ADAM SMITH'S WAGE THEORY.   Term Paper ID:25794 Click to get this paper

Essay Subject: Examines major concepts of 20th Cent. Scottish economist (labor, price & allocation, growth) & his influence on other theorists.... More...

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Paper Abstract: Examines major concepts of 20th Cent. Scottish economist (labor, price & allocation, growth) & his influence on other theorists. Paper Introduction: ADAM SMITH ON WAGES: AN ESSAY This research examines Adam Smith’s position on wages and the influence of that position on economic theorists who followed him. All aspects of Smith’s position on wages, including the determinants of wage level differences are reviewed. Adam Smith was born in 1923 in Kirkcaldy, Scotland, across the Firth of Fourth from Edinburgh. Eventually, he became the world’s first political economist. Smith studied at Oxford, where his interest in the ideas of another Scot, David Hume, caused him some problems with the dons of Oxford. Smith was a student and later a professor of moral philosophy. It was within the context of moral philosophy that he developed his ideas about political economy. His work An Inquiry into the Text of the Paper: The entire text of the paper is shown below. However, the text is somewhat scrambled. We want to give you as much information as we possibly can about our papers and essays, but we cannot give them away for free. In the text below you will find that while disordered, many of the phrases are essentially intact. From this text you will be able to get a solid sense of the writing style, the concepts addressed, and the sources used in the research paper. From the conditions described above, Smith (176) concluded that the"liberal reward of labor ... Smith, thus, concluded that, in more complex economies, value hadthree components-wages, profit, and rent (Ekelund and Hebert 91). Smith's ideas onwages emanated from his labor theory of value (Blaug 42). Liberal labor rates also made it possible for couples tosupport more children (Smith 176). In the long-run, the supply of labor,according to the doctrine, is related to the minimum subsistence requiredto maintain the labor force. E. In this context, he stated that: It is often difficult to ascertain the proportion between two different quantities of labour. Nothing is more useful than water: but it will purchase scarce anything; scarce anything can be had in exchange for it. Marx,however, held that the quantity of labor used in the production processdetermined the actual value of the commodity being produced. David Ricardo refined Smith's theory to postulate that the use oflabor in production provided the basis for a rough determination ofrelative prices over the long-term (Ekelund and Hebert, 1983). Cairnescontended that the fixed or non-fixed character of the fund was not thepoint. Eventually, he became the world's firstpolitical economist. Amill hand, by contrast with a physician, enjoys a relative constancy ofwork and, thus, need not receive wages or earnings at the level paid to thephysician. It could not be correctly applied, hecontended, in a more complex economy characterized by private property, andcapital accumulation. The sociallynecessary labor time required to produce workers is comprised of the inputsrequired to rear, feed, clothe, educate, and train workers. From this basis, he concluded that valueis determined by rules observed in the exchange of goods for money. Of the aggregate amount spent on wages, Mill (516)said, in his recantation, "there is an impassable limit to the amount whichcan be so expended; it cannot exceed the aggregate means of employingclasses. According to David Ricardo, as costs and profits were the same on allcultivated land, a surplus was earned on non-marginal land (Sraffa 141-143). and Hebert, R. "The Grundrisse." [1858]. The labor theory approach to the analysis of valuepostulates that value reflects the cost of production, as that cost ismeasured in terms of absorbed labor. Marx believed thatthe utility value of labor was greater than the exchange value of labor. Adam Smith on Wages: an essay This research examines Adam Smith's position on wages and theinfluence of that position on economic theorists who followed him. The Wealth of Nations, (1776, Reprinted). In the British colonies of the eastern hemisphere,particularly Bengal, the level of wealth was either stable or declining,and labor rates were also decaying (Smith 175). Dartmouth, Nova Scotia: Blue Peter, 1995. Smith made apoint of distinguishing between self-interest and selfishness, andcontended that the two were not synonymous. ," and "thenatural symptom of increasing national wealth." He further concluded thatthe "scanty maintenance of the labouring poor ... Economic growth, in turn, led to an increase inwealth. Smith conceived of value as being determined by eitherthe creation of one type of good for another, or the exchange of money forgoods (Ekelund and Hebert 9 ). The examples are lessrelevant, however, in the more typical situations wherein a physician isemployed from time to time by a large number of different persons. One of the many theories with which Smith is associated in the labortheory of value. 4. Smith contended that freecompetition was also essential for the development of an efficient economy. In (Ed.). Harmondsworth, England: Penguin Books, 1978.Sraffa, P. to exchangeit for other commodities ... It is adjusted, however, not by any accurate measure, but by the ... Marshall (279) also held that labor is a market, and that the labormarket is different from commodity markets. Capitalgeneration, thus, in Marxist economic theory derives from labor (Ekelundand Hebert, 1983). Ricardo thought that the consequence of this relationshipwas that, as the population expanded and less-fertile land was broughtunder cultivation, profits became squeezed by (1) an increasing proportionof total output which was allocated to rent, and (2) the basic minimumlevel of subsistence which was allocated to labor wages (Ricardo 167, 174). In his recantation, he changed his viewon the unchanging character of the fund earmarked for the payment of labor. Once again, he contended that this concept appliedonly in early and rude economies. Adam Smith was born in 1923 in Kirkcaldy, Scotland, across the Firthof Fourth from Edinburgh. Cambridge, England: Cambridge University Press, 1951. He also recognizedthe need to include different types of labor in value determinations.Thus, the amount of labor which can be commanded by land and capital mustalso be a part of value determinations. Wagesare the workers' component, while profit is the component representingcapital, and rent is the land component. Free competition, according to Smith (264-268), was translated into aminimum of government regulation of economic activities. (Ed.). Smith, however, thought that thedivision of labor would lower long-run costs of production, and thatcompetition would cause market prices to closely parallel natural prices(Ekelund and Hebert 92). L. Cairnes, however, was unsuccessful in hisattempt to counter Mill's recantation of the wage fund theory. On the one hand, he held that the division of labor arises from apropensity in human nature to exchange, for which each trader must have asurplus over his immediate needs with which to trade (Ekelund and Hebert9 ). When low labor rates and high interest rates develop in colonies(as they did in the British colonies in India), however, wealth begins todecline, and the economy stagnates (Smith 196-197). Labour, therefore, is the real measureof the exchangeable value of all commodities." Smith recognized the practical problems involved in this approach tothe determination of value. The wage fund theory was developed by Adam Smith, and it became acornerstone of classical economic theory (Ekelund and Hebert 97-98). Economic Theory in Retrospect. Thisdifferentiation was not a case where Smith did not recognize the value toan economy of services. Marshall (474-475) also recognizedthe relevance of these variables; however, he emphasized labor inconstancy. Smith (173) held that the most "decisive mark of prosperity of anycountry is the increase in the number of its inhabitants." It was to thisreason that he ascribed the different economic growth rates in the BritishNorth American colonies (where both population and economic growth werehigh), and in Britain itself, where both population and economic growthwere much slower (Smith 175). (Ed.). W. The Works and Correspondence of David Ricardo Vol. In this context, Smith recognized that wealth wasnot determined on the basis of nominal values, but, rather, on the basis ofreal values. to attract more customers," which wouldtranslate into "lower consumer prices and improved economic welfare"(Ekelund and Hebert 87). A History of Economic Thought. W. Smith thought that the accumulation of capital permitted, withinan economy (1) the creation of plant and equipment to assist human labor,and (2) the full employment of labor. is a great enemy to good management ...." The Physiocrats, who preceded Smith in the evolution of economictheory, contended that agricultural labor was "the creator of wealth" (Marx24 ). Allaspects of Smith's position on wages, including the determinants of wagelevel differences are reviewed. Ricardo did not emphasize demand, to the same extent that he didproduction and distribution, while Smith did emphasize demand. By 1869,however, he had changed his view. bargaining of the market (Smith 134). Behind the Veil of Economics. Norton & Company, 1988.Heilbronner, R. Population growth worked hand-in-handwith liberal labor wages, according to Smith (176), because liberal laborrates created economic growth, which, in turn, created an increased demandfor labor. New York: W. is the natural symptomthat things are at a stand, and their starving condition that they aregoing fast backwards" (Smith 176). Marshall's theory of wages did not so much challenge the ideas ofSmith as they extended Smith's concepts (Blaug 4 3). New York: W. In a more complex society, Smith asserted that value could no longerbe determined solely in terms of direct labor inputs (Barber 32). C. "Thornton on Labor and Its Claims." Fortnightly Review, (May- June 1869): 5 5-518, 68 -7 .Rankin, S. Smith (132), in The Wealth of Nations, was concerned with value in theexchange context. Smith was a student and later a professor of moral philosophy. Smith studied at Oxford, where his interest in theideas of another Scot, David Hume, caused him some problems with the donsof Oxford. Smith (172) held that it was not the actual level of wealth, but therate at which wealth was increasing or decreasing which most affected laborrates. Marx (2 3) postulated that the value of labor used established theexchange value for a commodity. It was for this reason, according to Smith, that the labor rates inBritain's North American colonies were so much higher than they were inBritain (Smith 172). (8th ed., 192 , Reprinted). John Stuart Mill initially accepted the wage fund doctrine. Smith thought that the size of an economy's output should be limitedonly by the size of markets-or demand. Further, Marxthought that this value was both fundamental and immutable. In the long-run, also, the level of labordemand is determined by the size of the wage fund, which, in turn, isdetermined by the level of savings. Norton & Company, 1978, pp. The three key aspects of Smith's economic analysis were the divisionof labor, the analysis of price and allocation, and the nature of economicgrowth (Ekelund and Hebert 9 ). What wouldinfluence the levels of real wages was the level of profits, becauseprofits made possible savings. C. Where the division of labor was the initiator ofeconomic growth, capital accumulation was the engine which kept growthalive. On the other hand, he held that money enters the picture because itmakes trade more convenient insofar as it is generally acceptable andportable (Ekelund and Hebert 9 ). Homewood, Illinois: Irwin, 1968.Ekelund, R. The interaction of the division of labor,price, and resource allocation led to economic growth, which, in turn,created wealth. is equal to the quantity of labor which itenables him to purchase or command. The Marx-Engels Reader. New York: Simon and Schuster, 1972.Marshall, A. He postulated that value, in an exchange context,derived from considerations of both the division of labor, and the use ofmoney. Smith's defining of wealth in terms of tangible goods led, in turn, tohis differentiation between productive and unproductive labor. Rather, the approach was a reflection of his idea that onlytangible goods represented long-term value and, thus, wealth (Smith 175-18 ). Marshall (462) also held that what he termed an inconstancy of laborcaused wages or earnings to rise. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it (Smith 131-132). Ricardo called this surplus earned on non-marginal land "rent"(Rankin 247). Marx, thus,regarded labor as a commodity, and the distinction between the labor valueof a commodity and the utility value of a commodity was critical in ananalysis of value employing Marxist theory. The difference between the utility value of labor and theexchange value of labor was termed surplus value by Marx, who thought thatonly labor, among all of the factors of production, could produce surplusvalue. Smith interpreted competitionas an absence of monopoly. But, short of this limit, it isnot, in any sense of the word, a fixed amount." Mill eventually recast the wage fund into two parts-the actual capitalin the fund, and the income earned on that capital. Smith (194-195) also concluded that high labor wages, and highinterest rates are things "which scarce ever go together, except in thepeculiar circumstances of new colonies." This situation arose, accordingto Smith, because new colonies are typically understocked in both labor andmoney. The wage fund doctrine eventually fell out of favor with economists.In 1874, J. The one may be called 'value in use'; the other "value in exchange". Thus,the gross national product (GNP) in Marxist economic theory is the sum ofconstant capital plus the labor wages fund plus surplus value. Norton & Company, 1978, 221-293.Mill, J. He rejected the concept that the value of acommodity is determined by the quantity of labor required for itsproduction (Barber 31). In crude terms, the doctrine indicated that ...the average wage rate over a productive period would be given by dividingthe stock of capital by the number of workers" (Ekelund and Hebert 97). Smith further recognized the problems inherent in themeasurement of labor qualities, and the assignment of value to thosequantities. Harmondsworth, England: Penguin Books, 1984.Blaug, M. http://www.bluepete.com/Literature/Biographies/ Philosophy/Smith.htmBarber, W. "Supply and Demand in Ricardian Price Theory: A Re- Interpretation." Oxford Economic Papers 32 (July 198 ): 241-262.Smith, A. Marshall (17 )also held that the value and productivity of labor depend largely ontraining. In the labor market, thus,when a worker, because of a dire need for money, comes off second best inwage bargaining with an employer, and begins working a low wages, theprobability is that the worker will, in the future, continue to work forlow wages from that employer. In thesedeterminations, land and capital had also to be considered, and thedetermination of their labor content was recognized as a much morecomplicated process. W. In thislatter scenario, variables other than the inconstancy of labor must be usedto justify higher wages or earnings for physicians. F. In return for the exchange value of labor, the owners ofcapital who use labor gain the utility value of labor. WORKS CITED"Adam Smith." Biographies. To this reason, Smith (176) also attributedthe higher birth rates in the North American colonies, as opposed to themuch lower birth rates in Britain. But it is not easy to find any accurate measure ... Smith (172) observed that prices in the British North Americancolonies were lower than prices in Britain, although wage rates were justthe opposite. The division of labor provided Smith's starting point for his conceptof economic growth. Marx considered the amount of capital required to pay labor to bevariable; however, he considered all other capital to be constant. different sorts of labor for one another, some allowance is commonly made for both. For a complex society, Smith did not stop with the need to findsuitable means of measurement for the value of labor. Marx, as an example, was essentially a classical economist(Heilbronner 159). J. His work An Inquiry into the Nature and Causes of theWealth of Nations published in 1776 established him as the creator ofmodern economic thought ("Adam Smith" 3). New York: McGraw-Hill Book Company, 1983.Heilbronner, R. 2. Value determination, according to Smith, must be considered in twocontexts-utility and exchange, although Smith was not referring to marginalutility. (2nd ed.). Marshall (54) held that all labor "is directed toward producing someeffect." Thus, Marshall (54) defined labor as "any exertion of mind orbody undergone wholly or partly with a view to some good other than ...pleasure." Thus, all labor is regarded as productive unless it fails toachieve what was intended by its application. He attributed this apparent anomaly to the fact that higherwage rates increased demand, which in turn increased supply, which, inturn, led to lower unit costs (Smith 173). These examples are applicable in a situation wherein a singleentity employs both physicians and a mill hand. The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use. Skinner A. Reprinted in Tucker, R. of hardship or ingenuity. Collective bargaining permits workers to restrictthe availability of labor and, thus, gain a balance of power with employersin the labor markets. In the short-run, however, a commodity'svalue was not necessarily stable. The contributions of the division of labor to the creation ofwealth, thus, were, according to Smith, due to "(1) an increase in theskill and dexterity of every worker, (2) the saving of time, and (3) theinvention of machinery" (Ekelund and Hebert 1 1-1 2). Where Smith thought that thefactors of supply and demand were major determinants of commodity prices(although the value of labor consumed in their production provided a basisfor the determination of value), Marx (2 3-217) thought that: 1. Alfred Marshall, "the great neoclassical contributor tomicroeconomics, was very adamant in his admiration for, and use of,Ricardo's theory of cost in formulating partial-equilibrium analysis"(Ekelund, and Hebert 171). Marshall (28 ) held that the balance ofpower between buyers and sellers in commodities markets was relativelyequal, but that the balance of power was usually with buyers in labormarkets. Mill's recantation of the wage fund doctrine led the way towardthe decline of classical theory (Ekelund, and Hebert 164-17 ). Philadelphia: Porcupine Press, 192 .Marx, Karl. There may be more labour in an hour's hard work than in two hours easy business; or in an hour's application to a trade which it cost 1 years of labor to learn, than in a month's industry at an ordinary and obvious employment. A commodity's value, thus,was stable over the long-run, and represented the wages, rent, and profitcomponents of production costs. Thus, Marshall's theory of labor and wages provided the basis forcollective bargaining. He was cognizant of the value to an economy ofservices. value of any commodity ... to the person who means ... C. Smith (175-18 , 227-23 )traced the creation of value through the accumulation of wealth as follows:(1) the division of labor; (2) increased productivity stemming from thedivision of labor; (3) increased output of goods, as a result of increasedproductivity; (4) higher wages for workers, in recognition of theirincreased productivity; (5) increased per capital income derived fromhigher wages; (6) higher levels of consumption resulting from per capitaincome increases; and (7) greater wealth creation through increased capitalaccumulation. In Smith's conception, each ofthese components represents a measure of labor-direct labor expended by theworkers, and indirect labor commanded by land and capital. Marshall theorized thatwith every increase in the amount of labor provided there was acorresponding decrease in the unit price for that labor. As Smith recognized differentiations between types of labor, and themeasures of values assigned to those types of labor, he also differentiatedbetween the types of value which could create wealth. The exchange value of labor, in turn, is determined by thesocially necessary labor time required to produce workers. The example provided was that of aphysician who must be paid a higher wage than is paid to most other workerswhen work is performed so that the physician can be retained over thoseperiods when the buyer does not require the services of a physician. In exchanging ... Smith conceived ofwealth as only physical goods, as opposed to intangibles. The Marx-Engels Reader 2nd ed. According to this conception, anincrease in consumption reduces savings, and, in turn, the wage fund.Productivity would not influence the level of real wages. In this context, he stated that: The word VALUE, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. He contended that competition would cause"sellers to lower their prices ... Smith's wage fundtheory was discarded along the way, but his conceptions of the value oflabor remain valid. The owners of capital paid wages which are determined by theexchange value of labor. While he did not attempt to mask the deficiencies of acapitalist economic system, and while he recognized the danger to a societyof unchecked selfishness, he held that self-interest, as opposed toselfishness, was a necessary ingredient for economic growth. The point was what the employer, or holder of the fund, did with itin the real world. The income on thecapital provided the employer with the capacity to increase the amount ofthe fund. The stock of capital amassed through the process of assimilationwas, to Smith, the level of wealth in an economy. Labor was the central factor in Smith's determination of value. Tucker, R. Smith felt that the catalyst which would promote self-interest, and,thereby, check selfishness was competition. New York: W. Smith's natural price was assumedto be invariant over time; however, his market prices changed, as short-term demand changed (Ekelund and Hebert 92). 3. I. In more sophisticated economies, however, Smith (133) held that"the ... He did not think that the utility value ofthe commodity altered the fundamental value of the commodity, which wasestablished by the amount of labor consumed in its production. Marshall (66) also viewedlabor as only those activities designed to produce income. 2 3-217.Marx, K. Training was defined to include education. Training was thevariable used by Marshall (171) to differentiate between skilled andunskilled labor. Human nature played a major role in Smith's concept of economicactivity. Along with the division of labor, Smith (227-23 ) considered capitalaccumulation an essential ingredient for economic growth, and, in turn, thecreation of wealth. A History of Economic Theory and Method 2nd ed. Smith concluded, thus, that the appropriate measureof value contribution by land and capital was their command over laborBarber 32). In the measurement of the value of labor, Smith recognized thetendency to use monetary values; however, he further recognized theproblems of such a measure which derived from real and nominal prices(Ekelund and Hebert 91). It cannot come up to those means; for the employers have also tomaintain themselves and their families. Cairnes attempted to "rehabilitate the wages-fund doctrineand to review classical theory" (Ekelund and Hebert 168-172). is the necessary effect ... The different degrees of hardship endured, and the ingenuity exercised, must likewise be taken into account. Most modern economistscite the differences in the value of financial resources and time investedin preparing for different occupations as the bases for differences inwages and earnings among occupations. Market prices,according to Smith, are determined by the interaction of supply and demandin the short run, while the natural price is a reflection of long-run costsof production (Ekelund and Hebert 92). It waswithin the context of moral philosophy that he developed his ideas aboutpolitical economy. It was Smith's view that,while selfishness would undermine economic progress, self-interest, bycontrast, would improve the economic welfare of society (Ekelund and Hebert87). Smith rejected the limitations of the Physiocrats' concept of wealthand its creation. To Smith, the production oftangible goods led to an increase in aggregate net investment, and thusserve the end of economic growth, while the production of services merelyserve the needs of households (Ekelund and Hebert 1 2). Thewage fund doctrine held that, at the end of a production period, "a givenstock of circulating capital is advanced to labourers to tide them over thenext production period ... Classical economists used the fixed character of the wage fund to arguethat, in the short-run, it was futile for trade unions to attempt to raiseaggregate compensation. Accordingto Smith, productive labor was that which produced a tangible good of somemarket value, while unproductive labor results in the production servicesperformed by artisans or professionals. By contrast, Smith (251) concluded that "Monopoly... Marshall (117) also postulated a marginal utility of labor, which hereferred to as the marginal disutility of labor. Indirect, as well as direct, laborcontributes to the determination of value (Heilbronner 151-152). Wealth was increasing rapidly in the North Americancolonies, where it was increasing slowly in Britain, although the actuallevel of wealth in Britain was much higher than it was in the NorthAmerican colonies. Inwhat he referred to as an early and rude society, value was determinedthrough the process of barter, where the value of a good was determined bythe amount of some other good that one could obtain through the exchange ofgoods. The labor theory approach to theanalysis of value is the approach of classical economics. The Worldly Philosophers 4th ed. Cairnes was a believer in the classical economicconcept of the stationary state. "A Contribution to the Critique of Capital." [1859]. S. Inthe short-run, there would be a given number of workers, and a given amountof savings to pay their wages. In determining value, Smith was also concerned with thedifferentiation between market and natural prices. Principles of economics. E., Jr. The time spent on two different types of work will not always along determine this proportion. The key element in the process ofdeveloping a market, in Smith's perception, was the accumulation ofcapital. Cairnes' failure, however, did not mark the end of classical theory.As Adam Smith incorporated into classical economic theory many of the ideasof those who preceded him, so too did the marginalists and neoclassicistsincorporate into their theory many of the ideas of the classicaleconomists. (Ed.). If this paper is not what you are looking for, you can search again: Search for: or Click here to request an essay written just for you.

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