Source: Cyclopaedia of Political Science, Political Economy, and of the Political History of the United States by the best American and European Authors, ed. John J. Lalor (New York: Maynard, Merrill, & Co., 1899). Vol 3 Oath - Zollverein Chapter: WAGE FUND, The
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Hidden within the massive Lalor's Cyclopedia are some essays by important economists such as the American Political Economy (1887) was one of the most widely used textbooks of the 19th century prior to Marshall. We have reproduced his essays from Lalor's Cyclopedia here in The Forum.
WAGE FUND, The. The wage fund is the term used to characterize that theory of the distribution of wealth which became prevalent in England sbortly after the close of the Napoleonic wars; which was generally accepted upon English authority by American economists, and remained in full virtue unchallenged for nearly half a century. It never crossed the British channel, however, and is practically unknown to the political economy of continental Europe.
—This theory made the capitalist employer to be the residual claimant upon the product of industry. Rent was to be first deducted, the amount thereof to be determined, in the main, according to the Ricardoan formula, with more or less of concession or remission by landlord to tenant, under the influence of personal good feeling or of a public sentiment prescribing a kindly and considerate treatment of the actual cultivators of the soil. Next, wages were to be deducted, the amount thereof to be ascertained, according to the wage-fund formula, of which we are now to speak. There were to remain: profits, composed of interest on the capital employed (including a premium for the insurance of capital against extraordinary risks), and of the remuneration of business management. Profits constituted the share of the product of industry going to the capitalist employer, who, after paying rent and wages, as indicated, retained all the rest as his own. This view of the relation of the several parties to the distribution of wealth was summed up by De Quincey in the saying: "Profits are the leavings of wages," rent not being here mentioned, inasmuch as De Quincey has in view the production of wealth upon the lowest grades of soil, which pay no rent.
—We find no trace of the wage-fund doctrine in Adam Smith's "Wealth of Nations," published in 1776. Dr. Smith, indeed, writes of "the funds for the maintenance of labor"; but while he thus recognizes the need the laborer has of a pre-existing body of wealth from which he is to be sustained during the period while his labor is bearing its fruit in harvested or marketed products, he did not intimate that the laborer's remuneration was strictly limited to the amount thus required for his immediate sustentation; he did not allege that no part of these funds might be the laborer's own, accumulated from the savings of previous years; he did not assume that these funds were so fixed and definite in amount as to be independent alike of the industrial quality of the laboring class and of any efforts they might put forth to increase their share of the product of industry. So far was Adam Smith from holding this view, that he expressly stated that "the wages of labor are the encouragement of industry, which, like every other human quality, improves in proportion to the encouragement it receives."
—Even Mr. Malthus, in his work of 1820, although he gave great prominence to the laborer's need of provisional maintenance during the interval between the rendering of the service and the realizing of the product, failed to intimate any constant or any necessary relation between the funds so employed and the aggregate capital of a country.
—Yet at this time the industrial condition of England had become such through the effects of the Napoleonic wars, and of the ill-devised pauper legislation of parliament, as strongly to suggest the doctrine which was, in 1824, to be announced by Mr. James Mill, and was, for nearly fifty years, completely to dominate all theory of the distribution of wealth, so far as English and American political economy was concerned.
—The wars which, with the intermission of a single year, raged from 1793 to 1815, by checking the importation of grain, drove cultivation in England down to inferior soils, thus raising the proportion of the aggregate produce going in rent to the landlords. The frequent and violent fluctuations of prices through all this period, according to the fortunes of battle by sea and by land, threw no small part of the wealth of the kingdom into the hands of the speculating as distinguished from the producing class. And while these causes were working to prejudice especially the interests of labor, the volume of wealth to be distributed was diminished by the waste of war.
—But it is doubtful whether the effects of all these causes, acting in conjunction to depress the condition and degrade the character of the mass of the English people, were equal to the deleterious influence of the changes in the poor law system of the kingdom, by which the workhouse test for able-bodied paupers was abandoned; by which appropriations were made from public funds, to supplement wages; and by which a premium was put upon births, and an even higher premium upon illegitimate births.
—So efficient for evil were the causes described as operating during this period, that, by the close of the Napoleonic wars, the working classes of England had been reduced to extreme and apparently hopeless misery. Accumulation by the laborer had been rendered impossible, and he was thus rendered completely dependent upon the employer, who was required to advance the whole of his subsistence, in anticipation of the crops or the goods being harvested or marketed. At the same time the average efficiency of the industrial agent had been so impaired, by both moral and physiological causes, and the market for labor had become so crowded, that the laborer's share of the ultimate product rarely exceeded in any degree the sums so advanced in provisional maintenance.
—Under these conditions the subsistence fund became, in fact, precisely equivalent to wages; and it is not at all surprising that English economists, contemplating the state of things reached in their own country, should have come to regard the subsistence fund and wages as necessarily identical, and, in so doing, have evolved the notion of a wage fund.
—The first distinct statement of the doctrine under consideration, is that of James Mill, in his work of 1824. The "Political Economy" of J. R. M'Culloch, published in the following year, contains a positive assertion of the necessary dependence of wages upon the proportion which the whole capital of a country bears to the whole laboring population. Mr. John Stuart Mill, in his great work of 1848, makes the doctrine of a wage fund the keystone of his theory of the distribution of wealth. The following is his statement: "If wages are higher at one time or place than at another; if the subsistence and comfort of the class of hired laborers are more ample, it is and can be for no other reason than because capital bears a greater proportion to population. * * The rate of wages, which results from competition, distributes the whole wage fund among the whole laboring population." Let us add the statement of this doctrine given by Mr. Mill, twenty-one years later, when its validity had been rudely questioned. "There is supposed to be, at any given instant, a sum of wealth which is unconditionally devoted to the payment of wages of labor. This sum is not regarded as unalterable, for it is augmented by saving, and increases with the progress of wealth; but it is reasoned upon as, at any given moment, a predetermined amount. More than that amount, it is assumed that the wage-receiving class can not possibly divide among them; that amount, and no less, they can not but obtain. So that, the sum to be divided being fixed, the wages of each depends solely upon the divisor, the number of participants." ("Fortnightly Review," May, 1869.)
—The first challenge of the dominant theory of wages in England came from a barrister little known to fame, Mr. Francis D. Longe, who, in 1866, issued a pamphlet entitled "A Refutation of the Wage-Fund theory of Modern Political Economy, as enunciated by Mr. Mill, M. P., and Mr. Fawcett, M. P." This pamphlet attracted little attention; not one of the reviews noticed it; and when, three years later, Mr. W. T. Thornton attacked the wage-fund doctrine, he appeared wholly ignorant of its existence. Yet the earlier work was the abler of the two, and nearly covered the whole case against the current economic doctrine. That doctrine, as we have seen, stood upon the asserted need, on the part of the laborer, of provisional maintenance, to be afforded by the capitalist, out of funds previously accumulated. As Prof. Fawcett had stated in his "Manual of Political Economy," "laborers while engaged in any particular industry can not live upon the commodity which their labor is assisting to produce. The plowman who tills the soil, from which in the following autumn the harvest will be gathered, is fed with the wealth which his master has saved, or, in other words, the master pays his laborer's wages from the wealth he has previously saved." That is, because the master must needs pay the laborer something before the harvest, he can not possibly pay him anything after the harvest! To say that the laborer derives a provisional maintenance from the master's capital, is, in Prof. Fawcett's view, precisely equivalent to saying that the laborer derives his wages, his entire wages, from this source. Mr. M'Culloch has left the same assertion of the natural and necessary equivalency of subsistence and wages.
—Upon this open point in the position of the economists Mr. Longe fell with incisive force, He insisted upon the distinction between "the wealth or capital available for the maintenance of laborers," and "the amount of wealth available for the purchase of their work." "The amount of money," reasons Mr. Longe, "which a farmer can afford to advance for the maintenance of laborers, without using the money he gets from the sale of his stock or crops, is unquestionably limited by the amount of wealth at his disposal from other sources; but the amount of money or wealth which the farmer can afford to pay, or contract to pay, as wages, is limited only by the amount of money for which his crops will sell."
—Although Mr. Longe's pamphlet did not even receive the honor of a notice in the reviews, Mr. Thornton, when in 1869 he advanced nearly the same arguments against the current economic doctrine, and, as I must think, with less of clearness and force, achieved an overwhelming triumph. Through an article in the "Fortnightly Review" of May of that year, Mr. John Stuart Mill, after stating the wage-fund doctrine, in the terms already quoted, and adding, "this series of deductions is generally received as incontrovertible: they are found in every systematic treatise on political economy, my own certainly included," proceeded completely to renounce these life-long views. He declared that Mr. Thornton had deprived of all scientific foundation the doctrine so long taught by "all or most economists"; that Mr. Thornton had shown that the barrier (the wage fund) which had "closed the entrance to one of the most important provinces of economic and social inquiry," is but "a shadow which will vanish if we go boldly up to it."
—Mr. Mill's recantation of the wage-fund doctrine produced a deep impression. The "London Quarterly Review" (July, 1871) characterized the wage fund as "a thing, or un-thing (to borrow a German idiom), which is henceforth shunted fairly out of the way of future discussion of all questions affecting labor and labor's wages."
—Yet Mr. Mill's surrender was not wholly acquiesced in by the professional economists. Prof. John E. Cairnes, in his masterly work of 1874, undertook the rehabilitation of the economic doctrine of wages; and, with much care and pains, sought to show that something which might not improperly be called a wage fund, though widely different from the wage fund of the two Mills, of M'Culloch and of Fawcett, does exist, and does limit the amount that can be paid in wages. But the prestige of the old doctrine was destroyed, and the result of successive assaults has been its practical abandonment by the English economists. Prof. W. Stanley Jevons, in the second edition of his theory of "Political Economy," published in 1880, after referring to the general consent of his brethren to give up what was once the keystone of the orthodox theory of the distribution of wealth, writes: "In this matter of wages, the English economists have been living in a fool's paradise. The truth is with the French school."
—In the foregoing sketch of the rise and fall of this economic doctrine, have been intimated the nature and direction of the arguments which have compelled the practical abandonment of it by the economists of to-day. Its great importance in the history of political economy, however, and the fact that it is still found in most of the systematic treatises on the shelves of our libraries, and even in the treatises now used as text books156 in our colleges, render desirable a compact recital of the objections to this theory of the origin and the limit of wages.
—In the first place, the reason for holding this theory of wages assigned by the Messrs. Mill, by Mr. M'Culloch and by Prof. Fawcett, proves to be no reason at all, in view of the distinction first presented by Mr. Longe, between the amount advanced by the employer for the maintenance of the laborer, and the amount to be paid, first and last, for the laborer's services. It is seen at once, in the light of this distinction, that the mere fact that the employer must pay the laborer something, in advance of the harvest, constitutes no reason whatsoever why the employer should not pay the laborer something more, on the completion of the harvest.
—But, again, this doctrine assumes, in all the statements of it we have quoted, that the laborer is always and necessarily dependent on the employer for the entire amount of his subsistence. Now, this state of things did, in fact, exist throughout England, during the period when the doctrines in question came to be formulated. Probably the doctrine would never have arisen but for that state of things. But this condition is not involved in the nature of the relation of the laborer to his employer; nor have there been wanting examples, on a large scale, of the ability of the working classes to accumulate vast sums out of their earnings; witness the deposits of our American savings banks!
—But the wage-fund theory might be true were all the reasons adduced in support of it conclusively proven to be false. Let us, then, examine without prejudice from the mistakes of its advocates, the proposition that wages are paid out of capital, and that the possible amount of wages in any country, at any time, is determined by the amount of capital then and there existing.
—Why does an employer pay wages at all? Surely not to expend a fund of which he finds himself in possession, and of which he regards himself as trustee; but to purchase labor. Why does he purchase labor? Not at all that he may keep it employed; as it might be employed in carrying burdens first up-stairs and then down-stairs again, but he purchases labor as a means to the production of wealth. Why does he produce wealth? Merely that it may be produced, as might be the case had he no personal part in its ownership, no interest in its use or enjoyment? Surely not: unless the most exceptional of mortals, he produces wealth, not for the sake of producing it, but with a view to a profit to himself, individually, therefrom. The mere fact that a person has capital at his command no more constitutes a reason why he should use it in production when he can get no profits, than the fact that the laborer has arms and legs constitutes a reason why he should work when he can get no wages. It is, we see, for the sake of future production, that laborers are employed; not at all because the employer has possession of a fund which he must disburse. Is it not, then, the value of the product, such as it is likely to prove, which determines the amount of wages the employer is both able and willing to pay? If so, it is production, and not capital, which furnishes the motive for employment and the measure of wages.
—But, if production furnishes the measure of wages, the amount so to be paid can not be irrespective of the industrial quality of the wages class, since production varies necessarily, and varies within a wide range, according as that industrial quality is high or low. Therefore, the wage-fund doctrine is false, for it teaches that the rate of wages depends solely upon the proportion which the amount of capital bears to the numbers of the laboring population, altogether irrespective of their industrial quality.
—But even were we to waive consideration of the industrial quality of a laboring population, would it then be true that the amount of possible wages is determined in and by the amount of capital existing; and that the wage fund so constituted forms a predetermined dividend, the divisor of which is to consist of the number of laborers? Precisely this is involved in the wage-fund doctrine, as it was taught, without qualification, down to a recent period. In 1864 Prof. Fawcet delivered a course of lectures in Cambridge university, in which he laid down the following rule: "The circulating capital of a country is its wage fund. Hence, if we desire to calculate the average money wages received by each laborer, we have simply to divide the amount of this capital by the number of the laboring population." The fallacy of this is seen the moment we realize that the purpose for which labor is employed is, not the distribution of a pre-existing fund, but the creation of values, the production of new wealth. This being so, the dividend can not be predetermined irrespective of the number of laborers, since the quantity or amount of the product of industry must itself depend upon the number of laborers. More laborers will produce more wealth—whether proportionately more or not, is aside from the question: fewer laborers will produce less wealth—whether proportionately less or not, we need not here inquire. Therefore the wage-fund doctrine is again shown to be false.
—The only virtue the doctrine we have been considering ever possessed, for practical uses, was in its assertion that an economic reason must exist for any and every advance of wages. Doubtless this explains why some economists still cling to the doctrine, as fearing that if it be abandoned, there will be no barrier against foolish and mischievous claims by the laboring classes for increase of remuneration or reduction of the hours of work. But the proposition that production furnishes at once the motive to employment and the measure of wages, equally establishes a barrier to every claim on behalf of the working classes which can not present a substantial economic reason. The one view of the origin and limit of wages, equally as the other, opposes itself to all demands, in the interest of labor, which are made merely under the impulse of compassion, or philanthropy, or the enthusiasm of humanity.
—The only difference between the two theories is, that by the one the economic force which limits wages is found in the amount of capital, while by the other it is found in the value of the product of industry, to which land, capital and labor jointly contribute. Which rule would be more consonant to sentiments of natural justice is not at issue, though here the preference clearly lies on the side of the rule we propose; the question is, Which corresponds the more closely to the reason of the case and to the just import of industrial statistics? On this issue the movement of economic opinion since 1866 has been overwhelmingly against the wage-fund doctrine.
FRANCIS A. WALKER.
[156.]In spite of Mr. Mill's complete recantation of the wage-fund doctrine, in 1869, his earlier statements are still found, unretracted and unqualified, in the latest edition of his "Political Economy."
Last modified April 10, 2014