THE' WAGES FUND THEORY: A HISTORICAL ANALYSIS . _ AND “CONSIDERATION ’ mCHIsAN m UNIVERSITY ‘ fl' ' Wllham Leo Brelt ' 5 This is to certify that the thesis entitled THE WAGES FUND THEORY: A HISTORICAL ANALYSIS AND REC ONSI DERATI ON presented by WILLIAM LEO BREIT has been accepted towards fulfillment of the requirements for Ph.D. degree in E0 onohics 0-169 LIBRARY Michigan State University IllllflifillillflflliWWTflfifliflilliil7flflflfiI!!! ‘ 3 3 10537 9568 3 RETURNING MATERIALS: DV1531.} P1ace in book drop to LIBRARJES remove this checkout from Ann-[sl-IL your record. FINES wil] be charged if book is returned after the date stamped be10w. THE WAGES FUND THEORY: A HISTORICAL ANALYSIS AND RECONSIDERATION BY WILLIAM LEO BREIT A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Economics 1961 to Professor many valuabl also underto the many imp help and enc committee: Professor Th ideas, both I am particu ii ACKNOWLEDGEMENTS In the preparation of this work I have incurred many obligations. I wish to acknowledge, above all, my gratitude to Professor John Henderson who supervised the study and made many valuable suggestions on matters of fact and theory. He also undertook the laborious task of mercilessly correcting the many imperfections in style. At all stages I had the help and encouragement of the other members of my guidance committee: Professor Harry Brainard, Professor Anthony Koo, Professor Thomas Mayer, and Professor Richard Rudner. Their ideas, both in and out of the classroom, proved very helpful. I am particularly indebted to Professor Koo for his advice with respect to Chapter VII. I also owe a debt of gratitude to the Workshop in Monetary Theory and Policy at Michigan State University. The study could not have been completed at this time without the provision of a Workshop Fellowship relieving me of teaching duties. I am grateful to Professor Abba Lerner and Professor Thomas Mayer who directed the Workshop seminars where various portions of the thesis got an early hearing. The other participants in the Workshop——Professor Andrew Brimmer, and Messrs. Nae Hoon Chung, G. Stanley Groves, and Robert Haney Scott~—made many helpful criticisms. It is a pleasure to record my thanks to the librarians of the Special Collections Room at the Columbia University Library where I 1960. Every I was often none of thee omissions, q Fina whose moral last minute iii did research for some of the chapters during the summer of 1960. Everyone there was most pleasant and helpful. Since I was often singularly stubborn in accepting suggestions none of these mentioned are responsible for any errors, omissions, or lapses in logic that the study may contain. Finally, I owe a deep debt of gratitude to my Mother whose moral support made it possible for me to absorb the last minute confusions and emergencies of the final days. III. somi IV. THE V. LAT] VIII. CONC BIBLIOGRApm TABLE OF CONTENTS Chapter I. INTRODUCTION............ II. THE WAGES FUND THEORY AND CLASSICAL ECONOMICS . . . . . . . . . . . III. SOME NEGLECTED EARLY CRITICS OF THE WAGES FUNDTHEORY............. IV. THE WAGES FUND THEORY AND THE TRADE UNION MOVEMENT V. LATER ATTACKS ON THE WAGES FUND THEORY AND MILL'S RECANTATION . . . . . . . . IV. RESTATEMENTS AND REBUTTALS VII. THE WAGES FUND THEORY: A DIAGRAMMATIC RECONSTRUCTION VIII. CONCLUSION: THE MODERN SCENE BIBLIOGRAPHY . . . . . . . . . . . . . . . . . . iv Page 35 57 75 105 132 153 173 3' 5. LIST OF FIGURES 111 App BY WILLIAM LEO BREIT AN ABSTRACT OF A THESIS Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Economics Approved a doctrine is theories in, detractors, , the classica Mill' 5 Princ was that all contradictor the Wages fu The greater 4 tendency to I i 1 William Breit ABSTRACT The interpretation usually given to the wages fund doctrine is that it was one of the most sterile and pernicious theories in economic literature. Although never without its detractors, the doctrine was one of the foundation stones of the classical economics, reaching its apogee in John Stuart Mill's Principles. The policy implication of the doctrine was that all institutional means of raising wages were self- contradictory since the rate at which capital, and therefore the wages fund, could be increased varied directly with profits. The greater proportion of wages to profits, the smaller the tendency to accumulation. The wages fund doctrine was accepted by both employers and trade union officials. However. the doctrine came under attack by Francis D. Longe in 1866, and ,William T. Thornton in 1869. In a review of Thornton"s volume John Stuart Mill recanted and this event is generally credited with the demise of the wages fund theory. But the doctrine's adherents were not liquidated by Mill“s surrender and within five years they regrouped their forces for a counterattack. The chief defenders of the wages fund theory in the latter half of the nineteenth century were J. E. Cairnes and F. W. Taussig; its major critics were Francis A. in favor of ceased. not against the‘ the essenti; problem of 1 of the limi' anything ah The calPital the. that produc- consumer go. °f Producti. advances to Abstract William Breit Walker, Cliffe Leslie, and Henry George. By 1890, however, the theory was finally abandoned in favor of marginal productivity analysis. Controversy ceased, not because of the cogency of the criticisms levied against the doctrine, but because of a shift in emphasis from the essentially macro problem of economic growth to the micro problem of efficiency. The wages fund doctrine was a theory of the limits to aggregate wages, and was not intended to say anything about the wages of individual workers. The wages fund theory remained incognito as a part of capital theory, since in modern capital theory it is postulated that production is a process in which time is required before consumer goods result from the use of the roundabout method of production. In the interim period somebody has to make advances to the various inputs producing capital. These advances constitute a wages fund. This was precisely the role of the wages fund in classical economics. Therefore, the theory was a doctrine of production incorrectly interpreted as a theory of distribution. Moreover, Keynesian economics involves a return to the wages fund theory since Keynes showed that real wages are determined in the capital market through decisions affecting investment and not in the labor market. The provide a at that raged a statement um a theoretic; relationshi; examined wit the system. that were ne nineteenth c Th@‘@E relationships between the various parts of the system can be examined with the wages fund doctrine as an integral part of the system. The model may help to clarify some of the issues that were never resolved in the spectacular debates of the nineteenth century. I dt field. our 1 writing off immediate or not think t] policies of policies out been done, 1 but also to our intelle< become so c1 studies. I do not think that, even in the purely analytical field, our knowledge is so far advanced as to justify us in writing off as superseded the propositions of all but our immediate contemporaries; and in the applied field, I do not think that we can hope to understand the problems and policies of our own day if we do not know the problems and policies out of which they grew. I suspect that damage has been done, not merely to historical and speculative culture, but also to our practical insight, by this indifference to our intellectual past—-this provincialism in timen-which has become so characteristic of our particular branch of social studies. Lionel Robbins ”The untrue abstI to the reput zation ever expunged fro express the wages fund d years after .‘ by the "fa151 stating that in that drew neoclassical century. " 3 1: doctrine as " CHAPTER I INTRODUCTION "The wages fund theory is the crowning instance of an untrue abstraction expunged from them." These words, by James Bonar, fairly well Writing forty years after Bonar, Paul Samuelson claims he has been impressed . , 2 by the "falseness and emptiness of the wage fund doctrine," stating that "' . . 4 doctrine as "an amazing tissue of inconSIStency and irrelevance." \ 1 James Bonar, Disturbing Elements lg the Study and Teaching o_f Political Economy (Baltimore: The Johns Hopkins Press, 1911), p. 75. 2Paul Samuelson, "Economic Theory and Wages," The AEESEE.9£ the Union (New York: Kelley and Millman, 1951) Ed. by David McCord Wright, p. 320. 3Ibid., p. 316. 4 (Chicago: Frank H. Knight, On The History and Method 2; Economics University of Chicago Press, 1956), p. 75. S general, a that the g1 devoted the and empty" blocks of t Senior, Mil succeeding finally lea Stuart Mill "was one of classical 5; this time 01 it "sank wi‘ less any ap] Purely illu: occurred in sense they I, behalf of t} Unheeded by 2 Such repudiations of the wages fund doctrine are quite general, although not easily explained. It seems incredible that the great thinkers of classical economics should have devoted themselves with Vigor to the espousal of such a "false and empty" theory. After having been one of the main building blocks of the classical edifice of Smith, Ricardo, Malthus, Senior, Mill and others, it was vigorously attacked in succeeding decades by Longe and Thornton, the latter“s onslaught I! finally leading to a much—discussed recantation" by John Stuart Mill in 1869. T. W. Hutchison claims that this event "was one of the more overt signs of the crumbling of the classical system,"5 and it is sometimes supposed that from this time onward the theory dropped out of economic literature—— it "sank without a trace,"6 one commentator put it. Neverthe— less any appearance that the theory succumbed that soon is purely illusory. At least two major attempts at reconstruction occurred in the last half of the nineteenth century. In a sense they were largely dying gasps. The arguments raised on behalf of the doctrine by Cairnes and Taussig remained almost unheeded by a tranquilized generation of economists. By the T. W. Hutchison, A Review of Economic Doctrines, ______—.__.____—_———_—_.__, 5 1870—1929 (Oxford: Oxford University Press, 1953), p. 13. —__—.__ 6A. C. Pigou, "Mill and the Wages Fund," Economic Journal, Vol. LIX (June. 1949). p« 177- beginning a structure 11 productivit decision-ma studied agg economy as by microeco in the main The classical t conception and time-co then it fol performed t produce tod time. In a. all product is fixed,- t? during the into the fu beginning of the twentieth century most of the classical super- structure had been replaced with the fabric of marginal productivity theory. The latter analysis relates to individual decision—making units, whereas the classical economists mainly studied aggregates of individual decision-making units-~the economy as a whole. In short, macroeconomics was replaced by microeconomic analysis as the central focus of attention in the main stream of economic writings. The origin of the wages fund theory rests on the classical theory of capital which in turn was based upon a conception of the production process as being discontinuous and time-consuming. If the production process is time-consuming then it follows that the real wages received for the work performed today must have been produced yesterday; what workers produce today reaches the form of finished goods at a later time. In any period shorter than the length of the over— all productive process, the aggregate amount of wages goods is fixed; there is a fixed fund which cannot be increased during the specific period. The number of workers divided into the fund gives the average wage rate. The foregoing is essentially the form of the doctrine as found in Smith, Malthus, Ricardo, Senior and the Mills, as well as lesser members of the classical school. Perhaps it is worth noting that the theory, when properly stated, was in "real" terms, since much confusion has occurred because of the failure classical a goods, or q and inventq wages fund of wage goo of producti period. Mo physical st being the r When the ou stock is re and the adv now include The was that la? institution contradicto. and, theref. any moment, increased r. argued, the: the thinkin. actually re- the failure to recognize and remember this simple fact. In classical economics, total capital stock consists of (l) wages~ goods, or circulating capital, and (2) machinery, buildings, and inventories of non-wage goods, or fixed capital. The wages fund doctrine conceives of the fund as a physical stock of wage goods used to support labor during the present period of production, resulting from the product of the previous period. Money wages are merely the means by which this physical stock of wage goods can be obtained, with the latter being the real equivalents of the total money wage bill. When the output of the present period is completed the capital stock is replenished (part of the stock being the wages fund) and the advance is returned to the capitalist in a form that now includes profits. The major policy implication of the wages fund doctrine was that labor unions, factory legislation and other institutional means of raising wages were futile and self— contradictory because they merely reduced aggregate profits and, therefore, investment. Given a specific population at any moment, only net additions to the capital stock could bring increased real income to the working classes. It can be argued, therefore, that the theory, because of its effect on the thinking of employers, union officials and the public, actually retarded the growth of organized labor, especially as in Great Bri The Hill, after British writ The. cogency his retracti content and critics of t regards the development of collective bargaining agencies in Great Britain and the United States. The rejection of the wages fund doctrine by John Stuart Mill, after a prolonged series of attacks by a number of British writers, is an event for which it is hard to account. The cogency of the criticisms of the doctrine cannot explain his retraction, since most of them contained little analytical content and there was certainly no empirical refutation. Most critics of the doctrine gloriously confused the monetary and real factors. The strange point is that in his eventual repudiation of the doctrine, Mill fell into the same fallacy after having clearly understood the distinction at an earlier date. It is significant, of course, that the wages fund theory flourished in the period when economists were primarily concerned with the conditions prerequisite to capital formation and economic growth. However, by the close of the nineteenth century the English capitalist System had matured to the point where the emphasis could be shifted from that of capital accumulation to the need for economic efficiency. After 1890 the marginal productivity theory of wages became increasingly popular among economists. As a matter of fact there is no inconsistency between the wages fund theory and the marginal productivity doctrine since they provide different answers to fact that a with the li] determined ' laborers in theory of pi a theory of‘ fund theory indirectly 1 the other he limits to W} but explains a. it makes to °f the main been exhumed different questions. The wages fund theory dealt with the fact that a rapid growth of capital can increase real wages, with the limits to aggregate wages at any point in time being determined by the real wage bill advanced by capitalists to laborers in the period of production. Therefore, it is a theory of production, which has incorrectly been rendered as a theory of distribution. The special insight of the wages fund theory is that the wage bargain affects distribution only indirectly through the effects on profits and investment. On the other hand, the marginal productivity doctrine explains the limits to what determines the demand for individual workers, but explains nothing about the limits to aggregate wages. The point of the present thesis is the contribution it makes to the "classical revival." In recent decades some of the main theoretical concepts of classical economics have been exhumed and refurbished: the Malthusian population principle, Say's law, and the quantity theory of money. The industrial revolution and the birth pangs of capitalism were closely associated with the original rise of the classical economics of which the wages fund theory was so fundamentally a part. It is significant that the widening of interest in classical economics is taking place in a world that is once again undergoing rapid and profound change. Perhaps the new industrial societies appearing in other parts of the world in and critiqu the wages f turn of the the history end of the 1‘ Stuart Milll 1870's and I wages fund < exist. The model of the bGtWeen the our time is related to the current "re-enlightenment." The thesis has two aims. First, to provide a survey and critique of the theoretical controversy that raged over the wages fund theory from its earliest statement up to the turn of the century. One of the most neglected periods in the history of economic thought is the interim between the end of the classical period, usually represented by John Stuart Mill's Principles, and the "marginal revolution" of the 1870's and 1890's. Aside from scattered remarks as to the wages fund controversy, a systematic treatment does not exist. The second aim is the construction of a theoretical model of the classical economics so that the relationships between the various parts of the system can be examined, with the wages fund doctrine as an integral part of the system. The model may help to clarify some aspects of classical ,economics, in general, and the wages fund theory in particular. In general the sequence of chapters and topics is chronological, covering the earliest statements of the theory by the classical economists and neglected early critics of the doctrine (Chapters II—III), through later criticisms and attempted reconstructions (Chapters V—VI). Chapter IV deals with some of the effects of the wages fund doctrine on the trade union movement in the nineteenth century. In Chapter VII is found the highly simplified model of the classical system. Chapter VIII contains an assessment of the wages fund +LnAv" Lag-.. THE! Cla: .as a race he Although the a circular I else. it is For the rate . -5.W ...-.-n -a.__ varied accor rate was the “Mk Blaug' s CHAPTER II THE WAGES FUND THEORY AND CLASSICAL ECONOMICS Classical economics saw the development of the economy las a race between capital accumulation and population growth. Although the whole Classical system can be conceptualized as a circular flow in which everything depends on everything else, it is possible to think of wages as the prime mover. For the rate of capital accumulation and popu1ation growth varied according as wages were high or low. Thus the wage rate was the crucial variable in the system. For this reason Mark Blaug's comment that "no aspect of classical economics was as little developed as wage theory”1 is disturbing. It is true that much of the discussion of the wages fund theory was ambiguous. Nevertheless it must be conceded that by the time of John Stuart Mill the doctrine had been stated clearly and unequivocally. The present chapter will provide a sketch of the wages fund theory at the hands of the major classical economists. The ”wages fund" theory undoubtedly took its name from Adam Smith’s statements occurring repeatedly in the lMark Blaug, Ricardian Economics (New Haven: Yale University Press, 1958). p. 127. . 'I. :II . : _[: t, E: In his diSCI phrases "fum "funds desti |'the demand increase but are destined But with Adam Sm ThrEIOt. used and this was Physiocratic a Subsistenc. that nothing the state Si] 0f Subsistem were greater area of the E a Rafi \fl 9 eighth chapter of the first book of the Wealph 9f Napions. In his discussion of wages Smith uses over and again the phrases "funds destined for the maintenance of labour" and "funds destined for the payment of wages." In Smith"s words, "the demand for those who live by wages, it is evident, cannot increase but in proportion to the increase of the funds which are destined for the payment of wages."2 But the idea of a wages fund was not entirely original with Adam Smith. The Physiocrats, especially Quesnay and Turgot, used the concept of avances in their theory of capital, and this was suggestive of a "wages fund." However, the physiocratic theory of wages was not the wages fund theory, but a subsistence theory of wages. Quesnay hoped to demonstrate that nothing could be deducted from wages for the support of the state since wages were already at the level of the means of subsistence. Both Quesnay and Turgot argued that if wages were greater than the minimum means of subsistence for any area of the economy, or if they fell below that point, the migration of laborers would eliminate the variation. The weakness of the physiocratic theory is that it never explained why wages are at the means of subsistence 2Adam Smith, Ag lgguiry into the Nature agd Causes Of the Wealth of Nations (New York: Modern Library Edition, ~—_—————.——.___ Random House, Inc., 1937). p. 69. See also pp. 71, 73 ff. question he Nevertheles having been, at least twi used the now expenses th1 (2) the pri: (which is a 10 necessary. In the Physiocratic Doctrine this fact was pre— supposed; in the classical economics it was the problem itself. Acutally, the physiocrats could not answer the question because they did not have a theory of population. Nevertheless, Quesnay and his followers must be credited with having been precursors of the classical theory of wages in at least two respects: (1) The theory of capital outlay that used the notion of avances annuelles meaning the recurring expenses the farmer was presumed to make in order to produce; (2) the principle of a subsistence or "iron law of wages" . . . . . 3 (which is a limiting case of the wages fund theory). Adam Smith's Theory of the Wages Fund The theory of the wages fund in Adam Smith follows logically from his treatment of capital and is really a corollary of the classical views on that subject. Adam Smith saw the productive process as a time consuming one, that is, as one in which a time period elapses until the product of labor is ready for the market. Goods for the maintenance of the laborers must therefore be provided for the 3For a history of the premolassical theory of wages, see Michael T. Wermel, The Explution 9f the Classical flage Theory (New York: Columbia University Press, 1939). See also Joseph Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), p. 663. is ready for supplies of fore. must 1 supplies of by later cla‘ Actt for labor: spent for "r a good for a for the dire using his ca PIOdigality: 11 time until the product is completed. As soon as the commodity is ready for the market the need for maintenance ceases. But supplies of food are rarely owned by workers, and they, there~ fore, must rely on the employer to provide those goods. The supplies of such goods came to be called the “wages fund," by later classical economists. Actually, Smith refers to two sources of the demand for labor: "revenue" and "stock." "Revenue" meant that amount spent for "unproductive" workers, those who do not produce a good for sale in the market. Any employer who hires workers for the direct satisfaction of his own wants is, therefore, using his capital unproductively. What is spent on them is prodigality: By not confining his expense within his income, [the prodigal] encroaches upon his capital. Like him who perverts the revenues of some pious foundation to profane purposes, he pays the wages of idleness with those funds which the frugality of his forefathers had . . . consecrated to the maintenance of industry. By diminishing the funds destined for the employment of productive labour, he necessarily diminishes . . . the quantity of that labour which adds a value to the subject upon which it is bestowed, and, consequently, the value of the annual produce of the land and labour of the whole country, the real wealth and revenue of its inhabitants. If prodigality of some was not compensated by the frugality of others, the conduct of every prodigal, by feeding the idle with the bread of the industrious, tends not only to beggar himself, but to confusion ow Smith' 5 tree of real good funds in the Smith uses t the source c funds destir wages of lat The source c emPloyers; a Smit circulating. ‘ ll - ls fixed"; 12 . . 4 impoverish his country. By far the most important part of the demand for labor is derived from "stock." The beginning of the real confusion over the wages fund can be traced to this part of Smith's treatise. At times "stock" is conceived of in terms of real goods, while at other times it refers to the money funds in the hands of capitalists. In Chapter I of Book I Smith uses the term "capital" and "stock" interchangeably as the source of wages.5 He claimed that any diminution of the funds destined for the payment of labor, "as it lowers the wages of labour, at the same time raises the profits of stock."6 The source of wages, then, is simply funds in the hands of employers; a surplus over and above the employer”s consumption. Smith then divides capital into two kinds: fixed and circulating. That part of the capital consisting of tools is "fixed"; that which is employed in the maintenance of the 4Smith, 2p. cit., p. 322. The idea of the productives ness and efficiency of private as opposed to public expenditures can be traced to this and similar passages (cf. p. 315) in Smith. This firm credo, a part of what Professor Galbraith has called the "conventional wisdom" of our society had its origin in the Wealth 9f Nations and has resulted in the social imbalance between public and private expenditures which Galbraith believes characterizes American capitalism. See John Kenneth Galbraith, The Affluent Society (Boston: Houghton Mifflin, 1958). 5Smith, Ibid, p. 87. 6Ibid., p. 90. time into t which he pr he now tell: consists of ‘ consumption} which is us Capital, thi to bring f0] the quantit3 "the great V is altogethe the circulat income appea not CoImpose l3 laborers is "circulating capital.”7 In Book II where Smith essentially enters the realm of economic dynamics by introducing time into the analysis, he clarifies his definition of capital which he previously used interchangeably with stock. Actually he now tells us that capital is only a pagp of stock° Stock consists of: (1) finished commodities reserved for immediate consumption, and (2) capital, both "fixed" and "circulating" which is used in production and is expected to yield a revenue. Capital, therefore, is that part of stock which is expected to bring forth a revenue.8 The real income of society is in the quantity of goods and services which are circulated by "the great wheel of circulation" we call money. But money is altogether different from the commodities to which it does the circulating. Smith notes that in a money economy all income appears first in the form of money. But money does not compose the real wages fund; rather the fund consists of the goods that money wages of the laborers can buy. Adam Smith must be credited with the first statement of the wages fund theory, not only in the sense that he was the first to use the term "funds" in his discussion of wages, giving the theory its particular characteristic. In addition, 7 . Ibid., pp. 262—263. 8 Loc. cit. process of supplied wi products. goods are i must bargaii with which unproductiw produce gooc presentatiox became a fei the Wages f1 later . 14 Smith showed that in a society having division of labor the process of production is time—consuming. .80 Workers must be supplied with goods until present labor results in finished products. Given the inequality of incomes, such supplies of goods are in the hands of capitalists, and therefore workers must bargain for wages. Employers have "revenue" and "capital" with which labor can be paid. The former funds hire only unproductive workers while the latter hires workers who produce goods for sale in the market. However, in Smith's presentation, there are two flows—-one money, one real. This became a fertile source of confusion in the controversy over the wages fund doctrine which started about a half century later.) Ricardo“s Treatment of the Wages Fund Theory Like Adam Smith, Ricardo at times used the term "circulating capital" to mean that part of capital which constitutes the demand for labor. His distinction between fixed and circulating capital was in terms of technical durability, but in practice circulating capital in Ricardo“s analysis consisted only of wages.9 To Ricardo"s mind, that M 9P. Sraffa, Ed., The Works and Correspondence 2: David Ricardo, Vol. IV (Cambridge: The University Press, 1951), PP- 305—306. was unders- with the i , had Adam Smj bargain in fund, and t laborers gi' defined cap. is employed tools, raw 1 to labor.10 he was quit¢ times he us part of cap: other times llcapital" i1 distinction capital: It distinc begins ; 10D Taxation(c I’iero Sraff 15 wages were paid from capital was an unquestioned premise. Although the time consuming nature of the productive process was understood by him, he did not clearly connect the fact with the importance of the payment of wages from capital as had Adam Smith. For Ricardo, wages are determined by a bargain in which the demand for labor comes from the wages fund, and the amount of this fund divided by the number of laborers gives a fixed and definite wage rate. Ricardo defined capital as that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw materials, machinery, etc., necessary to give effect to labor.lo But Ricardo did not stress the idea. In fact, he was quite careless in his discussion of this topic. At times he used the term "circulating capital" to stand for that part of capital which constitutes the demand for labor; at other times he was not so careful and merely used the term "capital" instead. He admitted the difficulty in making a distinction between the terms ”fixed" and "circulating" capital: It is difficult to define strictly, where the distinction between circulating and fixed capital begins; for there are almost infinite degrees in the loDavid Ricardo, Principles 9f Political Economy and Taxation (Cambridge: The University Press, 1951), ed. by Piero Sraffa, p. 30. we L351 - period So Ricardo i depended oni Indeed Rica: source of w: discussion 1 rigid prede' harvest of 1 would raise lead to a r:' subsist on 1 race of lab: proportion a the importar for its sigr determinatu Qt profit. Profit them 16 durability of capital. The food of a country is consumed and reproduced at least once in every year; the clothing of the labourer is probably not consumed and reproduced in less than two years; whilst his house and furniture are calculated to endure for a period of ten or twenty years.11 So Ricardo was unclear as to whether the demand for labor depended on total capital, or only on circulating capital. Indeed Ricardo's only consistency appears to be that the source of wages is some part of capital. However, in his ' ' n "12 . discuSSion of Taxes on Raw Produce Ricardo has a very rigid predetermined wages fund in mind. It consists of the harvest of past seasons. He argued that a tax on raw produce would raise the price of food to the consumer, and this would lead to a rise in wages. Laborers "would not be able to subsist on the same wages as before, and to keep up the race of labourers. Wages would inevitably rise; and in . . "l3 . . proportion as they rose, profits would fall. Herein lies the importance of the wages fund theory in Ricardo's system, for its significance lies not in his discussion of the determination 9; wages, but in his treatment of the determination f profit. The importance of the wages fund in Ricardo‘s .— profit theory has been summed up by Professor Henderson: 1 1Ibid., p. 150. 12Ibid., pp. 156—172. 13 Ibid., p. 159. are wage . . wage—profit increase pr rate of prof to the total utilization regarded fro producing th greater quan additional u Ricardo's sy amounts of 1 the produc ti wage rate . "1 it played on To 5 wages fund t consistency . 1 4Jo Them of Va 0f Maryland, 1 5La ifiarXian Syst lLondon: Ma 17 "If the rate of profit is explained by only those goods which are wage goods, then the origin of profit is a function of the wage-profit relationship and not the ability of capital to increase production."14 To Ricardo wage goods determine the rate of profit. For profits as a share of output are equal to the total physical product at the margin of land utilization minus the wages fund. Changes in wages are regarded from the standpoint of resources devoted to producing the wages fund. Given diminishing returns a greater quantity of labor comes to be embodied in each additional unit of agricultural output. This means that in Ricardo's system "the rate of profit depends ppiy on the amounts of labour and those turnover periods which concern the production and distribution of the goods forming the real "15 wage rate. Aside from this use of the wages fund theory, it played only a small part in Ricardo's analysis. To sum up, it may be said that Ricardo's use of the wages fund theory was characterized by a lack of clarity and consistency. His remarks on the subject were scattered, and 14John P. Henderson,’A Reinterpretation of Ricardo“s Theory of Value" (Unpublished Doctoral Dissertation, University Of Maryland, 1956), p. 133 n. 15 , . . n . . Ladislaus BortkieWicz, Value and Price in the Marxian System," International Economic Papers, No. 2. (London: Macmillan Co., 1952), p. 32. ._u The was complet« James Mill' : proportion 1 Capital . "l6 to increase workers are disturbed by after readir strictly cor the power of increase of dePonds on t on the incre shown in his may vary irr 18 the chief role that the doctrine played was in his theory of profits, rather than in his theory of wages. Nevertheless he conceived of the demand for labor as being determined by capital, although he did not always distinguish between fixed capital, and the wages fund. The distinction between circulating and fixed capital was completely lost at the hands of Ricardo“s disciples. In James Mill's Elements "the rate of wages depends upon the proportion between Population and Employment, in other words, Capital."l6 Mill argued that since population had a tendency to increase more rapidly than capital, wages are low and workers are poor and miserable. Ricardo himself was somewhat disturbed by this uncritical use of the wages fund theory and after reading Mill“s Elements wrote him that "it is not strictly correct" to say that "the demand for labour and the power of employing it will be in the proportion to the increase of capital . . . . The power of employing labour depends on the increase of a particular part of capital, not "17 on the increase of the whole capital. For Ricardo had shown in his chapter on machinery that the demand for labor may vary irrespective of changes in the amount of capital M 16 . , . James Mill, Elements 2; Political Economy (London: G- C. Bohn, 3rd edition, 1944), p. 41. 17 P. Sraffa, pp. cit., Vol. IX, p. 127. 011' the logic - inherited. " In ‘ came to plaj In 1816 Mrs Political Es within the I as the authc Philosophy. in England. between a gc The lesson c fully apprec Caroline Mrs. B. Caroline l8 19 through the principle of factor substitution. As Blaug has pointed out, however, ”Ricardo°s disciples failed to develop the logical implications of the system which they had inherited."18 Mrs. Marcet°s Conversations In the popular literature of the time the wages fund came to play a major role in discussions of economic policy. In 1816 Mrs. Jane H. Marcet published her gppyppppppppp pp Political Economy, a work that went through seven editions within the next twenty years. Mrs. Marcet was already known as the author of Conversations pp Chemistry pad Natural Philosophy. But her new book made her name a household word in England. The text consists of a series of conversations between a governess named Mrs. B. and a child named Caroline. The lesson on the wages fund theory must be quoted to be fully appreciated. Caroline What is it that determines the rate of wages? Mrs. B. It depends upon the proportion which capital bears to the laboring population of the country. Caroline Or. in other words. to the proporation which subsistence bears to the number of people to be maintained by it? 18 _ Blaug, pp. cit., p. 123. Mrs. B. the increase wa education c Carol in Mrs. B. 20 Mrs. B. Yes, it is this alone which regulates the rate of wages, when they are left to pursue their natural course. It is this alone which creates or destroys the demand for labor Caroline By demand for labor do you mean the demand of the poor for work, or of the capitalist for workmen? Mrs. B. Certainly the latter. The demand for labor means the demand for laborers, by those who have the means of paying them for their work, whether it be in the form of wages, maintenance or any other kind of remuneration.19 Mrs. B. then went on to explain that attempts of workers to increase wages through combinations would prove futile. Only education could save the workers from misery. Caroline Surely you would not teach political economy to the laboring classes, Mrs. B.? Mrs. B. No; but I would endeavor to give to the rising generation such education as would render them not only moral and religious, but industrious, frugal and provident . . . . We may hope that the influence of prudential habits will help to raise the poor above the degrading resource of parochial assistance, and prepare the way for the abolition of the poor=rate, a tax which falls heavily on the middle classes of people, and which is said to give rise to still more poverty than it relieves . . . . I know there— fore of no other remedy to this evil than the slow and gradual effect of education. By enlightening the minds of the lower classes, their moral habits are improved, and they rise above that state of degradation in which all feelings of dignity and independence are extinguished.20 l9 , Mrs. Jane B. Marcet, Conversations oanolitical Esgflgmy 3p Which the Elements of_Ihat Scienceiépp Familiarly EfiEiéiflég (Boston: Bowles & Dearbcrn, 19283, p. 92. 20 . Ibid., p. 176. misdirected to help the people are the progres the prejudi 21 The purpose of Mrs. Marcet”s book was to instill an understanding of the classical theory into the minds of well meaning, but misdirected, young people who might have humanitarian impulses to help the poor. As she stated in her preface, such young people are "fluctuating between the impulse of [their] heart[s} and the progress of [their] reason, and naturally are imbued with all the prejudices and popular feelings of uninformed benevolence."21 Malthus“s Theory of The Wages Fund Thomas Robert Malthus published his Principles 2; Political Economy in 1820. In this work he rejected the "iron law of wages' that followed from his theory of population growth. He saw no reason to assume that a subsistence wage was the logical outcome of economic and social forces. Never— theless he made crucial use of the wages fund theory, of which the subsistence or “iron law" theory is only a limiting case. For to Malthus the average wage could be explained only through the use of supply and demand concepts. In his treatment of the demand for labor, Malthus presented a clear statement of the wages fund theory. The welfare of the laborer, he argued, depended upon "the funds for the maintenance of labor," and must be proportional to the rapidity with which the fund 21Ibid . , p. vi . increased d workers thr working wil I is divided I an increase, fund; he tws Ada! considel the soc: 22 increases. An increase in the demand for labor is brought about by an increase in the fund; but until the time that the increased demand generates an increase in the supply of workers through its effect on population growth, those currently working will enjoy higher wages, since the larger wages fund is divided up among them. Malthus was careful not to confuse an increase in capital per pp with an increase in the wages fund; he twitted Adam Smith for this error: Adam Smith, in his chapter on the wages of labour, considers every increase in the stock or revenue of the society as an increase in the funds for the maintenance of labour . . . . Upon a nearer examination, however, it will be found that the funds for the maintenance of labour do not necessarily increase with the increase in wealth, and very rarely increases in proportion to it.22 On the contrary, Malthus held that for the economy as a whole, an increase in the stock of revenue can be considered an increase in the wages fund only if it consists of surplus food capable of supporting a greater number of laborers, that is, I! if it is a "product of the soil. Malthus‘s sharp distinction between the "product of labour" and the "product of the soil" is a corollary of his belief that the products of the soil must constantly lag behind the products of labor. Malthus contended that any general increase in the wages of labor without a corresponding increase in the production of food 22Thomas Robert Malthus, Principles 9: Political Economy, Considered with 3 View pp Their Practical Application (New York: Augustus Kelley, 1949), p. 126. 2nd Edition. (Originally published in 1820, 2nd Edition, 18 36). Wha proposition and demand 1 growth. whil This fund i: is dependeni in the supp] short run. aPPlication available a 23 can only be a nominal increase: that is, it must inevitably be followed by a rise in the price of food, leaving real wages unaffected. What Malthus's wage theory comes down to is the proposition that the average wage rate depends on the supply and demand for labor. The supply is determined by population growth, while the demand is detefmined by the wages fund. This fund is only a part of the total "stock of revenue" and is dependent upon the productivity of the soil. Any increase in the supply of labor will lead to a fall in wages, in the short run. When wages fall, there follows an increased application of labor to the same amount of capital, making available a larger quantity of food. Thus wages rise. The causal sequence is as follows: As the number of laborers increase, there is an increased demand for wage goods. The price of these goods rises and real wages fall. But a fall in real wages increases profits; capital accumulation grows, the demand for labor increases, and real wages rise again.23 It should be noted that Malthus did not argue that wages inevitably tend toward some minimum level of subsistence. The level of wages depended upon the adjustment of population to Changes in wages. That is why Malthus advocated moral 23Ibid., pp. 126-136. is his reco as a whole, the wages f wage for woI i | Perl as well as 1 was that of veritable k: and Blaug c1 PIOPagation that he was 24 . 24 restraint on the part of workers. Malthus's chief contribution to the wages fund theory is his recognition that (a) the wages fund, and not capital as a whole, determines the demand for labor, and (b) that the wages fund theory did not necessarily imply a subsistence wage for workers. ;. McCulloch Perhaps the baldest statement of the wages fund theory, as well as of the general principles of Ricardian economics, was that of John Ramsey McCulloch. Hollander called him "the . . 25 veritable keeper of the economic conSCience of England"; and Blaug credits him as being the "major factor in the rapid . . . . ‘26 . propagation of Ricardian economicsh; and James Bonar claimed 2 that he was the real author of the wages fund theory, 7 although, as we have seen, that distinction must be reserved for Adam Smith. The truth is that McCulloch was really no more, and no less, than a popularizer par excellance of Ricardo, 24ibid., pp. 163, 174, 175, 176. 2 . . 5Jacob Hollander, DaVld Ricardo. A Centenary Estimate (Baltimore: Johns Hopkins Press, 1910), p. 123. 26Blaug, pp. cit., p. 40. 27James Bonar, Malthus and His Work (London: Allen & Unwin, 1924), p. 155. wages fund 1 stated in t1 1 The; raised t as comp: of popul for rai: or Whicl to popul nugator} He did not c‘ 25 stating in over-simplified terms what had already been said by others. In 1826 in his Essay pp Wages, he argued that since wages depend on capital the accumulation of capital must precede the division of labor. The essence of McCulloch's wages fund views and their policy implications are well stated in the following quotation: There are no means whatever by which wages can be raised other than by accelerating the increase of capital as compared with population, or by retarding the increase of population compared with capital. And every scheme for raising wages, which is not founded on this principle, or which has not an increase of the ratio of capital to population for its ultimate objective, must be nugatory and ineffectual.28 He did not deviate from Ricardo in his analysis of capital, and stressed in unequivocal terms the dependence of wages on the "fund for the maintenance of laborers." Thus he added nothing new to the doctrine. Nassau.Senior With the publication of Nassau Senior's Political Economy in 1836 we have the first attempt to explain the actual determination of the wages fund. The amount of the fund depended on two factors: the productivity of labor in the production of wage goods, and on the amount of employment in 2 . 8John Ramsey McCulloch, Ag Essay pp the Circumstances Whlgp Determine the Rate p: Wages and the Conditions p: the Eééggggpg Classes (London: Longman, Brown, Green, and Lmedians. 2nd Edition, 1851), p. 16. labour we shou 26 wage goods industries. In his words: On what, then, does the extent of that fund depend? In the first place, on the productiveness of labour in the direct or indirect production of the commodities used by the labourer; and, in the second place, on the number of persons directly or indirectly employed in the production of things for the use of labourers, compared with the whole number of labouring families. If we wished to ascertain the comparative wages of the labouring population in two parishes, containing each, we will say, twenty-four labouring families, these are the only two points to which we need direct our inquiries. If we found that in one parish eighteen families, and in the other only twelve, were employed in producing commodities for the whole twenty—four, we should infer that, supposing the labour of each to be equally productive, wages must be higher by one-fourth in the first than in the second. But if we found that in the second parish labour was more productive by one-half than in the first, we should infer an equality of wages in the two.29 To Senior, the productivity of labor was a function of the intellectual, physical, and moral qualities of the laborers; the natural resources of the economy; the degree to which labor is assisted by fixed capital; and the existence or the . 30 . absence of government interference. Once the fund is created, the distributive shares between capitalist and laborers are determined by two factors: (a) the rate of profit on the advance of capital for a given period, and (b) the time period elapsing between the advance of capital 2 . . 9Nassau William Senior, An Outline of the Solence of Political Economy (New York: Augustus M. Kelley, Inc., 1938), P- 174. (Originally published in 1836). 30 Ibid., pp. 175-181. 27 . . 31 . . and the receipt of profit. Senior assumed that the period of production is of uniform length of one year, and starts at the first day of the year for everybody, when wages (in goods) are advanced. Thus the fund is irremediably determined at the beginning of the year, and all production proceeds parallel through the year. Senior's conclusion in brief is that if the capitalists decide to increase their circulating capital by devoting more laborers than usual to the production of wage goods for the following year, instead of to the production of income for themselves, in the next year they will have a greater amount of capital, wages will be higher, and the rate of profit lower. Senior pointed out that the rate of profit depends on: the amount of labour which at a previous period was devoted to the production of wages, compared with the amount of labour which these goods when produced can command.32 As to the average length of the period of production, Senior stated that it depends on the circumstances of the country and industry, and cannot be reduced to a general rule. 'Senior‘s distinct contribution to the wages-fund analysis 31Ibid., pp. 185-186. An excellent discussion of Senior's treatment of the wages fund theory can be found in ____._._——-_______._.4__—__—____. York: Augustus M. Kelly, 1949), pp. 185—193. 3 2Senior, pp. cit., p. 194. .As‘ an investig its product threefold (1 objects (th The latter of labour, " confusing m 28 was his attempt to clarify the forces at work in determining the amount and distribution of the fund, and, as Bowley has noted, he related the productivity of labor to the theory of 3 capital. 3 John Stuart Mill As Mill saw it, the subject of economics was really an investigation into "the nature of Wealth, and the laws of . . . . 34 . . . . its production and distribution." Mill retained the traditional threefold division of productive resources: labor, natural objects (the primary factors) and capital (the derived factor). The latter he defined as an "accumulated stock of the produce "35 of labour, and assiduously warned the reader against confusing money with capital: Money cannot in itself perform any part of the office of capital, since it can afford no assistance to production . . . . What capital does for production is to afford the shelter, protection, tools, and materials which the work requires, and to feed and otherwise maintain the labourers during this process. These are the services which present labour requires from past, and the produce of past, labour. Whatever things are destined for usem—destined to supply pro— ductive labour with these various prerequisites—-are Capital.36 33Bowley, pp. cit., p. 193. 34John Stuart Mill, Principles p: Political Economy (Fifth Edition; New York: D. Appleton & Co., 1858), Vol. I, p. 17. 351bid., Vol. 1., p. 83. 361bid., Vol. 1., p. 84. of the clas fund doctri 'I‘hei capital in the 1 them fo: however is a pa; be rece, investm, their r1 the cou: In. he cl aimed 29 But no sooner did Mill define capital as a stock of goods than did he confuse matters by stating the principle in terms of the ppp to which the goods are put: an unfortunate contradiction that was an fertile source of misunderstanding of the classical theory of capital in general, and the wages fund doctrine in particular: The distinction, then, between Capital and Not— capital, does not lie in the kind of commodities, but in the mind of the capitalist--in his will to employ them for one purpose rather than another; and all property, however ill adapted in itself for the use of labourers, is a part of Capital, so soon as it, or the value to be received from it, is set apart for productive re— investment. The sum of all the values so destined by their respective possessors, composes the capital of the country.37 In Mill's discussion of the factors that limit production he claimed adherence to Say's Law, stating that what was 7’ saved was immediately consumed, although this fact was not 38 at all apparent to the vulgar." There was always a market for the sale of the output for the "supply of commodities in general cannot exceed the power of purchase, nor the "39 inclination to consume. An increase in output, therefore, was only limited by the efficiency and quantity of the factors 37Ibid., Vol. I., p. 86. 381bid., Vol. 11., p. 104. 391bid., Vol. 11., p. 107° life may be prevents hu of the food the supply So of capital, Since a of abst a futur two thi can be prompt Recording t on many var for, giVen the output. \ 40 30 of produCtion. So Mill concerned himself with the forces that limited these factors. Relying on his assumption of the validity of the Malthusian theory of population, Mill immediately rejected the notion that there can be a limitation of the quantity of labor: "The power of multiplication inherent in all organic life may be regarded as infinite."4O The only force which prevents humans from overstocking the earth is the limitation of the food supply. As the quantity of nutriment increases the supply of labor increases. So far as regards the limitations on the accumulation of capital, Mill says: Since all capital is the product of saving, that is, of abstinence from present consumption for the sake of a future good, the increase of capital must depend upon two things-—the amount of the fund from which savings can be made and the strength of the disposition which prompt to it.41 According to Mill, the inducement to save and invest depended on many variables which, for purposes of this discussion we need not go into. Suffice it to say that Mill saw no reason why the process of capital accumulation should be limited, for, given Say's Law, markets will always expand to absorb the output. 4OIbid., Vol. I, p. 206. 4lIbid., Vol. I, pp- 213—214. Hill found of economic the land, in degree: I I 1 el than pr to the importa The princip progress. either thro diminishing 31 So the only element which was limited in quantity and not susceptible of indefinite increase was 1and.. Like Ricardo, Mill found nature to be the limiting factor in the progress of economic growth. By increasing the quantity of labor on the land, the product would not be increased in an equal degree: . . . every increase of produce is obtained by a more than proporational increase in the application of labour to the land . . . . This general law . . . is the most important proposition in political economy.42 The principle of diminishing returns was antagonistic to progress. Technology increased output per unit of labor either through increasing the productivity of the land or diminishing the quantity of labor necessary to obtain a given quantity of produce. Like nearly all of his predecessors, Mill minimized the importance of technology feeling that the stronger force was the law of diminishing returns. So long as the rate of increase of population was more rapid than technological progress, the future of the human race was not an optimistic one. Mill believed that the principle of diminishing returns would cause a fall in the rate of profit to the minimum, a decline in the rate of capital accumulation, and a movement Mm— 4211oid., Vol. I, p. 230° at e ., The station‘ the economy] Mil' necessarily wages could of living. their wages eMigration 32 to the ”stationary state": It must always have been seen, more or less distinctly by political economists, that the increase of wealth is not boundless: that at the end of what they term the progressive state lies the stationary state, that all progress in wealth is but a postponement of this, and that each step in advance is an approach to it.43 The stationary state exists until technological changes jar the economy into movement again. Mill did not believe that the stationary state was necessarily accompanied by a mere subsistence wage level. For wages could be increased by raising the laborers“ standard of living. He felt that individual workers could also raise their wages by getting out of the laboring class, and by . . . . 44 emigration into less populous regions. In his theory of the general level of wages, Mill uncritically accepted the wages fund theory. He stated that the level of wages was determined by the ratio of population to capital, or, in other words, by the relation between the supply and demand of labor. By population, Mill meant only members of the laboring class, or those who work for hire; and by capital, Mill meant only circulating capital expended in the direct purchase of labor power. Such capital was necessary because productive operations "require to be 43Ibid., Vol. II, p. 334. 44Ibid., Vol. II, pp. 341—381. supply 1 proporti is here: of th051 culatinq the par] labour. which, 1 exchangn domestit There i: familia: wages f1 labour 1 t0 overi say that Will be however, literal Witl 33 continued a certain time before their fruits are obtained.“ Mill's statement of the causes of wages was very brief and pointed, and since it is all that Mill ever said on the wages fund theory until his "recantation" it is worth quoting in full: 0 Wages, then depend mainly upon the demand and supply of labour; or, as it is often expressed, on the proportion between population and capital. By population is here meant the number of the labouring class, or rather of those who work for hire; and by capital, only cir— culating capital, and not even the Whole of that, but the part which is expended in the direct purchase of labour. To this, however, must be added all funds which, without forming a part of capital, are paid in exchange for labour, such as the wages of soldiers, domestic servants, and all other unproductive labourers. There is unfortunately no mode of expressing by one familiar term, the aggregate of what may be called the wages fund of a country; and as the wages of productive labour form nearly the whole of that fund, it is usual to overlook the smaller and less important part, and to say that wages depend on population and capital. It will be convenient to employ this expression, remembering, however, to consider it as elliptical, and not as a literal statement of the whole truth. With these limitations of the terms, wages not only depend on the relative amount of capital and population, but cannot, under the rule of competition, be affected by anything else. Wages (meaning, of course, the general rate) cannot rise but by an increase of the aggregate funds employed in hiring labourers, or a diminution in the number of competitors for hire; nor fall, except either by a diminution of the funds devoted to paying labour, or by an increase in the number of labourers to be paid.45 From this Mill concluded that labor unions could not raise 45Ibid., Vol. I, pp. 420421. fund theory of the earli to be an ord and demand, ‘ much justifi major critic ”gogdinary case of. the operation of the law of 'sf‘c’ S ‘ and demand, a belief' which atlater chapter will show has much justification. It was just this point that led to 'the major Qr-iticisms of the doctrine in the late 1860's. The after it we! Although th: of classica subsequent fund theory austere and completely Ricardian e and by the other Point 0v‘3I‘throw t Wild haVe 35 CHAPTER III SOME NEGLECTED EARLY CRITICS OF THE WAGES FUND THEORY The wages fund theory came under attack fifty years after it was first spelled out in the Wealth 9: Nations. Although the early heretics each assailed a fundamental part of classical economics, their incursions had no effect on the subsequent development of the classical system. The wages fund theory was a key part of Ricardian economics, and Ricardo's austere and unpalatable doctrines, had "conquered England as completely as the Holy Inquisition conquered Spain."l Ricardian economics was accepted by the public, by statesmen, and by the academic world. Controversy was suspended and all other points of view ceased to be discussed. In order to overthrow the wages fund theory Ricardian economics itself would have required abandonment. In economics it takes a theory to kill a theory, and since none of the first critics of the wages fund doctrine came forward with a new system of thought, the victory of classical economics was complete. M..— I John Maynard Keynes, The General Theory of Employment, EEEEESEE and Money (New York: Harcourt, Brace, 1936), p. 32. curiously n Tnis neglec "the first,‘ the 'Ricard; discovery 0: March 9, 181 "I have rea: views agree linked West world, near 36 West's Criticisms of the Wages Fund Theory The earliest writer to question the validity of the wages fund doctrine was Sir Edward West, one of the most curiously neglected figures in the history of economic thought. This neglect is hard to explain since Cannan has called him, "the first, though not the name—father, and the greatest of . . 2 . . . . the 'Ricardian school,'" and credits him With the independent . . . . . 3 discovery of the law of diminishing returns. Moreover, on March 9, 1815, Ricardo wrote to Malthus concerning West, "I have read his book with attention and I find that his . . ,4 . Views agree very much With my own.’ Two years later Ricardo linked West's name with Malthus as having "presented to the . 5 world, nearly at the same moment, the true doctrine of rent." ————__—_—.—_.__.____._—__——— Ibid., p. 123. 4Letters of David Ricardo to Thomas Robert Malthus 1810—1823 (Oxford: Oxford University Press, 1887), edited by James Bonar, p. 63. 5 David Ricardo, Principles 9f Political Economy and Taxation (Cambridge: The University Press, 1951), edited by P. Sraffa, p. 5. In the pref .. true doctrirw and said, "I( claim to the: before the p claim is wel West wages 0f wor‘ But he makes 37 We may now credit this remarkable man with another "first," since in 1826 he managed to raise the initial challenge to the wages fund theory.6 true doctrine of rent" and the law of diminishing returns, and said, "The author thinks is is not unfair to assert his claim to these and other important principles; his essay is before the public, and the public will decide how far the claim is well founded."7 West agrees with Smith, Ricardo, and Malthus that real wages of workers cannot increase without an increase of capital. But he makes one essential point against the doctrine, namely, x.“— The facts about West's life are somewhat scanty. He was born in 1782 and graduated from Oxford with the B.A. in 1804 and the M.A. in 1807. In 1822 he was knighted and one year later was appointed to the office of Chief Justice of Bombay. His anticipation of Malthus's rent theory and the principle of diminishing returns was suggested to him by evidence presented before the corn committees of 1813—14. The attack on the wages—fund theory was published in‘a pamphlet in 1826, although it was actually completed a few years earlier. A final and most ambitious economic work was in preparation at the time of his death. The Dictionary 9; National Biography From Earliest Times pg 1900 (London: OXford University Press), Vol. XX, p. 1240. 7Sir Edward West, Price 9: Corn and Wages pf Labour W133 Observations upon 23. Smith's, Mp. Ricardo's Egg Mp. MELEEEE:§_BSEE;ineS Upon Those Subjects (London: John Hatchard and Son, 1826), p. vii. Like Adam Smith, West was an empiricist. His pamphlet is replete with statistical tables showing the price of wheat per quarter for each year from 1744 to 1821. that an inc unless ther Hence, the condition f arises, 'W' increase i West' 5 ans in demand f Eventually, increase i We was that i. consumer de deny that 1: that the qt the demand determine 1 It and not any inc These x they c< capitai the re. sense < capita. withou might depend for la 38 that an increase of capital will not be used to hire workers unless there is an effective demand for the final product. Hence, the increase in capital is a necessary but not sufficient condition for increasing wages. But the obvious objection arises, "Will an increase in demand necessarily lead to an increase in capital accumulation, and a greater wages fund?" West's answer is in the affirmative. He argues that an increase in demand for final products will increase money wages first. Eventually, however, an increased money wage will result in an increase in real wages. West's objection to the wages—fund theory, therefore, was that it neglected the important factor of aggregate consumer demand. It must be reiterated that West did not deny that real wages are paid out of capital. But he felt that the quantity of available wage goods did not determine the demand for labor any more than did the quantity of cloth determine the demand for coats: It is obvious that if wages were all paid in kind, and not in money, an increase of capital must precede any increase of the demand for labour and of wages. These wages would be the real wages of labour, and they could not be increased without any increase of capital, that is, of the necessaries, etc., of which the real wages are constituted. Wages certainly in this sense could not be increased without an increase of capital; nor could the number of coats be increased without an increase of the quantity of cloth. But we might just as well say, that the demand for coats depends upon the quantity of cloth, as that the demand for labour depends upon the quantity of capital. error in ec the demand "This mode upon the s argued Wes the demand an increas efforts of native empl cause a shi in the prod in real wag depends not on the pres It hypothesis Rees has 51 39 Though the number of coats cannot be increased without an increase in the quantity of cloth, increase the demand for and the price of coats, and the cloth will soon be manufactured; so increase the demand for and the price of labour and the necessaries which the 8 labourers require will soon be raised and manufactured. West felt.that this important point waslmissed because of an error in economic reasoning: the failure to recognize that the demand for commodities is really the demand for labor. "This mode of reasoning is adopted in every work of note upon the subject of political economy."9 The truth is, argued West, that if the demand for, say, hats increases, the demand for labor will likewise rise. For there will occur an increase in the money wages of workers resulting from the efforts of hat manufacturers to bid workers away from alter— native employments. But the increase in money wages will cause a shift in demand to wage goods, resulting in an increase in the production of such goods, and eventually an increase in real wages. To West, therefore, the demand for labor depends not so much on previous capital accumulations, as on the present staua of effective demand. It appears that West was an early believer in the hypothesis that inflation causes real wages to rise. Professor Rees has shown that since 1889 there is a high positive 8Ibid., pp. 80-81. 9Ibid., p. 79. 9:51,: 5's? £91 13C! HUG on 912': but waist is e Hm suit-1:91 EA}. ‘. ,. . “P's/OW 4 2'11 I16 a. web m .(l .4 5‘1}: correlation wages and p as Kessel a cannot be i an increase since durin caPita incr improvement enabling wa improvement increases i theory. So . attack did 3 real wages increase be West's crit 0f inflatic recognitior. 10} Productivii York: The 111 Validity o; M Amer ic: 40 correlation between real wages on the one hand and money wages and prices on the other in the United States. However, as Kessel and Alchian have noted, these positive correlations cannot be interpreted as evidence for the proposition that an increase in money wages will cause an increase in real wages since during this period of time there also occurred a per capita increase in capital, improvements in technology, and improvements in the skills of the labor force——all of these enabling wages to rise in spite of inflation.11 Of course, improvements in productivity and capital formation leading to increases in wages is quite compatible with the wages fund theory. So far as the wages fund theory is concerned, West's attack did nothing to damage it. He accepted the idea that real wages arexpaid out of capital, and that capital must increase before real wages will rise. The importance of West‘s criticism is that it showed an awareness of the possibility of inflation as a stimulant to economic growth. Further, his recognition of the importance of consumer demand as a l . OAlbert Rees, "Patterns of Wages, Prices, and Productivity," Wages, Prices, Profits, and Productivity (New York: The Fifteenth American Assembly, 1959), pp. 11-59. llR. A. Kessel and Armen Alchian, "The Meaning and Validity of the Inflation—Induced Lag of Wages Behind Prices," The American Economic Review, Vol. L (March, 1960), p. 44. who, along Major Dougl imperfectl with clear hypotheses A theory, a to the doc. liberal whc pursuit of However, Hi questions < measures f< the repeal abolition 1 Hi 12 IX, pp. 81 41 determinant of employment puts him in the same league as Malthus, and he should be added to Keynes's list of heretics who, along with Mandeville, Malthus, Gesell, Hobson, and Major Douglas, "preferred to see the truth obscurely and imperfectly rather than to maintain error, reached indeed with clearness and consistency, and by easy logic, but on hypotheses inappropriate to the facts."12 Godfrey Higgins: A Mercantilist's Criticism Of the Wages Fund Theory A short time after West made his criticisms of the theory, a very obscure archeologist wrote an article objecting to the doctrine. The author was Godfrey Higgins, an active liberal who had been engaged in the study of archeology in pursuit of his interest in the history of religious beliefs. However, Higgins was also keenly interested in the practical questions of political economy. He took part in the earliest measures for the better treatment of the insane; he favored the repeal of the corn laws, and in 1832 advocated the 13 abolition of the Irish Church. Higgins directed his broadsides against the wages 12Keynes, pp. cit., p. 371. 13Dictionary 2: National Biography, pp. cit., Vol. IX, pp. 819—820. classes as increases. highly dan- existence . out that: It deduce. demand and dii a scie totall of the of the the st: reader The Emory lay believed tl senses by I sometimes 3 that McCulI untrue and l4 McCulloch' of Wages, " P- 251, 254 42 fund theory of McCulloch. He felt it was necessary to answer McCulloch since the latter's work had been made available in an inexpensive edition in order to educate the laboring classes as to the futility of any attempts to gain wage increases. Higgins felt that the analysis was erroneous and highly dangerous, and badly in need of refutation. "The existence of millions is at stake," he cautioned, and pointed out that: It ought never to be forgotten that the conclusions deduced by the economists, and on which they found their demand for changes are the results of the most abstruse and difficult reasoning known in any science whatever; a science in which the propositions in general are totally incapable of anything like the demonstrations of the exact sciences; though, like all philosophers of the day, its professors boast that it is capable of the strictest demonstration with how much truth, the reader must now be pretty well enabled to judge.14 The roots of Higgins' objection to the wages fund theory lay in the definition of the term "capital." He believed that the word had been used in two entirely different senses by McCulloch, and it was by confounding them and by sometimes reasoning from one, and sometimes from the other, that McCulloch "has been induced to draw conclusions perfectly untrue and erroneous." McCulloch had defined capital as the “h...— 14 . . n , Godfrey Higgins, Esq., Observations on Mr. McCulloch's Doctrines Respecting the Corn Laws, and the Rate of Wages," The Pamphleteer, Vol. XXVI (October 12, 1826), P- 251,254. existence. required fd portion fon' According t magnitude c Higgins dio‘ argument we metals cou] wages. Hig g Purely mone i 'I' Whe " to what ' larger 4' given I g each t1 I that ij ' Will h, 50 div y if two -'_-. diVide( '— i f ' It ' .‘ 3'? Was reason 57-" hi. of money w t ‘ 2:5,. :3"; 15. 43 produce of industry which can be made directly available either to the support of laborers or to the facilitating of production. That portion of capital which supports human existence consists of food, clothes, and other articles required for the use and consumption of the laborers. This portion forms the fund out of which wages must be paid. According to McCulloch, the rate of wages depended on the magnitude of this fund divided by the number of laborers. Higgins did not object to this. But the crux of Higgins's argument was that McCulloch did not recognize that precious metals could increase national capital without increasing wages. Higgins seemed to interpret the wages fund theory in purely monetary terms as indicated by the following quotation: When stripped of its formal and technical language, to what does it amount? Simply to this; that if a larger sum of money be divided as wages amongst a given number of persons, they will have a larger sum each than if a smaller sum be divided amongst them; that if two pounds be divided amongst four men, they will have each a larger sum than if only one pound be so divided; that is, the rate of wages would be higher if two pounds be divided, than if only one were so divided.15 It is clear from McCulloch’s argument that the latter was reasoning in real terms. Higgins, of course, is thinking of money wages, and not real wages. This being the case and 1 5Ibid., p. 251. The evident in l confusing g It quantit may be or the to such on the are of fact, 9 with th that is the rat increas would e our 90] ounces Suppose Off to is incr That is Hic_ and Preciom therefore, not increag \ l6. 44 believing he had stated McCulloch's position fairly, he therefore charged that McCulloch had made a mistake of con— fusing capital appropriated to the payment of wages, with national capital, which to Higgins, should include bullion. The extent of Higginso misunderstanding is made evident in his commission of the mercantilist fallacy of confusing precious metals with wealth: It cannot be denied that there are always large quantities of capital in every country which can or may be made available to the support of human existence or the facilitating of production, which are not turned to such purpose, and therefore can have no influence on the rate of wages. All gold and silver in hoards are of this description. Mr. McCulloch's argument, in fact, goes to prove that the rate of wages will increase with the increase of national wealth. I greatly fear that is so far from being true, that, on the contrary, the rate of wages decreases as civilization and wealth increase. I much fear that the history of the world would establish this mortifying result . . . . Suppose our gold companies of Mexico should send us 1,000,000 ounces of gold, the rate of wages will not be affected. Suppose we hoarde them against a future war, or send them off to buy luxuries, plate, pictures . . . . Our capital is increased but the rate of wages is not affected. That is what happened to Spain.16 Higgins understands McCulloch to have included gold and precious metals as part of national capital. But McCulloch was careful to exclude bullion from his definition and, therefore, Higgins” objection that an increase in gold would not increase wages is quite beside the point. In short, l6Ibid., pp. 251, 253. this objec - classical be considenI That Higgin' proposition Higgins was and difficu It is not t frantic rus theories. unfortunate "destructic dEStructivE 45 Higgins stricture is that an increase in national capital does not always lead to higher wages, since an influx of gold into England would not necessarily increase wages. But this objection is specious because gold is not included in the classical definitions of national capital. This might even be considered the special lesson of Adam Smith's treatise. That Higgins should have misunderstood this fundamental proposithon is evidence that economics at least so far as Higgins was concerned, did indeed contain "the most abstruse and difficult reasoning known in any science whatever." It is not too surprising that such an argument caused no frantic rush among political economists to revise their theories. To Higgins this latter fact must have seemed most unfortunate since he believed the wages fund theory to be "destructive to the very existence of society in this country—— destructive actually to the food of many millions of people."17 Thomas Hodgskin The next writer to raise doubts about the wages fund theory was an early socialist, Thomas Hodgskin. However, Hodgskin did not attack the properly stated form of the doctrine, but the theory in money terms. He argued that the 1 71bid., p. 254. U .- I 11583:, Van ‘N’j’T _.'_ 2 UL)” {"' T.P ”1 Westminster; precursor d of the term 46 ”real wages of the labourers do not consist in money, but what the money buys" and he denied that wages are paid by capital: "Labour, not capital, pays all wages."l8 T. Perronet Thompson: An Early Institutionalist A far more interesting analysis appeared in the Westminster Review in 1831. The article can be considered a precursor of institutional economics in the Veblenian sense of the term. T. Perronet Thompson, of Queens College, Cambridge, 1 . . . . 8Hodgskins Views were stated in his volume, Popular Political Economy published in 1827. His discussion of the wages fund theory was very scanty and added nothing to the general debate. We shall, therefore, present it only the courtesy of a footnote. His whole discussion is limited to the following quotation: When a capitalist "who owns a brew— house and all the instruments and material requisite for making porter, pays the actual brewer with the coins he has received for his beer, and then buys bread, while the journeymen bakers buy porter With the money wages, which is afterward passed to the owner of the brew—house, is it not plain that the real wages of both these parties consist of the produce of the other; or that the bread made by the journeyman baker pays for the porter made by the journeyman brewer? But the same is the case with all other commodities." P. 247. Now it hardly is a refutation of the wages fund theory to assert that goods exchange for goods. Hodgskin neglects the crucial problem involved—-the time—consuming nature of the productive process; the fact that workers today consume goods produced yesterday. It is true that they were made by other workers, but that does not mean such goods do not constitute capital. And his demonstration that real wages consists in what money wages can buy actually strengthens the wages fund theory. However, it should be noted that Werner Stark considers Hodgskin's attack on the theory "perhaps his best contribution to economic science in the narrow and technical sense of the word." See Werner Stark, The Ideal Foundations 2: Economic Thought (London: Oxford University Press, 1944), p. 71. in Re Opposit View (Lo \ 47 presented an argument purporting to subject the theories of political economy to test. According to Thompson economics is a branch of natural science and susceptible to the scientific method. The analysis of supply and demand involves the same kind of objective phenomena as does the subject matter of' chemistry or physics. For no reason can be given why the connexion, for example, between the demand for a given substance and the supply should not be as legitimate an object of philosophical examination as the connexion between two bodies at the ends of a lever or between two substances which exercise a chemical action upon each other . The object of this article is to bring the opinion of what has denominated itself ”the new school of political economy" to the test of something like such examination as is undergone by every theory which makes up part of the system of education in an English university.19 To Thompson the wages fund theory cannot hear close scrutiny. In order to develop an adequate theory of wages one must explain the underlying forces that cause wages to be what they are in different countries. By real wages Thompson means the actual composition of wage goods. For example, real wages in Ireland might consist largely of potatoes while in England some amount of roast beef would be assumed. Any explanation of wages must explain these differences. To Thompson the variations are a result of ”the force of opinion 19T. Perronet Thompson, ”The True Theory of Rent, in Opposition to Mr. Ricardo and Others," The Westminster Review (London, 1831): P- 5- habits the End potatoei not the would 9 utterly of Whic: causes everyth present in mode battles the pro classes which 111 which c Of his 48 . l.20 . . . . . . and habit. But this IS inconSistent Wlth the explanation given by the wages fund theory. A comparison of capital to population cannot give us any insights into the opinions and habits that cause wages to be what they are: Englishmen have the physical capability of living on potatoes as much as other men, but fortunately they have not the habit; and though it might be wrong to say they would starve first in their own proper persons, they will utterly refuse to multiply upon such a diet, the effect of which on population is ultimately the same. And the causes of these differences of habit are to be found in everything that has affected the past or affects the present condition of society——in ancient institutions, in modern improvements, in past and present laws, in battles lost and won, in reformations of religion, in the progress of science, in the manners of the higher classes, in the information of the lower, in everything which man can neither suddenly alter nor create, and which connects his present mode of existence with that of his ancestors and his posterity.21 Thompson argues that fluctuations regularly take place in the ratio of capital to population, but "the element which . . . keeps the average rate of wages to one point and not to another, or which determines the point to which wages "22 shall tend as mean, is not physical but mental. Thompson goes on to point out that most nations are considerably above the point of mere subsistence in their wage rates. So opinion 20Ibid., p. 16. 2 lIbid., p. 16. 2 21bid., p. 17. mfg-amok " ' a... 11- ” “'5' '9“ {W 3d 1+ ggufifiVl 9." - '-. ifef ‘ FIT"; f—'""" ' . .. . misunderly hammer .7 1!};- ”7' v -,:3_ 'li Pub that a' at all‘ them to shall w selves— the sta In was that it forces that cannot hold of society I. ' determinati attack was economics : “P 0f insti 23 0f a conte1 structure . just as it that defin relative a coTlditions Ame. The 1952), if 49 and habit determine wages as well as the rate of profit, ”which are only the wages of another description of labourers." The ultimate determinant of wages and profits is the institutional structure of society. Such prices merely register the underlying social framework. Public opinion and custom require, for example, that a shopkeeper shall have a good coat, shall drink at all times malt liquor and sometimes wine, and give them to his neighbors——that his wife and daughters . . shall wear clean linen, and moreover not wash it them— selves—~and that when they travel, it shall be by the stage—coach and not by the wagon.23 In sum, Thompson's objection to the wages-fund theory was that it did not search deeply enough into the submerged forces that ultimately determine wages. But such a criticism cannot hold up against a theory that takes the institutions of society as given data and then proceeds to explain the determination of wages. The significance of Thompson's attack was that it raised the question of the proper role of economics: Should it be a study of the evolution and make— up of institutions, or should economists accept them as given 23Loc. cit.,Compare Thompson's statement with that of a contemporary institutionalist, C. E. Ayres, "It is the structure of society that allocates the community's resources, just as it is the state of the community's arts and crafts that defines those resources determining their over—all relative abundance. Price patterns reveal those underlying conditions and structures and give effect to them." C. E. Ayres, Egg Industrial Economy (New York: Houghton—Mifflin, 1952), p. 370. .r, of the wage Jones in 18 delivered i language ir the point 1 capital whc with capita 50 and go on from there to discuss resources utilization? The issue was decided in favor of the former treatment by most economic heretics, in particular the American institutionalists. But the latter method became the approach of the classical economic tradition. Richard Jones Brief mention must be made at this point of a discussion of the wages fund theory at the hands of Reverend Richard Jones in 1833.24 In a series of lectures on wages which he delivered in April of 1833, Jones refers to the inaccuracy of language involved in the discussions of the wages fund theory, the point being that there is a tendency to confuse "the word capital when used . . . to denote the whole of this fund, with capital in its narrower and more appropriate sense of 24 . . Jones was a graduate of Caius College, Cambridge, from which he took his B.A. and M.A. in 1816 and 1819 respectively. In 1833 he was appointed professor of political economy at King's College, London, a position which he resigned in 1835 in order to succeed Malthus in the chair of political economy and history at the East India College at Haileybury. Ironically, he became one of Malthuses severest critics. According to his biographer, Jones was midway between Adam Smith and Ricardo, more "historical" than the former, less historical than the latter. "It cannot be said that his works establish any new principle; they introduced modifications into others previously formulated. His greatest claim to economic fame rests on his recognition of the necessity of the inductive method." Dictionary 92 National Biography, an. cit., Vol. IX, p. 1045. _-,i'18 ., ..-. , ‘h’ EH3 10 '1‘. "- fits the stocks purposes),d labor. So stock of ca capital not (that is, i the direct that capita fund is wr< possibility J01 population not necess it may sti of increas a decrease 0f article 2! flags 1 London, A] 51 'That portion of the stock of a country which is employed . 2 with a view to profit.'” 5 The amount of capital devoted to the maintenance of labor may vary, independently of any changes in the whole amount of capital. Capital (that is, the stock of accumulated wealth employed for profit making purposes) can increase without increasing the demand for labor. So the wages fund can vary or stay fixed with any stock of capital. In other words, Jones was warning that capital not only consists of wage goods, but also of machinery (that is, fixed capital). The latter cannot be used in ‘the direct satisfaction of human wants. Hence, to assume that capital accumulation per gg will increase the wages fund is wrong. Jones was essentially pointing out the possibility of technological unemployment. Jones also objected to the Malthusian principle of population on the grounds that an increase of wages would not necessarily cause an increase in population. Instead, it may stimulate new wants and consumption "leaving the rate of increase stationary, or, in some instances retarding it; a decrease in the rate of wages may diminish the consumption of articles subservient to artificial and secondary wants 25Rev. Richard Jones, 5 Syllabus 9: a Course of Lectures 93 the Wages of Labor, delivered at King’s College, London, April, 1833 (London: John Murray, 1833), p. 51. '4 .fnv'” 1m sail! h , all J51 a A "' -. Zh-s-r stun-.1193: 'm i; f -,- . (b'llf'J . . ".111 .J .' ‘i .- W: I: ma ( ' 043 03 . '53.: £9030 ':. ' H3542 against thef theorists. wrote a Sta of that stu P°Pulation vigorously early marri his statist time even t rQCOIIImenclat measures tc in Such a , It Partly embr aC1 distre, of the \- 26 52 ' ' ”26 leaving the rate of increase stationary or accelerated. Thomas Hopkins The next writer to discuss the wages fund theory directed his attack not against the theory itself, but against the policy implications derived from it by the theorists. The critic was Thomas Hopkins, an historian who wrote a statistical history of Great Britain. In the course of that study, Hopkins argued the thesis that increases in population are necessary to economic progress, and he vigorously attacked the view of Malthusians who argued that early marriages should be discouraged. Hopkins claimed that his statistical studies indicated that wages had risen over time even though population had also increased. The policy recommendation of Malthusians and wage fund adherents was measures to decrease population. Hopkins saw much contrivance in such a view: It appears to have obtained countenance and support partly from the avidity with which the wealthy classes embraced a theory which removed the odium of causing distress from themselves and threw it on the improvidence of the people .27 26Ibid., p. 56. 27Thomas Hopkins, Great Britain for the Last Forty Years; Being an Historical and Analytical Account 2: the Eiaéflgg, Economy, and General Condition, During that Period (London: Simpkin and Marshall, 1834), p. 55. wages will population this quest' economists strange ov = believer ir and entrepi Workers alc of workers workers wil political ¢ 0f the pee] 28. 29. 30' 53 The problem involved in the wages fund theory, he felt, was one of ceteris paribus. The theory states, for example, that if capital is increased, population remaining constant, wages will rise. But, says Hopkins, this "is not the real point at issue:-—the question is, if you reduce the labouring population will capital also be reduced?"28 Hopkins answered this question in the affirmative. He thought that most economists were unaware that labor creates capital, and "this strange oversight has led to the absurdities that have been advanced respecting the excessive population of Great Britain; and the means of improving the conditions of the people by reducing their numbers."29 Hopkins obviously was a strong believer in the labor theory of value, claiming that landlords ‘and entrepreneurs "create nothing that operates as capital." Workers alone create the wages fund, and reducing the number of workers must reduce the fund. Increasing the number of workers will have the opposite effect. He concluded that political economy is out of sympathy with the "great body . . . 3 of the people" and hence this inSight goes unrecognized. O . n _ a a o J 15’ ., ,e- r A I " r, I _ . . s_ ‘ ~v ,. I é,,j.-'.,.‘;.,,,-' apjjaluqaq $9.19!”! £53: an: Jun 5:" affix ,aniiqcu aysa .3ua .al + .1 1 Mmflhws " “' "" " -'-'" r---' "f “I 1:13:11; -'§7—-2B£l8“2 {‘01. _"-'r- II. "..‘... -. ._ .. . - . wage thee I : if»: no '. _ ‘ .3 . income rec = rm 1' :t asap . exerc15e - <1 2 imrmom of the cou legislatio theory dir = importance [If of marginal 1"": ‘ [If depend on i i! I, ‘ argued tha1 it; ‘1. and demand existing ri th< cap able 311 and receiv< the distim economy at 1834 when 1 Law at Dub. fiflfiflm. 32 ”slivers: : Millikan a: 54 Mountifort Longfield The last theorist whom we must mention before we come to the serious controversy of the 1860's is Mountifort Longfield.31 Longfield felt that there was no subject more important than wage theory because workers are the most numerous of the income receivers, and "the opinions held respecting them may exercise an immense influence over the peace and happiness of the country, independent of the effect they may have upon legislation."32 Longfield did not attack the wages fund theory directly; indeed, he completely ignored it. But his importance lies in the fact that he was a striking precursor of marginal analysis. He neglected the proposition that wages depend on the ratio between capital and labor. Instead he argued that they depend upon the relation between the supply and demand of labor: "The supply consists of the present existing race of laborers" while the demand is the utility or value of the work which they are capable of performing. Menial servants, and those 31Longfield was educated at Trinity College, Dublin, and received the M.A. in 1829 and the LL.D. in 1831. He has the distinction of being the first professor of political economy at Trinity College, a post he held from 1832 until 1834 when he became Regius Professor of Feudal and English Law at Dublin. He died in l884. Dictionary of National W, Vol. XII, pp. 119—120. 32Mountifort Longfield, Lectures 9n Political Economy Qélizgggg in Trinity and Michaelmas Terms (Dublin: Richard Milliken and Son, 1834), p. 201. 0f had no do , and cannot In of the wag writers, 5 attacks we did not di: as Higgins than it re, had mainly were really of consume, came close were ignor probably b treatment 33 34 55 labourers usually termed unproductive, must be maintained by funds derived from other sources; but the wages of the great mass of labourers must be paid out of the produce, or the price of the produce of their labour° This gives us the measure of each labourers wage in the articles which he contributes to produce, and by proportion we ascertain the quantity of any other article which he can procure in exchange for them. 33 Of the universal applicability of the theory Longfield had no doubts since it "is founded upon mere abstract reasoning, . . 34 and cannot be false in any time or country." In summary, we may note that the earliest criticisms of the wages fund theory were largely at the hands of obscure writers, some of whom were not professional economists. Their attacks Were not very powerful, either because the critics did not distinguish between monetary and real factors, such as Higgins; or they insisted that the theory should do more than it really set out to do (Thompson). Hodgskin and Jones had mainly semantical objections, while West and Longfield were reafly ahead of their time. West recognized the importance of consumer demand as a factor in the demand for labor; Longfield came close to stating a marginal productivity theory. Both This is were ignored by the leading economists of the day. Probably because none of the writers developed an extensive treatment of their views. Most of the tracts were devoted to 33Ibid., p. 210. 34Ibid., p. 212. union movement. The influence on trade union g; be the subject of the next chapter. sins: ' all: utfim' ' 1. 'd"-'!H: i” ' . w- "" Q‘Iijgbfih-Is '- -- "' reel ”Io—Ht“ -- n5 finch-u!- ~ - 1ndst ed: 5 fl ...-{'j' I I L century, a‘ in the seni more than 1 working cla and the nee the industi |II interest i: a . | i 57 CHAPTER IV THE WAGES FUND THEORY AND THE TRADE UNION MOVEMENT It might seem curious, at first that the nineteenth century, a period in which so many great advances were made in the sentiment of humanity, witnessed the development of no more than haphazard attempts at improving the lot of the working classes. There were, of course, well-meaning people, and the need for a new approach to mass misery occasioned by the industrial revolution was proved by the widespread interest in the reform of the Poor Laws. In addition, there were many supporters of social reform among the most influential men of the day: Disraeli, Owen, Dickens, Shaftesbury, Carlyle, to name only a few. If this was the case, why was it that no large scale efforts were made to deal sympathetically with the problem through labor legislation and trade unionism? The only possible answer lies in the ideas that molded men's outlook at that period. One historian has noted that in 1832, there was "a certain callousness, an indifference to suffering and in some reSpects an invincible blindness."l M..— lErnest L. Woodward, The Age 2: Reform, 1815—1870 (Oxford: Clarendon Press, 1938), p. 18. crucial to middle of was being 1 the immedi fund theor‘ the trade ' men of the 58 Even Shaftesbury was hostile to far—reaching labor legislation, and Bright was equally opposed to factory reform.2 The evidence indicates that the wages fund doctrine played a crucial role in forming this climate of opinion.3 By the middle of the nineteenth century particularly effective use was being made of the doctrine in restraining and modifying the immediate demands of the labor movement. For the wages fund theory contradicted the fundamental assumptions on which the trade union movement was based. On this fact all practical men of the day were agreed. Strikes in the London building trades in 1861—62 and other labor disturbances culminating in considerable violence in Sheffield in 1867, resulted in the selection in that year of "Royal Commissioners appointed to Inquire into the organi- sation and rules of Trade Unions and other associations“ by the Queen's warrant. The reports of this Commission constitute a cross-section of the opinions on trade unions as expressed by representatives of the British public at that time. 2A. F. Young and E. T. Ashton, British Social Work la the Nineteenth Century (London: Routledge and Kegan Paul, 1956), p. 9. 3 . . The use made of the wages fund theory in attacking factory legislation in England has been documented by Mark Blaug. See "The Classical Economists and the Factory Acts: A Re—examination," Quarterly Journal pf Economics (May, 1958), Pp- 211—226. governor-g Robert App; following 0. De of A. Ye 0- An th he A. Ye Q. T11 t}. a; A- Ye en ac‘ uE 59 For a period of more than a year the Royal Commission heard testimony from employers, public officials, and union members and leaders. On the first day of public hearings, Sir Edmund Walker Head, a member of the commission and former governor—general of Canada questioned the first witness, Robert Applegarth, leader of the London Carpenters. The following testimony took place: Q. Do your interests depend somewhat on the amount of capital employed in the trade? A. Yes. Q. And does not the amount of capital employed in the trade depend upon the employer and what profit he makes by it? A. Yes. Q. Therefore, your interests may be affected indirectly through the employer, although the direct benefit apparently is gained by the workmen? A. Yes; but I would ask what we should do in the event of all the rest of the trades getting an advance of wages, and the price of things going up, if we were to stand still?4 4 . . . Reports 2; the Royal CommiSSioners AppOinted £9 Inguire into the Organisation and Rules 9: Trade Unions and other Associations; together with Minutes of Evidence and an Appendix Containing g Digest pf the Evidence, Correspondence with Hg; Majesty's Missions abroad regarding Industrial Questions Egg Trade Unions, 32g Other Papers. Presented to Both Houses of Parliament of Her Majesty, London, 1867-69. Citation from First Report, 1867, p. 10. These are the official parliamentary documents as published by Her Majesty's Stationery office in twelve volumes. The first ten reports contain a verbatim account of the group of w a certain ‘ TY was that 0‘ Mr. Meriva India from Th supply by an labour for hi to the as sul to the I ment-- under: the w< inquii 60 Clearly this testimony indicates an understanding of the logical corollary of the short—run rigid wages~fund theory: that if one group of workers increases its share some other group of workers somewhere would have to take less, since only a certain amount is available for wage—earners. Typical of the statements made to the Commission was that of Mr. Herman Merivale. According to the Report, Mr. Merivale had been a barrister and under—secretary for India from 1834 to 1842. He testified as follows: That wages depend in reality on the demand and supply of labour; that they cannot rise except either by an increase of the aggregate funds employed in hiring labour, or a diminution in the number of competitors for hire; and that those truths, applicable as they are to the entire amount of wages earned in a country, are as substantially, though not as directly, applicable to the amount of wages earned in each separate employs= ment——are propositions which . . . are as thoroughly understood and admitted by the intelligent class among the workmen themselves as they are by impartial inquirers.5 The doctrine of the wages fund was accepted as an unquestionable fact by both friend and foe of labor. Professor testimony before the Commission. The last report is divided into two volumes, the first containing the final majority and minority reports, and ”observations” of several individual commissioners; the last volume is an appendix including a digest of the entire evidence from the first ten reports, tabulated replies from questionnaires submitted by the Commissioners to trade unions, letters from members of the British diplomatic service relative to labor conditions in foreign countries, and miscellaneous correspondence from employers, trade associations, and business groups. 5Eleventh and Final Report, 1867, Vol. I, p. cxxi. Butt was qt century "a: wage fund 1 the London, in a monogf theory and even trade "are in th we will en the workme: ations. N implicit b Propriety 61 Hutt was quite right when he claimed that in the nineteenth century "articulate trade union leaders readily accepted the 6 . . , wage fund formula.” One influential trade union leader of the London Consolidated Society of Bookbinders, T. J. Dunning, in a monograph published in 1860, referred to the wages fund theory and stated that no one was likely to refute it, not even trade union leaders. The theory“s propositions, he said, "are in the enunciation like that of two and tw0 making four== we will endeavor to Show why the propositions fail in convincing the workmen that they are doing wrong in entering into combin- ations. Not that the propositions are doubted but because implicit belief in them is perfectly consistent with the . . ..7 propriety of Trade Combinations. Critics of trade unionism attempted to show that unions, by increasing wages at the expense of profits, would 6William H. Hutt, The Theory_gf Collective Bargaipipg (London: P. S. King and Son, Ltd., 1930), p. 7. T. J. Dunning, Trade Unions ppg Strikes, gheir Philosophy ppg Iptentiopg (London: Published privately by the author, 1860), p. 5. Prefacing this essay is an advertisement stating that the view taken in the book represents not only that of the writer and his union, but the working classes generally. Dunning further argued that the only worthwhile object of trade unions, given the wages fund theory, would be to provide a fund for the support of the members when unemployed. Moreover, like other union leaders, he opposed strikes except on "extraordinary" and "most unusual" occasions. The Edinburgp Review was scathingly denounced for endeavoring to ”incite Public opinion against unions." What is more, “the true state of employer and employed is that of amenity, and they are the truest friends, each of the othen for each derives his revenue from the other.“ (p. 52). to profit of the mo- demonstrai 1 aggregate S in the prc Th capita labore remair. will t 62 check capital accumulation. Since the rate at which capital and therefore the wages fund, could be increased varied directly with profits, the greater the proportion of wages to profits, the smaller the tendency to accumulation. One of the most widely read critics of labor combinations demonstrated the futility of labor organizations in increasing aggregate wages by pointing out the causal factors involved in the process of distribution: There is only a certain produce to be divided between capitalist and laborer. If more be given to the laborers than nature awards, a smaller amount will remain for the capitalist; the spirit of accumulation will be checked; less will be devoted to productive purposes; the wage fund will dwindle, and the wages of the laborers will inevitably fall. For a time, indeed, a natural influence may be damned back; but only to act, ultimately, with accumulated force. In the long run, God's Laws will overwhelm all human obstructions.8 8 , . . . . James Stirling, Trade Unionism, With Remarks on the Maclehose and Sons, 1869), pp. 26—27. In this extremely interesting book, the free market was closely identified with divine ordinance: "The humble labourer finds his best protection, and his richest reward, in that very struggle among the powerful, which shallow thinkers denounce as oppressive to the poor; while, at the same time, the competition among labourers for employment secures the capitalist against the tyranny of the many. Free competition ensures justice to all. When nature is left free to work, a divinely regulated mechanism of antagonist interest secures to each man that which is fairly due to him: to the master, faithful service at a fair price; to the labourer, the hire whereof he is worth." ppo 6‘7; where e grant hi believed i services. I But the fa capital an less than and a stin later admc dash theme or eluded are the be an accept; union it j Condemned 63 It was claimed, therefore, that the wages fund doctrine was one of "God's Laws" and therefore the only way in which a union could help workers was by permanently restricting the numbers entering the trade and thereby forcing employers to grant higher wages. The aim and purpose of unions was believed to bring about a monopoly position in providing labor services. For if capital fell behind population, wages fell. But the fall would bring about increased accumulation of capital and a reduction in population. If population increased less than capital, wages rose, causing a check to accumulation and a stimulus to an increase in population. As Cairnes later admonished, "against these barriers Trade Unions must dash themselves in vain. They are not to be broken through or eluded by any combinations however universal; for they 9 . are the barriers set by Nature herself." With so complete an acceptance of the doctrine on both sides of the trade union it is no wonder that all the methods of unions were Condemned from 1825 to 1875. As the Webbs have put the case: Compare Stirling“s statement of 1869 with the recent comment of F. A. Hayek, "It is probably . . . impossible in our time for a student to be a true friend of labor and to have the reputation of being one.“ See F. A. Hayek, "Unions, Inflation, and Profits," ‘Tpg Public Stake pp Union Power (Charlottesville: University of Virginia Press, 1959), ed. Philip D. Bradley, PP. 46-63. 9 . , . . . J E. Cairnes, Spmg Leading PrinCiples pf Political Economy Newly Expopnded (New York: Harper & Brothers, 1874), p. 338. .. 2-.- ._ would And fi benevc by vol popula such I It is not 64 To the ordinary middle—class man it seemed logically indisputable that the way of the Trade “ Unionists was blocked in all directions. They could not gain any immediate bettering of the conditions of the wage—earning class, because the amount of the wage fund at any given time was pre— determined. They could not permanently secure better terms eVen for a particular section, because this would cause capital immediately to begin to desert that particular trade or tOWn. They could not make any real progress in the near future,.because they would thereby check the accumulation of capital. And finally, even if they could persuade a benevolent body of capitalists to augment wages by voluntarily sharing profits, the "principle of population" lay in wait to render nuggatory any such new form of "out—of—door relief."lO It is not surprising, then, that union leaders and entrepre— neurs opposed strikes as a means of bettering wages. It is significant that the first major attacks on the wages fund theory were accompanied by the development of trade unions as bargaining agencies. Prior to that period, unions were little more than mutual—aid societies, hamstrung as they were by the power of the wages fund. The wages fund theory as a barrier to union development was recognized as late as 1897, at which time the Webbs commented that "it still lingers in the public mind, and lies at the root of the current 11 middle—class objections to Trade Unionism." Recognition of the difficulty of increasing all around wages led Hoxie, M l . . 0Sidney and Beatrice Webb, Industrial Democracy, Vol. II (London: Longmans, Green and Company, 1897), pp. 615—616. 1 lIbid., p. 604. society or Jevons. In Political A Their Objec workers age I! the wages i associatior or attempt - s .532. .-_ ..... factories . Thf the mo: Wages , majori- injuri. Jevons Wen and "inves 65 taking realistic stock of the situation, to admit that, ”unions are not primarily concerned with wages as a whole, but with the wages and standards of living of a particular "12 group. The justification of unions only as a mutual—aid society or producers' cooperative was stressed by W. Stanley Jevons. In 1869, Jevons was invited by the Trade Unionists' Political Association to deliver a paper on "Trades Societies: l Their Objects and Policy.’ In this paper Jevons warned the workers against trying to subvert the inevitable logic of the wages fund. The only legitimate purpose of such an association, he warned, was to act as a "Friendly Society," or attempt to get more wholesome conditions of work in the factories. But when it came to raising wages, Jevons said: The more I learn and think about the subject the more I am convinced that the attempt to regulate wages in injurious to the workmen concerned in the majority of cases, and that in all cases it is thoroughly injurious to the welfare of the community.13 Jevons went on to suggest that the workers save their money and "invest it in a cooperative society, and let it grow, 12 . . . . Robert F. Hoxie, Trade Unionism in the United States .__—_._._.__....__._____._._—____ (New York: D. Appleton & Co., 1923), p. 283. 13 . . . . W. Stanley Jevons, "Trade SOCieties: Their Objects and Policy" (1869). Reprinted in Methods pf Social Reform (London: Macmillan & Co., 1883), p. 117. It ments up to out of the trade union theory were came about machinists unions as 1 I‘ As and reform in produce Problem. Labor Unio °f Produce ' "n;- . . Official p °r9anizati toward lan Create a s 66 and when you have a little sum, form with others in co-operative I,14 works. It is significant that the major working class move— ments up to the 1880's had as their object getting laborers out of the laboring class. Shortly after the rise of modern trade unionism the first successful attacks on the wages fund theory were made. The first real bargaining organizations came about in Great Britain in 1851 with the formation of the machinists as such a bargaining agency. In the United States unions as bargaining agencies came somewhat later. As a result of the wages fund theory, the liberals and reformers of the mid—nineteenth century had great faith in producers cooperatives as a means of solving the labor problem. In the United States, for example, the National Labor Union, and the Knights of Labor advocated the formation of producers' and consumers' cooperatives as part of their official program. The Knights of Labor was by far the largest organization of labor this country ever had. They looked toward land reform, producers cooperatives and education to create a society of small property owners. Such a system was to supplant the wage system.15 The Knights of Labor officially M l4Ibid., p. 110. 1 5Harry A. Millis and Royal E. Montgomery, Organized lehgr (McGraw-Hill Book Company, 1945), pp. 50—55, 59—75. and on effo program was The member: producing w making evei 0n wholeheartt bargaining of the end( 67 had little interest in the possibility of improving the economic conditions of the worker gpg worker. They frowned upon strikes and on efforts of the government to raise income. Their program was to help Workers in establishing cooperatives. The membership would be the market for the product of the producing units. The idea was to destroy capitalism by . . . 1 making everyone a capitalist. 6 On the basis of the evidence, therefore, we must agree wholeheartedly with a recent writer on the subject of collective bargaining who commented that "the question of the effectiveness of the endeavors of the union may result in different answers 16 As a solution to the problems of labor, a producers“ cooperative is wholly ineffective for it either succeeds as a business firm, or it fails. If it fails, it goes out of business. If it proves profitable and succeeds then it ceases to be a cooperative because the existing original group that formed it would lose if they brought in new members. The temptation is to close the doors of the concern and seek expansion through borrowing funds or internal investment. Thus it becomes another private business enterprize and hires additional workers. An economically successful producers" cooperative cannot get the workers out of the laboring class because it is to the interest of the membership to keep its doors closed to new members. Hence it ceases to be a cooperative. Consumers' cooperatives are a different story. It is to the interests of the members to enlarge the membership in order to get the cost advantages of large—scale marketing. But as a solution to the problem of labor the consumers' cooperative is not successful because it is not a working class organization. Like any other business enterprise it is interested in long hours, low wages, and low costs. Its aPpeal is to low income people, and therefore, its membership is made up to a large extent of working people. Such organizations aid Workers only in their role as consumers, and not as workers. the iron 1% and similar Ne theory to to replace With the n 68 17 depending on the wage theory with which it is attacked.” In the United States, the progress of trade unions also felt the heavy hand of the wages fund theory. In his autobiography, Samuel Gompers stated, "The first economic theory that came under my eyes was not calculated to make me think highly of economists. My mind intuitively rejected the iron law of wages, the immutable law of supply and demand, 18 I I" and similar so—called natural laws. Nevertheless, Mr. Gompers was not Without an economic theory to justify trade unions. Indeed, he found it necessary to replace the wages fund doctrine and the iron law of wages with the "Golden law of wages" of Ira Stewart. Ira Stewart was the writer who provided the American Federation of Labor with its wage—theory during its first years. In 1865 Stewart wrote: The simple increase of wages is the first step on that long road which ends at last in a more equitable distribution of the fruits of toil. For Wages Will continue to increase until the Capitalist and Laborer are one. But we must confine ourselves to the simple fact that a reduction of hours is an increase of Wages.19 M 17J. Pen, The Wage Rate Under Collective Bargaining, (Cambridge: Harvard University Press, 1959), p. 4. 18 . Samuel Gompers, Seventy Years of Life and Labor, Vol. II (New York: E. P. Dutton & Co., 1925), p. l. 19 . . Ira Stewart, "The Eight—Hour Movement: A Reduction of Hours is an Increase of Wages," 1865, Boston Labor Reform Associ— ation, Boston, Mass. Cited in Henry Raymond Mussey, "Eight-Hour Theory in the American Federation of Labor,rr Economic Essays Qgflggipppgg in Honor of John Bates Clark (New York: The Macmillan (lnmngu 'I n—\ fifi" time could determined effect rem 69 This latter proposition became the corner-stone of the American Federation's thinking. The theory is really nothing more than Ricardo's standard of living hypothesis: It is not to be understood that the natural price of labour estimated even in foods and necessaries is absolutely fixed and constant. It varies at different times in the same country, and very materially differs in different countries. It essentially depends on the habits and customs of the people.20 But John Stuart Mill is even clearer on the subject. Mill had argued that a substantial increase in wages over a long time could cause habits to change. Wages were in the long run determined by the standard—of—living. Such a notion in effect removed all pessimism from the dismal science. No wonder that it was grabbed eagerly by trade union leaders to replace the wages fund theory. Stewart's theory was based on the assumption that any rise in wages tends to become permanent. To Mill the workers' standard of living could be raised by education through which they are made aware that improvement in their economic condition could only come about through limiting their numbers. Combining this with a reduction in the labor supply through colonization, the Laborer's . 21 lot could be substantially ameliorated. Ira Stewart's 2ODavid Ricardo, Principles pf Political Economy and Taxation (London: G. Bell and Sons, Ltd., 1927), p. 74. 21John Stuart Mill, Principles 9:.Politica1 Economy (New York: D. Appleton & Company, 1895), Vol. II, pp. 341-381. 7O theory shows a similar optimism: My theory is, first, that more leisure will create motives and temptations for the common people to ask for more Wages. Second, that Where all ask for more Wages, there will be no motive for refusing, since Employers will all fare alike. Third, that where all demand more Wages, the demand cannot be resisted. Fourth, that resistance would amount to the folly of a "strike" by Employers themselves against the strongest power in the world, viz., the habits, customs, and opinions of the masses. Fifth, that the change in the habits and opinions of the people through more leisure will be too gradual to disturb or jar the commerce and enterprise of Capital. Sixth, that the increase of Wages will fall upon the wastes of society, in its Crimes, Idleness, Fashions, and Monopolies, as well as the more legitimate and honorable profits of Capital, in the production and distribution of wealth, and Seventh, in the mechanical fact, that the cost of making an article depends almost entirely on the number manufactured is a practical increase of wages, by tempting the workers through their new leisure to unite in buying luxuries now confined to the Wealthy, and which are costly because bought only by the wealthy.22 The influence of the economists' theory of wages in the nineteenth century was not confined to Great Britain and 22Ira Stewart, pp. cit., p. 233. [The italics are Stewart's]. and politic doing, stai wages, to l Law of Wagc issued by i General Woz; expounded l movement fl and on the 71 the United States. Ferdinand Lasalle carried its social and political meaning to the continent of Eruope, and in so doing, stated most clearly the supply side of the theory of wages, to which he gave the imperishable epithet, ”The Iron I Law of Wages.’ Lasalle was induced to do this by an invitation issued by the Central Committee for the Organization of a General Workers' Congress in Leipzig. At this congress he expounded his view on the subject of the efficacy of a labor movement for improving the conditions of the working class and on the importance for this purpose of workers' associations. In his Qppp Answer to the central committee, in 1863, Lasalle offered two problems for consideration: (1) the problem of improving the conditions of individual workers whose situation, due to causes such as sickness, old age, accidents of various kinds, is reduced to a subsistence level lower even than that of the working class as a whole; and (2) the problem "of improving and raising above the present level the general situation of the working class as a whole."23 Lasalle argued that only the second problem can be of fundamental importance to the general labor movement. But the only practical project designed for the accomplishment \— 23 __..___.__-___.—_.___._ (New York: Columbia University Press, 1939), p. 161. class suff producers. their lot i‘ that the g production offer prot working cl remunerati trade unio violated a Lasalle : 72 of the purpose up to that time had been the workers' consumers” cooperatives. Lasalle contended that these were unable to improve the condition of the workers, since the laboring class suffers from injustice, not as consumers, but as producers. To Lasalle, the only way workers could improve their lot would be to get out of the working class. He proposed that the government assist in the creation of free workers' production associations and suggested that the government offer protection to these associations. He argued that if the working class can become its "own entrepreneur" then the remuneration of labor would be the product of labor. But trade unions were not the answer, certainly, since they violated all the agreed—upon laws of economics. To quote Lasalle: Under present relationships of the rule of supply and demand for labor, wages are determined by the following Iron LEE: the average wage is always reduced to the absolutely necessary subsistence, demanded by the customs of the people for the maintenance of life and the propagation of the race. This is the point around which the actual daily wage fluctuates, like a pendulum, never rising for a long time above its average norm, because then as a result of an improve- ment in the condition of the workers, marriages would become more frequent, propagation Would increase and the laboring population would multiply, thereby, increasing the supply of work hands which would bring wages to the former level, or lower. But wages cannot for long remain below that which is absolutely necessary for subsistence, for then laborers are forced to migrate, refrain from marriage, and from raising children, and, finally, the number of laborers diminishes through misery which weakens the supply of work hands, and therefore restores wages to its former level tit. condi For Lasal naturally) universali improving the wage ‘ unequivoc; N< it as great thoug', preci 73 The limitation of the average wage by limits set by the customs of the people as to what is absolutely necessary for subsistence and the perpetuation of the race—~such, I repeat, is the iron and cruel law, regulating wages under present conditions.24 For Lasalle this law of wages was the most important feature I of his economic views, the law from which 'everything else naturally follows.’ Furthermore, he considered it to be universally recognized. His statement as to the futility of improving conditions of workers by any methods that contradicted the wage theory of the classical economists is so strong and unequivocal that it bears quoting in full: No one can argue against this law. I can cite for it as many authorities as there are in economic science, great and famous names-—and from the liberal school of thought too, because this law was discovered and proven precisely by the liberal school of economic though. I can tell you and the entire working class the surest remedy for safeguarding yourself once and for all against all deceit and attempts to lead you astray——as soon as anyone will speak to you about improving the lot of the laboring classes, ask him first of all this question: does he, or does he not recognize this law? If he does not recognize it, then you may as well know that he either wants to deceive you, or that he is a most pitiful ignoramous of economic science . . . All agree in recognizing this law. In this respect, there is no disagreement among men of science. And, if the person talking about the condition of the Workers will recognize this law, then, ask him how he proposes to do away with it. And, if he will find no answer, turn your back calmly on him. He is a demagogue 2 4Ibid., p. 162. nineteenth In partial legislatio bargaining criticisms famous "re develop in gIOWth of over the < it is toi 74 who wants to deceive you, and to deafen you or himself with loud phrases.25 In summary it may be said that the wages fund theory exercised great influence on the economic events of the nineteenth century. On this, the evidence is decisive. In particular, it restricted the passage of effective factory legislation, and hampered the development of trade unions as bargaining agencies. This latter fact led to the first major criticisms of the theory resulting eventually in Mill's famous "recantation" in 1869. For trade unions could not develop until the wages fund theory was laid to rest. The growth of unions is inextricably bound up with the dispute over the doctrine during the second half of the century, and it is to that controversy that we now turn. 25Ibid., p. 164. no eoneulini eds fined-nave a-lmooe 9dr! '0 -s.l= .sln'j n0 .~.-'l:1:m9:> .u;r\.-iar:>:,';: :' -_--.--'---.- .. :5 ins). ' , was made . nor as ' J role pla E - x;::.m1'5913d the histo economist a few yea cOffllllissic) I "I" duties br ‘ l-' I I | I 75 CHAPTER V LATER ATTACKS ON THE WAGES FUND THEORY AND MILL'S RECANTATION The first important attack on the wages fund doctrine was made by Francis D. Longe in 1866. However, the precise role played by Longe's monograph remained undetermined in the history of economic thought. Longe himself was not an economist but a lawyer. At Oxford he studied philosophy and a few years after his graduation, in 1854, became assistant commissioner of the Children's Employment Commission. His duties brought him in contact with employers of large numbers of workers, giving him the opportunity to become acquainted with the opinion of businessmen on the wages problem. During this time he also became familiar with John Stuart Mill's theories of the relation between capital and labor. In the process, Longe became convinced that the wages fund theory was a delusion and he eventually presented his 1 argument to that effect in his treatise published in 1866. His only previously published writing, "An Inquiry into the lFrancis D. Longe, A Refutation 2: the Wage Fund Theory pf Modern Political Economy pg Enunciated py_M£. Mill Egg Mg. Fawcett (London: Longman Green and Co., 1866). Reprinted by the Johns Hopkins Press, 1903, as A Reprint 9: Economic Tracts, edited by Jacob H. Hollander. LC wages fune um condit or on the T} wage 1 the ir socia] that 1 a prir rescue censm know 1 I entire Whom 1 ‘ Ultima I. great: I well-1 76 Law of Strikes,” had been published in 1860; it was an historical essay on the treatment of combinations of workers in common law. Longe's Attack on the Wages Fund Theory Longe began by noting the practical objection that the wages fund theory stood in the way of all efforts to better the conditions of workers, either through trade union action, or on the part of government. In his words: The most important practical objection to the wage fund principle is that it excludes altogether the influence of liberal principles from the field of social action, where it is for the interest of society that they should be ever most influential. It is a principle which forbids public opinion coming to the rescue of a depressed class, by awarding its just censure against those who themselves perfectly well know that they or their class are partly, if not entirely, responsible for the conditions of the labourers whom they are employing, and whom they could without any ultimate loss to themselves raise to a condition of greater comfort, and one more tending to the general well-being of the community to which they belong.2 However, Longe also made a theoretical attadk on the theory by questioning its basic assumptions. According to _ 3 . . . Longe, there were three assumptions: (1) There is a definite fund separate and distinct from society's general wealth, being a part of capital available for, and necessarily M 2 Ibid., p. 16. 3 Ibid., p. 27. He argued as a whole resting i1 denied th‘ fund of d of which ‘ theu 77 expended in the remuneration of labor; (2) that laborers constitute a group among whom this fund can be, and is, in fact,distributed through competition; (3) and that the wages fund doctrine is merely an application of supply and demand analysis to the particular commodity, labor power. Longe denied the validity of the first assumption. He argued that if there were such a wages fund in the economy as a whole, it must be composed of many particular funds resting in the hands of individual capitalists.4 But Longe denied that each and every employer was in possession of a fund of definite amount that could not be increased and all of which had to be spent in the hiring of labor: Suppose, then that such a fund would represent the utmost amount which at any given time the whole body or supply of labourers could get from their labour, such fund Would represent the money—measure of the demand for labour in a country at Such time. But, even so, the wage fund principle would be a false principle. For such money—measure of the demand for labour would only represent the amount of wages which at any given time the labourers in a country could get; it would not represent a certain amount of wealth, which would or must be distributed by the competition of sellers and buyers of labour, any more than the money-measure of the demand for oysters or beef at any given time represents a certain sum of money which the sellers of oysters or beef must get from their customers, at whatever price some of them sell their oysters or beef. The total amount of money which the labourers could possibly get would be limited by the amount of the Ibid., p. 37. and: (E) stadiums-rip cub" Y — L bu “a b m 5 J - LK ‘- ~ ' "-i---u.'.q 5d: a: “'5 Unlocwmi. . taunt-:4- jt- ._ '5me 1' " 3': empl! - -l-:-'€w 5 II as- ta- the ”I 1; mi! , use more 1 employ moi errhloyers1 workers, ‘ smallest 1 The mom would hav whole bod the aggre to give t there was eXtended 78 wages fund; but whether they got all that wealth, or only half of it, would depend solely upon whether they let their labour go at its proper or half its proper price.5 The employer, argued Longe, has considerable discretion as to the uses to which he might put his wealth. He might use more or less of it for his personal consumption, or employ more or less for productive operations. Although employers could give the full amount of the wages fund to the workers, there was no reason to expect them to give more than the smallest quantity necessary to employ the laborers they required. The amount of the aggregate wages fund at any given period would have no bearing on the amount of wages received by the whole body of workers, except insofar as it would represent the aggregate sum that laborers could compel their employers to give them. So far as the individual capitalist was concerned, there was no definite amount of wealth that needed to be extended in the hiring of labor. According to Longe, the factor that determined how much of his wealth the capitalist used in employing labor (that is, the amount he employs "productively") depended on demand. Output must be salable at profitable prices: The existence, or prospective existence, of a purchaser is a condition precedent to the employment of wealth as capital; and the quantity of money or wealth Loc. cit. demano of we which opera '1 1 For Longe,‘ of his wea much any i The total wages func' commoditie 79 for which they will be exchangeable,«—in other words, the demand and its money—measure, governs the quantity of wealth used from time—to—time in production,~— whatever may be the quantity of wealth applicable to . . . such a purpose, the quantity of labour seeking employment, and the quantity of suitable raw material, available to the producer . . . . The estimate of the demand in the producer's mind . . . governs the quantity of wealth or capital (using the terms as synonymous) which is from time to time employed in productive operations.6 For Longe, then, the demand for output determines how much of his wealth the entrepreneur will use productively and how much any individual capitalist would use to employ labor. The total amount expended would not depend on a pre—existing wages fund, but on the extent of aggregate demand for commodities. The position that the demand for commodities is really a demand for labor is in contradiction to Mill's teaching. In his Principles Mill was unequivocal on this. point: The demand for commodities is not a demand for labour. The demand for commodities determines in what particular branch of production the labour and capital shall be employed; it determines the direction of labour, but not the more or less of the labour itself, or of the maintenance or payment of labour. The demand for commodities is a consideration of importance rather in the theory of exchange than in production. Looking at things in the aggregate, and permanently, the remuner— ation of the producer is derived from the productive power of his own capital.7 M 61bid., p. 44. 7 . . . John Stuart Mill, PrinCiples of Political Economy, 5th edition, Vol. 1 (New York: D Appleton and Company, 1865), p. 114. _ "m. '. m ._ gun-w out .uoqx dBI'sldailua to viifinisp ad: but ' ' '1 e . . . aseuboaq 9d: 03 . $113 10 alfM1:21;:T . . hnln: .-."rsouho1q ad: ul- .._'Jtmm'r.- n- _. nr- .,.-- “i ::!’£'-'.1H 153,15" 10 d1. .— __.lt- _. . ll? 5‘ _,.ul ”1.9.1.3 BI “.annifis . . ...., 'l'-. " .n H, .- E.1. ,gpnod .- aid 10 :'2-1_.'1! mew expendit - required f the conce; demonstrat wide of t} is that 1: What is m< services 1 the demam does not . to derive 80 It should be pointed out that Mill did n93 deny that the production of commodities involved the employment of labor; Mill's argument was simply that expenditures on labor services resulted in a larger total demand for labor than did direct expenditure on commodities. Nor did Mill deny that labor was required for the production of commodities. By reasserting the concept of derived demand, therefore, Longe did not demonstrate a fallacy in Mill's position, and was, in fact, wide of the mark. In modern terminology, what Mill was saying is that labor is a substitute in consumption for commodities. What is more, since laborers directly employed in providing services probably spend their income on commodities anyway, the demand for labor derived from the production of commodities does not give rise to a direct demand for labor in addition to derived demand. Mill's proposition can be reformulated into the interesting theorem that the demand for labor is greater if the demand of consumers is directed toward more labor intensive satisfaction. Given the technical conditions of production, the relative shares in the national income between labor and capital depends on the preferences of the community as between relatively labor—intensive and relatively capital—intensive types of goods. Factor owners have an interest in demand being directed to those industries that use their factors P.:-'v'.' 155116 bib msru 10L..:=l. Jsrij ~;r.' ".1 up. . 4 .- .5: -, g. I:— tall .82" 'J.:rm-11.J§'u'va 30.451 103 bnsmeb [5:901 zap-15.! L3 ”abnmmoa no \. i 2113 103' quanoa ;si:anomab i;' .l. "I— l'refutat-zig completely fund since wages were fund as t} of labor . means tha1 wages fum aVailable course (a1 was no pr. 81 . . 8 most intenSively. The demand for commodities, therefore, (that is, relatively capital using types of goods) is not the demand for labor (that is, relatively labor intensive types of goods).9 Actually, there is a more serious objection to Longe‘s "refutation" of Mill at this point. For his argument seems completely irrelevant to the central question of the wages fund since it did not come to grips with the problem of whether wages were advanced out of capital. Longe treated the wages fund as though it were a fund of money used in the employment of labor. If this is a correct interpretation of Longe, it means that he took Mill in his simplest meaning. If Mill's wages fund theory referred to money in the hands of employers available for paying money wages, the logical corollary of course (and the one that Longe naturally drew) was that there was no predetennined fund. Since Mill took great pains to 8See Wolfgang Stolper and Paul Samuelson, ”Protection and Real Wages," Review 9: Economic Studies, Vol. IX (Nov., . 1941), pp. 58—73. Reprinted in American Economic Association, Readings in the Theory_9£ International Trade (Philadelphia: The Blakiston Co., 1949): pp. 333-358. 9Another way of saying this is that the employment multiplier is greater if the expenditure is for relatively labor—using items. Furthermore, if it is the case that the marginal propensity to consume from labor income is greater than from capital income, the conclusion is even stronger. See Harry G. Johnson, ”Demand for Commodities is not Demand for Labour," Economic Journal, Vol. LIX (Dec., 1949), pp. 531-536. 9&1: (sheep to am akin I aimin- Pom E (shoot: in ascryd aviauswjni rods! via-Jittsis-i .01 . I I . ' isdhstl‘ib i4 -~-c(c ----- -- ”1'- c c .a'lj 0.1155 1 3'3‘ (._"J. o: ‘ --.-_: .._.._ .- V P asa-class1 .1.” .... . having din across suc‘ labor of a than he wo to 9st int Ii; 1 I ’ - the rest c I, . I fund: l 5:43 .5 :3 rt- (’1 82 talk in real terms, Longe’s objection cannot be taken , lO seriously. Longe rejected the second assumption of the wages fund theory (laborers constitute a body among whom the whole is distributed by competition) by pointing out that laborers as a class consist of a number of different groups of workers having different skills and abilities. Workers do not compete across such group lines. If an employer is able to hire labor of a given kind and of a certain skill at a lower wage than he would otherwise pay, there is no way for this saving to get into the hands of other employers for distribution to the rest of the work force. Thus, there is no definite wages fund: How could the shoemakers compete with the tailors, or the blacksmiths with the glass-blowers? Or how should the capital which a master—shoemaker saved by reducing the wages of his journeymen get into the hands of the master—tailor? Or why should the money, which a reduction in the price of clothes enables the private consumer to spend in other things, go to pay or refund the wages of any other class of labourers belonging to his own 10The same can be said of Henry D. Macleod. In 1858 Macleod published a book in which the wages fund theory comes in for discussion as a periperal notion to the main subject Of the work: deposit creation and banking. Macleod agrees With Longe that the demand for commodities determines the amount that will be paid in wages, but he stressed the effect Of bank credit expansion in enlarging the "wages fund." In Macleod's treatment the source of wages as simply money funds is stated in its baldest form. See Henry D. Macleod, The §Q§E§§E§.gf Political Economy (London: Longmans, Brown, Green, Longmans and Roberts, 1858). ' . noifiinmrhnm ail! ' wages ... ' «3113223.?va 21 of diffe 3:. n ‘ .‘3‘ '. 2""!le“9'3 \{d ‘ Longe's ol‘ .'- -'. HERO!) ‘ ‘ 311': not a very . El _ !:._I". . L4 dz): 2 fund is or theory to He (Illesti1 has anyth: i; - i II II conceived l’. ' I arQUEd th; must be Sl ti: suPplied .' 117' B I I ‘I relation j I hit:- interpret; ll l I I wages £11111 .| .| l i \ l l 83 country? It would clearly be just as likely to be spent in the purchase of foreign wine or in a trip to Switzerland.1 This objection is a specious one, of course, since the wages fund theory did not purport to be a theory of the wages of different laborers, but to explain the average wage rate. Longe's objection to the second assumption of the theory is not a very powerful one. Longe's rejection of the third assumption (the wages fund is only a particular application of supply and demand theory to the determination of wages) is more interesting. He questions whether the general law of supply and demand has anything to do with the wages fund. Mill, of course, had conceived of the determination of wages as simply an application of the supply and demand apparatus to the labor market. Mill argued that the quantity demanded varied with prices and price must be such that the quantity demanded just equals the quantity supplied.12 But to Longe, the wages fund theory postulated a relation between supply and demand quite different from Mill's interpretation of that relationship. He argued that in the wages fund theory, demand in relation to labor means the l . lLonge, pp. c1t., p. 53. 12Mill, pp. cit., Vol. I, p. 549. 30 .9no sadism I it ...- as ._ -- I ‘ antlty '|'- ."i signs 0:? Jun .a‘muodsl’. qu l '-+5'r 3:..‘sw rugs -- qr i ' ~- r- "- :' joetdo labor sup; theory su1j of labore; When the - of wages 1 demand an. Longe's a I senses: u i it differ, fixed and this conf 84 quantity of capital offered, not the quantity of labor demanded. The ratio is the simple one of comparing a given quantity of offered capital with a given quantity of labor in the market; it is not the Millian ratio of ascertaining at what price the quantity of labor demanded will be equal to the quantity of labor supplied. Longe pointed out that in the wages fund theory supply and demand were fixed. Supply was the number of laborers; demand was the quantity of circulating capital. When the two were brought together the average or general rate of wages was determined. Hence there is no play for a varying demand and no possibility of more than one point of equilibrium. Longe's argument is that demand is being used in two different senses: in the conventional sense of a varying quantity demanded at different prices, as opposed to the wages fund sense of a fixed and given amount. Longe took Mill severely to task for this confusion: ”Mr. Mill leaves it to his readers to reconcile, if possible, the two uses of the term “demand" and to extricate him from a difficulty, the solution of which would have discovered the error of his theory of wages, and the unreality of the entire system on which that theory was 13 based." But this objection cannot hold up, although it is the 34—35. iii iota: 3:. «(dun-us! m . - " with the arid soizq jsdw if. grim 1.119an in our: 115.11 JJIldéed a . _ ' [- _-_- :r.')r £5me IM'I '.‘ dill-Jul: ' "." "_.‘ lb.=l.lU 9‘3 I - ' ' I . . “I 9 i391 schedule! -. 1.51 qqua establisii f-tii'ftfldil 10' Neither I .3.l_'i ($55“ classica] 3.!) equilibri else, the i s I David Hul- 85 one to which more space has been given in the wages fund debates than any other. We shall have to wait until Chapter VII to demonstrate that the wages—fund doctrine, when taken with the other postulates of the classical economics, is indeed analyzable in terms of demand and supply in which schedules can be derived and a determinate equilibrium established with chances for variation in that equilibrium. Neither Longe nor Thornton saw this possibility. But when the classical system is seen as a sort of aggregative general equilibrium model in which everything depends on everything else, the confusion is cleared up. Thornton's Attack on the Wages Fund Theory It might be said of Francis Longe's Refutation what David Hume said of his Treatise pf Human Nature: it "fell dead—born from the press without reaching such distinction as even to excite a murmur among the zealots." But in 1869, only three years after Longe's attack, there appeared William Thomas Thornton's volume, 9p Labour: Its Wrongful Claim and Rightful QE§§,_IE§ Actual Present Egg Possible Future. The book had a curious effect on John Stuart Mill, and is generally credited with the destruction of the wages fund theory. Thornton, unlike Longe, was a professional economist. He was a close friend of Mill and Well—known by his earlier publications; he that!“ .9111!me Fungi-13.9961! NB -. . "tilt": .- (._., .3de 1° 35351111101 s1 .auimc-n-zm: 1.5:- : :rsn destroy f“‘!:3"-‘CI -.-'rr'2'.-.-i_l "1.1" of to make England . 1“ assumptio for one: capital, time-cons ill. 5 I ; The only 1 given tin there was _ ..—- —_‘-—_.._ ._ _ 86 was able to command a wide and attentive audience. Nevertheless, it appears that Longe's criticism was far more substantial than that of Thornton's. Thornton admitted that his motive in attempting to destroy the wages fund theory was a practical one. He wanted to make way for reform in the conditions of the poor of England.14 Unlike Longe, Thornton accepted all of the assumptions on which the wages fund theory was based, except for one: he accepted the notion that wages were paid out of capital, and did not question the underlying assumption of the time-consuming nature of the capitalist productive process. The only point he denied was that the wages fund was at any given time a definite and determined amount. He argued that there was no definite wages fund clearly identifiable in the general wealth of the economy, all of which was destined to be paid out in wages. He made the same point as Longe: Any given capitalist at his discretion may spend more on himself, and invest less, or vice versa. If one prospective employer can do this, they all can; if the fund is so indefinite it cannot form theI-mw 9!” GM 3:. ‘5’ -'r1.: rfsad 1.1-1? ric ar- :- -.’ and" ”so QUADRANT C v QUADRANT B Figure 7. 151 curve to the left, thereby aggravating the problem of unemploy— ment. Hence labor as a whole cannot be better off. Evaluation of the Model The analytical tools of the classical economists have certain defects which make them not fully suitable for applica- tion in the economy of the twentieth century. For one thing the classical model as presented herein shows the wage rate, and the levels of output and employment determined by "real" factors alone. In keeping with classical theory money wages and prices were determined solely by monetary factors. It was assumed that changes in the monetary side had no effect on the "real" magnitudes. Clearly, however, monetary policy can be used to affect the wages fund, though the classical economists were skeptical that monetary happenings could have any “real" effects. However, if it can be shown that an increased supply of money affects the rate of interest and investment (or a whole range of expenditures through the real balance effect), then monetary policy is capable of affecting the size of the wages fund and employment. However, we have demonstrated that there is a consistent version of the classical theory of employment, based on the residual theory of profits, the theory of capital accumulation, and the wages fund theory. Of its logical completeness there can be no doubt. [5.50M art: ‘16 noun-mu! i =i401 lsuirq --: Itifiv -'--:.=I a!” Easiaasls --..-._- ni at}: m .\flffi£1 I-I. l .d I. .- I I I I i ..I I I I I I I —.'. .-=- ._-__ - . .2: __. “136$ ll [fii IF it I any I demand theory? We now see that, ashtraryate the analysis can be couched in terms of supply and demand schedules, although through a rather indirect route. Furthermore, the insistence on the part of some interpreters (including Mill of the "recantation") that the wages fund theory involves a unitary elastic demand curve is seen to be misleading. Also, one of the special insights of the wages fund theory, the dependence of future wages on ‘ present profits, is made clear by use of the model presented here. 11 Inc: 16 [xx JI'IJII: .\'l='--ISII :aojfiahb' has =.;[u_.1-.I'—: -\.;'!-_'---'Ii'.'.' DH} 2")?L3T: -. 'J --'=-'. w-un 9' ' -.I"I.l 13.5 .I..-r.;.U LI. . surhxu'i 2' :Iefl-fiq'I-Im l l :I II-i II: "-TI.I"II' 153 CHAPTER VIII CONCLUSION: THE MODERN SCENE The subject matter of economics is returning to what it was in the beginning--a study of the causes of the wealth of nations. The century following the second Mill witnessed the discovery and enthronement of neo-classical economic theory. With that development the emphasis shifted from the causes of the wealth of nations to the role of the market mechanism in distributing the products which buyers have requested. The individual unit without reference to the economy of which he was a part was the phenomenon whose habits were of central H interest. The "economy as a whole dropped out of focus, and the "isolated datum" of economic man opened into View. As we know, the classical economic theory was developed in the early stages of English capitalism and on an economic scene in which landed interests opposed the new and emerging manufacturing class. Hence, the problem of capital accumulation and functional distribution had popular interest and practical import. By the twentieth century, however, the economic scene had changed in certain fundamental respects. The latter part of the nineteenth century was one of great progress in which capitalism had firmly established itself. The economy of the Western world was one in which the forces of progress were 'l I'_‘. 1933“ §--nfliflfl _ 3.- mm a!” 2.755 " 154 powerful and in which investment outlets were numerous. The . . 1 only unemployment was due to fluctuations in the buSiness cycle. Thus, the turn of the century saw a shift from concern over the problem of growth to concern over the problem of economic performance. As Leontief has recently pointed out, economists . . 2 worry first about growth and then about effiCiency. Even as early as 1870, Jevons was able to state the economic problem as follows: Given=Eicertain population, with various needs and powers of production, in possession of certain lands and other sources of material: required, the mode of employing their labour which will maximize the utility of the produce.3 However, in working out his theory Jevons did not depart too far from the older classical theory. His ideas on capital were . . . 4 baSically those incorporated in the wages fund theory. But with the shift in emphasis it is not surprising that the wages lAlvin Hansen, "Economic Progress and Declining Population Growth," The American Economic Review, Vol. XXIX (March, 1939), Reprinted in American Economic Association, Readings in Business Cycle Theory (Philadelphia: The Blakiston Company, 1944), pp. 336—84. See especially pp. 367—70. 2 . . . . . Wa5511y Leontief, "The Decline and Rise of SOViet Economic Science," Foreign Affairs, Vol. I (January, 1960), pp. 261-272. 3William S. Jevons, The Theory 2; Political Economy (London: Macmillan, 1871), p. 267. 4George Stigler, Production and Distribution Theories (New York: Macmillan, 1941), p. 29. .de a was Vivi!“ usvo Erasmus max} 1%} vimonoos 10 w:=.wfi" - Ts~e nfsfifiuo o: 'eijnbsd dd} =n fund: 155 fund theory no longer played a central role in economic analy- sis. When the problem was one of economic development the wages fund theory had a strategic role to play. In order to achieve rapid development, an economy's resources must be channeled into capital investment. In order to do so, wages must be kept down so as to control consumption, and the wages fund theory provided a matrix for the classical theory of economic growth. But when the problem shifted from economic progress to efficiency, the wages fund dropped out of wage theory. Not that economists were anti—wages fund. It would be more correct to say that they were passively non—wages fund. This point is not usually made. It is generally asserted that the theory was forsaken, the abandonment taking place after Mill's recantation.5 But as we have seen the controversy lasted until the twentieth century, and the theory was a central issue in the writings of such leading economists as Cairnes, Walker, and Taussig. It should be clear that the wages fund theory was a theory of the average wage rate, and was not intended to say anything about the wages of individual workers. If the main emphasis of the time was on atomistic economic problems, then of course the wages fund theory had no part to play, a least 5cf. A. C. Pigou, ”Mill and the Wages Fund,” Economic Journal, June, 1959, pp. 171—80. Especially p. 177. ,15Lq o: slam avifdbfl oi zebra nI bslsrmsin e-U' fazmv :-.::':-'::I-:I:=s-Iu a'mnonoao Ill- . Jul-9:711. -r.-1-;5I';na Q3 “grit-m II I 156 $2; fig 3 theory _f_individua1 ygggg. The point to remember is that the marginal productivity theory did not replace the wages fund doctrine, since they are not substitute products. Indeed it was just this fact that made Alfred Marshall reluctant to accept the marginal productivity analysis as a theory of wages. In his Principles, after illustrating the use of the marginal productivity theory to explain one of the causes that govern wages, Marshall added, This doctrine has sometimes been put forward as a theory of wages. But there is no valid grounds for any such pretension. The doctrine that the earnings of a worker tend to be equal to the net product ofhis work, has by itself no real meaning; since in order to estimate net product, we have to take for granted all the expenses of production of the commodity on which he works, other than his wages.6 Professor D. H. Robertson, one of the most influential adherents of the marginal productivity theory, has called Marshall‘s qualification of the importance of marginal productivity a godsend to critics"7 and admitted that the marginal productivity theory did not replace the wages fund theory since marginal analysis attempts to solve a micro rather than a macro problem. Robertson says, 6Alfred Marshall, Principles of Economics (New York: Macmillan, 8th edition, 1920), p. 518. 7Dennis H. Robertson, "Wage Grumbles," Ecoggmig Fragments (London: P. S. King & Son, Ltd., 1931). Reprinted in American Economic Association, Readings $3 the Theory pf Income Distribution (Philadelphia: The Blakiston Company, 1951), pp. 221-244. Citation from page 227. * 157 Now so long as we are fixing our eyes on a single business or a single industry the assumption that all other factors of production have clearly defined supply prices is perhaps sufficiently nearly valid to give no great trouble to anyone; but what we are in search of is the principle governing the level of wages as a whole .8 Robertson then goes on to argue that "grumbles" over the productivity doctrine result from attempts to read into the theory more than it is supposed to contain. All it was intended to slmwvwas an explanation for specific wages. T. W. Hutchison has interpreted Marshall”s reluctance in accepting the marginal productivity theory as a realization that the theory could not explain the level of wages as a whole: Nowhere than in his theory of wages does Marshall make a more strenuous effort to link up with the classical theory and treatment, though, in fact, the classical, mainly ”macro—economic" distribution theory is concerned with quite different questions of distribution than is . . . a precisely and correctly formulated marginal productivity analysis. The two types of treatment and analysis, though not necessarily incompatible, cannot be said, when combined, to produce a very significant synthesis; they remain separate . . . answers to separate questions.9 With the development of marginal productivity doctrine there was one important point in the new orthodoxy which left a flank exposed. It is doubtful that marginal productivity 81bid., p. 227. 9 . I . . T. W. Hutchison, A ReView of Economic Doctrines (Oxford: Clarendon Press, 1953), p. 84. 158 analysis can be considered significant in the determination of aggregate wages. Demand functions for labor are non— additive since they are derived on the assumption that other elements in the system remain stable. Economists whose expertise in marginal analysis is unquestioned are none the less reluctant to apply their tool kit to macroeconomic analysis.lo Notwithstanding the fact that the doctrine of the wages fund was no longer a part of wage theory, it remained a part of capital theory, and it did so in its most pristine form, since the capital theory of the twentieth century is nothing more than a generalized version of the wages fund. In Bohm-Bawerk, for example, the period of production is the parameter manipulated by the capitalist in order to maximize his rate of return. It is the period of time elapsing between the input of labor, on the one hand, and the sale of the final product on the other. Land is disregarded, and labor and capital are considered to be the only factors of production. But the crucial point is that the lapse of time between input l0For example, Kenneth Boulding claims that he I! can hardly help regarding the development of marginalism as a retrograde step as far as the theory of over-all distribution-- i.e., of the macroeconomics of distributionm—is concerned." Kenneth E. Boulding, "Wages as a Share in the National Income," Egg Impact of the Union (New York: Kelley and Millman, 1959), p. 132. 159 and output is made possible by capital which must be advanced in the form of wages to laborers because workers cannot wait . . 1 u . until the product is sold. 1 Bohm~Bawerk°s concept of capital llBo'hm—Bawerk“s theory of capital has been analyzed in detail by Stigler, 9p. cit., pp. 179-227. That the wages fund doctrine is a part of Bdhm—Bawerk's capital theory was recognized by Wicksell. See Knut Wicksell, Lectures 9n Political Economy (Vol. I; London: Routledge and Kegan Paul, 1934), pp. 193-95. It is interesting to note that Thorstein Veblen's first article in economics concerned the relation between Bohm— Bawerk's theory of capital and the wages—fund theory. Veblen's analysis is so perceptive that it bears repeating. Bohm-Bawerk made a distinction between what he called; "Social Capital" and "Private CapitalV; the latter included social capital plus the means of subsistence of labor. To B5hm— Bawerk real wages are not drawn from the community's capital, although from the employer“s standpoint they are drawn from his private capital. But B5hm-Bawerk includes in social capital consumption goods still in the hands of dealers and producers. Veblen noted that this point of classification might afford captious critics grounds for arguing that wages thus represent only a general claim on goods still a part of the general capital, and can only be satisfied by drawing on social capital. He felt that the controversy over the wages fund doctrine might be ended by drawing a distinction between the laborer's share of consumption goods (earnings) on the one hand, and wages on the other. From the standpoint of consumption goods, the laborer is not a laborer, but simply a member of society. The sustenance of workers while employed is drawn entirely from the product of past industry, and therefore wages are paid out of capital, since wages are a category of private capital. As a consumer he is not a "laborer" and his share of consumer goods is not "wages" but "earnings." Wages is a category having a different signifi~ cance for economic theory from that of earnings. From the point of view of production wages are paid out of capital. From the point of view of distribution they are draWn from the product of industry since 39 Ehg laborer they are the product of his present labor. "All this may seem to be a web of excessively fine—spun technicalities, but in apology it is to be said that it is also directed exclusively to a 11 9 a‘51awsfiumdafl 'n:1qsn 3o qujno 160 is thus very similar to Taussig“s: capital is the stock of commodities building up during the period of production. In modern capital theory it is postulated that the entrepreneur needs the services of labor, equipment, and other factors of production. His capital fund is his command over the products of other firms. The owners of factors want command over products in exchange for their services; the entrepreneur needs command over the products of other firms to tide him over the initial period during which he has no products of his own to sell. Hence, the firm“s capital consists of other firm's products. When the capital of all the firms in the economy is added together, we obtain society's real capital: the sum total of all products in the productive 12 system. The reason that the wages fund played a key part in point of pure theory. And the whole controversy about the source of wages has also been in the region of pure theory, having never directly involved questions of physical fact or expediency." See Thorstein Veblen: "B6hm-Bawerk“s Definition of Capital and the Source of Wages," The Quarterly Journal_g§ Economics, Vol. VI (January, 1892). Reprinted in Thorstein Veblen, Essays ip 9g; Changing Order (New York: The Viking Press, 1954), pp. 132—36. 12 . . , . . . " Compare With SCitovsky s definition: We can say that society“s capital consists of the total quantity of products stored up in the productive system in the form of inventories of consumers“ goods, plant and equipment of all kinds, goods in the process of manufacture, inventories of parts and raw materials, and so forth." Tibor Scitovsky, Welfare Egg Competition (Chicago: Richard D. Irwin, Inc., 1951), p. 217 ¥ .9113 “£13 baislujeoq at .31 {1095-3 -' $ng .mfi " nits! f". -_-----. .!I III-43p. .".-'.'I:'J‘ I. 19qafl .munsx 161 classical theory was because of the tremendous role given to capital accumulation in the spectacle of economic progress. Although technical change was recognized as a cause of economic growth, the classicals minimized the role of technology and concentrated on capital accumulation instead. However, one of the significant facts about capital formation is that it takes time before consumer goods result from the use of more "capitalistic" methods. In the interim period somebody has to make advances to the various factors producing this capital. These advances are the wages fund. So long as time is required for production, capital in the form of wage goods is necessary. In this respect it is significant that Mrs. Robinson‘s recent work on capital theory involved her in a return to the problem of classical economics and, in consequence, a return to the wages fund. If the focus of attention in economics is on economic growth and capital formation, a return to the wages fund theory can be expected. As Mrs. Robinson says, "The revival of interest in classical economics brings a revival of the classical theory." She pointed out that: Most kinds of human production consist of processes which take time to complete. The flow of consumption goods becoming available today is the result of work which was done in the past and with the aid of tools and equip— ment that may have been constructed very far in the past . . . . Thus in all human economies there must be property in capital goods-~equipment and work«in- 162 progress--as well as in territory . . . . In a capitalist economy property is OWned by a small number of individuals who hire the labour of a large number at agreed wage rates and organize their work. The excess of the product over the wages bill then appears as income from property.13 Mrs. Robinson‘s analysis is therefore a return to classical economics and to the wages fund theory. Her analysis is strikingly similar to Cairnes. For, as we have seen, in Cairnes“ analysis wages were residual income, and this is also the case in Robinson“s volume. The relationship between Robinson"s argument and that of the wages fund theory has been noted by Professor Lerner: In throwing out the marginal productivity mechanism she is forced . . . to a kind of residual theory which says that the real wage is determined by how much is left over to be divided among the workers as they take their turn in the queue after the requirements for accumulation and any consumption by capitalists, and we are back at the strict wages fund which comes back to life in several different contexts but alwa s in response to minor variations of the same spell.l To put this another way: the whole point of capital theory is that there is a lapse of time between input and output. This is made possible by capital, which must "advance" the wages of labor because wage earners cannot wait until the l3Joan Robinson, The Accumulation 2: Capital (London: Macmillan, 1956), p. 4. 14 n . . . Abba P. Lerner, ReView of Joan Robinson, Accumulation 2: Capital," American Economic Review, Vol. XLVII (September, 1957), p. 699. See also, in this connection, Nicholas Kaldor, "Alternative Theories of Distribution," Review 9: Economic Studies, Vol. 23 (Second series, l955—Q956), pp. 83-100. adT anneal an 3359: .siuw riafla 5...}: [lid 4 163 products of their labor have been sold. Viewed from the input side, capital is a wages fund. From the output side, capital is the stock of unfinished products accumulating during the period of production. When the theory is formulated in this fashion there is no inconsistency between capital theory and the wages fund doctrine. Both describe the roundabout process of production: one from the input side, one from the output side. The role of the wages fund doctrine as part of capital theory is increasingly recognized by wage theorists. Mr. Rothschild, for example, admits adherence to the wages fund theory and, in summing up his findings, presents a very complete description of the wages fund doctrine, showing that the total wage bill cannot be increased in the short run. In his words: To improve wages the national income, out of which they are paid, must be increased. This can be achieved by industrialization, i.e., the accumulation of capital. But it will take some time until the newly-formed capital will bear fruit in the form of consumption goods, and in the interim period total real wages will be fixed within fairly rigid limits. The originally existing capital, capable of turning out consumpgion goods, will constitute something like a wage fund. It is clear, therefore, that the marginal productivity 15K. W. Rothschild, The Theory 2: Wages (Oxford: Basil Blackwell, 1956), p. 10. pszruB 9:21 MIL-muons- “me ' 2 .. 7 -l ‘ .5. 1.. ' "3 "I '9"""‘ '3: - T-J'JI _ II :Ll-I? :l.| [ah-3» I -..l ._ 164 theory has in no way superseded the wages fund theory. The marginal analysis tells us a good deal about what determines the demand for individual workers of a certain skill; it tells us very little about total wages. Instead of replacing the classical analysis of distribution, it has simply created a vacuum in its place. There is a special sense in which the Keynesian analysis has filled the vacuum, for Keynes“s analysis in effect rehabilitated the wages fund theory. In showing that labor can determine its money wage, but has no control over its real wage, Keynes's analysis made clear a point which follows directly from the wages fund theory: real wages are not determined in the labor market, but are a function of a quite different set of decisions. Keynes denied that labor has any control over real wages. Of course, it is possible for an individual worker to reduce his real wages by accepting a loWer money wage, for so long as other prices do not fall, a lower money wage means a lower real wage. But if all money wages were reduced a certain percentage, it does not follow that real wages would fall. According to Keynes it is impossible for labor to determine real wages since a variation in money wage rates affects prices and real wages. Keynes“s thesis is that a variation in money wage rates affects the demand for output, accompanied by falling prices which leave 165 1 real wages unchanged. 6 This is apparently what Professor Boulding meant when he referred to the "modified "wages fund“ "17 of the General Theory. Thus real wages are determined in the capital market through decisions affecting investment, and not in the labor market. Keynesian theory involves an indirect type of wages fund theory since he argued that, given the propensity to consume, employment was a function of investment (defined as net additions to capital). The demand for labor depends on capital, and this is precisely the wages fund argument of the classical economists. In the Keynesian system, as in the classical economics, the wage bargain in the 1 . . . 6It appears that Keynes was of two minds in this matter. By Chapter 19 of the General Theory he admitted that variations in money wages might affect real wages through what has come to be called the "Keynes Effect." Because a fall in wages will be accompanied by a fall in prices, the stock of money in "real" terms increases. Assuming the nominal amount of money is constant, this lowers the rate of interest, increases investment thereby increasing employment and income. Not— withstanding this fact, Keynes rejected the manipulation of money wage rates as a policy for increasing employment. For one thing, in capitalistic economies there is no method available to bring about a universal reduction of the money wage rate. Employers must have sufficient bargaining pOWer to push them downward, which they may not have. What is more, even if employers could cut wages, they Would possibly get reduced in one industry before another, causing great labor unrest and dissatisfaction. What is still more, falling prices would have adverse effects on debtors. Keynes, there- fore,'felt that manipulation of the quantity of money Would be a much sounder policy to follow in the event of unemployment. John Maynard Keynes, The General Theory pf Employment, Interest gpg Money (New York: Harcourt, Brace and Co., 1936), pp. 257—271. l7Kenneth Boulding, pp. cit., p. 132. 166 labor market only affects distribution indirectly, that is, as it affects the determinants of investment and future income. The conclusion that distribution is largely independent of what happens in the labor market seems to be supported by the statistical evidence. The redistributive potential of trade unionism is an issue almost as old as the wages fund doctrine itself. If unions have the power to alter over—all income distribution it should show up in an increase in the labor share of the national income. But in order to prove the redistributive power of unions, it must also be shown that the diversion of property income to wages can be attributable directly to collective bargaining, and not to other forces, such as capital accumulation, low interest rates or rent controls. The various studies on 1abor“s share are of unequal reliability and not always Comparable with one another. DeSpite differences of methods and definition, however, most studies show that the secular shift in the employee“s share has been relatively small. Professor Levinson has argued that there has been a slight upward shift but attributes the rise in labor"s share to governmental policy, with collective . . . 18 . . bargaining in a secondary role. This concluSion has been 1 . . . . 8Harold M. LeVinson, "Collective Bargaining and Income Distribution," American Economic Review, Papers and Proceedings, XLIV (May, 1954), pp. 315~16. r I 81 HOiJUdIIJIiE :uer'uiaqehni Insets -"‘.-?‘::srn unis! 9&1 t" ”la a”? .auhablvg _ :IIia 1mm 167 supported by Phelps Brown and Hart in their study of the wage share of the United Kingdom between 1870 and 1950. They concluded that the wage share has been relatively stable . l9 . . . throughout the period. Similar concluSions have been reached by Phillips20 and Hildebrand.2l The labor unions themselves seldom claim.more than that they can raise real wages through the effect on purchasing power; few unionists argue that they can effect a permanent long—run shift of income from profits to labor for the economy as a whole.22 Of course, we can never know what might have occurred in the absence of unionism, but the evidence does imply that unions have not improved the relative position of wage earners over time. Although it is tempting to conclude that the impotence of unions to raise wages is a telling tribute to the accuracy of the wages fund theory, it must be noted that the validity l 9E. H. Phelps Brown and P. E. Hart, "The Share of Wages in National Income," Economic Journal, Vol. 52, (June, 1952), pp. 253157. 20Joseph D. Phillips, "Labor“s Share and “Wage Parity,”" The Review of Economics and Statistics, XLII (May, 1960), pp. ——_..___—_.__.____._._—-__._..— 21 . . George H. Hildebrand, "The Economic Effects of Unionism," A Decade pf Industrial Relations Reserach 1946-1956 (New York: Harper & Brothers, 1958), pp. 98~l45. 22Allen M. Cartter, Theory pf Wages and Employment (Homewood: Richard D. Irwin, 1959), p. 167. 168 of the doctrine does not depend on empirical evidence regarding the share of labor. Indeed, both Ricardo and Cairnes expected the share of labor to fall over time. The truth is that any fact about the progress of labor“s share would be consistent with the wages fund doctrine, depending on certain arbitrary assumptions about changes in other variables. Thus, Ricardo expected the share of labor and capital to decline at the expense of landlords. This followed from Ricardo's acceptance of the Malthusian theory of population and diminishing returns to land. If he found that labor's share had increased, the wages fund theorist would look for offsetting factors in technological development, or the willingness of workers to limit their numbers. The point is that the wages fund theory is not necessarily tied up with any definite trend in labor‘s share. Labor Unions, the Wages Fund and Economic Development What is of interest is that unions are still seen as an obstacle to economic development. The same arguments raised against them by the classical economists are once again used to demonstrate that they act as an obstacle to economic growth because they hinder capital formation. Professor de Schweinitz, for example, has argued that the labor movement in underdeveloped countries must be restricted in the interests 169 of economic development. In drawing upon evidence from Western experience in the nineteenth and twentieth centuries. he showed that if unions are successful in redistributing income from profits to wages, savings decline, consumption rises, and investment is retarded. The rapid industrial growth of England, Germany and the United States in the nineteenth century occurred when trade union action was either prohibited, or restricted. In the Soviet Union trade unions have never been permitted to develop because low wage rates are necessary . . . 23 . to prOVide high rates of saVing. As one writer has put the case: Unions fundamentally favor consumption; economic development requires keeping aggregate consumption down in order to free resources for investment. Effective unions, whatever else they may do, thus tend to delay. reduce, or prevent the growth of investment.24 Recognizing the incompatibility of trade unions and economic growth for newly industrializing societies, Professor Mehta suggests that unions should be given assignments that would interfere as little as possible with the requirements of rapid development.25 23Karl de Schweinitz, Jr.,"Industrialization, Labor Controls, and Democracy," Economic Development and Cultural Change, Vol. VII (July, 1959), pp. 385-404. 24Adolph Sturmthal, "Unions and Economic DeveloPment,” Economic Development and Cultural Change, Vol. VIII (January, 1960), p. 199. 26 n . . . . Asoka Mehta, The Mediating Role of Trade Unions in Underdeveloped Countries," Economic Development and Cultural Change, Vol. VI (October, 1957), pp. 16—23. 3 111'- .an'i Eur-sh agnivaa awe! no! dqmuansu .nr 05:33 up Estjan 170 That the wages fund is still a crucial consideration for underdeveloped economies has been noted by Vakil and Brahmanand. They claim that in countries such as India the concept of capital as a stock of wage goods available to support labor in investment activities is realistic: We have maintained that unemployment in under- developed countries is due solely to the prevalence of the wage—goods gap. It is the inability of the economy to provide in the short—period the required surplus of wage—goods necessary in order that disguised unemploy— ment can be employed in investment, that inhibits expansion in employment and investment. Countries like India have an abundance of population, but such an abundance does not necessarily connote a proportionate availability in employable units. If the economy can make good the wage- goods gap through a quick expansion in the output of wage goods, it is possible to raise the employment potential and thus initiate an upward cumulative process.26 The same argument is made by Professor Higgins. He notes that in some underdeveloped countries the labor cost of food determines the real wage rate and the spread between prices and real wages determines profit. When agricultural yields are good, wages are low and profit high. Investment thereby tends to increase. Once the new supplies of manufactured goods reach the market their prices fall. "If this drop in manufactures coincides with a bad harvest, so that wages and raw material costs are rising at the same time, investment may 26C. N. Vakil and P. R. Brahmanand, Planning for 3p Expanding Economy (Bombay: Vora and Co., 1956), p. 23. See also, p. 211, 231—232, 397. H I van a} ‘3!” 5!:an as done aei'mn .I.'-:. = = . r.- '. -- -: nu PRIME. a ll wm‘anvnl fit l.| EM 3 I I... I'J‘; . {49.u. "If. : vmq 171 be cut off to a trickle.“27 Thus the experience of under— developed economies seems to support the proposition that the wages fund theory is not without validity. As we have shown in this chapter, the wages fund theory was not replaced by the development of marginal productivity analysis since the two theories are attempts to explain two quite different phenomena. In fact the attempt to use marginal analysis to explain wages has created a vacuum in wage theory since it can only explain specific wages and tells us nothing about the total wage bill, or average wage rate, essentially macro—economic issues. The Keynesian theory in a sense filled the void by returning to the problem of aggregates. It involves a wages fund theory in the sense that real wages are assumed to remain constant in the face of a change in money wages, and the latter proposition has many of the same consequences as the classical wages fund doctrine. Furthermore in the Keynesian system, the important consideration so far as income determination is concerned is net investment (or net additions to capital) and this is a 27Benjamin Higgins, Economic Development (New York: Norton & Co., 1959), p. 47. See also P. T. Bauer, "Regulated Wages in Under—Developed Countries," The Public Stake ip Union Power (University of Virginia Press, Charlottesville, 1959), Ed. by Phillip D. Bradley, pp. 324—329. L butput an" I; r- 'F'. wages. Moreover, experience in undefidiem I.. -- -'-..'4 indicates that the wages fund doctrine is indispensable "ls a tool of analysis. I' swsad gal: 30 nnqc I has auqnj n9 =.I'.t I"{.III-':'..H sidlssoq 9b!!! :- 1- =.-::-.-:'IE.‘! ‘II.=. 173 BIBLIOGRAPHY OF LITERATURE CITED Ayres, C. E. 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