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Book 1, Chapter 9
Themes
and Colors
Key
LitCharts assigns a color and icon to each theme in The Wealth of Nations, which you can use to track the themes throughout the work.
Labor, Markets, and Growth
Capital Accumulation and Investment
Institutions and Good Governance
Mercantilism and Free Trade
Money and Banking
Summary
Analysis
In a society where people are perfectly free to choose their jobs and investments, the market will tend toward equality: people will crowd into the best jobs and investments (whose wages and profit rates will then fall) and abandon the worst ones (whose wages and profit rates will then rise). Eventually, all occupations will have the same wage and profit rates. But this doesn’t happen in the real world for two reasons: different occupations have their own intrinsic advantages and disadvantages, and people aren’t truly free to choose theirs. This chapter will deal with those two effects separately, one after the other.
Smith again uses an ideal model to show how perfect competition would work, and then contrasts that model with how the economy actually works. In theory, just like competition among capital owners would bring the whole economy toward a standard profit rate, competition among workers would bring their pay in line with an average wage. But in reality, capital can move between different places and industries far more easily than labor. This is even more true today than it was in Smith’s era. Altogether, it means that profit rates are more uniform than wages.
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“Part I. Inequalities arising from the Nature of the Employments themselves.” There are five main reasons that some employments are better-paid and/or more profitable than others. First, some jobs pay less because they are more intrinsically enjoyable: they are easier, cleaner, and/or more respected. For instance, tailors make less than weavers because tailoring is easier than weaving; blacksmiths make less than coal miners because mining is dirty, dangerous, and uncomfortable; and public executioners make unusually high wages because their occupation is so dishonorable. Similarly, in advanced societies, hunting and fishing turn from serious occupations into pleasurable hobbies, while professional hunters and fishermen are often poor. In contrast, inns and bars are highly profitable businesses because of their sordidness.
Smith’s first criterion reflects the common wisdom that people who love their jobs are willing to work for less than their labor is really worth, while people who hate their jobs will only continue to do them if high pay makes up for their unhappiness at work. The honor or dishonor, pleasure or displeasure, and comfort or discomfort associated with a job can thus be seen as a kind of hidden bonus or tax on top of the worker’s wage. In the 21st century, Smith’s analysis can help us understand why artists, teachers, and care workers are underpaid relative to the value they create for society. Namely, people tend to choose these professions at least in part because doing them is intrinsically rewarding.
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Second, the easier and cheaper an occupation is to learn, the lower its wages. Like complex machinery, workers in highly skilled industries require lots of upfront investment, which takes the form of education. For instance, in Europe, skilled tradespeople (“mechanics, artificers, and manufacturers”) must first go through an apprenticeship. During this time, someone else needs to pay for the worker’s subsistence, and everything they produce goes to their master. In contrast, country laborers usually learn on the job and maintain themselves, so they don’t need an upfront investment to start. This is why skilled tradespeople make higher wages than common laborers. In turn, artists, lawyers, doctors, and other people who require a liberal education make even more. This principle applies to wages, but not to profits, since it is not much more difficult to invest in one kind of business than another.
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Third, the constancy of employment shapes wages. For instance, bricklayers cannot work in certain kinds of weather, so they often miss days of work, while carpenters can work any day they want. This is why bricklayers make higher wages than carpenters. Similarly, coal miners in northern England make less than the men who haul the coal off ships in London, because these ships only arrive irregularly. Constancy only affects wages, not profits.
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Fourth, wages vary depending on the trust bestowed on an occupation. For example, people trust their precious possessions to jewelers, their health to physicians, and their freedom and reputation to lawyers, so it’s only natural that these occupations are all well-paid. Like constancy, trust only affects wages, not profits.
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Fifth and finally, the odds of success in any given business affect its wages. Shoemaking apprentices are likely to become master shoemakers, while most law students do not become successful lawyers. While successful lawyers may earn more than successful shoemakers, in reality, professionals like lawyers are still under-compensated relative to the true risks of joining their occupations. But “the most generous and liberal” people still flock to such professions for two reasons: these jobs are highly respected, and most people overestimate their own abilities. Success in this kind of profession is a clear mark of “genius or superior talents.” In fact, recognition for such talents is the main form of compensation for some professions, like poetry and philosophy. Musicians also get recognized for their special talents, but their profession is considered dishonorable, and they must get paid extra to compensate.
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People typically overestimate their odds of success because they are too optimistic about their abilities and luck. Lotteries are profitable because people overvalue their chances of gain, and insurance companies are profitable because they underestimate their chances of loss. Young people are the most prone to this bias, which is why they become soldiers and sailors, choosing a life of discomfort and danger for a small chance at wealth and glory. In reality, most of them make no more than common laborers.
In this way, while ordinary unwholesomeness deters people from joining a profession (and raises its wages), the promise of adventure and surmountable danger instead attracts young people to the army and the seas (and doesn’t raise their wages). Profit rates typically rise in riskier businesses, but these are also the most likely to go bankrupt. Smuggling is the riskiest of all. But people overestimate their chances of success in such industries and crowd into the market, which leaves their profit rates insufficient to compensate for the risks they incur.
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Of the five factors that affect wages, only agreeableness and risk also affect profits. This is why, in a given time and place, profit rates across industries tend to be more similar than wages across them. Specialist professions like apothecaries and country merchants may seem to have very high profit margins, but actually, most of their pay should be seen as wages for their skill, knowledge, and trustworthiness. Wholesale prices are cheaper because wages make up a smaller portion of them, and the lower profit rates in large cities make goods cheaper there, so long as transportation costs are not much higher. In small towns, profit rates are high, but there is nowhere to invest that profit. In cities, profit rates are lower but there are endless investment opportunities. Most urban fortunes are the product of diligent, lifelong hard work and investment, but others arise suddenly from commodity speculation.
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For agreeableness, education, constancy, trust, and risk to reliably shape wages, three other factors must also hold. First, this only applies to old, established trades. Getting people to join a new, unproven trade requires paying them extra-high wages (and often leads to higher profits). Second, jobs must be in their “natural state,” meaning that there are typical levels of demand. For instance, the demand for soldiers and sailors skyrockets during war, and weather leads to highly variable grain and tobacco harvests from year to year.
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Third and finally, these wage effects only apply to people’s primary sources of employment. People with significant leisure time often spend it doing other activities for comparatively low wages. For instance, many servants living on Scottish farms spend their free time knitting stockings and spinning yarn, which accordingly command lower prices than they would otherwise. Similarly, even though London has the most expensive land prices in Europe, rent for a furnished room is relatively cheap there because most London tradespeople rent entire multi-story houses, then let out a few rooms to help cover their housing costs. These landlords’ primary income comes from their trade, whereas landlords in other places live first and foremost off their tenants.
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“Part II. Inequalities occasioned by the Policy of Europe.” By making the market deviate from “perfect liberty,” national policies exacerbate wage and profit inequalities in three ways. First, they restrict competition by giving professional associations (also called corporations) exclusive privileges over particular trades and defining apprenticeship requirements. For instance, most English tradespeople are only allowed two apprentices, who must work for seven years before they can set up shop on their own. The regulations vary in France and Scotland.
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Such rules are oppressive, because they infringe on people’s sacred right to their own labor. Further, apprenticeships don’t actually guarantee the quality of work, since most inadequate workmanship comes from fraud, not inability. And apprenticeships teach young people to choose idleness over hard work by preventing them from reaping the benefits of their labor for many years. Notably, the Greeks and Romans had no apprenticeships. And even complex artistic trades like watchmaking don’t require multi-year apprenticeships—they can be learned in a few weeks.
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If young workers could instead start out as journeymen, paying for the materials they use and getting paid for their work, they would learn faster and more cheaply. Masters would lose out on their revenue from apprentices, and competition would likely drive tradespeople’s wages and profits down, but the public would benefit from greater access to cheaper high-quality goods. Indeed, professional associations (or corporations) originally formed by paying the king in exchange for monopoly power over a certain trade in a certain area. By keeping the market under-stocked with both tradespeople and goods, these corporations increase prices, wages, and profits.
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As these corporations take over a town’s trades, both prices and wages rise. This has enriched towns at the expense of rural areas, which send raw goods to towns and buy manufactured goods from them. Accordingly, most of Europe’s fortunes are made in towns, not the countryside. This dynamic constantly draws more capital and labor to towns—where it’s easier for people to organize into corporations. This is why there are no farming apprentices, even though their profession is far more complex than most urban ones. (It requires adapting to a wide range of uncertain conditions, rather than repeatedly performing one or two simple tasks.) High taxes on imported goods also unjustly enrich tradespeople in towns by protecting them against foreign competition. Farmers, common laborers, and landlords generally don’t have associations, so they end up paying the price of professional associations’ greed.
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In Britain, towns’ advantage over the country is shrinking. This is because, as town industries grew larger and more profitable, they accumulated more and more capital stock, which they invested back into their operations. This increased competition, reducing prices and profit levels, until tradespeople found it more profitable to start investing in rural areas. Such “overflowings of the stock originally accumulated in the towns” returns wealth to the countryside.
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When people in the same trade assemble, they often conspire to raise prices. The law can’t ban such assemblies, but it should avoid encouraging them by requiring tradespeople to register, work together for charity, or incorporate an association. Discerning customers keep tradespeople honest, while trade associations more often protect bad actors.
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The second way that policy drives inequalities in wages and profits is by artificially increasing competition. For instance, public scholarships and prizes draw too many people to certain professions, such as the clergy, which accordingly pays less than trades like masonry and shoemaking. While lawyers and physicians are well-paid because they generally fund their own education, the teaching profession is equally challenging but poorly paid because it is “crowded with indigent people who have been brought up to it at the public expense.” In contrast, teachers were very wealthy in ancient Greece because their students paid them directly. Still, the current oversupply of teachers is a good thing overall, as it makes education far more affordable to the public.
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The third and final way that policy drives wage and profit inequalities is by preventing labor and capital from moving freely across different places and employments. Apprenticeship prevents people from switching occupations and local corporation privileges prevent them from exercising the same occupation in a different place. As a result, workers generally cannot switch from declining, low-wage industries to prosperous, high-wage ones. Since capital needs labor to make profit, such rules also restrict the free circulation of capital stock—although there are usually fewer restrictions targeting capital directly, and merchants can generally move from place to place with relative ease.
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England’s Poor Laws further restrict labor and capital by requiring that each parish support its own poor people. The laws make it extremely difficult to gain settlement (legal residency) in a new parish, so the poor can really only live and work in the parish of their birth. A certificate system has promised to solve this problem by letting poor people work in other parishes, but parish officials don’t want to support people who are working elsewhere, so they simply refuse most certificate requests. As a result, the poor cannot move wherever they find the best jobs, and so labor costs vary widely from place to place in Britain. Forcibly returning people to their legal parishes is also a major violation of liberty.
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Laws and judges used to set wages, but don't anymore because this dissuades people from working hard and innovating. Parliament still passes labor regulations, which generally just help masters increase their profits. Similarly, while the government no longer sets the prices for all different goods, there are still strict rules on bread weight, price, and quality. Finally, a country’s level of wealth and economic growth doesn’t meaningfully shape the balance between wages and profits—rather, it increases or decreases them while keeping them in the same proportion.
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