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Adam Smith's Theory of Natural Wages

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Adam smith’s theory of ‘natural’ wages

Adam Smith’s theory of natural wages begins with a socio-cultural concept of a subsistence wage towards which wages will tend to gravitate. The subsistence wage “must be at least sufficient to maintain him [the worker]” (Wealth of Nations, hereafter WN, I.viii.15) and in most occasions “be somewhat more; otherwise it would be impossible for him to bring up a family” (WN I.viii.15), by what proportion more Smith does not attempt to quantify (WN I.viii.15). Smith also proposes that the subsistence wage depends not only on meeting basic survival needs but is set at a level of “common humanity” (WN I.viii.16). As a result subsistence is a dynamic concept as economic progress and development prescribes that the human definition of necessity will change over time and “the labouring poor will not now be contented with the same food, cloathing (sic) and lodging which satisfied them in former times” (WN I.viii.35).

There are, however, difficulties with Smith’s notion of a subsistence wage which he himself appears to recognise. Smith observes that nowhere in Great Britain are wages “regulated by this lowest rate which is consistent with common humanity” (WN I.viii.28). Smith provides numerous examples of how the wage rate often does not correspond with the cost living (WN I.viii.29-34) and in fact regularly demonstrate an inverse relation (WN I.viii.32). The prevalence of such disparities means that in all cases but the worst scenario, that is the time and place where prices are highest and money wages lowest, the natural wage must be at some level above subsistence[1] (WN I.viii.29-34). Although Smith should be applauded on his discourse of the complexities of the wage rate the fact he concedes a subsistence wage does not persist widely in reality may be problematic for his supply and demand approach to the natural wage, which is…...

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