Commentary: On Wages

By: The FHE Team

What do wages have to do with politics? Let’s recall the mantra from a few years back: “It’s the economy, stupid.” And wages drive the economy.

David Ricardo, 1772-1823, At the age of 20 this British Economist entered business as a stockbroker and was so skillful in the management of his affairs that within five years he had amassed a huge fortune. He then turned much of his attention to scientific topics, and in 1799, after reading Adam Smith’s The Wealth of Nations, began to study political economy. However, 10 years elapsed before the appearance of his first writings on the subject, a series of letters to the Morning Chronicle. A number of pamphlets and tracts followed, in turn succeeded by Ricardo’s major work, The Principles of Political Economy and Taxation (1817). In that book he presented most of his important theories, especially those concerned with the determination of wages and value. For the problem of wages he proposed the iron law of wages, according to which wages tend to stabilize around the subsistence level. Any rise in wage rates above subsistence will cause the working population to increase to the point that heightened competition among the glut of laborers will merely cause their wages to fall back to the subsistence level. As far as value was concerned, Ricardo stated that the value of almost any good was, essentially, a function of the labor needed to produce it. According to his labor theory of value, a clock costing $100 required 10 times as much labor for its production as did a pair of shoes costing $10.

In an age of the commoditization of everything — manufacturing becomes cheaper and cheaper and will ultimately turn out free goods through nanofactories — what are the implications? Let’s get grounded in some fundamental theory before we speculate on the future…

Original Work by David Ricardo

Labor, like all other things which are purchased and sold, and which may be increased or diminished in quantity, has its natural and its market price. The natural price of labor is that price which is necessary to enable the laborers, one with another, to subsist and to perpetuate their race, without either increase or diminution.

The power of the laborer to support himself, and the family which may be necessary to keep up the number of laborers, does not depend on the quantity of money which he may receive for wages, but on the quantity of food, necessaries, and conveniences become essential to him from habit which that money will purchase. The natural price of labor, therefore, depends on the price of the food, necessaries, and conveniences required for the support of the laborer and his family. With a rise in the price of food and necessaries, the natural price of labor will rise; with the fall in their price, the natural price of labor will fall.

With the progress of society the natural price of labor has always a tendency to rise, because one of the principal commodities by which its natural price is regulated has a tendency to become dearer from the greater difficulty of producing it. As, however, the improvements in agriculture, the discovery of new markets, whence provisions may be imported, may for a time counteract the tendency to a rise in the price of necessaries, and may even occasion their natural price to fall, so will the same causes produce the correspondent effects on the natural price of labor.

The natural price of all commodities, excepting raw produce and labor, has a tendency to fall in the progress of wealth and population; for though, on one hand, they are enhanced in real value, from the rise in the natural price of the raw material of which they are made, this is more than counterbalanced by the improvements in machinery, by the better division and distribution of labor, and by the increasing skill, both in science and art, of the producers.

The market price of labor is the price which is really paid for it, from the natural operation of the proportion of the supply to the demand; labor is dear when it is scarce and cheap when it is plentiful. However much the market price of labor may deviate from its natural price, it has, like commodities, a tendency to conform to it.

It is when the market price of labor exceeds its natural price that the condition of the laborers is flourishing and happy, that he has it in his power to command a greater proportion of the necessaries and enjoyments of life, and therefore to rear a healthy and numerous family. When, however, by the encouragement which high wages give to the increase of population, the number of laborers is increased, wages again fall to their natural price, and indeed from a reaction sometimes fall below it.

When the market price of labor is below its natural price, the condition of the laborers is most wretched: then poverty deprives them of those comforts which custom renders absolute necessaries. It is only after their privations have reduced their number, or the demand for labor has increased, that the market price of labor will rise to its natural price, and that the laborer will have the moderate comforts which the natural rate of wages will afford.

Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse which an increased capital gives to a new demand for labor be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labor may give a continued stimulus to an increase of people.

Capital is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, machinery, etc., necessary to give effect to labor.

Capital may increase in quantity at the same time that its value rises. An addition may be made to the food and clothing of a country at the same time that more labor may be required to produce the additional quantity than before; in that case not only the quantity but the value of capital will rise.

Or capital may increase without its value increasing, and even while its value is actually diminishing; not only may an addition be made to the food and clothing of a country, but the addition may be made by the aid of machinery, without any increase, and even with an absolute diminution in the proportional quantity of labor required to produce them. The quantity of capital may increase, while neither the whole together, nor any part of it singly, will have a greater value than before, but may actually have a less.

In the first case, the natural price of labor, which always depends on the price of food, clothing, and other necessaries, will rise; in the second, it will remain stationary or fall; but in both cases the market rate of wages will rise, for in proportion to the increase of capital will be the increase in the demand for labor; in proportion to the work to be done will be the demand for those who are to do it.

In both cases, too, the market price of labor will rise above its natural price; and in both cases it will have a tendency to conform to its natural price, but in the first case this agreement will be most speedily effected. The situation of the laborer will be improved, but not much more improved; for the increased price of food and necessaries will absorb a large portion of his increased wages; consequently a small supply of labor, or a trifling increase in the population, will soon reduce the market price to the then increased natural price of labor.

In the second case, the condition of the laborer will be very greatly improved; he will receive increased money wages without having to pay any increased price, and perhaps even a diminished price for the commodities which he and his family consume; and it will not be till after a great addition has been made to the population that the market price of labor will again sink to its then low and reduced natural price.

Thus, then, with every improvement of society, with every increase in its capital, the market wages of labor will rise; but the permanence of their rise will depend on the question whether the natural price of labor has also risen; and this again will depend on the rise in the natural price of those necessaries on which the wages of labor are expended.