Part I, Chapter IX
THERE IS NO WAGE-FUND IRRESPECTIVE OF THE NUMBER AND INDUSTRIAL QUALITY OF LABORERS.
WE can not well go farther in our discussion without considering a theory of wages which has been very generally accepted by the political economists of the English school, namely, that of a Wage-Fund.
The doctrine is in substance as follows:
There is, for any country, at any time, a sum of wealth set apart for the payment of wages. This fund is a portion of the aggregate capital of the country. The ratio between the aggregate capital and the portion devoted to the payment of wages is not necessarily always the same. It may vary, from time to time, with the conditions of industry and the habits of the people; but at any given time the amount of the wage-fund, under the conditions existing, is determined in the amount of capital.
The wage-fund, therefore, may be greater or less at another time, but at the time taken it is definite. The amount of it can not be increased by force of law or of public opinion, or through sympathy and compassion on the part of employers, or as the result of appeals or efforts on the part of the working classes.
The sum so destined to the payment of wages is distributed by competition. If one obtains more, another must, for that reason, receive less, or be kept out of employment altogether. Laborers are paid out of this sum, and out of this alone. The whole of that sum is distributed without loss; and the average amount received by each laborer is, therefore, precisely determined by the ratio existing between the wage-fund and the number of laborers, or, as some writers have preferred to call it, between capital and population.
The wage-fund having at any given time been determined for that time, the rate of wages will be according to the number of persons then applying for employment. If they be more, wages will be low; if they be fewer, wages will be high.
I have stated this doctrine minutely, with something of iteration, and with full quotations, in order to avoid all suspicion of misrepresenting that which I propose to assail. An excellent summary of the doctrine is that given by Mr. John Stuart Mill, in the Fortnightly Review for May, 1869, as follows:
"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 the wages-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 depend solely on the divisor, the number of participants."
The doctrine of the wage-fund has found wide acceptance on both sides of the Atlantic. The natural history of the notion on which it rests is not obscure. It grew out of the condition of affairs which existed in England during and immediately subsequent to the Napoleonic wars. Two things were then noted. First, capital had become accumulated in the island to such an extent that employers found no (financial) difficulty in paying their laborers by the month, the week, or the day, instead of requiring them to await the fruition of their labor in the harvested or marketed product. Secondly, the wages were, in fact, generally so low that they furnished no more than a bare subsistence, while the employment offered was so restricted that an increase in the number of laborers had the effect to throw some out of employment or to reduce the rate of wages for all. Out of these things the wage-fund theory was put together. Wages are paid out of capital, and the rate is determined by the ratio between capital and population.
Both the facts observed were accidental, not essential. Wages in England were paid out of capital because capital had become abundant, and employers could just as well as not pay their laborers as soon as the service was rendered. In the United States, at the same time, employers were paying their laborers larger wages, but obliging them to wait for the whole or a considerable part till the product should be harvested or marketed. In the United States, therefore, the industrial conditions were more favorable to the payment of wages, while in England the financial conditions were more favorable. But it is the industrial conditions which determine the amount of wages, the necessaries, comforts, and luxuries which the laborer receives; the financial conditions only determine the manner and time of payment, whether at once or at a future day, whether in money or in goods, etc.
Again, the fact that in England, at the time this doctrine sprang up, an increase of the number of laborers applying for employment involved, as it doubtless did, a reduction in the rate of wages, was due to the circumstance that English agriculture, in the then existing state of chemical and mechanical knowledge, had reached the condition of "diminishing returns." But at the same time in the United States, the accession of vast bodies of laborers was accompanied with a steadily-increasing remuneration of labor, and States and counties were to be seen bidding eagerly against each other for these industrial recruits.
That English writers should have been misled, by what they saw going on around them, into converting a generalization of insular experiences into a universal law of wages, is not greatly to be wondered at; but that American writers should have adopted this doctrine, in simple contempt of what they saw going on around them, is indeed surprising.
I would not impeach the scientific impartiality of those who first put forward in distinct form this theory of wages; but it may fairly be assumed that its progress towards general acceptance was not a little favored by the fact that it afforded a complete justification for the existing order of things respecting wages. If there was, in truth, a definite fund out of which wages were paid; if competition unerringly distributed the whole of that sum; and if no more could be paid to the wages class, as a whole, without impairing capital, diminishing employment, and thus in the end injuring the laborers themselves, then surely it was an easy task to answer the complaints or remonstrances of the working classes, and to demonstrate the futility of trades-unions and strikes as means of increasing wages. If an individual workman complained for himself, he could be answered that it was wholly a matter between himself and his own class. If he received more, another must, on that account, receive less, or none at all. If a workman complained on account of his class, he could be told, in the language of Prof. Perry, that "there is no use in arguing against any one of the four fundamental rules of arithmetic. The question of wages is a question of division. It is complained that the quotient is too small. Well, then, how many ways are there to make a quotient larger? Two ways. Enlarge your dividend, the divisor remaining the same, and the quotient will be larger; lessen your divisor, the dividend remaining the same, and the quotient will be larger." (Pol. Econ., p. 123.)
A most comfortable doctrine surely, and one which made it a positive pleasure to conduct a quarterly review in times when the laboring classes were discontented or mutinous. If the workman would not give up when told to enlarge his dividend, he was struck dumb on being informed that his only alternative was to lessen his divisor. The divisor aforesaid being flesh and blood, with certain attachments to home and life, and with a variety of inconvenient affections, was not to be lessened so easily. If the workman turned him from words to blows, and went out "on strike" with a view to better his condition, it was regarded as the act of an irrational animal whose instincts, unfortunately, were not politico-economical. Strikes could not increase the wage-fund; strikes did not diminish the number of applicants for employment; therefore, it was plain as a pikestaff that strikes could not raise wages.
Now, it may seem wanton to break such a pretty toy as this; but the fact is that the wage-fund theory is demonstrably false, contrary alike to the reason of the case and to the course of history.
1st. As has been shown in a former chapter, wages are really paid out of current production, and not out of capital, as the wage-fund theory assumes.
(a) Granting, for the moment, that wages are wholly advanced out of capital to supply the immediate necessities of the laborer, I have, I think, abundantly proved that the two questions, whether labor shall be employed at all, and, secondly, what wages shall be paid to laborers if employed, are decided by reference to production and not to capital. It is the prospect of a profit in production which determines the employer to hire laborers; it is the anticipated value of the product which determines how much he can pay them. The product, then, and not capital, furnishes at once the motive to employment and the measure of wages. If this be so, the whole wage-fund theory falls, for it is built on the assumption that capital furnishes the measure of wages; that the wage-fund is no larger because capital is no larger, and that the only way to increase the aggregate amount which can be paid in wages is to increase capital.
(b) But as matter of fact, wages are not wholly advanced by capital, but are paid out of the product of the labor for which wages are due, as has been shown in the preceding chapter. This alone, which is indisputable, invalidates the theory we are considering.
2d. But there is more and worse to be said against the wage-fund. It will be noted that by every statement of this doctrine which we have quoted, the amount that can be paid in wages is taken as fixed irrespective of the number and quality of laborers seeking employment. If, then, the laborers be few, wages will be high; if they be many, wages will be low, for the number of laborers is taken as the divisor of a predetermined dividend. Let us consider this.
(a) This assumption disregards all those elements, brought out to view in Chapter III., which go to make up the efficiency of the laborer. Thus, granted a certain store of provisions, of tools, and of materials for production, sufficient, say, for 1000 laborers, those who hold the wage-fund assert that the same rate of wages (meaning thereby the actual amounts of necessaries, comforts, and luxuries received by the laborer) would prevail whether those 1000 laborers be Englishmen or East-Indians; or, if Englishmen, whether they be, as a body, drunken, ignorant, wasteful and indolent, or possessed of all the economical virtues. Ultimately, it is held, the former state of things would reduce capital, and hence reduce wages; but, in the exact present, the rate of wages is fixed by the ratio between the predetermined wage-fund and the number of laborers applying for employment, and employers can and will pay the rate so fixed.
On the contrary, is it not true that the present economical quality of the laborers, as a whole, is an element in ascertaining the aggregate amount that can now be paid in wages; that as wages are paid out of the product, and as the product will be greater or smaller by reason of the workman's sobriety, industry, and intelligence, or his want of those qualities, so wages may and should be higher or lower accordingly?
(b) But, again, since wages are paid out of and measured by the product of industry, and since productive power may be increased by the invention of machinery, the discovery of arts, and the improvement of processes, without any immediate increase of capital, ought it not to be possible that wages should be enhanced by such causes, population and capital being assumed, for purposes of argument, to stand still? Now, the wage-fund advocate concedes that such inventions and improvements will increase capital, and hence become the reason for an advance in a more or less distant future; but only as they first increase capital can they increase the wage-fund.
Let us discuss this point.
We will take a community having a capital represented by 100,000, a population represented by 1000, and an annual product represented by 10,000, of which labor receives 7000. Let it be supposed that the productive power of this community is increased at once 10 per cent by improvements in tools, implements, and machinery through all the departments of its industry. The new machinery is brought into use. The capital of the community has not been thereby increased; on the contrary, all such inventions involve a temporary diminution of capital. The old machinery becomes useless, while a portion of the previously-circulating capital has to be taken for the new. The capital, whether we consider the aggregate capital or circulating capital only, being certainly no larger, wages can not at present, the wage-fund advocate declares, be increased, although the productive power of the community is greater, by 10 per cent, from the moment the new machinery begins to move. The product is now 11,000; but as capital is now something less than 100,000, wages must even be something less than before. The additional 1000 of product will therefore go to the share of capital, although there is less capital than before. And it is only as the capitalists, in their uncontrolled discretion, decide to save this addition to their income, or a portion of it, for future reproductive investment, instead of spending it upon their own pleasure, that capital will be increased, and, with that increase, increase of wages be realized.
Now, to the contrary, I hold that the moment the aggregate product of labor and capital is increased by inventions, which are a clear gain of power for the benefit of all, that moment a sufficient economical reason exists for an advance of wages in some degree corresponding. In the case supposed, the share of the laborers in the 1000 gained might be found to be 700, or it might be but 690, or it might rise to 710.
(c) But the most signal fallacy of the wage-fund doctrine remains to be noted. Waiving now all consideration of the economical quality of the laborers in any given community, and of the possible gain in production through improvements and inventions, irrespective of any increase of capital, let us inquire what foundation there is for the assumption that an increase in the number of laborers involves a proportionate reduction in the amount of wages going to each.
Let us take, first, a community which has not reached the condition of "diminishing returns." The number of laborers being taken as 100, let the amount of capital accumulated be represented by 100a. By the wage-fund theory a certain rate of annual wages will result from the ratio between these quantities. Now let us suppose that twenty additional laborers arrive, bringing with them capital 20a. The ratio between capital and population remains the same as before, and by the wage-fund theory no increase of wages can result. Upon our principles, however, an increase of wages may result, because an increase of production will occur. 120 laborers with capital 120a, can and will produce more, per man, in a community which has not reached the condition of "diminishing returns" than 100 laborers with capital 100a. A more effective co-operation will become possible, a minuter subdivision of labor will result, and the greater laboring force of the community will enable them to undertake highly-remunerative enterprises to which their numbers were previously inadequate. In the same way, it might be that in this same community 150 laborers with capital 150a would produce more, per man, than the 120 laborers; and that 200 laborers only equally endowed might produce in a higher degree, per capita, than 150. The reader is referred to Chapter V. for a fuller discussion of the industrial possibilities of such a community. Now, through all this, it is to be noted that our results are directly in contradiction of the wage-fund theory, which asserts that wages are determined by the ratio between capital and population.
Now, if there is such power in association and in the subdivision of employments that the product may be largely increased although the capital, per man, remains the same, the reader will scarcely question that the operation of these causes might suffice to keep the per capita product good, though the capital, per man, should fall off somewhat. Yet this result, again, would be in contradiction of the wage-fund theory. Indeed, it is quite conceivable that a considerable number of laborers might be added to a community without bringing with them any capital at all, yet the per capita product be actually increased thereby. It is insight into this condition of production that gives motive to the exertions put forth by almost every Western and Southern State, and almost every Western and Southern county, to attract immigration. Capital they want, and they would much prefer immigrants with capital; but they want immigrants anyhow. These communities are not acting foolishly. They are not calling in additional laborers to divide with them a predetermined product. They know perfectly well that the product will increase as the producers increase, and that, in their situation, the product will increase faster than the producers; and therefore that each producer may have more, and not less, by reason of the arrival of immigrants.
Laborers have come to us from every part of the world, and constantly has the existing body of laborers been benefited by the accessions. Some of these laborers have brought with them small amounts of capital, and have been all the more welcome on that account. But, however they have come, were it with but a bundle on a stick, there has been room and work enough for all. Labor has had its periods of distress; but these have been due to the interference of government with industry, to false currencies, to extravagant speculation, or to other causes, but not to any real excess of labor.
In contradiction, then, of the view that wages are universally determined by the ratio between capital and population, we see that in countries which have not reached the condition of "diminishing returns," the per-capita product may be largely increased while the amount of capital, per man, remains the same, and that it may even be increased, though, of course, not in the same proportion, while the amount of capital, per man, is actually reduced by the accession of new bodies of laborers destitute of accumulations.
But suppose now that the condition of "diminishing returns" is reached; that the accessions to population have continued until all the eligible land is taken up, and the first course of simple improvements made. If further accessions are made, we may then expect to see the wages of labor fall, not because there is a greater number to divide among them a predetermined dividend, but because the annual product is not increased proportionally to the increase of labor. Nature fails to respond to fresh applications with its former generosity. Under this condition, five men now produce, as they always must produce, more than four, but not one fourth as much more. The five must, therefore, submit to receive each less than the four had received, that is, the wages of labor must fall. They fall because production has sustained a check, through the limitations of natural agents.
But this process of reduction in wages may, and generally will, proceed slowly, first, because for a long time the labor of the new-comer, while it will not be quite as productive as was that of the community upon the average previous to his arrival, will yet not fall far short of it, nature giving long warning against an undue increase of population, and having great patience with men; and, secondly, because the limits of production are being constantly pushed backward by the discovery of new resources, by increased economy of labor, by improvements of method, by the application of distinctly new arts, by the invention of machinery, and by the utilization of waste. But through all these the tendency now is to "diminishing returns," and hence to lower wages.
Under these conditions, then, is the wage-fund theory true? We answer with confidence that this theory can never be true, for it excludes altogether the contribution which the new-comer, the additional laborer, makes to the production of the community in which he is so unwelcome an arrival. The wage-fund doctrine regards him as a pure addition to the divisor, without recognizing the fact that his labor must also add something to the dividend. He no longer contributes more, far more to production than the cost of his own subsistence, as in an advancing state of industry, before natural agents are fully occupied and employed. He no longer contributes as much as he requires. But he still contributes something, and that something, however small it may be, helps to swell the amount that can be paid in wages.