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: WAGES
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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.
WAGES. The word wages, in its popular use, signifies the remuneration of hired labor. As so used, it is more or less disparaging, being commonly placed in contrast with the words salaries, fees, honorarium, etc., by which it is sought to denote the remuneration of services of a higher or more intellectual character.
—To the economist, however, the word wages has no special reference to manual, as distinguished from intellectual, effort. That term in economic literature has two significations, the one much wider than the other. By the first is embraced, not only the wages of manual labor, hired by an employer; not only the avails of unhired manual labor, as of the smith working in his own shop, or of the peasant proprietor tilling his own lot of ground (due exception being made of rent and interest); not only the salaries of school teachers and public officials, the fees of lawyers and physicians, and the honorarium of the artist; but, also, all sums accruing to the employers of labor, through their own personal supervision and direction of the processes of industry. In a word, wages, in this largest sense, embraces all the material rewards of human exertions and sacrifices which are directed to the production of wealth, as distinguished only from the remuneration paid for the use of land and the remuneration paid for the use of capital.
—In the second and narrower economic sense, while retaining in all other respects the significance attributed to it above, the word wages becomes exclusive of the sums accruing to the employer of labor, as such, who, under the four-fold division of industrial activity specially characteristic of the present age, leases land, so far as this may be essential to his operations, and pays therefor rent; borrows capital, and pays therefor interest; hires labor, paying therefor wages; and has remaining in his hands, out of the product of industry, an amount of wealth, greater or less according to his activity, his enterprise, his prescience, his prudence, and, also, in some measure according to his good or evil fortune.
—The difference, then, between the two senses of the word wages, is found wholly in the fact that the former includes, while the latter excludes, the remuneration received by the employer, as such. The two alike exclude rent and interest, proper. Throughout the present article the word will be used in the latter and more restricted sense, the remuneration—viz., profits—which is received by the employer of labor, as such, forming the subject of a separate investigation.
—The questions relating to wages may be discussed under two titles, General Wages and Particular Wages: the former having reference to the problem of the distribution of wealth between the wages class, as a whole, and other claimants upon the product of industry; the latter, to the problem of the distribution of the aggregate amount of wealth paid, or possibly to be paid, in wages, among the several classes of wage receivers. We shall take up these two divisions of the subject in inverse order.
—I. PARTICULAR WAGES. In any consideration of the comparative remuneration of individuals or classes, it is of the highest importance to preserve the distinction expressed by economists as that between real and nominal wages. Real wages are the remuneration of the laborer, as reduced to the necessaries, comforts or luxuries of life. These are what the laborer works for; these are truly his wages. The money he receives is only a means to that end.
—Real may differ from nominal wages by reason of: First, variations in the purchase power of money. This is a consideration of prime importance, in the comparison of wages, as between one epoch and another. Second, varieties in the form of payment. Wages, though generally reckoned in money, are, to a very large extent, not paid in money. Especially in agriculture, the world over, full payment in money is highly exceptional. The forms, other than money, in which labor is remunerated, are various, the chief among them being rent, where cottages or tenements are provided for the laborer and his family, whether in agricultural or mechanical industry; board, mainly confined to unmarried laborers; and, lastly, a great variety of allowances, perquisites and privileges, such as definite quantities of certain kinds of food, drink or fuel, furnished by the employer; such as the hauling to the laborer's house of wood, coal or peat by the employer's teams, the keep of a cow, the right to take flour at millers' prices or at a fixed price whatever the market rate, the gleaning of fields, etc., etc. So numerous and diverse are the forms of payment of wages to hired laborers in agriculture, that anything like an exact comparison between the rates of real wages in different countries or districts often becomes practically impossible. Third, opportunities for extra earnings, by the head of the family, or by its other members. Thus, a weaver or spinner earning twenty shillings a week, may find places in which his wife and minor children may earn an equal sum, making the income of the family forty shillings. A carpenter or coal-heaver, on the other hand, receiving twenty-five shillings a week, may find himself unable to add anything to the family income through the labor of wife or child. It is evident, therefore, that in any comparison of wages, the total income of the family should be taken as the unit. Fourth, the greater or less regularity of employment. Varying regularity of employment may be due to the nature of the individual occupation, or to the force of the seasons, or to social and industrial causes of a general nature. In agriculture, for example, the nature of the operations involved, and the difference of seasons, cause great irregularity of employment. The rate of wages during the third quarter of the year is generally more than twice that during the first quarter. In this respect, however, there is great difference between different countries. An English farmer is plowing while a New England farmer is hauling wood on the ice and snow. In some countries agricultural operations are spread over eight months; in others, they are confined to four. In the fisheries, also in the so-called building trades, and in most out-door avocations, there is great irregularity in the matter of employment during the different periods of the year. On the other hand, there is nothing in the force of the seasons, or in the nature of the operations involved, to prevent weaving, spinning, shoemaking, paper-making, etc., from proceeding uniformly through twelve consecutive months. Industrial causes, also, like strikes, lock-outs, panics, and so-called hard times, produce great differences in the real rate of wages, where the same nominal rates exist. Fifth, the longer or shorter duration of the power to labor. This consideration is of prime importance, both as between nations and as between the classes of persons pursuing different avocations within the same country. It is evident, that, if two persons begin to labor productively at the same period of life, and continue at work in the same occupation, at the same nominal wages, until death or final disability, the one receives the higher real remuneration who lives and works the longer, since the cost of his maintenance during the period of unproductive labor is properly to be charged upon his wages during the productive period. In the foregoing respect, there are wide differences among nations, which must enter to greatly affect the real remuneration of labor. Dr. Edward Jarvis has stated, that, for every thousand years expended in the developing period upon all who are born, including both those who die, and those who survive to the age of twenty, the consequent laboring and productive years are, in Norway, 1,881; in Sweden, 1,749; in England, 1,688; in the United States, 1,664; in France, 1,398; and in Ireland, 1,148. Moreover, as between different occupations in the same country, there are wide differences in the duration of the power to labor, which must be taken into account in adjusting nominal to real wages. The eminent actuary, Dr. Neison, states that the influence of occupation upon life is so considerable that the mortality in one avocation exceeds that of another by not less than 239 per cent. Taking the period of life, twenty-five to sixty-five, Dr. Neison finds that the mean mortality in the clerical profession, in England, is 1.12 per cent., in the legal, 1.57; in the medical, 1.81. In domestic service, the mortality among gardeners is but.93, among grooms, 1.26; among house servants, 1.67, among coachmen, 1.84. Of the several branches of manufacture, paper shows a mean mortality of 1.45; tin, of 1.61; iron, 1.75; glass, 1.83; copper, 2.16; lead, 2.24; earthenware, 2.57; the mortality among those operatives in the last-named branch of industry, who are known as china-scourers, due to the inhaling of the fine dust floating in the air, being positively frightful. Among the different kinds of mining industry, the range of this effect is even greater, the mean mortality of iron miners being 1.80; of tin miners, 1.99; of lead miners, 2.50, due to the prevalence of asthma and chronic bronchitis; and of copper miners, 3.17, due largely to the excessive heat prevailing in this class of mines. Even these figures, striking as they are, do not exhibit the full effect of the cause under consideration, since the occurrence of permanent disability among operatives of certain classes is out of proportion to the actual occurrence of death. In some of the agricultural districts of England, owing to wretched food and still more wretched lodgings, the laborer, though often long-lived, is early crippled and doubled up by rheumatism.
—The foregoing heads embrace the chief causes which are commonly adduced in reduction of nominal to real wages, i.e., of money wages to wages expressed in terms of what Mr. Malthus calls "food, clothing, lodging and firing." In satisfaction, however, of still other desires of the laborer (using that term in the large sense attributed to it at the beginning of this article), and consequently forming a possible part of his real, as distinguished from his nominal, wages, enter certain other elements which may be found in a high degree in one occupation and in a low degree in another. Such is agreeableness of situation or of work; such is reputableness, or even distinction attaching to the performance of certain services. These are most influential causes in producing differences between real and nominal wages, in not a few departments of labor. One great object for which wealth is expended is to command social consideration. If, then, a certain position of itself gives authority or dignity, this may constitute, to one person, or even to many persons, a fair equivalent for a portion of the remuneration which, in a different avocation, he might expect and be able to exact. A judgeship is often accepted by eminent lawyers who have been accustomed in their professional practice to earn several times the salary of that office. "Forty pounds a year," wrote Adam Smith, in the last century, "is reckoned at present very good pay for a curate, and there are many curacies under twenty pounds a year. There are journeymen shoemakers in London who earn forty pounds a year, and there is scarcely an industrious workman of any kind, in that metropolis, who does not earn more than twenty." The conception of dignity which thus gives preference to one occupation over another, may be wholly false or mistaken, without losing anything of its power to influence the actions of men, which is all the economist has to consider. Thousands of young men, in every large American city, stand around the marts of trade, hoping, by some chance, or by influence or solicitation, to crowd themselves into hard-worked and ill-paid places as clerks, because they deem manual labor degrading, although a skilled mason or carpenter earns twice or thrice as much, and that in a shorter day of labor. On the other hand, there are avocations which are exceptionally unpleasant to the senses, or exceptionally dangerous to life and limb, or exceptionally discreditable, and which, on this account, would naturally, were all other conditions constant, command a higher rate of remuneration. If, in some instances, those who pursue such avocations do not only not receive higher wages, but are compelled to accept a smaller, perhaps a much smaller, remuneration, this is not because the force just adverted to does not operate, but because it is counteracted by another cause, viz., that large numbers of persons are, by reason of ignorance, or misfortune, or disrepute, debarred from more favorable employment, and shut up to one or another avocation of the class described.
—Assuming the proper reduction of nominal to real wages, by allowances on the several foregoing accounts, we next come to inquire what are the causes which produce the wide differences which exist in the wages of labor, as between different countries, and as between particular avocations within the same country.
—As between different countries, the tendency to equality of wages within the same or closely corresponding avocations, varies with the readiness with which emigration or immigration, which we may call the flow of labor, takes place. Between no two countries, however near, and however similar in social or political conditions, is the flow of labor sufficiently easy to secure a close approximation to equality of wages. Adam Smith, in his day (1776), declared that man is, of all sorts of luggage, the most difficult to be transported. "A difference of prices," he says, "which is not always sufficient to transport a man from one parish to another, would necessarily occasion so great a transportation of the most bulky commodities, not only from one point to another, but from one end of the kingdom to another, almost from one end of the world to another, as would soon reduce their prices more nearly to a level." Mr. Ricardo, writing a generation later (1817), assumed that the flow of labor from country to country would be so tardy and difficult as practically to leave the laboring classes to enjoy or to suffer the industrial advantages or disadvantages of their respective countries, without any important influence as the result of immigration or emigration. John Stuart Mill, writing still a generation later (1848), just at the beginning of an age of wonderful progress in the arts of transportation and the communication of news, noted "a visible tendency toward a freer migration of labor and capital, to take advantage of better opportunities of employment and investment." One generation later still, we may say, that, in 1883, the tendency pointed out by Mr. Mill acquires strength from year to year; but that the flow of labor still remains, as between country and country, so difficult and so tardy as to allow very great differences in real wages to remain, through long periods, but little affected by emigration or immigration.
—As between different avocations within the same country, the earlier economists, like Smith and Ricardo, assumed a substantial equality of real wages; and in this they were followed, though with more or less qualification, by John Stuart Mill. In his great work of 1874, Prof. Cairnes, writing with especial reference, we may suppose, to English conditions, proposed his theory of "non-competing groups." "What we find," he said, "is, in effect, not a whole population competing indiscriminately for all occupations, but a series of industrial layers, superimposed on one another, within each of which the various candidates for employment possess a real and effective power of selection, while those occupying the several strata are, for all purposes of effective competition, practically isolated from each other." Prof. Cairnes held the practical isolation of these industrial groups to be not less complete than the isolation which Mill had attributed to the several commercial countries of his day; and he proceeded to apply to such groups, mutatis mutandis, Mr. Mill's law of international values. Whether Prof. Cairnes' view of the structure of industrial society, within any given country, say, England, will be found in all respects just, or not, it is evident that it contains enough of truth to deserve the careful attention of the student of wages. It is doubtless in this direction that the largest contribution to economic science now possible might be made by a competent investigator.
—All the foregoing remarks relative to the rates of wages prevailing in different countries, and in different occupations within the same country, presuppose a practical equality in the powers and qualifications of laborers. In addition, however, to the difference in real wages produced by resistance to the flow of labor from country to country, or from one group of avocations to another group within the same country, are the effects upon the real remuneration of labor within particular avocations, produced by the differences in the powers, the faculties, and the aptitudes of individuals within the same country, and within the same great group of occupations. The rate of wages within any particular avocation will be determined exclusively by the operation of the principle of demand and supply.
—Now, in economics, the words demand and supply alike have reference, 1, to a certain article, and, 2, to a certain price. Demand means the quantity of a given article which would be taken at a given price. Supply means the quantity of that article which could be had at that price. Applying the term supply, in the sense indicated, to any given market for labor, we find that supply reaches its maximum in the number of persons who are capable of rendering the service which is required, and its minimum in the number who are both capable of rendering that service and are willing to do so at the price which the demand for the service causes to be offered. The maximum supply of labor so determined, may, in a given occupation, be so small as, given a large demand for the service to be rendered, to allow a very high rate of wages to be reached, and to be maintained and even increased from generation to generation. Thus, the demand for the services of opera singers of the highest class was, forty years ago, so great as to permit the wages of a prima donna to equal the income of a lord; yet, during the entire human generation that has intervened, this magnificent premium upon operatic art, although open freely even to the peasantry of every land, has not sufficed to reduce, in the slightest degree, the price of such services. On the contrary, that price has steadily risen, under the influence of enlarged demand, until $2,000 is paid for an evening's singing. In a similar way, the wages of the lawyer of the first class is almost wholly uninfluenced by the presence of large numbers of persons of the same profession who would be rejoiced to earn a tenth or a twentieth part of his income.
—Those who perform manual labor, again, seem, as one looks over the face of industrial society, to be organized into certain not very clearly defined "non-competing groups," to use Prof. Cairnes' phrase, within each of which the tendency to the equalizing of wages is in continual, if irregular, progress; but between any two of which, movement is so slow and difficult as to produce painfully small results, even from age to age. If we study the body of skilled artisans, in any country where caste does not exist, and the spirit of tradition is not very strong, we find that the interchange of the trades of carpenter, cabinet maker and carriage builder, for example, is freely made: that these trades, though less freely, interchange with those of blacksmith, mason and plumber, wherever strong reason exists for diminishing the supply of labor in one trade and increasing that supply in another. All the while, however, there is found below the class of skilled artisans a vastly greater class, consisting of factory operatives, of day laborers, etc., who are compelled not only to work for half the wages of the skilled artisan, but also, by what would seem, from almost unvarying recurrence, to be a moral necessity, to bring up their children, in the main, to take their own low places in the industrial order, however crowded and uncomfortable those places may be. Indeed, it may be said that the less desirable the place which the parent fills in life, the smaller his ability to provide for the advancement of his offspring.
—The services performed by the laborer of this last-indicated general class vary almost infinitely in form. So much, however, are the several recognized avocations within this group alike in the demands they make on the mental and physical powers, that a certain movement of labor exists, tardy and difficult, it is true, so tardy and difficult, indeed, as often to allow an individual who has been unfortunate in seeking employment, or has put himself at disadvantage by bad habits, to be cast down into the industrial grade which lies beneath; yet still the tendency to the equalization of wages here continues to operate appreciably, in spite of all obstructions.
—Below the class described as including the ordinary factory operative, the ordinary day laborer, and others receiving an approximately equal remuneration, is found a great body of the more or less helpless, the more or less unfortunate, the very ignorant, the men and women of vicious habits, the weak, the crippled, and the "broken men" of the higher industrial grade. These constitute the lowest stratum of the industrial order. Movement, here, in the nature of change, whether of place or of occupation, is very tardy. A member of this class may with great difficulty pass from one avocation to another within his grade; it is most unlikely that he will ever, by any exertion of his powers, or any effort of self-denial, rise out of the class in which he was born or into which he has fallen.
—We see, in the rude sketch here offered of modern industrial society, as existing, say, in England, how it is that the supply of labor within certain avocations, or groups of avocations, is restricted, so that, after making all needed allowances in reduction of nominal to real wages, the average remuneration of one class may be twice that of another, four times that of a third, though only a small fraction of that received by the members of a class still more fortunate; how it is that this may not only be at a given time, but that the causes which create these differences of condition may go on operating to produce inequality faster than competition can perform its leveling work; and that, thus, the range of wages, wide as it may be at any given time, shall steadily increase from year to year, and from generation to generation.
—It is the effect of education, and, in a lower degree, of political franchises, by promoting the communication of news, from man to man and from place to place, by promoting self-reliance and power of initiative on the part of individuals, and by promoting self-respect and social ambition throughout the community, to promote, also, the flow of labor under economic impulse. Such causes, so far as they produce such effects, are strictly economic causes, to be recognized by the economist, and incorporated in his theory of the distribution of wealth.
—The operation of the forces thus set in motion is clearly to be seen in such countries of the old world as Saxony, Switzerland and Scotland, rising to its maximum probably in the United States of America, where alike the inertia of the laborer and the external resistance to his migration in search of the best market for his services, are so far reduced as to become almost inconsiderable. Nine and a half millions of the native inhabitants of this country at the present time reside in states other than those in which they were born.157 Doubtless an even greater number of those who reside within the states of their birth, are found in alien counties. If we consider only the heads of families in the United States, I personally believe, although no adequate statistical data are available to corroborate this opinion, that not more than one-fourth are to be found within the towns or parishes in which they were born.
—Such a complete subjection of the laborer to economic impulse has, of course, no power to reduce those inequalities of wages which are due to differences in physical or mental strength, activity or persistence. It has no great power to reduce those inequalities which result from early mistakes and misadventures, or from vicious habits and courses, always most influential causes in arranging men upon the industrial scale; yet it has a certain unmistakable efficiency in this direction, through affording the opportunity to blot out a bad record and to begin a new career without prejudice. But over all those inequalities of wages which result from accidents of condition or circumstances, the force indicated has irresistible sway.
—And this, too, is to be taken into account, that in the degree, and in more than the degree, in which the laborer, by change, whether of place or of occupation, secures an increase of his own remuneration, does he also promote the general production of wealth. Whenever the laborer, by the exercise of courage and intelligence, breaks away from the spot or the kind of work in which he has found an inadequate remuneration, and seeks and finds a better market, he does not only that which is best for himself, but that which is best for others. He not only gets more by resorting to the new place or the new trade, but, in the very act of doing so, he gives more also. If in that market his service bears a higher price than elsewhere, this is, of itself, a proof that his service is there in greater demand, more needed, the subject of an intenser want. By all the difference which the change works in his own condition, and, doubtless, by even much more than that difference, is the general industrial system re-enforced and stimulated by that change.
—Hence we say, that freedom and facility of industrial movement as seen at their maximum in the United States, do not only reduce the range of remuneration, as between the classes naturally less favored and those more favored, but it also, by enhancing the productive power of the community, raises the remuneration of the whole body of laborers.
—II. GENERAL WAGES. The question, what portion of the product of industry passes, by the normal operation of economic laws, into the hands of that one of the co-operating agents of production whom we call, in economic discussion, the laborer, was, until fifteen years ago, deemed to have been conclusively and definitively answered by the accepted political economy of England and America. That answer made the capitalist employer to be the residual claimant upon the product of industry. Rent was first to be deducted, the amount to be determined according to the Ricardoan formula. Next, wages were to be deducted, the amount to be determined by the wage-fund formula. There were to remain profits, composed of interest upon capital and of the remuneration of business management. These constituted the share of the capitalist employer, who, after paying rent and wages, according to the formulæ indicated, retained all the rest of the product of industry as his own. In the article next preceding, we have traced the rise and fall of the wage-fund doctrine, and have stated the arguments which have led to its general abandonment by the economists of England and America, opening the way for a philosophy of wages. So long as that doctrine was accepted, wages remained purely a question in long division, and no philosophy of wages was possible. To what view of the distribution of the product of industry economic opinion will ultimately incline, can not be predicted with confidence. In 1871, Prof. Stanley Jevons, decisively rejecting the notion of a wage fund, advanced the proposition that "the wages of a laboring man are ultimately coincident with what he produces, after the deduction of rent, taxes, and the interest of capital." Upon this statement of the law of wages, Mr. Henry Sidgwick, in an article in the "Fortnightly Review" of 1879, remarked as follows: "It is to be observed that it does not attempt to settle the distribution of produce as between employers and employed, except so far as the employer's share consists of interest. That is, it does not help us to determine what Mill calls 'the wages of superintendence.' Now, it is just this latter that, in our practical discussions, usually appears the most prominent element of the problem. What English workmen grumble at, is not the rate of interest, but the undue extra profits which they suppose the employer to be making." Accepting as correct the judgment of Prof. Sidgwick, that the one undetermined point in the theory of the distribution of wealth is that which relates to the "wages of superintendence," the writer of the present article now proceeds to offer a view of profits, in their relation to the other shares of the product of industry, which, if it shall be accepted as based upon a just generalization of the facts of modern industrial society, will indubitably yield a complete and consistent theory of distribution, according to which the laborer, and not, as by the exploded wage-fund doctrine, the capitalist employer, is made the residual claimant upon the product of industry.
—The line of argument which appears to lead to this momentous conclusion is as follows: The successful conduct of business, under free and active competition, must be due either to exceptional abilities or to exceptional opportunities. Whether due more to one than to the other of these causes, could make no difference with what is to follow; just as it makes no difference in the matter of rent, whether the advantages, for productive purposes, of any piece of land under consideration be due to superior fertility or to proximity to market. As the economist, in writing of rent, is wont, for convenience of reasoning and simplicity of illustration, to attribute the productive advantages of land solely to superior fertility, assuming all tracts in question to be equally near the market, so, in the further progress of this paper, the more or less successful conduct of business will be attributed to the possession of higher or lower abilities, all employers being assumed, for convenience of reasoning and simplicity of illustration, to occupy industrial positions equally eligible. When we shall have passed over the field, it will then appear that all our conclusions, upon the foregoing hypothesis, would hold equally true upon the assumption that all differences in the degree of business success were due to differences of industrial opportunity, and not at all to differences of business ability.
—Since, however, it can not be a matter of indifference to the social philosopher whether the power to secure profits be due more to exceptional abilities or to exceptional opportunities, it may be worth while to pause one moment to point out that the former are much the more efficient cause of profits. To justify this assertion, it will be enough to refer to the notorious fact that the great majority of all business houses in the United States which have achieved marked success have been founded by men who owed little or nothing to opportunity, perhaps by those who had to contend at the outset against positive disadvantages or actual misfortunes; while, on the contrary, great houses, enjoying high prestige, wide connections and vast accumulated wealth, are frequently brought to the ground, under the successors of the original founder, for no other reason than that the management, which had been wise and brave and strong, became, in other hands, vacillating, purposeless and unintelligent, or perhaps no worse than merely commonplace and tied to routine. So overwhelming is the preponderance, in this country at least, of business houses owing much or everything to ability, and little or nothing to unearned opportunities or advantages, that no American158 is likely to dispute the proposition that the former are much the more efficient cause of profits.
—Attributing, then, for convenience, the successful conduct of business to ability alone, we have to note, that, were the number of men of a high order of business ability throughout any large community more than sufficient to do all the business of all kinds which there required to be done; were these men, however much surpassing other members of the industrial society, among themselves equal in all respects which concern the conduct of business; and were this class, thus constituted and endowed, so clearly and conspicuously marked that no one of their number should ever fail to be recognized as belonging to it, while, on the other hand, no one lacking business ability in this degree should esteem himself capable of conducting business or be so esteemed, with a view to his obtaining credit, by those who have capital to loan or goods to sell: were these several conditions to be all completely realized, we should then have a situation closely analogous to that which exists in the case of a community around which is found good land, of uniform quality, in amount more than adequate to raise all the produce required. The result would be, either that the employing class would, by forming a combination and scrupulously adhering to its terms and its spirit, create and maintain a monopoly price for their services in conducting the business requiring to be done, which is so improbable as to be altogether out of our contemplation, or else they would, by competing among themselves for the amount of business to be done by them individually, bring down the rate of profits to so low a point that the remuneration of each and every one of this class would be practically equal to what he could earn for himself in other avocations, either as an independent laborer, working in his own shop or on his own lot of land, or, as a wage laborer, hired by some one of his own intellectual class, no more qualified in any way than himself to conduct business. Under such conditions, profits, as distinguished from wages, would be destroyed. The persons actually remaining in the conduct of business would, indeed, earn their subsistence—otherwise the function could not be performed; but, economically speaking, it would make no difference to them whether they did this as employers or as employed.
—In fact, however, the qualifications for the conduct of business are not equal throughout all of a sufficiently numerous class.
—First, we have those rarely gifted persons who, in common phrase, seem to turn everything that they touch into gold; whose commercial dealings have the air of magic; who have such power of insight that they almost appear to have the power of foresight; who are so resolute and firm in temper that apprehensions and alarms or repeated shocks of disaster never cause them to relax their hold or change their course; who have such influence and command over men that all with whom they have to do acquire vigor from the contact, and work for them as they would not work for others.
—Next below, but far below, the class described, we have that much more numerous body of men of business, who possess a high order of talent, merely; whose success is easily comprehended, even if it can not be imitated, by their less gifted competitors; men of natural mastery, sagacious, resolute and prompt in their avocations.
—Then, descending further in the scale, we have men who on the whole do well or pretty well in business; men who enjoy a harmonious union of all the qualities required for the conduct of affairs, though possessing those qualities each in but a moderate degree; or else in whom some defect, mental or moral, impairs a higher order of abilities; men who are never masters of their fortunes, are never beyond the imminence of failure, and yet, by care and pains and diligence, win no small profits from their business, and, if frugality be added to their other virtues, accumulate in time large estates.
—Lower down in the industrial order are a multitude of men who are found in the control of business enterprises, for no very good reason that can be seen by those who know them; men of checkered fortunes, sometimes doing well, but more often ill; some of them, perhaps, filling a place which would not otherwise be filled, but more commonly in business because they have forced themselves into it under a mistaken idea of their own abilities, perhaps encouraged by the partiality of friends who have been willing to place in their hands the agencies of production, or entrust them with commercial or banking capital.
—Now, in my view of the question of profits, we find, in the lower stratum of the industrial order, as thus sketched, a "no profits" class of employers. Notwithstanding all the magnificent premiums of business success, the men of real business power are not so many but that a great part of the posts of industry and trade are filled by persons inadequately qualified, who consequently have a very doubtful career, and realize for themselves, first and last, a very meagre compensation, so meagre that, for purposes of scientific reasoning, we may treat it as constituting no profits at all. Live they do, partly by legitimate toll upon the business that passes through their hands; partly at the cost of their creditors, with whom they make frequent compositions; partly at the expense of friends or by the sacrifice of inherited means. This bare subsistence, obtained through so much of hard work, of anxiety, and often of humiliation, we regard as that minimum which, in economics, we can treat as nil. From this low point upward we measure profits, just as we measure rent upward from the line of the no-rent lands, or lands whose selling price represents an annual interest of only a few cents an acre.
—If the view of the employing class here presented fairly corresponds to the facts of industrial society, profits, manufacturing profits, for example, are, granted only perfect competition, not obtained by deduction from the wages of mechanical labor, any more than rent is obtained by deduction from the wages of agricultural labor; and, secondly, manufacturing profits do not constitute a part of the price of manufactured goods, any more than rent constitutes a part of the price of agricultural produce. All profits are drawn from a body of wealth which is created by the exceptional ability of the employers who receive profits, measured upward from the line of the no-profits employers, just as rents are drawn from a body of wealth created by the exceptional fertility of the rent lands, measured from the level of the lands which bear no rent. The normal price of manufactured goods, of any particular description, is determined by the cost of production of that portion of the supply which is produced at the greatest disadvantage. If the demand for such goods is so great as to require a certain amount to be produced under the management and control of persons whose efficiency in organizing and supervising the forces of labor and capital is small, the cost of production of that portion of the stock will be large, and the price will be correspondingly high; yet it will not be high enough to yield to employers of this grade any more than that scant and difficult subsistence which we have taken as the no-profits line.
—The price at which these goods are to be sold, however, will determine the price of the whole supply, since, in any market, at any given time, there can be but one price for different equal portions of the same commodity. Hence, whatever the cost of production of those portions of the supply which are produced by employers of higher industrial grades, they will command the same price as those portions which are produced at the greatest disadvantage, just as wheat produced on rich lands at a cost of three shillings a bushel is sold for the same price with wheat produced on comparatively sterile lands, at a cost of six shillings a bushel.
—Profits, therefore, do not enter into the price of any commodity; for the price of each and every commodity is fixed by the cost of production of that portion of the supply which yields no profits.
—Do profits come out of wages? Not at all. The employer of the lowest industrial grade, the no-profits employer, must pay wages sufficient to hire laborers to work under his direction. The employer of a higher industrial grade will pay the same wages, no less, no more; but, selling his goods, so far as they are of equal quality, at the same prices as the employer who makes no profits, he will yet be able, by careful study of the sources whence his materials are drawn; by a comprehension of the ever-varying demands of the market; by steadiness and self-control; by organizing force and administrative ability; by energy, economy and prudence, to accumulate a clear surplus, after all obligations are discharged, which surplus is called profits, just as the cultivator of the better soils has a surplus left in his hands, after paying wages for labor and interest for capital, which surplus, in this case called rent, goes to the owner of the soil, as such, be he the actual cultivator or another person.
—It will have been observed, that, throughout this discussion, I closely assimilate profits with rent. I believe this to be a sound and just view of the origin of profits and of their relation to the other shares of the product of industry. If this view shall be approved as correct, the demand of Prof. Sidgwick will be met, and we shall have, for the first time since the destruction of the wage-fund doctrine, a complete and consistent theory of the distribution of wealth. By this theory the residual claimant upon the product is not, as under the old economic doctrine, the capitalist employer, but the laborer. Subject to three several deductions of a definite nature, the wages class will, upon the assumption here made of perfect competition, supplying all the conditions of a really good market, receive all they have helped to produce.
—First. Rent is to be deducted. On the lowest grade of soils there is no rent. On the more productive soils, rent, at its economic maximum, equals the excess of produce after the cost of cultivating the no-rent soils has been deducted; this rent, as has been said, does not affect the price of agricultural produce, nor does it come out of the remuneration of the agricultural laborer. We thus see that the first deduction to be made from the product of industry is of a perfectly definite nature. Rent must come out before the question of wages is considered. The laborer, as such, can not get this, or any part of it, by any economic means. It must go to the owner of the lands unless confiscated by the state, or ravished away by violence.
—Second. From the product of industry must be deducted a remuneration for the use of capital. That remuneration must be high enough to induce those who have produced wealth to save it and store it up, instead of consuming it immediately for the gratification of personal appetites or tastes. This may imply, in one state of society, an annual rate of interest of eight per cent.; in another, of five; in another, of three. The only reason, industrially speaking, for interest being paid at all, is, that by the use of capital production may be enhanced; and the interest so paid is, theoretically, only a part, often, such is the force of competition among would-be lenders, a very small part of the excess of product so generated. Since the product remaining after the payment of interest is always, in theory, equal to what would have been the product had interest not been paid (that is, had the capital for the use of which interest is paid, not been employed), and since, in fact, the product so remaining is always greater in general, vastly greater—at times inconceivably greater—than the product otherwise would have been, we see that that party to distribution whose claims are residual, that is, which takes all which no other claimant carries away, is benefited by every payment of interest on account of capital used in the production of wealth. Indeed, as high interest, under free competition, shows that the contribution made to production through each successive increment of capital is very large, it may fairly be said that the residual claimant upon the product of industry derives a greater relative benefit through the employment of capital where a high rate rather than a low rate of interest is paid.
—The third and last deduction to be made from the product of industry, before the laborer becomes entitled thereto, is what we have called profits, the remuneration of the employer, the entrepreneur, the man of business, the captain of industry, the merchant, manufacturer or banker, who sets in motion the costly and complicated machinery of modern production.
—If I have rightly apprehended the nature of the employer's function and the source of his profits, those profits would, under free and full competition, not form a part of the price of commodities (price being determined by the cost of production under the most disadvantageous conditions, i.e., in this instance, production by the no-profits employers); while no economic means whatsoever would suffice to carry any portion of profits over to wages, even were employers forbidden by law to receive them, just as no economic means can be devised by which rent could be made to enhance wages, even though landlords were forbidden themselves to touch it. In other words, profits consist wholly of wealth created by individual employers, over and above the wealth which would have been produced, in similar industrial enterprises, by the same labor force and capital force, under the control and direction of employers of lower economic efficiency.
—These three shares being cut off, the whole remaining body of wealth daily or annually produced is, according to the economic theory presented, the property of the laboring class: their wages or the remuneration for their services. So far as by their energy in work, their economy in the use of materials, or their care in dealing with the finished product, the value of that product is increased, that increase goes to them by purely economic laws, provided, only, competition be full and free. Every invention in mechanics, every discovery in the chemical art, no matter by whom made, inures directly and immediately to their benefit, except so far as a limited monopoly may be created by law for the encouragement of invention and discovery. Every improvement in their own efficiency as laborers, whether due to quickened zeal, to heightened intelligence or to greater industry, sobriety or thrift, will, by this rule, serve directly to advance their wages. Unless by their own neglect of their own interests, or through inequitable laws, or social customs having the force of law, no other party can enter to make any claim upon the product of industry; nor can any one of the three parties already indicated carry away anything in excess of its normal share, as hereinbefore defined.
—It will appear, at a glance, how widely the result here attained differs from that which was reached under the old economic theory of the distribution of wealth, according to which from the entire product of the exertions and sacrifices of the industrial community is cut off, first, rent, as determined by the Ricardoan formula; secondly, wages, the laborer's share, as determined by the wage-fund formula, the amount possibly to be paid in this way being irrespective of the number and of the industrial quality of the laboring class. All that remains belongs to the capitalist employer. By such a rule of distribution, no gain in the efficiency of the individual laborer, whether taking the direction of greater energy or of greater economy; no mechanical invention, no chemical discovery, however much the capability of production may be increased thereby, can profit the laborer anything, except as it first enhances the profits of the employing class, and thereby adds to the capital of the wage fund, to be thereafter expended in purchasing labor—In opposition to this view, I hold, that, notwithstanding the formal attitude of the laboring class in industry, as hired by the employing class and working for stipulated wages, the normal operation of the laws of exchange is to make the former, in effect, the owner of the whole product, subject to the requirement of paying the definite sums charged against the product on the three several accounts of rent, interest and profits.
FRANCIS A. WALKER.
[157.]"The full-blooded American," said Michel Chevalier, "is encamped, not established, on the soil he treads upon."
[158.]"Many employers of labor," says Prof. Alfred Marshall, "in some parts of England more than half, have risen from the ranks of labor." Accepting this statement as correct, it is to be noted, that, in addition to business ability being the efficient cause of profits, in comparison of the employer with the non-employer, business ability becomes, in a still higher degree, the cause of profits, as between the employer on a large and the employer on a small scale.
Last modified April 10, 2014