How Smith's Wage Theory Still Shapes Labor Law and Risk

Adam Smith’s account of wage bargaining, published in 1776, planted a premise that still shapes labor law: workers stand before capital from a position of weakness. That premise, though challenged by later economists, found its way into the National Labor Relations Act of 1935, which made collective bargaining a federal policy. For investors, the lingering influence of Smith’s labor pessimism is not a historical curiosity. It is a regulatory risk factor that affects labor costs, strike exposure, and corporate strategy across union-heavy sectors.

The Austrian economist Murray Rothbard called The Wealth of Nations “a huge, sprawling, inchoate, confused tome, rife with vagueness, ambiguity and deep inner contradictions.” The contradiction that mattered most was Smith’s claim that masters “have the advantage” in wage disputes because they can combine more easily, can wait out strikers, and maintain a tacit agreement not to raise wages. In The Theory of Collective Bargaining, economist W. H. Hutt showed that this argument rested on three unproven assertions: active employer conspiracies, tacit combinations, and a necessity gap between workers’ thin reserves and capital’s deep pockets.

Hutt’s historical evidence undercut Smith’s picture. He reported that deliberately organized employer bodies were almost nonexistent until the late nineteenth century and that early industrialists were marked by an individualism hostile to association. During the Combination Act era, employer combinations revealed by parliamentary inquiries were mostly retaliatory against unions using the “strike in detail” – the tactic of targeting employers one by one while workers at competing firms stayed employed and subsidized strikers. Hutt’s example from Barnsley linen weavers showed factories struck in sequence, with support from those still working elsewhere. Employer association often emerged as the defensive counter-combination, not the initiating predator.