These observations must be received as a general correction to be applied whenever relevant, whether expressly mentioned or not, to the conclusions contained in the subsequent portions of this treatise. Our reasonings must, in general, proceed as if the known and natural effects of competition were actually produced by it, in all cases in which it is not restrained by some positive obstacle. Where competition, though free to exist, does not exist, or where it exists, but has its natural consequences overruled by any other agency, the conclusions will fail more or less of being applicable. To escape error, we ought, in applying the conclusions of political economy to the actual affairs of life, to consider not only what will happen supposing the maximum of competition, but how far the result will be affected if competition falls short of the maximum.
§ 2. The Wages-fund, and the Objections to it Considered.
Under the head of Wages are to be considered, first, the causes which determine or influence the wages of labor generally, and secondly, the differences that exist between the wages of different employments. It is convenient to keep these two classes of considerations separate; and in discussing the law of wages, to proceed in the first instance as if there were no other kind of labor than common unskilled labor, of the average degree of hardness and disagreeableness.
Competition, however, must be regarded, in the present state of society, as the principal regulator of wages, and custom [pg 178] or individual character only as a modifying circumstance, and that in a comparatively slight degree.
Wages, then, depend mainly upon the demand and supply of labor; or, as it is often expressed, on the proportion between population and capital. By population is here meant the number only of the laboring-class, or rather of those who work for hire; and by capital, only circulating capital, and not even the whole of that, but the part which is expended in the direct purchase of labor. To this, however, must be added all funds which, without forming a part of capital, are paid in exchange for labor, such as the wages of soldiers, domestic servants, and all other unproductive laborers. There is unfortunately no mode of expressing, by one familiar term, the aggregate of what may be called the wages-fund of a country: and, as the wages of productive labor form nearly the whole of that fund, it is usual to overlook the smaller and less important part, and to say that wages depend on population and capital. It will be convenient to employ this expression, remembering, however, to consider it as elliptical, and not as a literal statement of the entire truth.
With these limitations of the terms, wages not only depend upon the relative amount of capital and population, but can not, under the rule of competition, be affected by anything else. Wages (meaning, of course, the general rate) can not rise, but by an increase of the aggregate funds employed in hiring laborers, or a diminution in the number of the competitors for hire; nor fall, except either by a diminution of the funds devoted to paying labor, or by an increase in the number of laborers to be paid.
This is the simple statement of the well-known Wages-Fund Theory, which has given rise to no little animated discussion. Few economists now assent to this doctrine when stated as above, and without changes. The first attack on this explanation of the rate of wages came from what is now a very scarce pamphlet, written by F. D. Longe, entitled “A Refutation of the Wage-Fund Theory of Modern Political Economy” (1866). Because laborers do not really compete with each other, he [pg 179] regarded the idea of average wages as absurd as the idea of an average price of ships and cloth; he declared that there was no predetermined wages-fund necessarily expended on labor; and that “demand for commodities” determined the amount of wealth devoted to paying wages (p. 46). While the so-called wages-fund limits the total amount which the laborers can receive, the employer would try to get his workmen at as much less than that amount as possible, so that the aggregate fund would have no bearing on the actual amount paid in wages. The quantity of work to be done, he asserts, determines the quantity of labor to be employed. About the same time (but unknown to Mr. Longe), W. T. Thornton was studying the same subject, and attracted considerable attention by his publication, “On Labor” (1868), which in Book II, Chap. I, contained an extended argument to show that demand and supply (i.e., the proportion between wages-fund and laborers) did not regulate wages, and denied the existence of a predetermined wages-fund fixed in amount. His attack, however, assumes a very different conception of an economic law from that which we think right to insist upon. The character of mankind being what it is, it will be for their interest to invest so much and no more in labor, and we must believe that in this sense there is a predetermination of wealth to be paid in wages. In order to make good investments, a certain amount must, if capitalists follow their best interests, go to the payment of labor.[162] Mr. Thornton's argument attracted the more attention because Mr. Mill[163] admitted that Mr. Thornton had induced him to abandon his Wages-Fund Theory. The subject was, however, taken up, re-examined by Mr. Cairnes,[164] and stated in a truer form. (1.) The total wealth of a country (circle A in the diagram) is the outside limit of its capital. How much capital will be saved out of this depends upon the effective desire of accumulation in the community (as set forth in [Book I, Chap. VIII]). The size of circle B within circle A, therefore, depends on the character of the people. The wages-fund, then, depends ultimately on the extent of A, and proximately on the extent of B. It can never [pg 180] be larger than B. So far, at least, its amount is “predetermined” in the economic sense by general laws regarding the accumulation of capital and the expectation of profit. Circle B contracts and expands under influences which have nothing to do with the immediate bargains between capitalists and laborers. (2.) Another influence now comes in to affect the amount of capital actually paid as wages, one also governed by general causes outside the reach of laborer or capitalist, that is, the state of the arts of production. In production, the particular conditions of each industry will determine how much capital is to be set apart for raw material, how much for machinery, buildings, and all forms of fixed capital, and how many laborers will be assigned to a given machine for a given amount of material. With some kinds of hand-made goods the largest share of capital goes to wages, a less amount for materials, and a very small proportion for machinery and tools. In many branches of agriculture and small farming this holds true. The converse, however, is true in many manufactures, where machinery is largely used. No two industries will maintain the same proportion between the three elements. The nature of the industry, therefore, will determine whether a greater or a less share of capital will be spent in wages. It is needless to say that this condition of things is not one to be changed at the demand of either of the two parties to production, Labor and Capital; it responds only to the advance of mechanical science or general intelligence. It is impossible, then, to escape the conclusion that general causes restrict the amount which will, under any normal investment, go to the payment of wages. Only within the limits set by these forces can any further expansion or contraction take place. (3.) Within these limits, of course, minor changes may take place, so that the fund can not be said to be “fixed” or “absolutely predetermined”; but these changes must take place within such narrow limits that they do not much affect the practical side of the question. How these changes act, may be seen in a part of the following illustration of the above principles:
Suppose a cotton-mill established in one of the valleys of Vermont, for the management of which the owner has $140,000 of capital. Of this, $100,000 is given for buildings, machinery, and plant. If he turns over his remaining capital ($40,000) each month, we will suppose that $28,000 spent in raw materials will keep five hundred men occupied at a monthly expenditure of $12,000. The present state of cotton-manufacture itself settles the relation between a given quantity of raw cotton and a certain amount of machinery. A fixed amount of cotton, no more, no less, can be spun by each spindle and woven by each loom; and the nature of the process determines [pg 181] the number of laborers to each machine. This proportion is something which an owner must obey, if he expects to compete with other manufacturers: the relationship is fixed for, not by, him. Now, each of the five hundred laborers being supposed to receive on an average $1.00 a day, imagine an influx of a body of French Canadians who offer to work, on an average, for eighty cents a day.[165] The five hundred men will now receive but $9,600 monthly instead of $12,000, as before, as a wages-fund; the monthly payment for wages now is nearly seven per cent, while formerly it was nearly nine per cent of the total capital invested ($140,000). Thus it will be seen that the wages-fund can change with a change in the supply of labor: but the point to be noticed is that it is a change in the subdivision, $12,000, of the total $140,000. That is, this alteration can take place only within the limits set by the nature of the industry. Now, if this $2,400 (i.e., $12,000 less $9,600) saved out of the wages-fund were to be reinvested, it must necessarily be divided between raw materials, fixed capital, and wages in the existing relations, that is, only seven per cent of the new $2,400 would be added to the wages-fund. It is worth while calling attention to this, if for no other reason than to show that in this way a change can be readily made in the wages-fund by natural movements; and that no one can be so absurd as to say that it is absolutely fixed in amount. But it certainly is “predetermined” in the economic sense, in that any reinvestments, as well as former funds, must necessarily be distributed according to the above general principles, independent of the “higgling” in the labor market. The following is Mr. Cairnes's statement of the amount and “predetermination” of the wages-fund: