THE ANALYSIS OF INCOME DISTRIBUTION

Smith's discussion of the 'natural price' had been developed around its three components: wages, profits and rents. It was thus incumbent upon him to explain the mechanisms governing the 'natural rates' of these shares of income (or, in his terms, of 'revenue').

At this point, Smith's argument was constructed around a tripartite division of society into 'orders', each of which received a specified income share. Wages were paid to members of the working class, profits accrued to capitalists (or owners of stock), and rents were collected by landowners. These distinctions corresponded roughly to the major social class divisions of his time, though some blurring at the edges remained. The net receipts of the smallholder in agriculture, for example, might be a compound of three income shares: a wage return for his own labour; a rent return from the land he owned; and a profit on the capital he had invested in his farm. A similar overlapping might occur in the case of the self­employed small manufacturer. Conceivably the large landowner, should he invest to improve his estate, could thereby receive a profit as well as a rent. While allowing for this possibility, Smith described large landowners as men who loved 'to reap where they never sowed',24 and as given to 'indolence which is the natural effect of the ease and security of their situation'.25 This characterization of the landlord class, which played a crucial role in his interpretation of society's prospects during the course of the 'progress of improvement', was not altogether just. As later historical research has demonstrated, much of the agricultural innovation of the period was initiated by progressive large landowners who exhibited the behavioural traits that Smith ascribed to capitalists.

It must be emphasized that Smith, while building his analysis of income distribution around 'three different orders of people', did not regard these divisions as closed compartments.

At the same time, Smith's analytical categories contrast sharply with those widely used in much current economic analysis. A prevalent modern approach to income distribution is entirely 'functional' in orientation; that is to say, various income payments are treated as rewards to the 'factors' contributing to production. The wage share is the payment to human productive agents, without regard to their social status, including salaries as well as wages; moreover, part of the revenue Smith regarded as 'profit' would now be treated as a 'wage' to management. Similarly, rent is now often treated as accruing to owners of the God-given productive factor, land; this procedure, though stripped of social class associations, is closer to Smith's approach. Interest (which Smith subsumed under profits) is treated as the return on capital, the inanimate but man-made factor of production. Though the treatment of profit is far from uniform, a venerable tradition supports the view that (apart from the case of monopoly) 'pure profit' over and above rewards necessary to retain the services of productive factors in their present uses can be realized only temporarily before being competed away. In such a 'functional' system all class lines are hidden. Smith, on the other hand, began with a social class division and built the greater part of his analytical structure around it. Though he did introduce some 'functional' considerations, they were intended primarily to cover the fuzzy cases.

How then was the national revenue divided between the various orders of society? Smith's answer was developed in two stages. In the first, he considered the special and peculiar features attached to the determination of wages, profits and rents with considerable attention to the influence of the institutional environment on variations in the level of each. But never far from view was a second and overriding influence: the 'general circumstances of society' - i.e. whether the economy as a whole was stationary, expanding, or declining.

Thus in the case of wages, prevailing scales at any particular moment were likely to be influenced by a variety of factors peculiar to individual jobs: their 'agreeableness or disagreeableness,' their geographical situation, expected duration, the worker's knowledge (or ignorance) of alternative employments and their terms, etc. But Smith also drew attention to another consideration - the relative bargaining strength of employers and employees - and he noted that the scales were often weighted to the disadvantage of workers.27

These variations, though important, could operate only above a lower limit: the minimum wage level required to maintain the labour force in healthy and productive condition. After all, Smith argued, wages could not sink below subsistence requirements without shrinking the size of the labour force. Did it then follow that the 'subsistence' level of wage payments would also be the natural rate toward which actual wages, over the long period, would gravitate? Malthus was to argue this case at a later moment in the evolution of classical theory. At one point, Smith wrote as if in anticipation of the Malthusian position: '... the demand for men, like that for any other commodity, necessarily regulates the production of men'.28 This assertion implied that a rise in wage rates above the minimum required for subsistence would soon be neutralized by an induced expansion in the si; and of the labour force. It would have been convenient for other parts of S he consistently maintained this position.

quantity of labour at different times - i.e. when the natural price of labour was constant.

But, once having introduced this notion, Smith quickly moved away from it, arguing that the natural course of wages was closely related to 'the general circumstances' of the economy. An expanding economy was likely to be associated with rising wage rates, a declining one with falling wages, while in a stationary economy there would be little reason to expect wage levels to change.

This argument hinged on what Smith described as the volume of 'funds destined for the payment of wages'.29 The notion he had in mind calls for a few words of elucidation, both because it is based on concepts now unfamiliar and because its central idea figured so prominently in the general classical outlook. In this view the process of production and exchange was regarded as beginning with 'advances' of funds by employers (capitalists and landlords) to acquire labour and the material inputs required in production. Workers, the recipients of these advances, later spent them on subsistence goods. The same transaction, however, involved the transfer of funds back to employers who could finance 'advances' to initiate the next round of production. Thus, whether the demand for labour in a subsequent period was greater or less than, or unchanged from, the preceding one depended in large measure on the size of the non-wage shares of income (profits and rents) and the proportion of the fund thus generated that was allocated as advances to labour. In a period of general economic expansion it was expected that the wage fund would be enlarged and the demand for labour augmented. This, in turn, would tend to bid wage levels beyond the subsistence minimum and to bring improved conditions to the 'servants, labourers and workmen of different kinds [who] make up the far greater part of every great political society.'30 Population growth might then follow.

The liberal reward of labour, therefore, as it is the effect of increasing wealth, so it is the cause of increasing population. To complain of it, is to lament over the necessary effect and cause of the greatest public prosperity.31

The course of economic progress was still not clear, despite Smith's generally optimistic expectations. The behaviour of the second income share - profits - might lead to problems. As Smith saw it, the returns to capitalists and those of wage earners moved inversely: as wages increased, profits would be reduced. Smith's first attempt to explain this relationship amounted to asserting that the more employers paid their workers, the less they could retain for themselves. But this account was too static to be fully satisfactory; after all, Smith had suggested elsewhere that a regime of high wages might well lead to at least compensating increases in output per worker.32 More basic to his explanation was the increasing competition among capitalists that he expected to accompany economic expansion. With reasoning more convincing in his day than in ours, he held that in a climate of general economic expansion businessmen would be more vigorous in pursuing their own advantage, suppressing their tendencies toward collusion, and competing down the average rate of return on capital. This tendency toward falling profits was reinforced by another consideration that Smith hinted at but did not develop systematically:

As capitals increase in any country, the profits which can be made by employing them necessarily diminish. It becomes gradually more and more difficult to find within the country a profitable method of employing any new capital.33

A fuller explanation of the expected effects of the 'progress of improvement' required an analysis of the relationship between profits and rents. Land-ownership and the income share attached to it clearly possessed some special attributes.

High or low wages and profit, are the causes of high or low price; high or low rent is the effect of it. It is because high or low wages and profit must be paid, in order to bring a particular commodity to market, that its price is high or low. But it is because its price is high or low; a great deal more, or very little more, or no more, than what is sufficient to pay those wages and profit, that it affords a high rent, or a low rent, or no rent at all.34

How was this puzzling proposition to be explained? At base, Smith's account rested on the presupposition that nature was generous. Like the Physiocrats before him he viewed agriculture as capable of yielding outputs far in excess of inputs. But unlike the Physiocrats he wished to emphasize that the extent to which this natural bounty would actually be tapped depended largely on society's requirements for the output of land. It was his expectation (and a not unreasonable one) that an expanding economy would generate rising demand for the products of land. This would occur in two ways. In the first place, population growth would swell the demand for foodstuffs. In addition an expanding non-agricultural sector would increase requirements for raw materials derived from the land. Smith, in his day, had in mind raw materials required for industrial processing (such as wool and flax) as well as land- derived materials needed for construction (e.g. timber and stone) and as sources of power (e.g. coal). In combination, these effects would draw idle lands into productive use. But he was also at pains to emphasize - as had Quesnay and his followers - that the initial expansion of non-agricultural output depended, in the first instance, on the availability of foodstuffs and raw materials needed to support industrial expansion.

Substantial growth in demand for agricultural products would have an important effect on the distribution of income between the various orders of society. Most particularly, it would benefit owners of land. Smith anticipated that the demand for the various outputs of land was likely to rise more rapidly than production could be expanded - especially when various claims on land competed with one another; the same plot could not grow corn and graze sheep simultaneously nor could timber supplies be maintained if extensions in the cultivated acreage encroached on the forested area. Prices of agricultural products were thus expected to increase. But in a system of private property land tenure the bulk of this windfall would accrue to land-owners. The rents they collected, which he described as 'naturally the highest which the tenant can afford to pay in the actual circumstances of the land',35 would swell because tenants could be forced to part with that portion of their product in excess of the natural wage for their labour.

These arguments about the behaviour of various components of the natural price in the course of the 'progress of improvement' might be construed as indicating that economic

expansion would ultimately undercut its own foundations. If a rising share of the national product was distributed to high-living landlords at the expense of frugal profit recipients, further accumulation and expansion might be dried up at its source. Smith was aware of this possibility; yet he did not push this argument to its logical conclusion. On the whole he regarded economic expansion as bringing benefits to all. It might be checked at a future point in time, but that day was distant. The emergence of a stationary state, when further expansion would be halted and capital accumulation restricted to replacement requirements, was too remote to call for serious analysis.

5.