Output and Employment

Abstract

Within his broader analysis of the ‘nature and causes of the wealth of nations’, Adam Smith (1776) identified the primary determinants of the growth of national output as labour productivity (given by the state of technology as determined by the division of labour), and the proportion of the total working population ‘productively’ employed (in modern language, producing outputs directed to the support of capital accumulation). For Smith, and other classical economists, the problem was not that commodities might remain unsold or labour unemployed, but the composition of output and employment required for capital accumulation: a high proportion of ‘unproductive’ labour would slow the pace of technological change by reducing the expansion of the market and thus the division of labour. When capital accumulation fell below the growth of population unemployment increased and wages would fall below subsistence, reducing population growth. The distribution of income between rent and profits was a key determinant of the composition of output: landowners expenditure on services or luxury goods being unproductive.