Profits and wages
The natural level of the real wage is made to depend by Smith on the workers’ bargaining position and their subsistence requirements, which are determined not merely by physiological needs but also comprise wants rendered necessary from habit and custom.
In economies which are stationary or retrogressing, the common real wage is said to be usually low or declining, while in fast growing ones, due to the better bargaining position of the workers, it is high or increasing (WN I.viii.16-17). Increases or decreases in real wages are taken to lead, however, to increases or decreases in the growth rate of population, and thereby of labour supply (WN I.viii.40).The idea that the supply of labour is adapting endogenously to the demand for it is encountered in many classical writers, but rather than invoking the population mechanism, authors such as Ricardo, Torrens, and Marx placed more emphasis on other factors, such as labour displacement due to labour-saving technical progress or international labour migration.
When the price is at the natural level the producer obtains the normal or natural rate of profits on the advanced capital. Smith is very clear about the fact that the popular belief that profits are “only a different name for the wages of a particular sort of labour, the labour of inspection and direction” is a misconception: “They are regulated altogether by the value of the stock employed, and are greater or smaller in proportion to the extent of this stock.” (WN I.vi.6). In competitive conditions, the rate of profits obtained in different lines of production must be the same (except for profit rate differentials that can be explained by differences in risk, agreeableness, and so on) and must equal the normal or “natural” rate. Its level is said to be low in societies that are stationary and retrogressing, and high in newly advancing ones. However, according to Smith there is a tendency towards a secular decline in the rate of profits also in advancing societies due to the “increasing competition of capitals” (WN I.ix.2) - but the arguments he put forward in support of this view cannot be sustained.