. General and continuing immiseration is a condition of the poverty of pre-capitalism and its modern versions in non-developing, non-market economies, not the (rich) capitalist economies.

9:02 am  

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