Book I, Chapter X, 3

In a small seaport town, a little grocer may earn forty or fifty percent on a stock of just a hundred pounds, while a substantial wholesale merchant in the same place may scarcely earn eight or ten percent on ten thousand. The grocer’s business may be necessary for the convenience of the inhabitants, while the limited market cannot support a larger capital in it. Yet the man must not only live by his trade but live in a manner fitting the qualifications it demands. Besides possessing a little capital, he must be able to read, write, and keep accounts; he must also be a fair judge of perhaps fifty or sixty kinds of goods, their prices, their qualities, and the markets where they can be bought cheapest. In short, he needs all the knowledge of a great merchant; only the lack of sufficient capital prevents him from becoming one. Thirty or forty pounds a year is hardly too much compensation for the labor of so capable a person. Deduct that from the seemingly large profits on his capital, and perhaps little more remains than the ordinary profits of stock. Most of the apparent profit here, too, is really wages.

The difference between the apparent profits of retail and wholesale trade is much smaller in the capital than in small towns and country villages. Where ten thousand pounds can be employed in the grocery trade, the grocer’s wages for his own labor add very little to the real profits of so large a stock. The apparent profits of the prosperous retailer there are consequently closer to those of the wholesale merchant. This is why goods sold at retail are generally as cheap, and often much cheaper, in the capital than in small towns and country villages. Groceries, for example, are generally much cheaper; bread and butcher’s meat are often equally cheap. It costs no more to bring groceries to the great town than to the country village; but it costs considerably more to bring corn and cattle, since most must come from much farther away. Since the prime cost of groceries is the same in both places, they are cheapest where the least profit is charged on them. The prime cost of bread and butcher’s meat is higher in the great town than in the country village; though profit is lower, they are therefore not always cheaper there, but often equally cheap. For goods such as bread and butcher’s meat, the same cause that lowers apparent profit raises prime cost. The size of the market puts greater stocks to work and lowers apparent profit, but by requiring supplies from farther away it raises prime cost. The fall in one and rise in the other seem, in most cases, nearly to offset each other. This is probably why, although corn and cattle prices commonly vary widely between parts of the kingdom, bread and butcher’s meat prices are generally much the same throughout most of it.

Though the profits of stock in both wholesale and retail trade are generally lower in the capital than in small towns and country villages, great fortunes are often made from small beginnings in the former and scarcely ever in the latter. In small towns and country villages, the limits of the market mean that trade cannot always expand as stock expands. Thus, though one person’s rate of profit may be very high in such places, the total amount of it can never be very great, nor can his yearly accumulation. In great towns, by contrast, trade can expand as stock grows, and a thrifty, flourishing man’s credit grows much faster than his stock. His trade expands in proportion to the two together; the amount of his profits grows with the extent of his trade, and his annual accumulation with the amount of his profits. Even in great towns, however, large fortunes seldom arise from a single regular, established, well-known branch of business except through a long life of industry, frugality, and attention. Sudden fortunes are sometimes made there, to be sure, through what is called speculative trade. The speculative merchant follows no single regular, established, or well-known line of business. He is a corn merchant one year, a wine merchant the next, and a sugar, tobacco, or tea merchant the year after. He enters any trade when he expects it to be unusually profitable, and leaves when he expects its profits to return to the level of other trades. His profits and losses therefore have no regular relation to those of any established and familiar business. A bold adventurer can sometimes gain a considerable fortune through two or three successful speculations, but is just as likely to lose one through two or three failures. This business can be conducted only in great towns. Only where commerce and commercial communication are most extensive is the information it requires available.

The five circumstances mentioned above, though they produce considerable inequalities in wages of labor and profits of stock, produce none in the sum of the advantages and disadvantages, real or imagined, of their different employments. Such is the nature of these circumstances that they compensate for a small monetary gain in some employments and counterbalance a large one in others.

For this equality in the sum of advantages or disadvantages to prevail, however, three conditions are needed even under the most complete freedom. First, the employments must be well known and long established in the neighborhood; second, they must be in their ordinary, or what may be called natural, state; and third, they must be the sole or principal employments of those who pursue them.

First, this equality can prevail only in employments that are well known and have long been established in the neighborhood.

Other things being equal, wages are generally higher in new trades than in old ones. When an entrepreneur tries to establish a new manufacture, he must initially lure workers from other occupations with higher wages than they could earn in their own trades, or than his work would otherwise require; considerable time must pass before he can risk reducing their wages to the usual level. Manufactures whose demand rests entirely on fashion and fancy change continually, and seldom endure long enough to become established. Those whose demand arises chiefly from use or necessity, by contrast, change less readily; the same design or fabric may remain in demand for centuries. Wages are therefore likely to be higher in manufactures of the first kind than of the second. Birmingham chiefly makes goods of the first kind; Sheffield, of the second. Wages in these two places are said to reflect this difference in their manufactures.

Establishing a new manufacture, a new branch of commerce, or a new agricultural practice is always a speculation from which its entrepreneur expects extraordinary profits. Sometimes these profits are very great; perhaps more often they are quite the opposite. In general, however, they bear no fixed relation to profits in the older local trades. If the venture succeeds, its profits are usually very high at first. Once the trade or practice becomes thoroughly established and familiar, competition reduces them to the level of other trades.

Second, equality in the sum of advantages and disadvantages of the various employments of labor and stock can prevail only when those employments are in their ordinary, or what may be called natural, state.

Demand for almost every kind of labor is sometimes greater, sometimes less, than usual. In the first case the advantages of the employment rise above the common level; in the second they fall below it. Demand for country labor is greater at haymaking and harvest than during most of the year, and wages rise with it. In wartime, when forty or fifty thousand sailors are taken from merchant service into the king’s, demand for sailors on merchant ships necessarily rises as they grow scarce; at such times their wages commonly rise from a guinea and seven-and-twenty shillings to forty shillings and three pounds a month. In a declining manufacture, conversely, many workers will accept lower wages than the nature of their employment would otherwise warrant rather than leave their trade.

Profits on stock vary with the prices of the commodities in which it is employed. When a commodity’s price rises above its ordinary or average rate, profits on at least some of the stock used to bring it to market rise above their proper level; when its price falls, they sink below it. All commodities are subject to price changes to some degree, but some far more than others. For all commodities produced by human industry, the amount of industry employed each year is necessarily governed by annual demand, so that average annual production can match average annual consumption as closely as possible. As already observed, in some employments the same amount of industry always produces the same, or very nearly the same, quantity of goods. In linen or woolen manufacture, for instance, the same number of workers processes nearly the same amount of linen and woolen cloth each year. Changes in these goods’ market prices can therefore arise only from accidental changes in demand. Public mourning raises the price of black cloth. But since demand for most kinds of plain linen and woolen cloth is fairly steady, so is their price. In other employments, however, the same amount of industry does not always produce the same quantity of goods. In different years the same amount of industry will produce very different quantities of corn, wine, hops, sugar, tobacco, etc. Their prices therefore vary not only with changes in demand, but with much greater and more frequent changes in quantity, and are consequently extremely unstable; the profits of some dealers must fluctuate with those prices. The speculative merchant deals chiefly in such commodities. He tries to buy them up when he anticipates a rise in price and sell them when he anticipates a fall.

Third, equality in the sum of advantages and disadvantages of the different employments of labor and stock can prevail only where these are the sole or principal occupations of the people engaged in them.

When someone earns his living from an occupation that does not take up most of his time, he is often willing to work at another in his spare hours for less than the wages that occupation would otherwise warrant.

In many parts of Scotland there are still people called cottars or cottagers, though they were more common some years ago. They are a kind of external servant to landlords and farmers. Their usual reward from their master is a house, a small garden for pot herbs, enough grazing for a cow, and perhaps an acre or two of poor arable land. When their master needs their labor, he also gives them two pecks of oatmeal a week, worth about sixteen pence sterling. During much of the year he has little or no need of their labor, while cultivating their own little holding does not fill the time they have at their disposal. When such tenants were more numerous, they are said to have offered their spare time to anyone for very little compensation, and to have worked for lower wages than other laborers. In ancient times they seem to have been common throughout Europe. In countries poorly cultivated and still more sparsely inhabited, most landlords and farmers could not otherwise obtain the exceptional number of hands needed for country labor at certain seasons. The daily or weekly payment these laborers occasionally received from their masters was plainly not the whole price of their labor: their small tenement formed a substantial part of it. Yet many writers who have compiled ancient prices of labor and provisions, and delighted in presenting both as astonishingly low, seem to have treated that daily or weekly payment as the whole price.

The products of such labor frequently reach the market more cheaply than the nature of the work would otherwise allow. In many parts of Scotland, stockings are knitted much more cheaply than they can be made on the loom anywhere. They are made by servants and laborers who get most of their livelihood from another occupation. More than a thousand pairs of Shetland stockings are imported into Leith each year, at prices ranging from fivepence to seven-pence a pair. At Lerwick, the small capital of the Shetland islands, I have been assured that tenpence a day is the usual wage for ordinary labor. In those same islands they knit worsted stockings worth a guinea a pair and upwards.

In Scotland, linen yarn is spun much as stockings are knitted: by servants hired chiefly for other purposes. Those who try to live by either occupation alone earn only a scanty subsistence. In most parts of Scotland, a woman who can earn twentypence a week is considered a good spinner.

In a small seaport town, a small grocer may make forty or fifty per cent. on stock worth a single hundred pounds. A substantial wholesale merchant in the same town may barely make eight or ten per cent. on stock worth ten thousand. Residents may need the grocer’s business, while the small market may not support a larger capital invested in it. But the grocer must earn a living suited to the skills his business demands. Besides owning a little capital, he must be able to read, write, and keep accounts. He must also know perhaps fifty or sixty kinds of goods reasonably well, including their prices, qualities, and where he can buy them most cheaply. In short, he needs all the knowledge of a major merchant. Only a lack of sufficient capital keeps him from becoming one. Thirty or forty pounds a year would not be too much to pay someone with all these skills for his labor. Subtract that amount from the apparently high profit on his capital, and perhaps little more than the ordinary profit on stock remains. Here too, most of the apparent profit is really wages.

The difference between the apparent profit of retail trade and that of wholesale trade is much smaller in the capital than in small towns and country villages. Where a grocer can use ten thousand pounds in the business, the grocer’s wages add very little to the real profit on such a large stock. So the wealthy retailer’s apparent profit is much closer to the wholesale merchant’s profit there. That is why retail goods are generally as cheap in the capital as in small towns and villages, and often much cheaper. Grocery goods, for example, are generally much cheaper; bread and butchers’ meat are often just as cheap. Bringing grocery goods to the big city costs no more than bringing them to a country village. Bringing in corn and cattle costs much more, though, since most must come from much farther away. The original cost of grocery goods is therefore the same in both places. They are cheapest where sellers charge the least profit. The original cost of bread and butchers’ meat is higher in the big city than in the village. Though the profit is smaller there, these foods are not always cheaper, but often cost the same. With goods such as bread and butchers’ meat, the same cause that reduces apparent profit raises the original cost. A larger market allows businesses to use greater stocks, which reduces apparent profit. But the market needs supplies from farther away, which raises the original cost. In most cases these two changes seem to nearly cancel each other out. That is probably why corn and cattle prices commonly vary greatly across the kingdom, while bread and butchers’ meat prices are generally much the same in most of it.

Profits on stock in both wholesale and retail trade are generally lower in the capital than in small towns and country villages. Yet people often build large fortunes from small beginnings in the capital and almost never do so in the smaller places. In a small town or village, the narrow market does not always allow a business to grow as its stock grows. A person there may earn a very high rate of profit, but the total profit can never be very large, and neither can the amount saved each year. In a big town, by contrast, a business can expand as its stock increases. A careful, successful person’s credit grows much faster than his stock. His business expands in proportion to both his stock and his credit. His total profit grows with his business, and his yearly savings grow with his profit. Even in big towns, though, a single regular, established, well-known line of business rarely produces a great fortune except after a long life of hard work, thrift, and close attention. What people call speculative trade does sometimes produce sudden fortunes there. A speculative merchant has no single regular, established, well-known line of business. One year he trades in corn, the next in wine, and the following year in sugar, tobacco, or tea. He enters a trade when he expects it to be unusually profitable and leaves when he expects its profits to return to the usual level. So his gains and losses have no fixed relation to those in any established line of business. A daring trader may make a substantial fortune from two or three successful speculations. He is just as likely to lose one through two or three failures. This trade can take place only in big towns. Only places with the widest commerce and business connections can provide the information it requires.

The five circumstances mentioned above cause considerable differences in wages of labor and profits of stock. But they do not cause differences in the total advantages and disadvantages, real or imagined, of the various ways of using either labor or stock. These circumstances make up for small financial gains in some occupations and offset large ones in others.

Even with complete freedom, three conditions must hold for these total advantages and disadvantages to be equal. First, the occupations must be well known and long established in the neighborhood. Second, they must be in their usual, or what we might call their natural, state. Third, they must be the sole or main occupations of the people doing them.

First, equality can exist only among occupations that are well known and have been established in the neighborhood for a long time.

Other things being equal, wages are generally higher in new trades than in old ones. Someone starting a new manufacture must first attract workers away from other jobs. He must offer higher wages than they can earn in their own trades, or than his work would otherwise call for. It takes a considerable time before he can risk lowering wages to the usual level. Manufactures demanded entirely because of fashion and taste keep changing. They rarely last long enough to count as long-established businesses. By contrast, manufactures demanded chiefly for their usefulness or necessity change less often. The same style or kind of fabric may remain in demand for whole centuries. Wages are therefore likely to be higher in the first kind than in the second. Birmingham deals chiefly in the first kind of manufacture, and Sheffield in the second. Wages in the two places are said to reflect this difference.

Starting a new manufacture, a new branch of commerce, or a new farming practice is always a speculation. Its founder expects unusually high profits. Sometimes those profits are very high; perhaps more often, they are nothing of the kind. In general, they have no consistent relation to profits in the neighborhood’s older trades. If the venture succeeds, its profits are usually very high at first. Once the trade or practice becomes well established and familiar, competition brings its profits down to the level of other trades.

Second, equality in the total advantages and disadvantages of different uses of labor and stock can exist only when those occupations are in their usual, or natural, state.

Demand for almost every kind of labor is sometimes higher and sometimes lower than usual. In the first case, the advantages of the job rise above the usual level; in the second, they fall below it. Demand for country labor is higher at haymaking and harvest than during most of the year, so wages rise. In wartime, when forty or fifty thousand sailors are forced from merchant ships into the king’s service, merchant ships must compete for the sailors left. Their wages commonly rise on such occasions from a guinea and seven-and-twenty shillings to forty shillings and three pounds a month. In a declining manufacture, on the other hand, many workers will accept lower wages than their work would otherwise justify rather than leave their trade.

Profits on stock change with the price of the goods in which that stock is invested. When a good’s price rises above its usual or average level, at least some of the stock used to bring it to market earns more than the usual profit. When its price falls, that profit falls below the usual level. All goods undergo some changes in price, but some change much more than others. For all goods made through human work, the amount of work used each year is necessarily adjusted to yearly demand. Producers aim to make the average yearly output as close as possible to average yearly consumption. As already noted, in some occupations the same amount of work always produces the same, or nearly the same, amount of goods. In linen or woolen manufacturing, for instance, the same number of workers can make nearly the same amount of linen and woolen cloth each year. Changes in the market price of these goods can therefore arise only from unexpected changes in demand. A period of public mourning raises the price of black cloth. But demand for most kinds of plain linen and woolen cloth is fairly steady, and so are their prices. In other occupations the same amount of work does not always yield the same amount of goods. The same amount of work produces very different quantities of corn, wine, hops, sugar, tobacco, etc., in different years. Their prices therefore change not only with demand but also with much larger and more frequent changes in the quantity produced. Their prices fluctuate greatly, and some dealers’ profits must fluctuate with them. The speculative merchant deals chiefly in such goods. He tries to buy them when he expects their price to rise and sell them when he expects it to fall.

Third, equality in the total advantages and disadvantages of different uses of labor and stock can exist only when they are the sole or main occupations of the people engaged in them.

When a person earns a living from one occupation that does not take up most of his time, he will often work at another during his free hours for less than its wages would normally have to be.

In many parts of Scotland there are still people called cottars or cottagers, though they were more common some years ago. They are a kind of part-time servant to landlords and farmers. Their usual payment from their master is a house, a small garden for cooking herbs, enough grass to feed a cow, and perhaps an acre or two of poor land to cultivate. When he needs their labor, he also gives them two pecks of oatmeal a week, worth about sixteen pence sterling. For much of the year he needs little or none of their labor. Working their own small holding does not use up the rest of their time. When these people were more numerous, they were said to offer their spare time to anyone for very little pay and to work for lower wages than other laborers. They seem to have been common throughout Europe in ancient times. In countries with poorly cultivated land and still fewer people, most landlords and farmers could not otherwise get the extra workers needed for country labor at certain times of year. The daily or weekly payment these workers sometimes received from their masters was plainly not their entire pay. Their small holding was a substantial part of it. Yet many writers who gathered ancient figures for the prices of labor and provisions seem to have treated that daily or weekly payment as the whole. They then took pleasure in portraying both prices as remarkably low.

Goods made by such workers often reach the market more cheaply than their kind of work would normally allow. In many parts of Scotland, stockings are knitted much more cheaply than they can be made on a loom anywhere. The knitters are servants and laborers who earn most of their living at another job. More than a thousand pair of Shetland stockings are brought into Leith each year, at prices from fivepence to seven-pence a pair. At Lerwick, the small capital of the Shetland islands, I have been told that tenpence a day is a common wage for ordinary labor. In the same islands, people knit worsted stockings worth a guinea a pair and upwards.

Linen yarn is spun in Scotland in much the same way stockings are knitted: by servants hired chiefly for other tasks. People who try to make their living from either trade earn very little. In most parts of Scotland, a woman who can earn twentypence a week is considered a good spinner.