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Book 1, Chapter 9
Themes
Key
LitCharts assigns a color and icon to each theme in The Wealth of Nations, which you can use to track the themes throughout the work.
Labor, Markets, and Growth
Capital Accumulation and Investment
Institutions and Good Governance
Mercantilism and Free Trade
Money and Banking
Summary
Analysis
In a society where people are perfectly free to choose their jobs and investments, the market will tend toward equality: people will crowd into the best jobs and investments (whose wages and profit rates will then fall) and abandon the worst ones (whose wages and profit rates will then rise). Eventually, all occupations will have the same wage and profit rates. But this doesn’t happen in the real world for two reasons: different occupations have their own intrinsic advantages and disadvantages, and people aren’t truly free to choose theirs. This chapter will deal with those two effects separately, one after the other.
Smith again uses an ideal model to show how perfect competition would work, and then contrasts that model with how the economy actually works. In theory, just like competition among capital owners would bring the whole economy toward a standard profit rate, competition among workers would bring their pay in line with an average wage. But in reality, capital can move between different places and industries far more easily than labor. This is even more true today than it was in Smith’s era. Altogether, it means that profit rates are more uniform than wages.
Themes
“Part I. Inequalities arising from the Nature of the Employments themselves.” There are five main reasons that some employments are better-paid and/or more profitable than others. First, some jobs pay less because they are more intrinsically enjoyable: they are easier, cleaner, and/or more respected. For instance, tailors make less than weavers because tailoring is easier than weaving; blacksmiths make less than coal miners because mining is dirty, dangerous, and uncomfortable; and public executioners make unusually high wages because their occupation is so dishonorable. Similarly, in advanced societies, hunting and fishing turn from serious occupations into pleasurable hobbies, while professional hunters and fishermen are often poor. In contrast, inns and bars are highly profitable businesses because of their sordidness.
Smith’s first criterion reflects the common wisdom that people who love their jobs are willing to work for less than their labor is really worth, while people who hate their jobs will only continue to do them if high pay makes up for their unhappiness at work. The honor or dishonor, pleasure or displeasure, and comfort or discomfort associated with a job can thus be seen as a kind of hidden bonus or tax on top of the worker’s wage. In the 21st century, Smith’s analysis can help us understand why artists, teachers, and care workers are underpaid relative to the value they create for society. Namely, people tend to choose these professions at least in part because doing them is intrinsically rewarding.
Themes
Second, the easier and cheaper an occupation is to learn, the lower its wages. Like complex machinery, workers in highly skilled industries require lots of upfront investment, which takes the form of education. For instance, in Europe, skilled tradespeople (“mechanics, artificers, and manufacturers”) must first go through an apprenticeship. During this time, someone else needs to pay for the worker’s subsistence, and everything they produce goes to their master. In contrast, country laborers usually learn on the job and maintain themselves, so they don’t need an upfront investment to start. This is why skilled tradespeople make higher wages than common laborers. In turn, artists, lawyers, doctors, and other people who require a liberal education make even more. This principle applies to wages, but not to profits, since it is not much more difficult to invest in one kind of business than another.
The education required for skilled work creates barriers to entry. Artisans and doctors can easily become farmers if they wish, but farmers cannot easily practice skilled trades or medicine without several years of training. Thus, educational requirements naturally restrict the supply of people able to perform skilled work, while burdening them with upfront costs in terms of both money and time. For their effort to be worth its while, these costs must get priced into their wages. The tradespeople Smith describes need a specific education in one particular skill, while the professionals he mentions require a more extensive general education.
Themes
Third, the constancy of employment shapes wages. For instance, bricklayers cannot work in certain kinds of weather, so they often miss days of work, while carpenters can work any day they want. This is why bricklayers make higher wages than carpenters. Similarly, coal miners in northern England make less than the men who haul the coal off ships in London, because these ships only arrive irregularly. Constancy only affects wages, not profits.
Constancy is just another word for regularity or predictability: workers who know they will get paid every week can live paycheck-to-paycheck, while workers who only get paid occasionally will need to save if they want to survive lean periods. Today, this principle applies to many entertainers and freelance creative workers. They spend much of their time securing work or between gigs, so they have to make up for it by earning higher wages during the hours they actually spend working.
Themes
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Fourth, wages vary depending on the trust bestowed on an occupation. For example, people trust their precious possessions to jewelers, their health to physicians, and their freedom and reputation to lawyers, so it’s only natural that these occupations are all well-paid. Like constancy, trust only affects wages, not profits.
Trusted professionals earn a premium for their discernment and moral character, as well as the personal risk they incur by practicing. Examples of this principle today include the additional cost of professional licensing or doctors’ malpractice insurance.
Themes
Fifth and finally, the odds of success in any given business affect its wages. Shoemaking apprentices are likely to become master shoemakers, while most law students do not become successful lawyers. While successful lawyers may earn more than successful shoemakers, in reality, professionals like lawyers are still under-compensated relative to the true risks of joining their occupations. But “the most generous and liberal” people still flock to such professions for two reasons: these jobs are highly respected, and most people overestimate their own abilities. Success in this kind of profession is a clear mark of “genius or superior talents.” In fact, recognition for such talents is the main form of compensation for some professions, like poetry and philosophy. Musicians also get recognized for their special talents, but their profession is considered dishonorable, and they must get paid extra to compensate.
Smith's analysis suggests that salaries will tend to be the most unequal in the most competitive professions. Bad shoemakers can still expect a steady stream of work, while bad lawyers will often struggle to find clients, and nobody will pay to learn from any but the absolute best poets and philosophers. Of course, many professions have changed significantly since the 18th century. For instance, in most of the world, music is no longer considered a sinful and dishonorable profession that can command a wage premium; rather, like fishing and hunting, it has become an intrinsically enjoyable, but very unprofitable thing that people do more often as a hobby.
Themes
People typically overestimate their odds of success because they are too optimistic about their abilities and luck. Lotteries are profitable because people overvalue their chances of gain, and insurance companies are profitable because they underestimate their chances of loss. Young people are the most prone to this bias, which is why they become soldiers and sailors, choosing a life of discomfort and danger for a small chance at wealth and glory. In reality, most of them make no more than common laborers.
Smith again points out the contradiction between ideal models of human economic behavior and the stark realities of actual human psychology. Again, this should remind readers that Smith was a moral philosopher by profession. Indeed, his earlier work focused largely on human emotions and moral judgments. He did not share modern economists’ assumption that people behave rationally. Rather, his models of prices and markets show that human behavior looks rational in the aggregate, because the people who make the most rational decisions tend to succeed.
Themes
In this way, while ordinary unwholesomeness deters people from joining a profession (and raises its wages), the promise of adventure and surmountable danger instead attracts young people to the army and the seas (and doesn’t raise their wages). Profit rates typically rise in riskier businesses, but these are also the most likely to go bankrupt. Smuggling is the riskiest of all. But people overestimate their chances of success in such industries and crowd into the market, which leaves their profit rates insufficient to compensate for the risks they incur.
Unwholesome professions (like coal mining and ditch digging) are unpleasant and unglamorous, while adventurous professions (like military service) are dangerous but glamorous. Humans’ predictable overconfidence distorts markets by allowing employers to hire unassuming young people into dangerous professions without adequately compensating them for the risk—much like humans’ passion for art, music, and storytelling lowers wages in entertainment professions. Again, where overconfident workers lose in terms of wages, their employers gain in terms of profits.
Themes
Of the five factors that affect wages, only agreeableness and risk also affect profits. This is why, in a given time and place, profit rates across industries tend to be more similar than wages across them. Specialist professions like apothecaries and country merchants may seem to have very high profit margins, but actually, most of their pay should be seen as wages for their skill, knowledge, and trustworthiness. Wholesale prices are cheaper because wages make up a smaller portion of them, and the lower profit rates in large cities make goods cheaper there, so long as transportation costs are not much higher. In small towns, profit rates are high, but there is nowhere to invest that profit. In cities, profit rates are lower but there are endless investment opportunities. Most urban fortunes are the product of diligent, lifelong hard work and investment, but others arise suddenly from commodity speculation.
Self-employed independent tradespeople, like apothecaries (pharmacists) and merchants, are not just workers and not just business owners. Rather, they are a mix of both, so their pay is a mix of wages and profit. This can make the underlying economic dynamics of their industries difficult to grasp. Smith’s distinction between wholesalers and small-scale (or retail) merchants reflects this. Wholesalers and retailers might spend the exact same amount of time on their businesses, and therefore be owed the same wage. But wholesalers buy and sell far more goods, so their labor adds less to the price of those goods. Lastly, the relationship between towns and cities resembles the relationship between less and more developed economies that Smith described in the previous part of Book I. Less developed economies and smaller towns enjoy high profit rates over a low volume of business, while more developed economies and large cities see lower profit rates but much higher volume.
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For agreeableness, education, constancy, trust, and risk to reliably shape wages, three other factors must also hold. First, this only applies to old, established trades. Getting people to join a new, unproven trade requires paying them extra-high wages (and often leads to higher profits). Second, jobs must be in their “natural state,” meaning that there are typical levels of demand. For instance, the demand for soldiers and sailors skyrockets during war, and weather leads to highly variable grain and tobacco harvests from year to year.
New trades are inherently uncertain and often collapse, so people who join them must be compensated for their risk taking. And demand for labor affects prices just like the demand for any other good. When war breaks out in the modern world, people must often quit their other jobs to become soldiers, which creates a scarcity in all kinds of labor. This is why wages tend to spike and new groups of workers (like women and minority communities) tend to be invited into the workforce during wartime.
Themes
Third and finally, these wage effects only apply to people’s primary sources of employment. People with significant leisure time often spend it doing other activities for comparatively low wages. For instance, many servants living on Scottish farms spend their free time knitting stockings and spinning yarn, which accordingly command lower prices than they would otherwise. Similarly, even though London has the most expensive land prices in Europe, rent for a furnished room is relatively cheap there because most London tradespeople rent entire multi-story houses, then let out a few rooms to help cover their housing costs. These landlords’ primary income comes from their trade, whereas landlords in other places live first and foremost off their tenants.
People do the kinds of side jobs that Smith outlines here in order to monetize the idle time when they cannot perform their main jobs. Thus, it makes little sense to compare their wages from their side jobs to their wages from their main jobs. Smith's insights about secondary employment here are particularly relevant to the 21st century. Today, digital and gig work have made it easier than ever before for people to monetize their free time. But hobbies like knitting generally don’t earn people supplemental income anymore, and part-time landlords generally charge market rents.
Themes
“Part II. Inequalities occasioned by the Policy of Europe.” By making the market deviate from “perfect liberty,” national policies exacerbate wage and profit inequalities in three ways. First, they restrict competition by giving professional associations (also called corporations) exclusive privileges over particular trades and defining apprenticeship requirements. For instance, most English tradespeople are only allowed two apprentices, who must work for seven years before they can set up shop on their own. The regulations vary in France and Scotland.
Part I of this chapter explained why the inherent qualities of different jobs lead wages to vary across the economy. Now, Part II will explain how policies prevent people from truly choosing their jobs. Just like a monopoly distorts the market by depriving consumers of free choice, these policies distort the market by preventing workers from moving from jobs where they are underpaid to jobs where they are adequately compensated. The system of corporations and apprenticeships that Smith describes here was essentially Britain’s version of the guild system. For instance, every blacksmith had to join the blacksmiths’ corporation and go through a seven-year apprenticeship to exercise the trade, even if they were already capable of doing it. Smith doesn’t take issue with the existence of professional associations as such, but rather with the way governments have given them monopoly status, requiring people to join them in order to practice their trades.
Themes
Such rules are oppressive, because they infringe on people’s sacred right to their own labor. Further, apprenticeships don’t actually guarantee the quality of work, since most inadequate workmanship comes from fraud, not inability. And apprenticeships teach young people to choose idleness over hard work by preventing them from reaping the benefits of their labor for many years. Notably, the Greeks and Romans had no apprenticeships. And even complex artistic trades like watchmaking don’t require multi-year apprenticeships—they can be learned in a few weeks.
Smith’s complaint isn’t that apprenticeships are ineffective, but rather that they’re overkill: they involve far more training than people really need. This proves that their true purpose is to monopolize their professions by creating barriers to entry, and not to guarantee quality (which is still a noble and important goal, especially in highly specialized professions like medicine).
Themes
If young workers could instead start out as journeymen, paying for the materials they use and getting paid for their work, they would learn faster and more cheaply. Masters would lose out on their revenue from apprentices, and competition would likely drive tradespeople’s wages and profits down, but the public would benefit from greater access to cheaper high-quality goods. Indeed, professional associations (or corporations) originally formed by paying the king in exchange for monopoly power over a certain trade in a certain area. By keeping the market under-stocked with both tradespeople and goods, these corporations increase prices, wages, and profits.
The distinction between apprentices and journeymen would be similar to the distinction between unpaid interns and paid assistants today. Journeymen see a clear link between their performance and their compensation, but apprentices merely spend several years waiting to see the fruits of their labor. Thus, journeymen have incentives to learn and improve, but apprentices do not. Smith’s analysis of professional associations’ monopoly power resembles many debates about antitrust law today. Notably, he emphasizes that only governments can create, regulate, or dismantle such monopolies—and the decisions they make deeply shape their people’s economic outcomes.
Themes
As these corporations take over a town’s trades, both prices and wages rise. This has enriched towns at the expense of rural areas, which send raw goods to towns and buy manufactured goods from them. Accordingly, most of Europe’s fortunes are made in towns, not the countryside. This dynamic constantly draws more capital and labor to towns—where it’s easier for people to organize into corporations. This is why there are no farming apprentices, even though their profession is far more complex than most urban ones. (It requires adapting to a wide range of uncertain conditions, rather than repeatedly performing one or two simple tasks.) High taxes on imported goods also unjustly enrich tradespeople in towns by protecting them against foreign competition. Farmers, common laborers, and landlords generally don’t have associations, so they end up paying the price of professional associations’ greed.
Cities generally grow faster than rural areas because manufacturing and services are concentrated in them, but this doesn’t have to mean that cities actively impoverish rural areas—as they did in Smith’s time, due to their monopoly power. In a fairer economy without guild monopolies, rural Europeans would also find their quality of life steadily improving. Later on, Smith will explore the ideas he presents here in more depth and historical perspective. He will analyze the history of unequal development between Europe’s rural and urban areas in Book III, and he will discuss import taxes’ effect on prices and people’s economic welfare at length in Book IV.
Themes
In Britain, towns’ advantage over the country is shrinking. This is because, as town industries grew larger and more profitable, they accumulated more and more capital stock, which they invested back into their operations. This increased competition, reducing prices and profit levels, until tradespeople found it more profitable to start investing in rural areas. Such “overflowings of the stock originally accumulated in the towns” returns wealth to the countryside.
The “overflowings” that Smith describes here offer another example of how the market can correct itself in the long term. Once wealth and activity become too concentrated in cities, it becomes more profitable to invest outside them. But notably, this does not mean that the market can overcome Britain’s monopolistic guild system on its own. Rather, those monopolies are just investing more evenly across the country, in order to increase their own profits even further.
Themes
When people in the same trade assemble, they often conspire to raise prices. The law can’t ban such assemblies, but it should avoid encouraging them by requiring tradespeople to register, work together for charity, or incorporate an association. Discerning customers keep tradespeople honest, while trade associations more often protect bad actors.
Curiously, Smith proposes establishing professional associations to cure the precise ills caused by professional associations and their monopoly power. In a nutshell, he argues that a transparent and publicly accountable monopoly is better than one that operates behind closed doors.
Themes
The second way that policy drives inequalities in wages and profits is by artificially increasing competition. For instance, public scholarships and prizes draw too many people to certain professions, such as the clergy, which accordingly pays less than trades like masonry and shoemaking. While lawyers and physicians are well-paid because they generally fund their own education, the teaching profession is equally challenging but poorly paid because it is “crowded with indigent people who have been brought up to it at the public expense.” In contrast, teachers were very wealthy in ancient Greece because their students paid them directly. Still, the current oversupply of teachers is a good thing overall, as it makes education far more affordable to the public.
The public subsidies that Smith depicts here are exactly the opposite of the monopolies he just described. They are also undesirable, because they distort the market. But they tend to mainly hurt the people in the subsidized professions, rather than consumers. So while monopolies are almost never justified (except in the case of utilities), subsidies are often worthwhile when they lead to socially desirable outcomes. Smith’s analysis of how teachers respond to economic incentives was the basis of his famous claim that he received a far better education at Scottish universities than at Oxford and Cambridge, where instructors rested on their laurels.
Themes
The third and final way that policy drives wage and profit inequalities is by preventing labor and capital from moving freely across different places and employments. Apprenticeship prevents people from switching occupations and local corporation privileges prevent them from exercising the same occupation in a different place. As a result, workers generally cannot switch from declining, low-wage industries to prosperous, high-wage ones. Since capital needs labor to make profit, such rules also restrict the free circulation of capital stock—although there are usually fewer restrictions targeting capital directly, and merchants can generally move from place to place with relative ease.
If people can easily move from weak labor markets to strong ones and underpaid professions to better-paid ones, then the economy will be more efficient overall because society will be allocating its time, resources, and talents toward the activities that produce the most economic benefit. Once again, the asymmetry in freedom of movement between labor and capital gives employers an unfair advantage in the economy, because they can discard workers more easily than workers can leave them. Contemporary debates about globalization and outsourcing are clear examples of this principle.
Themes
England’s Poor Laws further restrict labor and capital by requiring that each parish support its own poor people. The laws make it extremely difficult to gain settlement (legal residency) in a new parish, so the poor can really only live and work in the parish of their birth. A certificate system has promised to solve this problem by letting poor people work in other parishes, but parish officials don’t want to support people who are working elsewhere, so they simply refuse most certificate requests. As a result, the poor cannot move wherever they find the best jobs, and so labor costs vary widely from place to place in Britain. Forcibly returning people to their legal parishes is also a major violation of liberty.
Contemporary readers are most likely to know about the English Poor Laws from Victorian literature, and particularly the work of Charles Dickens. Smith’s point isn’t that the government shouldn’t take care of the poor—in fact, for all the squalor in Dickens, England was actually quite progressive in its approach to poverty. As Smith will point out later on, France was far more unequal and repressive in his day, before its revolution. Rather, Smith argues that England’s attempts to improve life for the poor have been counterproductive. They have locked poor people out of the economy, turning them into an underclass, thereby exacerbating the very problem they were designed to solve. Readers may be familiar with this line of argumentation from debates about American mass incarceration today.
Themes
Laws and judges used to set wages, but don't anymore because this dissuades people from working hard and innovating. Parliament still passes labor regulations, which generally just help masters increase their profits. Similarly, while the government no longer sets the prices for all different goods, there are still strict rules on bread weight, price, and quality. Finally, a country’s level of wealth and economic growth doesn’t meaningfully shape the balance between wages and profits—rather, it increases or decreases them while keeping them in the same proportion.
Smith points out how, like the Poor Laws, many economic regulations actually lead to the opposite of their intended effect by creating perverse incentives. Standardized wages take away the incentive to improve productivity and Parliament chooses regulations that enrich companies over those that help workers. Ultimately, these are all the government’s way of taking employers’ side in the perpetual conflict between them and their workers—or what later economists like Marx and his followers would call the class struggle.
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