Smith and Marshall on the Individual's Supply of Labor: A NoteAuthor(s): James O'ConnorSource: Industrial and Labor Relations Review, Vol. 14, No. 2 (Jan., 1961), pp. 273-276Published by: Cornell University, School of Industrial & Labor RelationsStable URL: http://www.jstor.org/stable/2520273 .

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SMITH AND MARSHALL ON THE INDIVIDUAL'S SUPPLY OF LABOR: A NOTE

JAMES O'CONNOR

BECAUSE the long-run theory of aggre- gate labor supply-in reality a theory

of population growth -was so central in classical economics, historians of economic thought have tended to overlook the views of Adam Smith and his successors on the individual's supply of labor. Clearly, there is no necessary correspondence between either a short and long-run, or an aggre- gative and disaggregative, theory; the be- lief that the labor supply in the long run is perfectly elastic at the subsistence wage does not imply that any given individual will supply an infinite amount of effort at the current market wage. In this note, Smith's position on the individual's labor supply is contrasted with that of Alfred Marshall, who was apparently the first important economist to deal systematically with the problem.

Smith's "theory" of labor supply - a

Labor supply functions are by definition the summation of the varied responses of indi- viduals to the prices, broadly defined, offered for their services. Although the variability of response has long been acknowledged, both theoretical and inductive work on the indi- vidual supply of labor has been neglected in favor of simplifying assumptions about the underlying structure of aggregative supply schedules. In this note, the author brings to- gether and contrasts the respective views of Adam Smith and Alfred Marshall on the in- dividual supply of labor. In tracing the ideas of the two men on this issue, this note also high- lights a facet of the change in the method of economic analysis during its development as a system of ideas.

James O'Connor is instructor, Department of Economics, Barnard College, Columbia Univer- sity. - EDITOR

potpourri of behavioral assertions and loose empirical statements- runs in the following terms:

The liberal reward of labour, as it en- courages the propagation, so it increases the industry of the common people. The wages of labour are the encouragement of industry, which, like every other hu- man quality, improves in proportion to the encouragement it receives.1

In this context, "industry" clearly means "effort"; thus, for Smith, it is likely that the individual's labor supply curve will be positively sloped. In contemporary indiffer- ence analysis, the substitution effect, which increases the demand for income follow- ing a reduction in its "effort-price," over- whelms the income effect; the effort de- mand elasticity for income exceeds unity. Also, if the phrase "in proportion" is strictly interpreted (as it undoubtedly should not be), the demand elasticity varies directly with the wage rate.2

This position contrasts sharply with that of many of Smith's successors, who be- lieved that the supply curve was negative, at least once the "necessities of life" have been purchased.3

1 Adam Smith, The Wealth of Nations, (New York: Modern Library Edition, 1937), p. 81.

2N dY/Y/dW/W, where W is the wage, Y is income, and N is the effort demand elasticity. If the wage doubles, according to Smith, so will effort. Thus the expression be- comes: 2E (2W) - EW/EW/W/W = 3, where E is effort. If the wage triples, the expression becomes: 3E (3W) - EW/EW/2W/W =4.

3 See Maurice Dobb, Wages (London: 1948), p. 59.

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274 INDUSTRIAL AND LABOR RELATIONS REVIEW

While Smith did not hesitate to general- ize about the slope of the individual's supply curve, he was not unaware of the possibility of individual differences.

Some workmen, indeed, when they earn in four days what will maintain them through the week, will be idle for the other three. This, however, is by no means the case with the greater part.

Since, at least by implication, differences in wage rates do not explain this "ob- served" phenomenon, some individuals evidently supply less effort than others at the going wage rate. Let us say that these individuals have "high leisure preferences." At first glance, this might appear incon- sistent with the original assertion that supply curves are positively sloped. There is no inconsistency, however, since de- mand elasticities for all individuals may exceed unity, yet, at any given wage, the distribution of effort supplied may be very wide indeed. Yet Smith is not entirely free of confusion on this point. As Cannan points out, in his Lectures Smith observes that the number of individuals with high leisure preferences appeared to him rather large.' This seems to be in direct contradiction to his position quoted above. Is there any way to reconcile these views? Perhaps.

Smith's two observations ("samples") may not have been "random" in the sense that each may have been "drawn" from opposite ends of the same distribu- tion, the distribution of leisure prefer- ences. Since he had no information re- garding the shape of the distribution (nor is it likely he even thought in terms of a "distribution"), his confusion is under- standable.

For Smith, there was a close relation-

4Smith, op. cit., p. 81. ' Adam Smith, Lectures on Justice, Police,

Revenue and Arms, Edwin Cannan, ed. (Ox- ford, 1896), p. 257.

ship between "idleness" and "industry" (in this context, the degree of industriali- zation). This relationship holds over time: Our ancestors were idle for want of suf- ficient encouragement of industry." It also holds at a moment in time; he cites the inverse relation between "idle- ness" and the degree of industrial and commercial activity in European cities in the late eighteenth century.

This observation can be rationalized in many ways; if, however, it is to be con- sistent with his original assertion, Smith assumes (or knows) that wages in more developed cities are relatively high. Clear- ly, an alternative hypothesis, and one con- sistent with the same set of facts, is that wages are relatively low in developed cities, and supply curves are negatively sloped. Smith's implicit assumption that wages are relatively high in developed cities seems to be more acceptable a priori, however. Because of this, it seems inappropriate to accept the third possible hypothesis; namely, that wages do not vary between cities, but that leisure preferences are higher in less developed cities. More- over, it is clearly inadvisable to postulate a tendency for wages to reach an equality between cities; in England, the Poor Laws - until 1795 when the Settlement Act was partially repealed - tended to im- mobilize labor. And after 1795, Speen- hamland tended to produce the same ef- fect. On the continent, of course, it is too early even to speak of a "labor market."

Smith's one casual attempt to "demon- strate" his proposition that labor supply is positive fails, mainly because he lacked the tools of marginal analysis. Workmen . . . when they are liberally paid by the piece, are very apt to over-work themselves.7

6 The Wealth of Nations, p. 319. 7Ibid., p. 81.

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SUPPLY OF LABOR 275

This observation is perfectly consistent with negative supply curves, since an in- crease in the quantity of effort implicitly reduces the effort price of income - the wage - at the margin. While an indi- vidual may work less given a rise in the average wage, it is entirely possible that an increase at the margin may be followed by more effort forthcoming.

Smith's comparisons between the supply curves of European tradesmen and those of Chinese peasants and tradesmen are very interesting. Contrasting the prefer- ences of these three groups, he writes:

If by digging the ground a whole day [a peasant] can get what will purchase a small quantity of rice in the evening, he is contented . . . [and with regard to the Chinese tradesmen] instead of waiting in- dolently in their workhouses, for the calls of their customers, as in Europe, they are continually running about the streets . as it were begging for employment.8

That the Chinese tradesman gives up leisure for the possibility of money income implies that his supply curve is positive and very elastic. Note the contrast between Chinese peasant and European tradesman, however. By implication, for both supplies are negative. Yet the peasant is "con- tented," the European "indolent." Here is a neat mixture of class bias and cultural relativism. Compare this with Marshall, who writes:

. . . the more ignorant and phlegmatic of races and individuals [have negatively sloped supply curves. But those with] more firmness and elasticity of character [have positively sloped curves].9

Gone is the cultural relativism and, in its place, an unsubtle shift in the choice of adjectives. What accounts for the change, given that Smith and Marshall wrote in the same broad tradition? It is to be ex-

8Ibid., p. 72. 'Alfred Marshall, Principles of Economics,

8th ed. (London: Macmillan, 1946), p. 528.

pected that both men would find the Euro- pean with a backward bending supply curve "ignorant" and "indolent" (the adjectives in their context are nearly synonomous) ; but that Marshall should generalize his value judgment to include everyone, everywhere, can be explained, it appears, only by the total ascendancy of Western bourgeois ideology in the late nineteenth century. While Smith helped pave the way for a new mentality and, as a result, was aware of alternatives, Marshall, writing at the time of its full acceptance, was blind to them.

THE DISUTILITY OF WORK Marshall, it appears, was the first econ-

omist to include explicitly a third variable - the disutility of work itself, as distinct from the utility of leisure - in his treat- ment of the nature of the supply of labor.

He begins by defining labor as:

. . . any exertion of mind or body under- gone partly or wholly with a view to some good other than the pleasure derived di- rectly from work.10

If pleasure can be derived from work, it follows that the disutility of work can be either positive or negative. What other "cgood" do individuals expect to extract from work?

The chief motive to most labour . . . is the desire to obtain some material advan- tage."1

Moreover, the utility of leisure may be negative:

Perhaps after [a worker] has been out of work for some time, he might, as far as his immediate comfort is concerned, rather work for nothing than not work at all.'2

To summarize Marshall's view, labor may be supplied for three reasons. First,

10Ibid., p. 65. "Ibid., p. 140. 12 Ibid., p. 141.

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276 INDUSTRIAL AND LABOR RELATIONS REVIEW

because an individual may enjoy work it- self (the disutility of labor may be nega- tive). Second, because an individual may need or desire a money income (the utili- ty of income may be positive). Third, be- cause an individual may be bored, anxious, etc., with leisure (the utility of leisure may be negative).

It might be objected that we are dis- torting Marshall's real position by insisting that the utility of work be separated from the utility of leisure. Did Marshall really have in mind a three-variable utility func- tion? Despite the fact that the leisure and work variables are merged into one in the Mathematical Appendix,"3 in the text Marshall explicitly draws a distinction be- tween the two:

The discommodity of labour may arise from bodily or mental fatigue . . . or from its occupying time that is wanted for recreation.'4

The next question is: In what relation- ship do these variables stand to one an- other? Marshall says:

Most people work more than they would if they considered only the direct pleasure resulting from work, but, in a healthy state, pleasure predominates over pain in a great part even of that work that is done for hire.'5

13 Ibid., Note X, p. 843. It is curious that contemporary economists often man- age to confuse the work and leisure variables. For example: "If the worker is free to work the extra hour or not, he will work up to the point where the disutility of another hour's work (which is the same thing as his valuation of another hour's leisure) . . ." (Abba P. Lerner, The Economics of Control, New York: 1944, p. 103). Lerner here confuses the objective rate of substitution between leisure and work, which is the price of leisure in terms of work and is defined as a straight line with a slope of unity, meeting the leisure and work axes at, say, twenty-four hours per day, with the subjective rate of substitution, given by relative tastes for leisure and work. The latter function can clearly take any form.

14Ibid., p. 140.

From this statement, which evidently refers to the "normal" conditions of labor supply, and from the fact that the utility of income is positive, we can infer that in equilibrium (when the marginal utility of income is equated with the marginal disu- tility of work), the disutility of work is positive. But over some range of effort sup- plied (say, the first few hours of a day's labor), the disutility of work is negative. Finally, it is clear that a rise in the wage rate, which raises (in a schedule sense) the utility of income, will invariably be followed by more effort supplied. Accord- ing to Marshall, then, are labor supply curves always positive in slope?

Note that the utility function Marshall employs above consists of but two varia- bles; the utility of leisure does not figure in it explicitly. Recall that for Marshall the utility of leisure may be positive or negative. If it is negative in equilibrium it is certain that a rise in the wage rate will result in more effort supplied, but it is far more likely that it will be positive. Thus a rise in the wage may be followed by less effort supplied, since the utility of an additional amount of leisure may ex- ceed the utility of an additional amount of income.

In fact, Marshall fails to make an unambiguous statement with regard to the slope of the individual's supply curve, al- though there is some evidence that he re- garded it as positive, turning negative for some individuals at high levels of in- come.'6 It would be a mistake, however, to rationalize this position on the basis of income and substitution effects. While his results are similar to those given by indif- ference analysis, with its stress on leisure as a "good demanded," Marshall remains a utility theorist.

`Ibid., p. 65, Note I. "lIbid., pp. 528-529.

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