Adam Smith Defends Wage Increases

Wednesday, 2007-February-21 at 19:40

Whenever there is talk of increasing the minimum wage, or of wage increases in general, some business advocates talk of being forced to increase their prices.  There is even a push in Congress to use tax breaks as a way to balance the cost to businesses.

It seems that any talk of wage increases spurs talk of “cost-push” inflation.  The Federal Reserve gets very antsy at the idea of workers getting higher pay and immediately desires to raise interest rates to try to cool the economy from its overheated state.

It is sometimes good to go back to the source.  The source for classical economics is Adam Smith.  Now, I am not an economist (far from it), although I took five or so econ classes during my business program.  But I have enjoyed my reading of The Wealth Of Nations.

Again, people that claim that any wage increase harms businesses will try to defend this as classical economics or its descendant Reaganomics.  In fact, Adam Smith looked at it differently:

In reality high profits tend much more to raise the price of work than high wages.  If in the linen manufacture, fore example, the wages of the different working people, the flax-dressers, the spinners, the weavers, &cl should, all of them, be advanced two pence a day; it would be necessary to heighten the price of a piece of linen only by a number of two pences equalt to the number that had been employed about it, multiplied by the number of working days during which they had been so employed.  That part of the price of the commodity which resolved itself into wages would, through all the different stages of the manufacture, rise only in arithmetical proportion to this rise in wages.  But if the profits of all the different employers of those working people should be raised five percent that part of the price of the commodity which resolved itself into profit, would, through all the different stages of the manufacture, rise in geometrical proportion to this rise in profit.  The employer of the flax-dressers would in selling his flax require an additional five percent upon the whole value of the materials and wages that would be advanced to his workmen.  The employer of spinners would require an additional five percent both upon the price of the flax and upon the wages of the spinners.  And the employer of the weavers would require a like five percent both upon the advanced price of the linen yarn and upon the wages of the weavers.  In  raising the price of commodities the rise of wages operates in the same manner as simple interest does in the accumulation of debt.  The rise of profit operates like compound interest.  Our merchants and master-manufacturers complain much about the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad.  They say nothing concerning the bad effects of high profits.  They are silent with regard to the pernicious effects of their own gains.  They complain only of those of other people.

I think this statement should be read out loud to every pundit and legislator.  Smith is also known to have said something to the effect that a nation’s economic wealth does not consist in how much the wealthy classes have, but in that which is available to the working classes.  Indeed, there are hardly any poor countries where everyone is impoverished.  What resources there are get sucked up by the wealthy, leaving little for everyone else.  A good aid program for such a country will attempt both to increase the total and the percentage of the total which goes to the laborers who actually produce the economic output.

Now, I am not a socialist by any means.  No one who has known the impact of growing up dependent upon government programs that change their eligibility rules every year would ever wish that upon someone else.  However, even a foolish capitalist recognizes that capitalism depends upon social order, which depends upon (at least to some degree) a perception of fairness in the allocation of resources.  Witihout that, one must strictly militarize society, so that no one dares to oppose the way things are.

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