"In reality high profits tend much more to raise the price of work than high wages."
In reality high profits tend much more to raise the price of work than high wages. If in the linen manufacture, for example, the wages of the different working people, the flax-dressers, the spinners, the weavers, etc., should, all of them, be advanced twopence a day; it would be necessary to heighten the price of a piece of linen only by a number of twopences equal to the number of people that had been employed about it, multiplied by the number of days during which they had been so employed. That part of the price of the commodity which resolved itself into wages would, through all the different stages of the manufacture, rise only in arithmetical proportion to this rise of wages. But if the profits of all the different employers of those working people should be raised five per cent, that part of the price of the commodity which resolved itself into profit would, through all the different stages of the manufacture, rise in geometrical proportion to this rise of profit. The employer of the flaxdressers would in selling his flax require an additional five per cent upon the whole value of the materials and wages which he advanced to his workmen. The employer of the spinners would require an additional five per cent both upon the advanced price of the flax and upon the wages of the spinners. And the employer of the weavers would require a like five per cent both upon the advanced price of the linen yarn and upon the wages of the weavers. 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. Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people.
An Inquiry into the Nature and Causes of the
Wealth of Nations
by Adam Smith 1776
Book 1, Chapter 9
Of the Profits of Stock
= new reply since forum marked as read
for quoting the conservative bible back to them.
If only they would actually read and comprehend.
Last edited Sun Jul 8, 2012, 01:05 PM - Edit history (2)
The guy who mines the nickel gets paid $10 for an hour's produce. The guy who refines the nickel costs another $10 in labor. The guy who casts it into a part costs another $10. The machinist adds another $10. So we have a price of $40 for the finished part, right?
No, assuming the profit margin for each of those guys employers were 15%, the part is priced at $57.42. Raising wages 10% would only add $4. However, raising the gross profit for each vendor by only half that amount adds $7 ($64.42 price). Small changes in corporate profit expectations have huge ramifications for price, while changing labor costs are relatively trivial. That's the reason a Big Mac is priced the same in Washington ($9.04 minimum wage) as it does in Alabama ($7.25 minimum wage) - very small changes in profit margin have can compensate for radically different labor costs.
So, the purpose of modern business school education is not to reduce prices (i.e. "competitiveness"
, but to find clever ways to turn labor costs into profit costs - retail pricing remains unchanged.
