I've read these excerpts from The Wealth of Nations multiple times:

In reality high profits tend much more to raise the price of work than high wages

In raising the price of commodities the rise of wages operates in the same manner as simple interest does in the accumulation of debt. The rise of profit operates like compound interest.

But I struggle to grok what he means.

What is "price of work" and how is it different to "wage", and why does profit have an exponential relative growth, not a linear one?


1 Answer 1


Smith was talking of "the price of work" as meaning the price of economic products bought from the employers and merchants, not the price of labour bought from the workers.

"Work" had this dual meaning historically, referring to both the activity of work and the result of work, whereas nowadays the latter meaning tends to be qualified (like a "work of art", or a "piece of work", etc.).

The distinction Smith makes is that if you put the wages of every worker involved up by 5%, the overall market price rises by 5%, because the 5% increase is by reference to their old wages.

Whereas if you increase the profits of a chain of merchants by 5%, the output price rises by much more than 5%, because each merchant in the chain takes 5% on top of all what the previous merchant took. The increase is by reference to the difference between input and output prices, not by reference to the merchant's old income.

Hence, in Smith's view, increases in wages result in "simple" percentage increases in output cost, whereas increases in profits result in "compound" increases in output cost.


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