Adam Smith and Labour Markets.

Profile of Adam Smith. [A]

"By directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention." (The Wealth of Nations, Book IV, chapter 2)

Adam Smith has been much ridiculed for that quote. This criticism, I believe, is not entirely fair.

Smith's quote does reveal an unjustified faith in the virtues of some quasi-divine Market. But, unlike present-day free-market devotees, one can't accuse Smith of being a shameless apologist of The Market.

Take Smith's views on the labour market, expressed in Book I, chapters VIII through X.

For Smith, whatever appearances to the contrary, the employee/boss relationship has intrinsically antagonistic elements:

"The workmen desire to get as much, the masters to give as little, as possible. The former are disposed to combine in order to raise, the latter in order to lower, the wages of labour."

These opposed interests, however, are not equally matched:

"It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily: and the law, besides, authorises, or at least does not prohibit, their combinations, while it prohibits those of the workmen". (My emphasis)

Writing in 18th century Britain, Smith describes an unbalanced opposition of interests; at the time, modern balancing influences (legal trade unions -"workmen's combinations"- social welfare and industrial relations provisions) were still in the distant future. Today, they are becoming a thing of the past.

The recent Crooked Timber vs. Bleeding Heart Libertarians debate on Workplace Coercion, for those who followed it, should be eerily reminiscent of Smith in this regard.

Further, Smith goes to some length to expose the elephant in the room of modern economic policy discussions (one so hidden, it was left out of the debate mentioned above!):

"We rarely hear, it has been said, of the combinations of masters, though frequently of those of workmen. But whoever imagines, upon this account, that masters rarely combine, is as ignorant of the world as of the subject".

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Perhaps surprisingly, given the previous, Smith extended his laissez-faire views to the labour market. These views, however, would probably disappoint modern free-market libertarians.

While not approving of "workmen's combinations", Smith does not approve of government legislating against them, either:

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty or justice."

If there ever was one, that's an ironic twist to the Libertarian laissez-faire version.

But Smith goes further. After elaborating on how ineffectual legislative interventions to control wages were, he added:

"Whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters. When the regulation, therefore, is in favour of the workmen, it is always just and equitable; but it is sometimes otherwise when in favour of the masters When masters combine together, in order to reduce the wages of their workmen, they commonly enter into a private bond or agreement, not to give more than a certain wage, under a certain penalty. Were the workmen to enter into a contrary combination of the same kind, not to accept of a certain wage, under a certain penalty, the law would punish them very severely; and, if it dealt impartially, it would treat the masters in the same manner." (My emphasis)

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Even if one doesn't share all of it, Smith's 240-year-old vision still resounds recognizable to contemporary readers. And in it employers and employees, both, play a role based on naked self-interest. The role of employers, still, is dominant.

Contrast Smith's exposition to the corny moralizing of parliamentary opposition leader Tony Abbott, delineating an eventual pro-business Coalition's orientation:

"The small business people who put their houses on the line to create jobs deserve support from government, not broken promises." (My emphasis)

But it's not just politicians speaking on the employers' behalf. Here's economic expert Alan Kohler justifying government intervention to eliminate weekend penalty rates, because "it's not about the money; it's about managing the business".

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This is where this post ties in with the previous one. Referring to the media coverage on an alleged skilled labour shortage in the US, Peter Capelli (Wharton School of Management, UPenn):

"The idea of a skills gap [propagated by media experts] is the employer's diagnosis of the situation they're facing (...) If everybody's got the same problem, and you're all paying the same wage, it's probably the case that you're not paying enough. So the way markets work isn't you set the wage and say, 'Well, this is good enough'. You pay what it takes to get the people you need, and if wages have to go up, then so be it, right?" (My emphasis)

Image Credit:
[A]  Profile of Adam Smith, based on an original by James Tassie (1787). Wikipedia.