The Bargain — The Wage, Plate i

The wage looks, at first, like a price among prices — a rate quoted for an hour as a grocer quotes a rate for a pound. But it is the price of the one thing most people have to sell, themselves at work, and it is not quoted by nature; it is settled by a bargain. And the first great theorist of the market, the man whose name is invoked whenever the market is praised, was also the first to insist that this particular bargain is not struck between equals.

Adam Smith set the wage at the head of his inquiry, and described its formation without illusion. Wages, he wrote, depend everywhere upon the contract made between two parties whose interests are opposed: the workmen would get as much, the masters give as little, as they can. So far the account is symmetrical, a tug between two appetites. But Smith did not leave it there. The two parties, he observed, do not come to the contract with equal strength, and the inequality runs in a settled direction.¹

1. Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), Book I, chapter viii, Of the Wages of Labour — the founding treatment of the wage, and notable for placing the asymmetry of the bargain, rather than any harmony, at the start.

The first inequality is one of numbers and of law. The masters are few, and the few combine without effort or notice; the workers are many, and their combination is difficult to organize and, for most of history, was forbidden outright. Smith remarked that we seldom hear of the combinations of masters, not because they do not occur but because they are the usual, the natural, the tacit state of things — an understanding among employers not to raise wages, so ordinary that it goes unspoken and unremarked, while any corresponding movement among the workmen is loud, visible, and punished. The law, in his day and long after, lent its weight to one side of the scale and laid its penalties on the other.²

2. The legal asymmetry was soon formalized: in Britain the Combination Acts of 1799–1800 criminalized workers' associations (repealed 1824); elsewhere the common-law doctrine of criminal conspiracy served the same end, in the United States until the Wagner Act of 1935. The masters' tacit combinations drew no such penalty. The ninth plate, The Union, follows this thread to its reversal.

The second inequality is deeper, because it does not depend on law and cannot be repealed. It is an inequality of staying power. When the bargain stalls and neither side will move, the question becomes simply who can wait. Here the masters, Smith noted, "can hold out much longer": a man of property can live a year or two upon his accumulated stock without employing a single worker, whereas the worker, owning nothing but the week ahead, cannot subsist a week, and few a month, without his wage. Hunger sits at one side of the table only, and it is a negotiator that never tires and never relents. The worker must come to terms because he must eat; the master may wait because he need not.³

3. The quoted phrase is Smith's. His point is not that masters are crueler but that they are better positioned: the asymmetry of reserves means that the mere passage of time, which costs the employer a margin of profit, costs the worker his subsistence — so delay is a weapon held by one party alone.

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The consequence is that the wage which emerges from such a bargain is not a midpoint between two equal claims but a figure pressed downward by the worker's weaker position — pressed, in the limit, toward the least that will keep him alive and willing to return tomorrow. It is worth being exact about why this tendency toward subsistence arises here, because a different and more famous account locates it elsewhere. This is not yet the iron law of wages, the claim that population growth must always drag the wage back to bare survival however high it climbs; that mechanism, classical and then Marxian, is the matter of another plate. The subsistence tendency Smith describes is simpler and more immediate: it is the gravitational pull of an unequal bargaining position, the wage settling low because the party who would push it up is the party who cannot afford to wait.⁴

4. The classical "iron law" — wages held to subsistence by Malthusian population pressure, later sharpened by Lassalle and by Marx's reserve army of the unemployed — is the subject of the third plate, The Subsistence. It should not be confused with Smith's bargaining argument: one drives the wage down through the supply of workers, the other through the relative weakness of the worker at the table.

Beneath the particular result lies a structural fact that the rest of the volume will keep returning to. A bargain of this kind does not have a single determinate price; it has a range. There is a most the employer would pay rather than lose the worker entirely, and a least the worker would take rather than go without entirely, and between those two figures lies a gap within which the wage might fall anywhere at all. Where, within the range, it actually settles is not fixed by the value of the labor or by any law of the market; it is fixed by relative bargaining power — by who is the more patient, the better organized, the less desperate. The wage is indeterminate in exactly the degree that the parties have power over one another, and determinate only in the imaginary case where neither has any.⁵

5. The range between the two parties' reservation prices is the indeterminacy of bilateral bargaining; Edgeworth would later draw it as the contract curve, a set of possible outcomes rather than a single point. The eighth and ninth plates, on monopsony and the union, are the two ends of this range made concrete.

It would misrepresent Smith to leave him a pessimist, for he was not one. He held that in a growing economy the demand for labor outruns its supply, so that employers, competing among themselves for scarce hands, are driven to bid wages up; and he welcomed the result, the "liberal reward of labour" of a prospering society, as both just and useful. Smith therefore carried both halves of the truth at once: the bargain is structurally unequal, and a growing economy can make even an unequal bargain a generous one. What he never did — and what his more confident successors would do — was pretend that the two parties met as equals, that the wage was a clean reading taken from the nature of the work itself.⁶

6. Smith on the progressive state: it is not the present wealth of a nation but its growth that raises wages, by making labor scarce relative to the demand for it. The point matters for the volume, because it shows the asymmetry of the bargain is compatible with rising real wages — power and prosperity are different axes, and a worker may be both better paid and no better placed.

The orthodox century that followed took precisely that step. It assumed the asymmetry away — assumed a market so competitive that no employer and no worker had any power over the wage at all — and on that assumption pinned the wage exactly to the worker's product, as though the figure were dictated by the work and not negotiated across a table. The next plate gives that orthodoxy its full due, for it is powerful and in its place correct. But the center of this volume will argue that it was Smith, and not his competitive heirs, who described the ordinary case — and that the wage is, first and last, the outcome of a contest weighted from the start by who can best afford to wait.