The essence of a free labour market

Free labour has a special meaning, and it has become an indispensable feature of the free enterprise, “laissez – faire” economic system that arose in the last quarter of the 18th century.

The liberal economy philosophy that emerged with the publication in 1776 of Adam Smith’s, “An Inquiry into the Nature and Causes of the Wealth of Nations” was based largely on the 18th century view of natural immutable laws. Among its key elements were

The principle of individual initiative, with each person attempting to maximize his benefits.

Private business operated for profit.

Competition among dominant firms, none of which was of a dominant size, and

The exchange of goods in a free market through the use of money.


A market was a place [and later an area], where goods and services were exchanged through the medium of money, in which because of competition, prices tend to uniformity [as no buyer will pay more if he can get it for less and no seller would offer his product for less than another seller].


Under economic liberalisation labour market too was free ie

Workers were not bound to the employer thus could change jobs whenever they wanted to

Employers were free to hire whomever they pleased and were only obliged to pay them for their services at a competitive price [wages/ salaries] dictated by the market and could dismiss them whenever their services were not required.


Under the industrial system, in order to manufacture goods and services inputs ie factors of production are required. These factors are

Land – includes not only the site of plant, but also raw materials, metals, minerals, forest and agricultural products, fuel, energy ets.

Capital – includes man made goods that produce other goods ie plant, machinery, equipment etc.

Enterprise – which co-ordinates the other factors of production to produce goods and services for sale.

By themselves land and capital cannot produce goods and services; this requires the exertion of human effort. Therefore labour becomes an indispensible factor of production which is combined by entrepreneurs with the other factors viz land and capital – to produce goods and services for sale.

The industrial worker was free to sell his services to the highest bidder and the employer is free to purchase these services for the lowest price he could obtain. The actual price of labour was of course determined by the market at a point where the supply of a particular type of labour was balance by the demand for it.

Hence the labour market existed whenever prospective employers and employees met to negotiate the purchase and sale of human services. This relation between the employers and employees became impersonal, purely exchange, unfettered by any obligations or status arrangement aside from paying what the balance of demand and supply required.

As Prof Kenneth Boulding defines Economics,  “Economics is a subject that specialises in the study of the total social system which is organize through exchange and deals with exchangeables”. Thus labour economics merely concentrates on the exchange relationship with respect to the labour factor of production.


An exchange economy leads to specialisation as the individual becomes an expert in one line and hence produces more units of output per unit of time.

The producer who specialises in one type of production exchanges his product for specialized product of another firm.


This in turn leads to division of labour which enables each worker to perfect some particular operation or skill.

Division of labour allows greater use of capital equipment [as machines can be devised to perform different tasks – both simple and complex].

Under the agricultural order a man might be a farmer, a priest, a merchant or a craftsmanlike a carpenter, shoemaker, but under industrialism – with its specialization and division of labour, hundreds and later thousands of new occupations arose.

As Prof Adam Smith points out however, division of labour is limited by the extent of market. Eg if one pair of shoes were to be made it would be uneconomical to divide the work among many people, for one man could do it more cheaply; but if thousands of pairs of shoes were to be produced, then it would be cheaper for many men, each specializing in one particular operation, to produce the shoes.

Thus as economic growth took place and many markets developed, work was more finely broken down and individual workers found themselves doing more and more restricted tasks.

Posted in General Economics