The Wealth of Nations: Book 1, Chapter 8 Summary & Analysis

In the state of nature, laborers own what they produce, and as humans figure out the division of labor, everything gets cheaper. But two key developments prevent this from happening in the real world: “the appropriation of land and the accumulation of stock.”

Once land is privately owned, landlords start demanding rent. Then, they start making profit from the difference between what they pay their farmworkers (as wages and maintenance) and the value of what the farm produces. Similarly, master artisans lend materials to their apprentices, pay their wages, and take a share of what they produce as profit. Some workers manage to get both wages and profit because they are independent: they have enough wealth to both purchase everything they need for their work and maintain themselves until that work is completed.

Clearly, workers will try to increase their wages, while masters will try to reduce them. But the masters have the upper hand: they can conspire to keep wages low, they generally have enough money to survive if operations get shut down, and unionization is prohibited in Britain. In general, masters silently agree not to raise wages beyond their natural rate—and sometimes they secretly work together to keep them even lower. When workers strike for higher wages, they’re usually unsuccessful. But masters cannot get away with paying workers less than the cost of subsistence for them and their families.

When the demand for a certain kind of labor is continually rising, workers in that field will see their wages go up without having to organize. This tends to happen when a country has extra money and capital sitting around—or surplus revenue (more income than its people need to survive) and surplus stock (more capital and materials than its existing labor capacity can make use of). The combination of surplus revenue and surplus stock increases the national wealth. And as the national wealth increases, so does the demand for wage-laborers, and thus also wages themselves. This means the fastest-growing countries have the highest wages, not the richest countries.

This is why, during Smith’s time, wages are much higher in poor but thriving North America than rich but stagnant England. In North America, the population is doubling every 20–25 years, so there is constantly a need for more and more laborers.

In contrast, in a rich but stagnant country where the number of laborers needed stays the same from year to year, population growth eventually leads to a scarcity of jobs. China appears to be like this, with low wages and entrenched poverty because of economic stagnation. In a country where national wealth is shrinking, wages fall very low, there is intense competition for jobs, and hunger and desperation can take over the population. Bengal is like this because of how the British East India Company “oppresses and domineers” it.

Wages are clearly above the subsistence minimum in Britain. After all, workers get paid more in summer even though subsistence costs are higher in winter, and wages don’t vary based on the price of provisions. These provision costs vary more than wages over time, while wage costs vary more geographically. This is because moving provisions is easier than moving people. In fact, places with lower provision prices often have higher wages, and vice versa. For instance, grain prices are lower in England than Scotland, but wages are higher. In both places, historical evidence shows that grain was dearer (more expensive), and wages were lower in the previous century, compared to Smith’s time. The working poor survived back then, so clearly their overall circumstances have improved. Indeed, all sorts of goods have become cheaper and more accessible for the majority of people.

Poverty doesn’t stop people from having children, but it does make raising them more difficult. Unlike their counterparts from wealthy families, most poor children in Britain still don’t make it to adulthood. Thus, as a society grows richer, more of its children survive and its workforce grows—until there are too many potential workers, wages fall, and fewer children start surviving again. In this way, “the demand for men, like that for any other commodity, necessarily regulates the production of men.” This is also why North America’s population is growing faster than Europe’s, while China isn’t growing at all. In short, as a nation’s wealth grows, its wages increase, and so does its population. In fact, everyone in a society is the best off when its wealth is growing.

High wages also make people work harder. In fact, well-paid laborers often burn out or hurt themselves due to overwork. In Smith’s estimation, people who work moderately but consistently and give themselves days to rest end up making the most money in the long term. Some people may work less as their wages rise, but in general, well-paid workers are more productive because they are healthier and better fed. In years when provisions are cheap, farmers often want to hire more workers, so wages rise. In years with higher provision prices, though, jobs become scarcer and wages fall. Thus, masters, farmers, and landlords tend to prefer more expensive years.

People always work harder when they’re independent and keep everything they produce, compared to when they work for a master. When provision prices are cheaper, more people tend to choose this kind of independent work. A study of three French textile factories has confirmed that they produced more in years with cheap provisions, but Smith’s analysis of Scottish linen production found no correlation at all. Of course, demand still affects production levels, and when people become independent in cheap years, their activity usually stops showing up in economic records.

Still, provision prices still do affect wages because they help determine the cost of subsistence. But this effect counterbalances the changing demand for labor: in a cheap year, the increased demand for labor pushes wages up but the low price of provisions drags it back down; in an expensive year, the low demand for labor pushes wages down, but the cost of provisions brings them back up. This is part of why wages vary much less over time than provision prices. Lastly, higher wages may slightly increase the price of provisions, but the productivity gains from the division of labor more than compensate for this effect.