Mises Daily Articles
The 1822 Refutation of the Spitalfields Act of Wage and Price Controls
In 1824, the Spitalfields Act of wage control for silk weavers was repealed after being in force for 50 years. The act was essentially a disaster that devastated the industry and the workers. While this act does not even have its own Wikipedia article as of 2010, it was a significant enough example of regulation to be mentioned by Herbert Spencer.1 The silk industry directly employed an estimated 40,000 looms and their attendant weavers in and around London, many of them in the Spitalfields area. Indirectly, the industry supported an estimated 400,000 workers and their dependents.2
In 1822, a 40-page pamphlet Observations on the Ruinous Tendency of the Spitalfields Act to the Silk Manufacture of London was published It lays out the key points as to why price controls on labor are against the long-term interests of the workingmen and the masters employing them. This 1822 statement is clear that keeping wages above the market rate leads to unemployment and that the industry would move to other parts of the country and the world where it could flourish more freely.3 It is a classic example of clear economic argument, and can be read profitably today by anyone contemplating wage regulation.
What was the Spitalfields Act?
The Spitalfields Act of 1773 mandated that local magistrates in designated silk-manufacturing districts, but not in the country, set the "wages and prices of work" masters could offer journeymen.4 In practice it actually controlled the piece-rate price of goods produced by labor. The exact rate masters could pay journeymen was set, with no leeway. Paying above or below the price subjected the master to severe fines. Work done with machines was paid at the same rate. One could only have two apprentices, (presumably to keep down the number of workers paid apprentice wages).
Economic Impact of the Act
The Spitalfields Act was a price control on the amounts master weavers in London and other silk centers could pay journeymen for each piece of silk. This not only removed all incentive to pay higher wages during good times, it made it illegal to do so. During bad times many workers had no work. This is because master weavers had to cut the prices they sold their goods for, but they could not cut the prices they paid for labor and therefore what they ultimately paid for goods. Therefore, the master weavers simply shut down operations.
As the price was per piece, there was no incentive for using machinery; the master would have to pay for the machine and still pay the same price per piece to journeymen. (It is interesting to note that masters apparently didn't rent machine time to journeymen and journeymen didn't build their own machines.) By 1822 labor rates were so far above market labor rates that much of the employment in silk manufacture had moved to the countryside. Remaining manufacturers tended to focus on expensive fashion items, which required proximity to court for quick changes in design and which had higher margins.
The Historical Context
Ironically, Spitalfields was established by refugee Huguenots fleeing France, but also avoiding restrictive London laws by settling just outside the city. Many of these Huguenots were master weavers. They introduced silk weaving as an industry in England and established Spitalfields as its center.
England in the 18th century was a land of smuggling; high import taxes on raw and finished silk made the silk trade no exception. The industry was marked by frequent rioting by silk weavers. In 1719 there was a riot of 4,000 weavers against women wearing Indian cotton calicoes and linens.5 They would literally attack women wearing the clothing. There were riots each year from 1764–1769.
Parliament, its members finding themselves and their homes harassed by rioters, passed the Spitalfields Act of 1773, allowing magistrates to set the exact rate that masters could pay journeymen. The act also made it unprofitable to buy machines or develop new techniques. The economic reality, ironically, was that the the industry had for decades benefited from, if not depended on, the preparation of raw silk by machines.6
While the act appeared a savvy move for a Parliament tired of riots, it didn't help the industry. The act was "exceedingly popular" till 1785, at which point the substitution of cotton cloth for other fabrics devastated the market for silk. Pay rates were not reduced accordingly. By 1793, 4,000 looms were idle. A revival in the trade during the Napoleonic Wars was followed by worse conditions starting in 1816. Two-thirds of weavers were out of work.
By 1832 Spitalfields became a run-down slum and continued to be one of the most crime-ridden areas in London throughout the century.
Duty-free import of French silk in 1860 killed the domestic silk industry, entirely to the benefit of English consumers.
The Arguments against the Spitalfields Act
The 1822 pamphlet Observations on the Ruinous Tendency of the Spitalfields Act to the Silk Manufacture of London argues that the Spitalfields Act works against the interests of everyone in Spitalfields involved in the silk trade.
The pamphlet's primary arguments are as follows:
Trade has prospered in spite of the act, not because of it. Spitalfields would have prospered more without the act.
The Spitalfieds Act has increased prices, thereby excluding Spitalfields silk products from all foreign markets and much of the home market.
Silk production has shifted to the country, where it can be done for two-thirds the price. (Similarly, the act encourages smuggling from abroad.)
Prices must drop to continue production in Spitalfields, and price drops can happen only with "the abrogation of all restrictions on labour, and a more extensive use of machinery."7
It is in principle well accepted that prices must be subject to supply and demand, if buyers are to find sellers and sellers buyers. Having the magistrates fix all prices for goods and labor is an absurdity.
Damage to the Manufacturer
Manufacturers who've invested capital in the trade find their investment jeopardized, (as they can't manufacture at a profit).
"The price of the article is unnecessarily raised, and its sale in consequence restricted."8
In practice, magistrates don't allow wages to decline.
"All improvements in Machinery, by which the price of goods might be lowered, and the sale extended, are checked and discouraged."9
Competitors are encouraged outside of Spitalfields, further damaging the investment of Spitalfields manufacturers (and encouraging them to leave). Manufacturers who engage in trade in Spitalfields and the country face fines. In fact, one case of a Spitalfields manufacturer hiring paupers in the country to work for him, when brought to the attention of Spitalfields journeymen, led to him being fined.
Damage to the Journeyman
"It tends to diminish the demand for his labour" by setting wage rates too high.10
It is in the long-term interest of manufacturers to have plenty of workers, and for those workers to have plenty of jobs. Therefore, manufacturers will not want to set wages so low as to discourage workers from the trade.
Both the laborer and manufacturer have the same long-term interest in flourishing of the industry.
The profit of the manufacturer is the only source of payment to labor. Labor therefore needs profitable manufacturers to work for.
The laborer's most important property is his labor; it is therefore essential he have a steady demand for it.
"It banishes the trade from Spitalfields … [and] threatens total destruction to the journeymen."11 The trade is moving to the unregulated countryside, which is seeing a huge boom in employment. There will eventually be no more weaver jobs in Spitalfields.
"Instead of making good to him in slack times the loss he suffered when the trade flourished, the Act throws him out of work altogether." Because the worker is completely unemployed during bad times, the burden of those times falls completely on him. Whereas if he had work at lower wages, the burden would be lessened.
It is therefore false that the act "prevents the growth of pauperism, by insuring to the weaver a fair price for his labour." "Free labor" protects against pauperism.14
"We assert, without fear of contradiction, that to force up the price of labour, whether the manufactured article will bear it or not, is to depress the trade, injure the labourer, and by rendering employment uncertain, to increase the demand on the parish fund, and destroy, instead of building up, the little 'hedge of a man's independence.'"15
There is no evidence that "the Act has prevented those riotous and tumultuous assemblages which once took place in Spitalfields, and disposes the people to peace and submission."16 There has been plenty of distress, which the law did nothing to prevent, yet the people did not riot. The changed character of the people is the cause of the change.
The "workman's security" is that the manufacturer needs laborers in order to keep his capital profitably employed; he will therefore gladly pay them so long as he can make money.17
Free labor would lead to competition for such skilled workers. During bad times they would be better off under free labor, as they would at least have work. This creates the additional outcomes that workers will be thrifty, become good workmen, and find other employment; the bad times will be shorter, and workmen will still retain some wages during them.
The pamphlet thus argues that repeal of the act would be to the general good of all, masters and journeymen, in the Spitalfields silk trade.
Assessment of the Arguments
It is hard to find anything wrong with the argument that workers and manufacturers alike will benefit from free labor and free prices. The principle of supply and demand is well established as the basis for setting prices. Obviously, an industry will not exist unless people are willing to buy its products, and people will not buy a more expensive product when they can buy the same thing less expensively. Therefore, the industry in Spitalfields needed to be legally permitted to sell its products at the market rates.
The act did not permit the industry in Spitalfields to sell its product at market rates, because it locked the prices of the silk goods and labor bought from the journeymen. It was supposed to protect the wages of the workers. However it does not protect the wages, because all wages come from the sales of goods; and the act cannot force anyone to buy the product of labor when a less-expensive alternative is available from home or abroad. (Attempts to keep out foreign imports simply led to smuggling, and the industry sprang up in the English countryside where wage regulations were not in force.)
When the market would not bear the high price of Spitalfields' products, the manufacturers saw no profit in continued purchases of product from journeymen. The journeymen workers then found themselves thrown out of work. Price controls on labor create surplus labor when times are bad and labor shortages when times are good.
Free labor and the introduction of machinery, on the other hand, allow manufacturers to expand and provide regular work for laborers during bad times and also allow for the competition that will drive up wages during good times. In order for the workers and manufacturers to flourish in Spitalfields, price controls for wages and goods had to be removed. The 1822 Observations on the Ruinous Tendency of the Spitalfields Act to the Silk Manufacture of London is a great example of the economic arguments against price controls.
- 1. Herbert Spencer, "The New Tories," excerpted from The Man versus the State, 1884.
- 2. Observations on the Ruinous Tendency of the Spitalfields Act to the Silk Manufacture of London, p. 8.
- 3. For instance, the American auto industry grew in states without labor regulations and declined in states attempting to keep wage rates above market rates.
- 4. English Economic history: Select Documents by Alfred Edward Bland, Philip Anthony Brown, Richard Henry Tawney, (Macmillan Co., 1919), p. 547.
- 5. "Industries: Silk-weaving," William Page, ed., A History of the County of Middlesex: Volume 2. (1911), pp. 132–137.
- 6. After the 1824 deregulation, weavers in 1837 working on Jacquard looms earned twice what plain silk weavers would. Sir Thomas Lombe received a patent for his invention to prepare raw silk in 1718 and it expired in 1732. "Industries: Silk-weaving," William Page, ed., A History of the County of Middlesex: Volume 2. (1911), pp. 132–137.
- 7. Observations on the Ruinous Tendency, p. 3.
- 8. Ibid., p. 12.
- 9. Ibid., p. 11.
- 10. Ibid., p. 23.
- 11. Ibid., p. 25.
- 12. Ibid., p. 29.
- 13. Ibid., p. 31.
- 14. Ibid., p. 32–33.
- 15. Ibid., p. 33.
- 16. Ibid., p. 34.
- 17. Ibid., p. 36.