Barack Obama, Adam Smith, and the Minimum Wage

by Timothy Taylor, Conversable Economist

Posted originally at Conversable Economist, o6 December 2013.

In a speech recently on economic mobility, President Barack Obama quoted Adam Smith in support of a higher minimum wage. Given that minimum wage laws were not a hot topic in 1776 when The Wealth of Nations was published, I went looking for context.

Here’s the comment from the transcript of President Obama’s speech:

[I]t’s well past the time to raise a minimum wage that in real terms right now is below where it was when Harry Truman was in office. (Applause) This shouldn’t be an ideological question. It was Adam Smith, the father of free-market economics, who once said, “They who feed, clothe, and lodge the whole body of the people should have such a share of the produce of their own labor as to be themselves tolerably well fed, clothed, and lodged.” And for those of you who don’t speak old-English – (laughter) – let me translate. It means if you work hard, you should make a decent living.

The quotation appears in Book I, Chapter 8, of The Wealth of Nations. I quote here from the ever-useful version of the book at the Library of Economics and Liberty website. At no point in the chapter is Smith considering the advantages of a minimum wage; however, he points out that in the politics of the time, there were occasionally political proposals to hold wages lower. He argues that the real standard of living for common workers – that is, what a common worker can afford to buy – has been rising, in large part due to technological improvements. Obama’s proffered quotation comes up when Smith is explaining that this increase in real wages over time should not be viewed as a cause for concern. Here’s the full passage:

The real recompence of labour, the real quantity of the necessaries and conveniencies of life which it can procure to the labourer, has, during the course of the present century, increased perhaps in a still greater proportion than its money price. Not only grain has become somewhat cheaper, but many other things, from which the industrious poor derive an agreeable and wholesome variety of food, have become a great deal cheaper. Potatoes, for example, do not at present, through the greater part of the kingdom, cost half the price which they used to do thirty or forty years ago. The same thing may be said of turnips, carrots, cabbages; things which were formerly never raised but by the spade, but which are now commonly raised by the plough. All sort of garden stuff too has become cheaper. The greater part of the apples and even of the onions consumed in Great Britain were in the last century imported from Flanders. The great improvements in the coarser manufactures of both linen and woollen cloth furnish the labourers with cheaper and better cloathing; and those in the manufactures of the coarser metals, with cheaper and better instruments of trade, as well as with many agreeable and convenient pieces of houshold furniture. Soap, salt, candles, leather, and fermented liquors, have, indeed, become a good deal dearer; chiefly from the taxes which have been laid upon them. The quantity of these, however, which the labouring poor are under any necessity of consuming, is so very small, that the increase in their price does not compensate the diminution in that of so many other things. The common complaint that luxury extends itself even to the lowest ranks of the people, and that the labouring poor will not now be contented with the same food, cloathing and lodging which satisfied them in former times, may convince us that it is not the money price of labour only, but its real recompence, which has augumented.

Is this improvement in the circumstances of the lower ranks of the people to be regarded as an advantage or as an inconveniency to the society? The answer seems at first sight abundantly plain. Servants, labourers and workmen of different kinds, make up the far greater part of every great political society. But what improves the circumstances of the greater part can never be regarded as an inconveniency to the whole. No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable. It is but equity, besides, that they who feed, cloath and lodge the whole body of the people, should have such a share of the produce of their own labour as to be themselves tolerably well fed, cloathed and lodged.

With his characteristic hard-headedness, Smith is in no doubt that employers want to hold wages low, and are making continual efforts to do so.

Masters are always and every where in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate. To violate this combination is every where a most unpopular action, and a sort of reproach to a master among his neighbours and equals. We seldom, indeed, hear of this combination, because it is the usual, and one may say, the natural state of things which nobody ever hears of.

However, Smith argues that wages for common workers are largely determined by whether the economy is in a “progressive” state of expanding, a stationary state, or a declining state.

It deserves to be remarked, perhaps, that it is in the progressive state, while the society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the labouring poor, of the great body of the people, seems to be the happiest and the most comfortable. It is hard in the stationary, and miserable in the declining state. The progressive state is in reality the cheerful and the hearty state to all the different orders of the society. The stationary is dull; the declining melancholy.

Smith grapples here with a difficult question for his time. England was richer than the North American settlements at this time, but wages for common workers (measured in terms of what they could buy) were much higher in North America. Thus, Smith formulates an argument that when an economy is rapidly expanding, common workers are better off, but if an economy has slow growth – even if that economy has high overall per capita income – then wages for common workers will be flat or even declining.  Smith writes:

It is not, accordingly, in the richest countries, but in the most thriving, or in those which are growing rich the fastest, that the wages of labour are highest. England is certainly, in the present times, a much richer country than any part of North America. The wages of labour, however, are much higher in North America than in any part of England. In the province of New York, common labourers earn three shillings and sixpence currency, equal to two shillings sterling, a day; ship carpenters, ten shillings and sixpence currency, with a pint of rum worth sixpence sterling, equal in all to six shillings and sixpence sterling; house carpenters and bricklayers, eight shillings currency, equal to four shillings and sixpence sterling; journeymen taylors, five shillings currency, equal to about two shillings and ten pence sterling. These prices are all above the London price; and wages are said to be as high in the other colonies as in New York. The price of provisions is every where in North America much lower than in England. A dearth has never been known there. In the worst seasons, they have always had a sufficiency for themselves, though less for exportation. If the money price of labour, therefore, be higher than it is any where in the mother country, its real price, the real command of the necessaries and conveniencies of life which it conveys to the labourer, must be higher in a still greater proportion.

But though North America is not yet so rich as England, it is much more thriving, and advancing with much greater rapidity to the further acquisition of riches. The most decisive mark of the prosperity of any country is the increase of the number of its inhabitants. In Great Britain, and most other European countries, they are not supposed to double in less than five hundred years. In the British colonies in North America, it has been found, that they double in twenty or five-and-twenty years. Nor in the present times is this increase principally owing to the continual importation of new inhabitants, but to the great multiplication of the species. Those who live to old age, it is said, frequently see there from fifty to a hundred, and sometimes many more, descendants from their own body. Labour is there so well rewarded that a numerous family of children, instead of being a burthen is a source of opulence and prosperity to the parents. The labour of each child, before it can leave their house, is computed to be worth a hundred pounds clear gain to them. A young widow with four or five young children, who, among the middling or inferior ranks of people in Europe, would have so little chance for a second husband, is there frequently courted as a sort of fortune. The value of children is the greatest of all encouragements to marriage. We cannot, therefore, wonder that the people in North America should generally marry very young. Notwithstanding the great increase occasioned by such early marriages, there is a continual complaint of the scarcity of hands in North America. The demand for labourers, the funds destined for maintaining them, increase, it seems, still faster than they can find labourers to employ.

Smith’s argument is that in a stationary economy, even a stationary economy with high per capita income on average, the demand for common workers won’t be strong, and even may fall because employers have already hired all the lower-class workmen that they need. He raises the possibility that there might be “a country where the funds destined for the maintenance of labour were sensibly decaying” – what we would in modern times refer to as labor’s declining share of total income. Smith explains:

“Though the wealth of a country should be very great, yet if it has been long stationary, we must not expect to find the wages of labour very high in it. The funds destined for the payment of wages, the revenue and stock of its inhabitants, may be of the greatest extent; but if they have continued for several centuries of the same, or very nearly of the same extent, the number of labourers employed every year could easily supply, and even more than supply, the number wanted the following year. There could seldom be any scarcity of hands, nor could the masters be obliged to bid against one another in order to get them. The hands, on the contrary, would, in this case, naturally multiply beyond their employment. There would be a constant scarcity of employment, and the labourers would be obliged to bid against one another in order to get it. …”

There is always an embarrassingly high risk of anachronism when applying eighteenth-century writing to modern policy arguments. After all, Adam Smith was writing before the start of the Industrial Revolution and the two centuries of transformative economic growth that have followed, and he was writing before the development of arguments about how wages are linked to the marginal productivity of labor. But frankly, it is ridiculous to cite Adam Smith in support of minimum wage legislation. A more plausible argument, although still running a real risk of anachronism, would be that Adam Smith believed that rapid economic growth and a tight labor market–say, the situation of the U.S. economy in the mid to late 1990s – was the way to benefit ordinary workers.

NOTE: For a post on minimum wages in different countries, see my May 2013 post on “Some International Minimum Wage Comparisons.” For a post on how the minimum wage affects employment and prices, see my February 2013 post on “Minimum Wage and the Law of Many Margins.” For a post on proposals to raise the minimum wage, see my November 2012 post on“Minimum Wage to $9.50? $9.80? $10?”

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