Smith and Hayek on the Labour Market

Over the past few decades, the work of Adam Smith has been enlisted into the neoliberal cause. His casual reference to the ‘invisible hand’ has permeated popular discourse in a way that implies that it is the theoretical cornerstone of his political economy; like a kind of sophisticated doctrine. Indeed, an entire generation has probably grown up thinking that Smith was a precursor to Hayek and a kindred spirit of Thatcher and Reagan. The free market right has had a large part in this appropration. The Adam Smith Institute, for example, is a British ‘think-tank’ that has wrapped themselves in the legacy of Smith since its founding in 1977. Its mission is to ‘promote libertarian and free market ideas’ in British policy circles. Indeed, one if its founders, Eamonn Bulter, has written books on Mises, Hayek, Friedman and, of course, Adam Smith.

The institute is obviously interested in appropriating Smith for the libertarian cause. In this sense, they are taking up the mantle of Hayek, who, in The Constitution of Liberty, situated himself within the ‘Whig’ tradition alongside the likes of David Hume and Adam Smith. What gets lost in this neoliberal/libertarian appropriation of Smith are some of the significant ways in which Smith diverges from the current strands of Hayekian liberalism dominant amongst many so-called ‘think tanks’ today. I would like to highlight just one point of divergence regarding Smith’s and Hayek’s understanding of the labour market.

For example, in his chapter on Wages of Labour in The Wealth of Nations, Smith displays a sense of realism regarding the clash of class interests within the labour market, leading him to discuss the various kinds of ‘combinations’ that tend to form. Here he is quoted at length:

‘What are the common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. 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.’

Employers, as well as workers, display a tendency, and an interest, in ‘combining’ in order to get the upper hand in the labour market.

‘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. We have no acts of parliament against combining to lower the price of work; but many against combining to raise it. In all such disputes the masters can hold out much longer. A landlord, a farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment. In the long-run the workman may be as necessary to this master as his master is to him, but the necessity is not so immediate.’

Here is a recognition of the disparities of market power between workers on the one hand, and farmers, masters of manufacture, merchants and landlords on the other. Employers can live upon their ‘stocks’, while labourers would last barely a week, thereby putting them at a disadvantage in the labour market.

‘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. Masters are always and every where in a sort of tacit, but constant and uniform combination, not to raise the wages of labour above their actual rate.’

Smith recognizes that employers will ‘combine’ in order to pursue their interests vis-à-vis workers. Notice that he does not say that they will collude to fix prices, but to keep wages down. Given the recent propaganda offensive from the food and service industries against raising the minimum wage for fast food workers and servers, this is far from being a conspiracy theory.

‘In order to bring the point to a speedy decision, they have always recourse to the loudest clamour, and sometimes to the most shocking violence and outrage. They are desperate, and act with the folly and extravagance of desperate men, who must either starve, or frighten their masters into an immediate compliance with their demands. The masters upon these occasions are just as clamorous upon the other side, and never cease to call aloud for the assistance of the civil magistrate, and the rigorous execution of those laws which have been enacted with so much severity against the combinations of servants, labourers, and journeymen. The workmen, accordingly, very seldom derive any advantage from the violence of those tumultuous combinations, which, partly from the interposition of the civil magistrate, partly from the superior steadiness of the masters, partly from the necessity which the greater part of the workmen are under of submitting for the sake of present subsistence, generally end in nothing, but the punishment or ruin of the ring-leaders.’

In this passage, Smith explains the nature of working class ‘violence’ in the struggle against their employers; yet he puts it in the context of their desperate situation, the fact that they face starvation unless they ‘frighten their masters into an immediate compliance with their demands.’ Employers, on the other hand, also engage in ‘clamorous’ action; but they have recourse to the ‘civil magistrate’ (in other words, the state). Indeed, Smith points out that while there are laws against workers’ ‘combinations’, there are no similar laws against those of employers. The playing field is clearly stacked in favour of the employer. On the one hand, they possess capital that enables them to do without their workforce – in the case of a strike – longer than their workforce can do without their employment. On the other hand, they have the state on their side.

For Hayek, however, the view regarding workers and the labour market is quite different. Whereas Smith recognized the disparity of power between workers and employers in the labour market, Hayek either doesn’t – particularly in terms of the labour market – or views workers having greater coercive power than employers through unions:

‘It cannot be stressed enough that the coercion which unions have been permitted to exercise contrary to all principles of freedom under the law is primarily the coercion of fellow workers. Whatever true coercive power unions may be able to wield over employers is a consequence of this primary power of coercing other workers; the coercion of employers would lose most of its objectionable character if unions were deprived of this power to exact unwilling support.’

And whereas Smith recognized that, in the advent of a dispute between workers and their employers, it is the employers who can hold out longer than the workers, Hayek has this to say:

‘It is true that any union effectively controlling all potential workers of a firm or industry can exercise almost unlimited pressure on the employer and that, particularly where a great amount of capital has been invested in specialized equipment, such a union can practically expropriate the owner and command nearly the whole return of his enterprise.’

None of this is to deny that Smith was not opposed to ‘combinations’, including what we would today call trade unions. What it is saying is that he was equally critical of employer ‘combinations’ in ways that Hayek and Friedman were not (not to mention their contemporary disciples). It also means that Smith had a recognition of the disparities of power that existed between workers and employers in the labour market; again, in ways that diverge greatly from contemporary neoliberals. It is not that Smith was not  an advocate of the ‘free market’; all it means is that Smith was more intellectually honest and was not a precocious advocate of Hayekian neoliberalism.

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5 thoughts on “Smith and Hayek on the Labour Market

  1. Here’s another little gem from Smith that would give neoliberals fits if they weren’t so successful at ignoring it:

    “The proposal of any new law or regulation of commerce which comes from [the business community] ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention. It comes from an order of men, whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.”

    1. And this too, for all those neoliberals fighting against a minimum wage:

      ‘The liberal reward of labour, as it encourages the propagation, so it increases the industry of the common people. The wages of labour are the encouragement of industry, which, like every other human quality, improves in proportion to the encouragement it receives. A plentiful subsistence increases the bodily strength of the labourer, and the comfortable hope of bettering his condition, and of ending his days perhaps in ease and plenty, animates him to exert that strength to the utmost. Where wages are high, accordingly, we shall always find the workmen more active, diligent, and expeditious, than where they are low’.

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