Why Would Smith Support An Increase In The Legally Mandated Minimum Wage?
In the debate of growing inequality, Smith would suggest direct intervention into labor market. According to him the well being of laboring population should be in the best interest of any country, because without workers it would not be able to accumulate wealth which is the driving force of economy. For Smith, it is important to reduce inequality or at least attempt to reduce it by some civil means, because it would keep workers content; hence, it is beneficial to the economy. The laborers are valuable because they create the value added – the wealth – while the capitalists prepare the necessary conditions for the laborer to produce it.
Smith would argue for the increase of legally mandated minimum wage to smooth out the growing inequality. He believes that one should avoid taxing capitalists beyond the essential public services and the expense of education, religious instruction, defense, and justice, the latter two for the security of rich from poor (771). The main reason is because the country’s economy grows only if its gross domestic product grows which is made up from wages, profits and rents. When government poses taxes, next to the wages of workers and rents of landlords, it will cut into profits of capitalists and that will influence the wages of workers. The increase in taxes would reallocate resources away from capitalists and therefore, lead to the diminishing revenue of the country. Smith believes that capitalists drive the wealth of economy and one should not strain that major source of economic growth. The more profit capitalists acquire the better it is, because they will invest it back into the economy, for example by expanding manufacturing, and that would create more demand for labor. “If one has more stock than what is sufficient he would naturally employ one or more journeymen with the surplus (79).” Consequently, this will increase the demand of labor which, while scarce, will augment the wages. Hence, increase in the national wealth originates from the increase in revenue and stock which naturally increases the demand for people who live by wage. As Smith argues that the countries that grow fastest are the richest and have the highest wages for the laborers (79).
There are many reasons why Smith would suggest a wage floor in economy. One of the most important notions would be to make sure that workers are assured subsistence level wage, as to guarantee a minimum standard of living. As Smith is very firm in his belief that wages have to be sufficient to maintain man and his family (77).When the worker’s wages are reduced to bare minimum he would not be able to bring up his family and as a result the laboring population will diminish (287). It would be government’s responsibility to stand up for the workers, because their lack of education and living conditions often would render them unfit to judge their situation or voice their opinions (286). And it is not in the interest of any country to have its men miserable, because the starving people are driven to seek subsistence either by begging or by becoming violent (84), which is a recipe for a revolution or a war - “for a great calamity,” as Smith would say. Consequently, he coincides with Hobbes by noting that the country would fall into a rude state and would not be able to accumulate wealth at all.
One could counter argue that if Smith has assumption of laissez-faire why should government then increase the wages to reduce inequality, because in the perfect competition they would adjust to the market naturally. Unfortunately, the market mechanisms that direct demand and supply of labor can naturally take hundreds of years (81, 163) to adjust, plus there are also many other constraints that can affect the labor market and, thus, the wages. At first, to afford to live, the laborers’ market wages have to be greater than subsistence wages. Otherwise, the worker would not be able to feed all his children and some of them could end up dying because improper nourishment or unsatisfactory health benefits. This would lead to the decrease of labor supply in the next generation.
In agriculture there is always lot of uncertainty about the wages. They will often depend on the climate. When there is a flood or a drought the harvest would be dreadful and farmers will not be able to hire as many workers. This will cause the excess labor supply and the wages will be driven down. One would expect the laborers to migrate to another region that can offer higher wages, but often workers don’t have sufficient enough funds to do so.
The notion of demand for products would adjust the demand for labor will not always work. Even if there is a huge demand for particular commodity it would not always be able to assure the increase in demand for labor, because that produce could be particular only to a certain area, knowledge or dexterity. For example, French wine can be only produced in France where are met the required natural conditions for certain grapes to grow. Or in the case of inventions it could take centuries before the particular knowledge becomes widely available and the monopoly of certain manufacturer or trader broken (68, 69). In these cases there is only a fixed number of labor supply that is needed to produce the commodity and the increase in demand for that product would not mirror in the augmentation of jobs. And even when the country is in good wealth and manufacturing sector is in surplus, it could still take a long time for the labor demand to go up and thus push up the market wages. Because capitalists could sometimes decide not to save and invest all of their profits back into the industry, or it could take a long time for the profits to flow back into economy, as factories take time to build, or there could be inadequate funds for the constant returns on scale to take effect.
In conclusion, to diminish the mounting inequality the workers need higher wages, but to achieve that we need a healthy and wealthy economy. This, in return, requires capitalists to save and invest their savings back into economy, what means that it is in the laborers’ best interest that capitalists would make lot of profit, because as profits go up, so will the demand for labor and consequently the wages. Hence capitalists and laborers are not so diametrically imposed to each other, but quite dependent on one another’s success. Therefore, if there is a growing inequality it could mean that all the market mechanisms are not working as expected or fast enough naturally. In this case government could attempt to intervene by increasing laborers wages, because country can become opulent only if its laborers are taken care of as the workers are the ones that produce the wealth of the nation.
Smith would argue for the increase of legally mandated minimum wage to smooth out the growing inequality. He believes that one should avoid taxing capitalists beyond the essential public services and the expense of education, religious instruction, defense, and justice, the latter two for the security of rich from poor (771). The main reason is because the country’s economy grows only if its gross domestic product grows which is made up from wages, profits and rents. When government poses taxes, next to the wages of workers and rents of landlords, it will cut into profits of capitalists and that will influence the wages of workers. The increase in taxes would reallocate resources away from capitalists and therefore, lead to the diminishing revenue of the country. Smith believes that capitalists drive the wealth of economy and one should not strain that major source of economic growth. The more profit capitalists acquire the better it is, because they will invest it back into the economy, for example by expanding manufacturing, and that would create more demand for labor. “If one has more stock than what is sufficient he would naturally employ one or more journeymen with the surplus (79).” Consequently, this will increase the demand of labor which, while scarce, will augment the wages. Hence, increase in the national wealth originates from the increase in revenue and stock which naturally increases the demand for people who live by wage. As Smith argues that the countries that grow fastest are the richest and have the highest wages for the laborers (79).
There are many reasons why Smith would suggest a wage floor in economy. One of the most important notions would be to make sure that workers are assured subsistence level wage, as to guarantee a minimum standard of living. As Smith is very firm in his belief that wages have to be sufficient to maintain man and his family (77).When the worker’s wages are reduced to bare minimum he would not be able to bring up his family and as a result the laboring population will diminish (287). It would be government’s responsibility to stand up for the workers, because their lack of education and living conditions often would render them unfit to judge their situation or voice their opinions (286). And it is not in the interest of any country to have its men miserable, because the starving people are driven to seek subsistence either by begging or by becoming violent (84), which is a recipe for a revolution or a war - “for a great calamity,” as Smith would say. Consequently, he coincides with Hobbes by noting that the country would fall into a rude state and would not be able to accumulate wealth at all.
One could counter argue that if Smith has assumption of laissez-faire why should government then increase the wages to reduce inequality, because in the perfect competition they would adjust to the market naturally. Unfortunately, the market mechanisms that direct demand and supply of labor can naturally take hundreds of years (81, 163) to adjust, plus there are also many other constraints that can affect the labor market and, thus, the wages. At first, to afford to live, the laborers’ market wages have to be greater than subsistence wages. Otherwise, the worker would not be able to feed all his children and some of them could end up dying because improper nourishment or unsatisfactory health benefits. This would lead to the decrease of labor supply in the next generation.
In agriculture there is always lot of uncertainty about the wages. They will often depend on the climate. When there is a flood or a drought the harvest would be dreadful and farmers will not be able to hire as many workers. This will cause the excess labor supply and the wages will be driven down. One would expect the laborers to migrate to another region that can offer higher wages, but often workers don’t have sufficient enough funds to do so.
The notion of demand for products would adjust the demand for labor will not always work. Even if there is a huge demand for particular commodity it would not always be able to assure the increase in demand for labor, because that produce could be particular only to a certain area, knowledge or dexterity. For example, French wine can be only produced in France where are met the required natural conditions for certain grapes to grow. Or in the case of inventions it could take centuries before the particular knowledge becomes widely available and the monopoly of certain manufacturer or trader broken (68, 69). In these cases there is only a fixed number of labor supply that is needed to produce the commodity and the increase in demand for that product would not mirror in the augmentation of jobs. And even when the country is in good wealth and manufacturing sector is in surplus, it could still take a long time for the labor demand to go up and thus push up the market wages. Because capitalists could sometimes decide not to save and invest all of their profits back into the industry, or it could take a long time for the profits to flow back into economy, as factories take time to build, or there could be inadequate funds for the constant returns on scale to take effect.
In conclusion, to diminish the mounting inequality the workers need higher wages, but to achieve that we need a healthy and wealthy economy. This, in return, requires capitalists to save and invest their savings back into economy, what means that it is in the laborers’ best interest that capitalists would make lot of profit, because as profits go up, so will the demand for labor and consequently the wages. Hence capitalists and laborers are not so diametrically imposed to each other, but quite dependent on one another’s success. Therefore, if there is a growing inequality it could mean that all the market mechanisms are not working as expected or fast enough naturally. In this case government could attempt to intervene by increasing laborers wages, because country can become opulent only if its laborers are taken care of as the workers are the ones that produce the wealth of the nation.
Häly Laasme
Works Citied.
Smith, Adam. The Wealth of Nations.
Labels: Adam Smith, labor
posted by Häly Laasme at 1:18 PM
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