The history of labor is interesting because most authors do not state exactly how labor started. Rather, many of them suggest that the start of labor was natural, and subsequently provide striking speculations. Malthus (1872) suggests that individuals imagine an ancient world where there were no cities or urban centers, implying that people lived in the rural areas. People were scattered all over the land, each with basic needs such as houses, food, and clothing. In that world, as Malthus wants people to imagine, people owned land communally; there was no private property. If the imagination is to hold, people shared the food they grew in equal proportions regardless of who expended the least or most effort. Nevertheless, population increase was inevitable. As the population rose, people had to put more of the land to use. It would obviously reach a point where, as a consequence of the increase in population, the demand for food would exceed the supply. People would also likely starve, or conflicts would emerge.
Consequently, people would likely raise the issue as a matter of urgency. Families with fewer children would read injustice if they are compelled to work hard and share the results of their labor equally with large families. Therefore, as Malthus (1872) suggests, it became necessary or likely that parcels of land were subdivided and every family became responsible for feeding their members. If families with fewer members produced surplus, it is not possible that they gave the surplus freely to those who lacked enough food. They would give them the surplus if they performed certain functions for them. Secondly, children would later be born into a world that had private property. Many of the children born into families with many members were compelled to work for those with surplus food to survive. Therefore, to a large extent, labor is a consequence of private property and is a natural phenomenon (Jowett, 1885). Many times institutions are blamed for labor issues but Malthus argues labor is driven by natural forces and institutions only play an insignificant role.
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Smith (1776) agrees that labor is a natural creation although he used a different approach. He posits that every person in the world requires help to do something. Initially, when land was owned by communities, members of families or communities worked together without pay, although there was a reward of sharing the produce at the end. However, when land was split or divided among individuals, people needed help. Although family members or individuals could help each other at no charge, it was much easier to get help when incentives were involved. People would get many people willing to help them if they involved rewards. Therefore, the concept of labor was born. Although Smith uses a different explanation, it is very much related to Malthus concept. Labor seems to have gained more prominence after the emergence of private property. Summarily, no man is an island, and those who put labor to good use, achieved more progress than those who did not.
Smith (1776) expands the concept of labor by introducing the aspect of wealth. He observes that individuals or countries who use or subdivide labor extensively achieve more success than those who do not. Smith tries to explain why some countries are poor while others rich arguing that the manner in which labor is used makes the difference. He firstly uses examples of developed countries such as England and France. These countries, in all respects can be described as economic powerhouses in the world, whose main fields of excellence are in technology, manufacturing and the arts. These countries have diversified their spheres of the economy, and consequently, there are low rates of unemployment compared to most developing countries in Africa, South America and Asia. Smith seems to suggest that the success of these countries can be attributed to the diverse labor force; people are not just skilled in one trade, but different people possess different skills, which are distributed to the different sector of the economy.
In particular, Smith examines how people operate in the manufacturing plants in the aforementioned countries. For instance, in the cloths’ production factories, different people are positioned at different manufacturing processes; some produce the yarn, some cut it into pieces, some people mix dyes, and so on. On the same note, people in the countryside grow cotton, employ people to work in the farms, package it, as well as other individuals specializes in transporting the cotton to the factories. On the other hand, after the cotton has been processed, people sew clothes involving many individuals who take them to the market. Evidently, it is a process that involves many people, giving rise to employment opportunities, and subsequently, generation of income.
The division of labor in developed countries gives rise to specialization. Individuals work only in a specification production process or unit. Such specialization brings about various advantages. Firstly, a lot of time is saved. If a single person is required to work in different processing units, it means that they will need to stop one process to attend to the other. In the process, time is lost. Secondly, specialization leads to invention or improvement in doing things. When one performs a specific function over a long time, they most likely become skilled. Consequently, they may discover a better way of doing things more efficiently. Perhaps that explains why the developed countries such as the United States of America and European countries have better technology than other countries in the world.
On the contrary, developing countries such as those in the sub-Saharan Africa and South America are poorer because of the lack of diversification of their labor force. Most countries in Africa rely on agriculture, and which most of the time employs little labor. For instance, an individual may plough the land, plant, and harvest by himself. Consequently, they take a lot of time to produce, and in that case, they can only produce small quantities. Besides, there is always little innovation because individuals never devote time to improve on one skill; each time, their attention is divided on many things. The juggling between many activities gives little room for improvement. Therefore, the use of labor is significantly related to quantities produced, the rate of production, as well as innovation.
As people in the world specialized, it was necessary for them to exchange what they produced with what they did not have. For example, a carpenter would exchange furniture for cattle, implying that labor eventually gave rise to trade. According to Smith (1776), trade resulted to nominal price and real price. Real price is defined as the cost of goods based on the cost of labor. On the other hand, nominal price is determined by the factors of demand and supply, and is mainly in monetary terms. The difference in the definition of the nominal and real price suggests that real price is somehow static while nominal price is constantly fluctuating. However, as it will be explained, Mill (1869) argues that nominal price, which constitutes the wage fund theory, is never static.
One issue that later emerged and is also argued presently concerns how laborers should be remunerated. Malthus (1872) states that wages need to be paid in relation to the supply and demand of labor. That means that if there is excess supply of labor, low wages should be paid and vice versa. In effect, this assertion means that there is always a constant wage amount set aside, which employers divide among the labor force. Before discussing the argument against the wage-fund theory, it is essential to understand how labor influences rent, and even demand. It is also at this juncture that two economic concepts are important; use value and exchange value. Resources such as water and air have use value; although they are very crucial, they are in abundant supply and almost everyone can acquire them. They can, therefore, be obtained free of charge. On the other hand, items such as gold and diamond are not crucial for survival, are in limited supply and fetch very high prices, hence are described as possessing exchange value.
According to the definition of use value and exchange value, it seems resources need to be limited to generate value. Ricardo (1891) uses land as an example. If land is abundant and unlimited, no rent will be charged because everyone can grow their own food or work on their own land. However, if there is land A which is more productive than land B, rent will be charged on land A because of its value. However, the value of working on land A is not just a consequence of its productivity; rather, it is because of the amount of labor that will be required to work on land B to make it as productive as land A. According to Ricardo, the amount of rent paid for land A is equal to the amount of labor required to work on land B. Ricardo suggests that if there were different categories of air and water, people would pay rent for the best category because of the labor that would be required to make the worst categories similar to the best categories. Scholars such as Ricardo seem to suggest that the value of something is always equal to the cost of labor involved in producing it.
Mill (1869) abandoned the wage-fund theory by analyzing firstly, the behavior of sellers or producers of commodities. Mill observed that the supply and demand relationship in some cases is obsolete. Specifically, most economists suggest that supply and demand are equal, that is, they always balance at some point. Secondly, that if supply exceeds demand, prices fall and vice versa. However, Mill argues that producers of goods do not always have to sell them at low prices because of excess supply. Rather, they can withhold the excess until a time when consumers can buy at the dictated price. Therefore, to a large extent, manufacturers set the price and are not swayed by the ‘liberal’ market forces. Similarly, in the wage-fund theory, it is inaccurate to conclude that wages are purely determined by the market forces. Manufacturers could set them. Mill stated that when people set up industries or businesses, they pump in capital and earn income after the end of the operation, mostly in one year. It is from this capital that the labor force is paid. After the end of the financial year, an employer may decide to take part of their income to add to the capital of the next year. In essence capital, from which employees are paid, is not static (Marx, 1887). Therefore, the wage-fund theory according to Mill does not hold because it suggests that the labor force is paid from a fixed wage bill, and if the employees are many they receive low wages and vice versa. A business or company does not always reduce its wages because there is a large pool of labor or that when labor becomes scarce; the existing employees automatically get a pay rise.
References
Jowett, B. (Ed.). (1885). The politics of Aristotle (Vol. 1). Clarendon Press.
Malthus, T. R. (1872). An Essay on the Principle of Population. .
Marx, K. (1887). Capital. A Critique of Political Economy. Volume I: Book One: The Process of Production of Capital. Moscow, RU: Progress Publishers .
Mill, J. S. (1869). Thornton on Labor and Its Claims. Fortnightly , 5 (30), 680-700.
Ricardo, D. (1891). Principles of political economy and taxation . G. Bell.
Smith, A. (1776). An inquiry into the nature and causes of the wealth of nations: Volume One. London: printed for W. Strahan; and T. Cadell, 1776..
