Universidade Federal de Minas Gerais

Centro de Desenvolvimento e Planejamento Regional de Minas Gerais

Subject: ECN/929 – Tópicos Especiais em Economia Política – A riqueza das Nações

Professor: Maria Pia Paganelli
Name: Marcos Gustavo Pires de Melo Date: 13/09/2016

Chapter VIII – Of the wages of labour1

Smith himself admits that the benefits of the division of labour could only be
appropriated by the labourer if he owns all the stocks and means of production needed.
So, in the actual situation of the market, there are no guarantees that the gains in
productivity would raise the wages, because these gains have to be divided between
wages and profits. But here we have a very curious situation: in order to have gains of
productivity we need division of labour, but with division of labour the laborurer can no
longer maintain himself during the time of production (because he don´t produce
everything he needs to survive), i.e., he needs to rely upon the stocks of others to
produce. But this reliance means that the gains of productivity must be divided between
him and the owner of the stocks. Even more than that, he must give the owner of the
stocks not only the value of the stocks back, but also an additional value (profit). The
only way for the labourer to appropriate the gains of productivity is to own himself the
stock that he needs, but, in being so, it seems like it would be much better for him to
become a capitalist. As the labourer specializes he can no longer provide his own
subsistence, so he needs others to advance him his needs. As every labourer also
specializes they all depend on someone else. So, division of labour presupposes the
existence of accumulation and a master. This seems to be more critical than the
existence of money! As we cannot assure that the value appropriated by the labourer is
bigger than it was before division of labour, we cannot assure that, for the labourer,
division of labour means that they get wealthier. But here, the reason becomes clear: the

1
Other notes not developed: (a) paragraph 42 – natural relation between the increase of wealth and the
increse of population, but what makes wealth increase?; (b) paragraph 44 – the wages are the
encouragement to industry of men, and the overwork is a consequence on that; (c) paragraph 48 – cheap
years make the best of men, for industry and for morality!; (d) paragraph 52 – did not understand the
statement: “The demand for labour [...] determines the quantity of the necessaries and conveniences of
life which must be given to the labourer; and the money price of labour is determined by what is requisite
for purchasing this quantity.”

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separation between workers and means of production (that seems to be prior to division
of labour itself!). This state of affairs is even more dramatic for the labourer when Smith
admits that the power of negotiation between labourers and capitalists is unbalanced
(favoring the capitalist that can either combine the price of labour with other capitalists
and can survive without the labourer – by consuming his stocks – although the labourer
would die without the capitalist). But, by now, the labourer has become only another
commodity (paragraph 40).
The natural wage remains a mystery. For someone so worry to determine the natural
prices around which the nominal prices oscillate, Smith seems more worried to debate
the effects of the conditions of supply and demand on the price of labour. He sets a
minimum wage: the subsistence of the labourer and of the working class as a whole,
although he refuses to calculate this minimum. But, after all, Smith´s main concern is
with the demand of labour that will depend, in his argument, on the funds available for
payment of wages. The growth in the demand for labour is the only source of growth in
wages, but the demand only rises if the wealth of a nation is increasing, i.e., it does not
depend on the actual “greatness of national wealth”. And why do we need growth to
keep wages going up? Because Smith defines prosperity by the rate of increase of its
population. But to support this increase without poverty, we need a rate of growth of the
economy otherwise the supply of labour would overcome its demand. The labourers are
always fighting against its own existence, and Smith´s description of this decay
(paragraph 26) really contrasts with the superiority image of modern society against the
tribal living made in the first chapter.
But all of these can be set apart because the analysis of the wages proves that nominal
and real wages are increasing. But the raising of wages would not be a source of raise in
the price of everything else? No, because the same source of raising in wages – the
availability of funds – is also the source of gains in productivity. So, even if labour is
more expensive, the capitalist needs less labour to produce the same quantity. But this
would not raise competition between labours? Smith does not develop this point.
At the demand the main determinant of money price of labour is the demand for labour,
that depends on the demand for the products. Even if Smith takes into account the
impact of the price of provisions upon wages it seems to be minimized: the price of
provisions does not seem to affect the price of labour. If there is plenty than the demand
is high and the wages are also high. The low price of provision only makes the real
wage even higher. In the dear years, the demand is low and the wages are also low, so

2
the dear price of provisions only makes the real wage even lower. The two mechanisms
are contradictory as Smith put them. In fact, the argument is that these two mechanisms
counter-balances each other and makes wages steady.
The final message is of stability: the stability of wages by the mechanism above
described and stability of prices by the gains of productivity. But, if the wages are
steady, who absorbs the gains of productivity2?
Chapter IX – Of the profits of stock3
It is not quite clear what Smith considers to be the source of higher or lower profits –
when examining the state of American colonies, the source of high profits, for example,
is the productivity of land, what, matter of fact, is rent and not profit (paragraph 11), but
he also considers high profits deriving from a situation of lack of stocks to put forward
the production (paragraph 12) and the risk of production. The relation between rate of
profit and price in the market is also not clear. He opens the chapter arguing that the
oscillation in the rate of profit is related to the increasing or declining state of the wealth
of the nation. If it is increasing the rate of profit is declining. This happens because if
the wealth of the nation (so the funds) are increasing than the wages must be also
increasing (as noted in the previous chapter). So, the profit is reduced because the
owners of stocks have to bid against each other to hire labourers. But this, presupposes
that prices are fixed in the market. Despite this, by the end of the chapter (paragraph 24
and 25), Smith puts profit as one of the factors that can contribute for higher prices in
the market, making profit not a deduction from the market price, but instead, something
to be add – like a cost of production. From this, is not quite clear if the rate of profit
diminish with competition between capitalists because of higher prices or because of
lower prices.
The second highlight from this chapter is the relation between rate of profit and rate of
interest. The rate of interest seems to be a sort of limit to the rate of profit from at least
two perspectives: if the capitalist does not have the stock and have to borrow them, then
his rate of profit must be greater than the rate of interest; if the rate of interest is above
the rate of profit than it would be better to lend money than to employ it in production.
But, in this second circumstance, Smith does not differentiate the money-stocks from

2
It is also remarkable that the gains of productivity come from the availability of funds. Why is that?
Smith does not tell us just yet.
3
Other notes not developed: (a) the imperative of growth both for profits and for wages (paragraph 14).

3
the commodity-stocks4. Anyway, the rate of interest seems to have its own independent
source: the risk of not receiving the money back (paragraph 19) (even if something it
looks like more a matter of power – like in paragraph 13)5. The rate of interest
sometimes seems to work as a mechanism to select what sort of enterprise will come to
be, but he can also be determined by the rate of profit (if the profit rate are high the
money lenders are able to charge a higher rate of interest, and if the profit rate is low
they might have to lower the rate of interest in order to put the money to circulate). So,
not quite clear the relation between them more than a possible correlation. It is neither
clear if the rate of interest is responsible for a equalization of the rate of profit.
Chapter X – Of wages and profit in the different employments of labour and stock6
It is interesting to notice that, although Smith enumerates five “natural” conditions in
which the wages and profits do not tend to equalize, everything can be summed up in
the market forces, i.e., all five reasons for the inequalities in profits and wages are,
actually, provoked by the same cause: the competition in the market. This means that
none of them is actually “natural”, because they seem more like an ex-post explanation,
a rationalization. Even if a labour is, for example, not constant, the labourer can only
receive a higher wage if the supply of labourers for that is not higher than a hypothetical
“normal” state of affairs. This means that the labourer do not have the power to impose
a wage due to its inconstancy. The final determinant is the market competition. Smith
considers that the nature of the labour would regulate this competition (if the work is
dishonorable, fewer people would want to do it), but the nature of the labourer does not
seem to stand against a much stronger impulse to competition: that of necessities. Then,
the natural characteristics of the labour that would be the source of inequalities in wages
and profits are, in fact, only rationalizations of the contingency results of market
competition. This also means that there is no value judgment on any kind of labour. The

4
Smith almost seem to derive the existence of stock from the borrowing of money when discussing the
relation between the magnitudes of the rate of interest and the rate of profit (paragraph 22).
5
The rate of profit is also said to have to reward risk, but is not clear if this reward selects the enterprises
or if affects the price of commodities (paragraph 18). The reward for the risk is said to be the lowest
6
Other notes not developed: (a) the “economical” analysis of cultural choices (paragraph 1.30); (b) the
inviolable right of disposal of a man´s own labour (distinction between labour and work?) (paragraph
2.12); on the contradiction effect of the institution of long apprenticeships (or the relation between
industrious people and high wages) (paragraph 2.14); (c) anachronism in the analysis of the towns
corporate – or, where the prices a result of a free-market? (paragraph 2.18); (d) glances of the results of an
alienated fabric labour? (paragraph 2.24); (e) the limitation to the market sociability (paragraph 2.27 and
2.28); (f) who determines the “normal” price, the market or a royal act? (paragraph 2.34); (g) about the
teachers payments and the investments in the education of the labourer (paragraph 2.38) – a moral
reminiscences?; (h) anachronism on the discussion about the wages of teachers in the Ancient Greek
(paragraph 2.39); (i) projections of his own political causes on the revolts of the people (paragraph 2.59).

4
existence of an activity is regulated by how much the market would pay for it; if the
labour is horrible or dishonorable, if someone is paid enough that is no longer so
horrible or dishonorable. The market is the space for validation, without value
judgments.
The thesis of the possibility of equalization of profits is, once again, no well explained
(paragraph 1.28; paragraph 2.26). How this process may occur? How a stock may move
form an employment to another? Smith takes much more care in the difficulties
involving the changing of labour by the labourer, than in the changes of trade be stocks,
but them seem to face the same sort of challenges. For a free circulation of labour,
abstract labour seems to be presupposed, but what about stocks and trades that are much
more concrete and specific? And even if this would be possible the conclusion that
profits tend to equalize in a context where wages have a hard time in equalizing
(paragraph 1.34) contradicts the thesis that wages are one of the main determinants of
the rate of profit itself. The defense of a free-circulation presupposes that all the things
(labour and stocks) would naturally easily circulate (paragraph 2.44).
When Smith tries to explain the apparent high profits of an apothecary, the distinction
between wages and profits becomes quite problematic. Smith argues that the apothecary
rather than having high profits is, matter of fact, receiving a higher wage for the
naturally more skilled and trustful labour that he offers that can only be charged when
selling his drugs. But, in this reasoning, the apothecary would have a power that no
other labourer has: that of determine his own wage. Smith is trying, actually, too give
various forms of one single force that determine wages and profits: competition in the
market – and the competition always appears as the main mechanism – this becomes
clear when Smith discusses the three condition of global equalization that actually
means a “normal” and sovereign market system. But with that, is gets progressively
harder to understand any conception of “natural prices” or “normal profits”/”normal
wages” (paragraph 1.44-46).
About the problem of the legislation on apprentices, is quite remarkable that Smith
makes a very distinct (in length and in direction) argument than when he discussed the
legislation of rate of interest. In the latter he states that the legislation is a simple
formalization of the market practice, and that, otherwise, it would be a law without
practice, but in the former, the law has a much more power to determine the market
prices. Also in this discussion, the education needed for a labour that was considered a

5
“natural” characteristic of the labour itself, here gains a much more social
determination.