Regulating the Supply of Labor

There has been a growing movement to reinterpret Adam Smith and his book The Wealth of Nations.  Smith has long been heralded by libertarians and neo-liberals as the father of free market capitalism, but in recent years he has been cited in support of such progressive issues as raising the minimum wage, increasing taxes on the wealthy and limiting the rates of interest on loans.  As the many young people have begun to doubt the virtues of a capitalist system these arguments suggest that the worst features of a capitalist economy—unemployment, poverty and its effects—were not inherent in Smith’s original vision, and that it’s possible to imagine a more benevolent form of capitalism that is more sympathetic to the working class. 

But is that what Adam Smith really intended?

Smith certainly would not have supported a minimum wage since he opposed any attempt to regulate the price of goods or labor believing the free market was always more efficient.  He even denied that it was possible to determine what proper wages should be.

“Where wages are not regulated by law, all that we can pretend to determine is what are the most usual; and experience seems to show that law can never regulate them properly, though it has often pretended to do so.”

One passage, in particular, has often been quoted in support of a living wage, or at least a subsistence minimum.

Immigrant Family, Jacob Riis

“A man must always live by his work, and his wages must at least be sufficient to maintain him.  They must even upon most occasions be somewhat more, otherwise it would be impossible for him to bring up a family, and the race of such workmen could not last beyond the first generation.”

However, people who quote this passage overlook a caveat that Smith offers later on:

“But one half the children born, it is computed, die before the age of manhood.  The poorest labourers, therefore, according to this account, must, one with another, attempt to rear at least four children, in order that two may have an equal chance of living to that age.”

At first glance this passage seems to advocate for sufficient wages to support a family, but according to Smith, wages should be low specifically in order to promote a high rate of childhood mortality.

“[I]t is only among the inferior ranks of people that the scantiness of subsistence can set limits to the further multiplication of the human species; and it can do so in no other way than by destroying a great part of the children.” 

This is how the free market determines a minimum wage—through supply and demand.  If the number of workers competing for jobs exceeds the demand, then wages will go down until the supply of labor is reduced through attrition.

“It is in this manner that the demand for men, like that for any other commodity, necessarily regulates the production of men.”

In smith’s vision unemployment, poverty and mortality were not flaws in the capitalist system; they were design features.