Principles of Economics

APPENDIX J
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§ 1. At the beginning of last century, great as was the poverty of the English people, the peoples of the Continent were poorer still. In most of them population was sparse, and therefore food was cheap; but for all that they were underfed, and could not provide themselves with the sinews of war. France, after her first victories, helped herself along by the forced contributions of others. But the countries of Central Europe could not support their own armies without England’s aid. Even America, with all her energy and national resources, was not rich; she could not have subsidized Continental armies. The economists looked for the explanation; and they found it chiefly in England’s accumulated capital, which, though small when judged by our present standard, was very much greater than that of any other country. Other nations were envious of England, and wanted to follow in her steps; but they were unable to do so, partly indeed for other reasons, but chiefly because they had not capital enough. Their annual income was required for immediate consumption. There was not in them a large class of people who had a good store of wealth set by, which they did not need to consume at once, and which they could devote to making machines and other things that would aid labour, and would enable it to produce a larger store of things for future consumption. A special tone was given to their arguments by the scarcity of capital everywhere, even in England; by the growing dependence of labour on the aid of machinery; and lastly, by the folly of some followers of Rousseau, who were telling the working classes that they would be better off without any capital at all.

In consequence, the economists gave extreme prominence to the statements; first, that labour requires the support of capital,
i.e. of good clothes, etc., that have been already produced; and secondly, that labour requires the aid of capital in the form of factories, stores of raw material, etc. Of course the workman might have supplied his own capital, but in fact he seldom had more than a little store of clothes and furniture, and perhaps a few simple tools of his own—he was dependent for everything else on the savings of others. The labourer received clothes ready to wear, bread ready to eat, or the money with which he could purchase them. The capitalist received a spinning of wool into yarn, a weaving of yarn into cloth, or a ploughing of land, and only in a few cases commodities ready for use, coats ready to be worn, or bread ready to be eaten. There are, no doubt, important exceptions, but the ordinary bargain between employers and employed is that the latter receives things ready for immediate use and the former receives help towards making things that will be of use hereafter. These facts the economists expressed by saying that all labour requires the support of capital, whether owned by the labourer or by someone else; and that when anyone works for hire, his wages are, as a rule, advanced to him out of his employer’s capital—advanced, that is, without waiting till the things which he is engaged in making are ready for use. These simple statements have been a good deal criticized, but they have never been denied by anyone who has taken them in the sense in which they were meant.

The older economists, however, went on to say that the amount of wages was limited by the amount of capital, and this statement cannot be defended; at best it is but a slovenly way of talking. It has suggested to some people the notion that the total amount of wages that could be paid in a country in the course of, say a year, was a fixed sum. If by the threat of a strike, or in any other way, one body of workmen got an increase of wages, they would be told that in consequence other bodies of workmen must lose an amount exactly equal in the aggregate to what they had gained. Those who have said this have perhaps thought of agricultural produce, which has but one harvest in the year. If all the wheat raised at one harvest is sure to be eaten before the next, and if none can be imported, then it is true that if anyone’s share of the wheat is increased, there will be just so much less for others to have. But this does not justify the statement that the amount of wages payable in a country is fixed by the capital in it, a doctrine which has been called “the vulgar form of the Wages-fund theory
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§ 2. It has already been noticed (Book I. ch. IV. § 7) that Mill in his later years under the combined influence of Comte, of the Socialists, and of the general tendencies of public sentiment, set himself to bring into prominence the human, as opposed to the mechanical, element in economics. He desired to call attention to the influences which are exerted on human conduct by custom and usage, by the ever-shifting arrangements of society, and by the constant changes in human nature; the pliability of which he agreed with Comte in thinking that the earlier economists had underrated. It was this desire which gave the chief impulse to his economic work in the latter half of his life, as distinguished from that in which he wrote his
Essays on Unsettled Questions; and which induced him to separate distribution from exchange, and to argue that the laws of distribution are dependent on “particular human institutions,” and liable to be perpetually modified as man’s habits of feeling, and thought, and action pass from one phase to another. He thus contrasted the laws of distribution with those of production, which he regarded as resting on the immutable basis of physical nature; and again with the laws of exchange, to which he attributed something very much like the universality of mathematics. It is true that he sometimes spoke as though economic science consisted chiefly of discussions of the production and distribution of wealth, and thus seemed to imply that he regarded the theory of exchange as a part of the theory of distribution. But yet he kept the two separate from one another; he treated of distribution in his second and fourth Books, and gave his third Book to the “Machinery of Exchange” (compare his
Principles of Political Economy, Book II. ch. I. § 1, and ch. XVI. § 6).

In doing this he allowed his zeal for giving a more human tone to economics to get the better of his judgment, and to hurry him on to work with an incomplete analysis. For, by putting his main theory of wages before his account of supply and demand, he cut himself off from all chance of treating that theory in a satisfactory way; and in fact he was led on to say (
Principles, Book II. ch. XI. § 1), that “Wages depend mainly upon…the proportion between population and capital”; or rather, as he explains later on, between “the number of the labouring class…who work for hire,” and “the aggregate of what may be called the Wages-fund which consists of that part of circulating capital…which is expended in the direct hire of labour.”

The fact is that the theories of Distribution and Exchange are so intimately connected as to be little more than two sides of the same problem; that in each of them there is an element of “mechanical” precision and universality, and that in each of them there is an element, dependent on “particular human institutions,” which has varied, and which probably will vary, from place to place and from age to age. And if Mill had recognized this great truth, he would not have been drawn on to appear to substitute, as he did in his second Book, the statement of the problem of wages for its solution: but would have combined the description and analysis in his second Book, with the short but profound study of the causes that govern the distribution of the national dividend, given in his fourth Book; and the progress of economics would have been much hastened.

As it was, when his friend Thornton, following in the wake of Longe, Cliffe Leslie, Jevons and others, convinced him that the phrases in his second Book were untenable, he yielded too much; and overstated the extent of his own past error and of the concessions which he was bound to make to his assailants. He said (
Dissertations, Vol. IV. p. 46): “There is no law of nature making it inherently impossible for wages to rise to the point of absorbing not only the funds which he (the employer) had intended to devote to carrying on his business, but the whole of what he allows for his private expenses beyond the necessaries of life. The real limit to the rise is the practical consideration how much would ruin him, or drive him to abandon the business, not the inexorable limits of the Wages-fund.” He did not make it clear whether this statement refers to immediate or ultimate effects, to short periods or long: but in either case it appears untenable.

As regards long periods the limit is put too high: for wages could not rise permanently so as to absorb nearly as large a share of the national dividend as is here indicated. And for short periods, it is not put high enough: for a well-organized strike at a critical juncture may force from the employer for a short time more than the whole value of his output, after paying for raw material during that time; and thus make his gross profits for the time a negative quantity. And indeed the theory of wages whether in its older or newer form has no direct bearing on the issue of any particular struggle in the labour market: that depends on the relative strength of the competing parties. But it has much bearing on the general policy of the relation of capital to labour; for it indicates what policies do, and what do not, carry in themselves the seeds of their own ultimate defeat; what policies can be maintained, aided by suitable organizations; and what policies will ultimately render either side weak, however well organized.

After a while Cairnes, in his
Leading Principles, endeavoured to resuscitate the Wages-fund theory by expounding it in a form, which he thought would evade the attacks that had been made on it. But, though in the greater part of his exposition, he succeeded in avoiding the old pitfalls, he did so only by explaining away so much which is characteristic of the doctrine, that there is very little left in it to justify its title. He states however (p. 203) that “the rate of wages, other things being equal, varies inversely with the supply of labour.” His argument is valid in regard to the immediate result of a
sudden great increase in the supply of labour. But in the ordinary course of the growth of population there results simultaneously, not only some increase in the supply of capital, but also greater subdivision of labour, and more efficiency. His use of the term “varies inversely” is misleading. He should have said “varies for the time at least in the opposite direction.” He goes on to derive an “unexpected consequence,” that an increase in the supply of labour, when it is of a kind to be used in conjunction with fixed capital and raw material, would cause the Wages-fund to undergo “diminution as the number who are to share it is increased.” But that result would follow only if the aggregate of wages were not influenced by the aggregate of production; and in fact this last cause is the most powerful of all those which influence wages.

§ 3. It may be noticed that the extreme forms of the Wages-fund theory represent wages as governed entirely by demand; though the demand is represented crudely as dependent on the stock of capital. But some popular expositors of economics appear to have held at the same time both this doctrine and the iron law of wages, which represents wages as governed rigidly by the cost of rearing human beings. They might of course have softened each of them and then worked the two into a more or less harmonious whole; as Cairnes did later. But it does not appear that they did so.

The proposition that
Industry is limited by capital, was often interpreted so as to make it practically convertible with the Wages-fund theory. It can be explained so as to be true: but a similar explanation would make the statement that “capital is limited by industry” equally true. It was however used by Mill chiefly in connection with the argument that the aggregate employment of labour cannot generally be increased by preventing people, by protective duties or in other ways, from satisfying their wants in that manner which they would prefer. The effects of protective duties are very complex and cannot be discussed here; but Mill is clearly right in saying that in general the capital, that is applied to support and aid labour in any new industry created by such duties, “must have been withdrawn or withheld from some other, in which it gave, or would have given, employment to probably about the same quantity of labour which it employs in its new occupation.” Or, to put the argument in a more modern form, such legislation does not
primâ facie increase either the national dividend or the share of that dividend which goes to labour. For it does not increase the supply of capital; nor does it, in any other way, cause the marginal efficiency of labour to rise relatively to that of capital. The rate that has to be paid for the use of capital is therefore not lowered; the national dividend is not increased (in fact it is almost sure to be diminished); and as neither labour nor capital gets any new advantage over the other in bargaining for the distribution of the dividend, neither can benefit by such legislation.

This doctrine may be inverted; so as to assert that the labour required to give effect to capital in a new industry created by protective duties must have been withdrawn or withheld from some other, in which it gave, or would have given, effect to probably about the same quantity of capital as in its new occupation. But this statement though equally true would not appeal with equal force to the minds of ordinary people. For as the buyer of goods is commonly regarded as conferring a special benefit on the seller, though in fact the services which buyers and sellers render to one another are in the long run co-ordinate; so the employer is commonly regarded as conferring a special benefit on the worker, whose labour he buys, though in the long run the services which the employers and employees render to one another are co-ordinate. The causes and consequences of this pair of facts will occupy us much at later stages of our inquiry.

Some German economists have argued that the resources with which the employer pays wages come from consumers. But this appears to involve a misapprehension. It might be true of an individual employer if the consumer paid him in advance for what he produced: but in fact the rule goes the other way; the consumer’s payments are more often in arrear, and merely give deferred command over ready commodities in return for ready commodities. It may be admitted that if the producer could not sell his goods he might not be able for the time to hire labour; but that would only mean that the organization of production was partially out of gear: a machine may stop if one of its connecting rods gets out of order, but that does not mean that the driving force of the machine is to be found in the rod.

Nor again is the amount which the employer pays as wages at any time governed by the price which consumers
do pay him for his wares; though it generally is largely influenced by his expectations of the price they
will pay him. It is indeed true that in the long run and under normal conditions, the prices which consumers do pay him and those which they will pay him are practically the same. But when we pass from the particular payments of an individual employer to the normal payments of employers generally—and it is really only with these latter that we are now concerned—consumers cease to form a separate class, for every one is a consumer. The national dividend goes exclusively to consumers in the broad sense in which wool or a printing press is said to go into consumption when it is transferred from the warehouse or engineering works in which it has rested, to a woollen manufacturer or a printer, and these consumers are also the producers, that is, the owners of the agents of production, labour, capital and land. Children and others who are supported by them, and the Government which levies taxes on them
*94, do but expend part of their incomes for them. To say therefore that the resources of employers generally are ultimately drawn from those of consumers generally, is undoubtedly true. But it is only another way of saying that all resources have been parts of the national dividend, which have been directed into forms suitable for deferred, instead of immediate use; and if any of them are now applied to any other purpose than immediate consumption, it is in the expectation that their place will be taken (with increment or profit) by the incoming flow of the national dividend
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The first Fundamental Proposition of Mill’s is closely connected with his fourth, viz. that
Demand for commodities is not demand for labour: and this again expresses his meaning badly. It is true that those who purchase any particular commodities do not generally supply the capital that is required to aid and support the labour which produces those commodities: they merely divert capital and employment from other trades to that for the products of which they make increased demand. But Mill, not contented with proving this, seems to imply that, to spend money on the direct hire of labour is more beneficial to the labourer than to spend it on buying commodities. Now there is a sense in which this contains a little truth. For the price of the commodities includes profits of manufacturer and middleman; and if the purchaser acts as employer, he slightly diminishes the demand for the services of the employing class, and increases the demand for labour as he might have done by buying, say, hand-made lace instead of machine-made lace. But this argument assumes that the wages of labour will be paid, as in practice they commonly are, while the work is proceeding; and that the price of the commodities will be paid, as in practice it commonly is, after the commodities are made: and it will be found that in every case which Mill has chosen to illustrate the doctrine, his arguments imply, though he does not seem to be aware of it, that the consumer when passing from purchasing commodities to hiring labour, postpones the date of his own consumption of the fruits of labour. And the same postponement would have resulted in the same benefit to labour if the purchaser had made no change in the mode of his expenditure
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§ 4. Throughout the whole discussion of the national dividend the relations in which the kitchen apparatus of a hotel and those of a private house stand to the employment of cooks have been implicitly treated as on a like footing. That is to say the capital has been regarded broadly: it has not been limited to mere “trade capital.” But a little more may be said on this subject.

It is indeed often thought that, though those workers who have little or no accumulated wealth of their own, have much to gain by an increase of the capital in that narrower sense of the term in which it is nearly convertible with trade capital that supports and aids them in their work; yet they have little to gain from an increase of other forms of wealth not in their own hands. No doubt there are a few kinds of wealth the existence of which scarcely affects the working classes; while they are directly affected by almost every increase of (trade) capital. For the greater part of it passes through their hands as implements or materials of their work; while a considerable part is directly used or even consumed by them
*97. It seems therefore that the working classes must necessarily gain when other forms of wealth become trade capital and
vice versâ. But it is not so. If private people generally gave up keeping carriages and yachts, and hired them out from capitalist undertakers, there would result a smaller demand for hired labour. For part of what would have been paid as wages would go as profits to a middleman
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It may be objected that if other forms of wealth take the place of trade capital on a large scale, there may be a scarcity of the things needed to aid labour in its work and even of those needed to support it. This may be a real danger in some Oriental countries. But in the western world, and especially in England, the total stock of capital is equal in value to the aggregate of the commodities consumed by the working classes during many years: and a very small increase in the demand for those forms of capital, that minister directly to labour’s needs, relatively to other forms, would quickly bring forward an increased supply of them, either imported from some other part of the world, or specially produced to meet the new demand. There is therefore no necessity to trouble ourselves much on this score. If the marginal efficiency of labour is kept high, its net product will be high; and so will therefore its earnings: and the constantly flowing stream of the national dividend will divide itself up in corresponding proportions, giving always an adequate supply of commodities for immediate consumption by the workers, and assigning to the production of those commodities an adequate stock of implements. When the general conditions of demand and supply have decided what part of the national dividend the other classes of society are free to spend as they will; and when the inclinations of those classes have decided the mode in which they will distribute their expenditure between present and deferred gratifications, etc., it matters not to the working classes whether orchids come from the private conservatories, or from the glass houses which belong to professional florists, and which are therefore trade capital.