The author says that the division of labor leads to increase in its productivity. The labor needed to produce any one
finished product comes from many different hands. Different trades and occupations have arisen as a result of this.
The quantity of work done increases due to three main reasons:
a) Increase in the skill of the worker,
b) Saving time which is lost in changing from one type of work to another,
c) Use of machines to facilitate labor.
The author says that the wealth we see in an ordered society is a direct consequence of the division of labor. Without the co-operation of many people, the basic needs of even the most humble person could not be provided for…
The author says that the division of labor has arisen due a natural tendency among people to barter, and to exchange one product for another. The author says that the extent of the division of labor is limited by the extent of the market – if the market is limited in scope, a worker cannot exchange the surplus part of his own labor. In other words, a person meets his wants by exchanging the surplus part of his own labor for the products of other men’s labor.
The practical difficulties in carrying out barter in a wide variety of goods led to the development of a common medium of exchange (money). In ancient times, cattle and shells were used as money. In more modern times, precious metals were used – because they were non-perishable and they could be divided into smaller units. At various times, gold, silver and copper coins have been used. To determine the weight and the purity of the metals, the process of stamping (coinage) was later introduced. Today, money is the medium of exchange by means of which all goods are bought and sold.
Labor, like any other commodity, has a real and a nominal price. The real price consists of the necessities of life that are exchanged for it; the nominal price consists of the amount of money given for it. The difference is important, because unlike the real value, the nominal value varies along with the value of gold and silver. However, in most ordinary transactions involving buying and selling, it makes no difference.
The price of a commodity, says the author, consists of three component parts – the price of labor (wages), the price of land (rent) and the price of stock (profit). The price of wear and tear / maintenance is including in one of these prices. As with the commodity, so with the sum of all commodities (national produce); all revenue is derived from either wages, rent or profit. When these different revenues are sourced to different persons, they can be easily distinguished; but when they belong to the same person, they are sometimes confused with each other. For example, a gardener who cultivates his own garden is both a landlord, farmer and laborer. He gains the rent of a landlord, the profit of the farmer and the wages of the laborer!
Commodities may be sold at their natural price – that is, for what it costs, inclusive of the cost of profit. Market price, on the other hand, is determined by the quantity available for sale and the effective demand for that product. When the quantity available for sale is less than the effective demand, the market price rises above the natural price. The author says that the quantity available for sale automatically adjusts itself to the effective demand for that product; and prices gravitate towards their natural price. This is the magic of the marketplace – the “invisible hand” at work…
The author says that high wages of labor are an advantage to society. Because workers constitute the greater part of every society – and whatever improves their lot must benefit society as a whole. High wages encourage the diligence of the workers. Higher earnings also enable poor people to provide better for their children. It is an article of faith with the author that the work done by freemen is cheaper than the work done by slaves, because it is more productive.
The author says that an increase in mutual competition naturally tends to lower profits. Profits are lower in towns and cities – where there is much stock – than in the countryside which has little stock. But the lowest rate of profit must be sufficient to compensate for trade related losses. Though it is difficult to determine the exact quantum of profit in a particular trade, an estimate may be made from the rate of interest of money.
The author says that it is a fallacy that high wages tend to raise prices; in fact, he says that high profits are more likely to be the culprit.
The author says that in a society where there was perfect liberty, every person would choose the occupation he desired, and change it as often as he liked.
But Wages and Profits vary in different trades due to:
a) The desirability of the profession,
b) The difficulty of learning it,
c) The reliability of employment,
d) The amount of trust required,
e) The probability of success.
And the policies being followed also affect wages and profits by:
a) Restricting competition in some trades,
b) Increasing competition in other trades,
c) Obstructing the free circulation of labor.