Front Page Titles (by Subject) Relation of Wages and Profit. - The Theory of Political Economy
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Relation of Wages and Profit. - William Stanley Jevons, The Theory of Political Economy 
The Theory of Political Economy (London: Macmillan, 1888) 3rd ed.
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Relation of Wages and Profit.
There is another inversion of the problem of Economics which is generally made in works upon the subject. Although labour is the starting-point in production, and the interests of the labourer the very subject of the science, yet economists do not progress far before they suddenly turn round and treat labour as a commodity which is bought up by capitalists. Labour becomes itself the object of the laws of supply and demand, instead of those laws acting in the distribution of the products of labour. Economists have invented, too, a very simple theory to determine the rate at which capital can buy up labour. The average rate of wages, they say, is found by dividing the whole amount of capital appropriated to the payment of wages by the number of the labourers paid; and they wish us to believe that this settles the question. But a little consideration shows that this proposition is simply a truism.The average rate of wages must be equal to what is appropriated to the purpose divided by the number who share it. The whole question will consist in determining how much is appropriated for the purpose; for it certainly need not be the whole existing amount of circulating capital. Mill distinctly says, that because industry is limited by capital, we are not to infer that it always reaches that limit;1 and, as a matter of fact, we often observe that there is abundance of capital to be had at low rates of interest, while there are also large numbers of artisans starving for want of employment. The wage-fund theory is therefore illusory as a real solution of the problem, though I do not deny that it may have a certain limited and truthful application, to be shortly considered.
Another part of the current doctrines of Economics determines the rate of profit of capitalists in a very simple manner. The whole produce of industry must be divided into the portions paid as rent, taxes, profits, and wages. We may exclude taxes as exceptional, and not very important. Rent also may be eliminated, for it is essentially variable, and is reduced to zero in the case of the poorest land cultivated. We thus arrive at the simple equation—
Produce = profit + wages.
A plain result also is drawn from the formula; for we are told that if wages rise profits must fall, and vice versâ. But such a doctrine is radically fallacious; it involves the attempt to determine two unknown quantities from one equation. I grant that if the produce be a fixed amount, then if wages rise profits must fall, and vice versâ. Something might perhaps be made of this doctrine if Ricardo's theory of a natural rate of wages, that which is just sufficient to support the labourer, held true. But I altogether question the existence of any such rate.
The wages of working men in this kingdom vary from perhaps ten shillings a week up to forty shillings or more; the minimum in one part of the country is not the minimum in another. It is utterly impossible, too, to define exactly what are the necessaries of life. I am inclined, therefore, to reject altogether the current doctrines as to the rate of wages; and even if the theory held true of any one class of labourers separately, there is the additional difficulty that we have to account for the very different rates which prevail in different trades. It is impossible that we should accept for ever Ricardo's sweeping simplification of the subject, involved in his assumption, that there is a natural ordinary rate of wages for common labour, and that all higher rates are merely exceptional instances, to be explained away on other grounds.
The view which I accept concerning the rate of wages is not more difficult to comprehend than the current one. It is that the wages of a working man are ultimately coincident with what he produces, after the deduction of rent, taxes, and the interest of capital. I think that in the equation
Produce = profit + wages,
the quantity of produce is essentially variable, and that profit is the part to be first determined. If we resolve profit into wages of superintendence, insurance against risk, and interest, the first part is really wages itself; the second equalises the result in different employments; and the interest is, I believe, determined as stated in the last chapter. The reader will observe the important qualification that wages are only ultimately thus determined—that is, in the long run, and on the average of any one branch of employment.
The fact that workmen are not their own capitalists introduces complexity into the problem. The capitalists, or entrepreneurs, enter as a distinct interest. It is they who project and manage a branch of production, and form estimates as to the expected produce. It is the amount of this produce which incites them to invest capital and buy up labour. They pay the lowest current rates for the kind of labour required; and if the produce exceeds the average, those who are first in the field make large profits. This soon induces competition on the part of other capitalists, who, in trying to obtain good workmen, will raise the rate of wages. Competition will proceed until the point is reached at which only the market rate of interest is obtained for the capital invested. At the same time wages will have been so raised that the workmen reap the whole excess of produce, unless indeed the price of the produce has fallen, and the public, as consumers, have the benefit. Whether this latter result will follow or not depends upon the number of labourers who are fitted for the work. Where much skill and education is required, extensive competition will be impossible, and a permanently high rate of wages will exist. But if only common labour is requisite, the price of the goods cannot be maintained, wages will fall to their former point, and the public will gain the advantage of cheaper supplies.
It will be observed that this account of the matter involves the temporary application of the wage-fund theory. It is the proper function of capitalists to sustain labour before the result is accomplished, and as many branches of industry require a large outlay long previous to any definite result being arrived at, it follows that capitalists must undertake the risk of any branch of industry where the ultimate profits are not accurately known. But we now have some clue as to the amount of capital which will be appropriated to the payment of wages in any trade. The amount of capital will depend upon the amount of anticipated profits, and the competition to obtain proper workmen will strongly tend to secure to the latter all their legitimate share in the ultimate produce.
For instance, let a number of schemes be set on foot for laying telegraphic cables. The ultimate profits are very uncertain, depending upon the utility of the cables as compared with their cost. If capitalists make a large estimate of those profits, they will apply much capital to the immediate manufacture of the cables. All workmen competent at the moment to be employed will be hired, and high wages paid if necessary. Every man who has peculiar skill, knowledge, or experience, rendering his assistance valuable, will be hired at any requisite cost. At this point it is the wage-fund theory that is in operation. But, after a certain number of years, the condition of affairs will be totally different. Capitalists will learn, by experience, exactly what the profits of cables may be; that amount of capital will be thrown into the work which finds the average amount of profits, and neither more nor less. The cost of transmitting messages will be reduced by competition, so that no excessive profits will be made by any of the parties concerned; the rate of wages, therefore, of every species of labour will be reduced to the average proper to labour of that degree of skill. But if there be required in any branch of the work a very special kind of skilled and experienced labour, it will not be affected by competition in the same way, and the wages or salary will remain high.
I think that it is in this way quite possible to reconcile theories which are at first sight so different. The wage-fund theory acts in a wholly temporary manner. Every labourer ultimately receives the due value of his produce after paying a proper fraction to the capitalist for the remuneration of abstinence and risk. At the same time workers of different degrees of skill receive very different shares according as they contribute a common or a scarce kind of labour to the result.
[]Principles of Political Economy, book i., chap. v., sec. 2.