An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith [e book reader pdf TXT] 📗

account, imagine that the price of

provisions has no influence upon that of labour. The money price of labour

is necessarily regulated by two circumstances; the demand for labour, and

the price of the necessaries and conveniencies of life. The demand for

labour, according as it happens to be increasing, stationary, or declining,

or to require an increasing, stationary, or declining population, determines

the quantities of the necessaries and conveniencies of life which must be

given to the labourer; and the money price of labour is determined by what

is requisite for purchasing this quantity. Though the money price of labour,

therefore, is sometimes high where the price of provisions is low, it would

be still higher, the demand continuing the same, if the price of provisions

was high.

 

It is because the demand for labour increases in years of sudden and

extraordinary plenty, and diminishes in those of sudden and extraordinary

scarcity, that the money price of labour sometimes rises in the one, and

sinks in the other.

 

In a year of sudden and extraordinary plenty, there are funds in the hands

of many of the employers of industry, sufficient to maintain and employ a

greater number of industrious people than had been employed the year before

; and this extraordinary number cannot always be had. Those masters,

therefore, who want more workmen, bid against one another, in order to get

them, which sometimes raises both the real and the money price of their

labour.

 

The contrary of this happens in a year of sudden and extraordinary scarcity.

The funds destined for employing industry are less than they had been the

year before. A considerable number of people are thrown out of employment,

who bid one against another, in order to get it, which sometimes lowers both

the real and the money price of labour. In 1740, a year of extraordinary

scarcity, many people were willing to work for bare subsistence. In the

succeeding years of plenty, it was more difficult to get labourers and

servants. The scarcity of a dear year, by diminishing the demand for labour,

tends to lower its price, as the high price of provisions tends to raise it.

The plenty of a cheap year, on the contrary, by increasing the demand, tends

to raise the price of labour, as the cheapness of provisions tends to lower

it. In the ordinary variations of the prices of provisions, those two

opposite causes seem to counterbalance one another, which is probably, in

part, the reason why the wages of labour are everywhere so much more steady

and permanent than the price of provisions.

 

The increase in the wages of labour necessarily increases the price of many

commodities, by increasing that part of it which resolves itself into wages,

and so far tends to diminish their consumption, both at home and abroad. The

same cause, however, which raises the wages of labour, the increase of

stock, tends to increase its productive powers, and to make a smaller

quantity of labour produce a greater quantity of work. The owner of the

stock which employs a great number of labourers necessarily endeavours, for

his own advantage, to make such a proper division and distribution of

employment, that they may be enabled to produce the greatest quantity of

work possible. For the same reason, he endeavours to supply them with the

best machinery which either he or they can think of. What takes place among

the labourers in a particular workhouse, takes place, for the same reason,

among those of a great society. The greater their number, the more they

naturally divide themselves into different classes and subdivisions of

employments. More heads are occupied in inventing the most proper machinery

for executing the work of each, and it is, therefore, more likely to be

invented. There me many commodities, therefore, which, in consequence of

these improvements, come to be produced by so much less labour than be.

fore, that the increase of its price is more than compensated by the

diminution of its quantity.

 

CHAPTER IX.

 

OF THE PROFITS OF STOCK.

 

The rise and fall in the profits of stock depend upon the same causes with

the rise and fall in the wages of labour, the increasing or declining state

of the wealth of the society ; but those causes affect the one and the other

very differently.

 

The increase of stock, which raises wages, tends to lower profit. When the

stocks of many rich merchants are turned into the same trade, their mutual

competition naturally tends to lower its profit; and when there is a like

increase of stock in all the different trades carried on in the same

society, the same competition must produce the same effect in them all.

 

It is not easy, it has already been observed, to ascertain what are the

average wages of labour, even in a particular place, and at a particular

time. We can, even in this case, seldom determine more than what are the

most usual wages. But even this can seldom be done with regard to the

profits of stock. Profit is so very fluctuating, that the person who carries

on a particular trade, cannot always tell you himself what is the average of

his annual profit. It is affected, not only by every variation of price in

the commodities which he deals in, but by the good or bad fortune both of

his rivals and of his customers, and by a thousand other accidents, to which

goods, when carried either by sea or by land, or even when stored in a

warehouse, are liable. It varies, therefore, not only from year to year, but

from day to day, and almost from hour to hour. To ascertain what is the

average profit of all the different trades carried on in a great kingdom,

must be much more difficult; and to judge of what it may have been formerly,

or in remote periods of time, with any degree of precision, must be

altogether impossible.

 

But though it may be impossible to determine, with any degree of precision,

what are or were the average profits of stock, either in the present or in

ancient times, some notion may be formed of them from the interest of money.

It may be laid down as a maxim, that wherever a great deal can be made by

the use of money, a great deal will commonly be given for the use of it; and

that, wherever little can be made by it, less will commonly he given for it.

Accordingly, therefore, as the usual market rate of interest varies in any

country, we may be assured that the ordinary profits of stock must vary with

it, must sink as it sinks, and rise as it rises. The progress of interest,

therefore, may lead us to form some notion of the progress of profit.

 

By the 37th of Henry VIII. all interest above ten per cent. was declared

unlawful. More, it seems, had sometimes been taken before that. In the reign

of Edward VI. religious zeal prohibited all interest. This prohibition,

however, like all others of the same kind, is said to have produced no

effect, and probably rather increased than diminished the evil of usury. The

statute of Henry VIII. was revived by the 13th of Elizabeth, cap. 8. and ten

per cent. continued to be the legal rate of interest till the 21st of James

I. when it was restricted to eight per cent. It was reduced to six per cent.

soon after the Restoration, and by the 12th of Queen Anne, to five per cent.

All these different statutory regulations seem to have been made with great

propriety. They seem to have followed, and not to have gone before, the

market rate of interest, or the rate at which people of good credit usually

borrowed. Since the time of Queen Anne, five per cent. seems to have been

rather above than below the market rate. Before the late war, the government

borrowed at three per cent. ; and people of good credit in the capital, and

in many other parts of the kingdom, at three and a-half, four, and four and

a-half per cent.

 

Since the time of Henry VIII. the wealth and revenue of the country have

been continually advancing, and in the course of their progress, their pace

seems rather to have been gradually accelerated than retarded. They seem not

only to have been going on, but to have been going on faster and faster. The

wages of labour have been continually increasing during the same period,

and, in the greater part of the different branches of trade and

manufactures, the profits of stock have been diminishing.

 

It generally requires a greater stock to carry on any sort of trade in a

great town than in a country village. The great stocks employed in every

branch of trade, and the number of rich competitors, generally reduce the

rate of profit in the former below what it is in the latter. But the wages

of labour are generally higher in a great town than in a country village. In

a thriving town, the people who have great stocks to employ, frequently

cannot get the number of workmen they want, and therefore bid against one

another, in order to get as many as they can, which raises the wages of

labour, and lowers the profits of stock. In the remote parts of the

country, there is frequently not stock sufficient to employ all the people,

who therefore bid against one another, in order to get employment, which

lowers the wages of labour, and raises the profits of stock.

 

In Scotland, though the legal rate of interest is the same as in England,

the market rate is rather higher. People of the best credit there seldom

borrow under five per cent. Even private bankers in Edinburgh give four per

cent. upon their promissory-notes, of which payment, either in whole or in

part may be demanded at pleasure. Private bankers in London give no interest

for the money which is deposited with them. There are few trades which

cannot be carried on with a smaller stock in Scotland than in England. The

common rate of profit, therefore, must be somewhat greater. The wages of

labour, it has already been observed, are lower in Scotland than in England.

The country, too, is not only much poorer, but the steps by which it

advances to a better condition, for it is evidently advancing, seem to be

much slower and more tardy.

The legal rate of interest in France has not during the course of the present century, been

always regulated by the market rate { See Denisart, Article Taux des Interests, tom. iii, p.13}.

In 1720, interest was reduced from the twentieth to the fiftieth penny, or from five to two per

cent. In 1724, it was raised to the thirtieth penny, or to three and a third per cent. In 1725, it

was again raised to the twentieth penny, or to five per cent. In 1766, during the administration

of Mr Laverdy, it was reduced to the twenty-fifth penny, or to four per cent. The Abb� Terray

raised it afterwards to the old rate of five per cent. The supposed purpose of many of those

violent reductions of interest was to prepare the way for reducing that of the public debts ; a

purpose which has sometimes been executed. France is, perhaps, in the present times, not so

rich a country as England; and though the legal rate of interest has in France frequently been

lower than in England, the market rate has generally been higher; for there, as in other

countries, they have several very safe and easy methods of evading the law. The profits of

trade, I have been assured by British merchants who had traded in both countries, are higher