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Chapter XIV. Contemporary Discussion

It is not the object of the present volume to follow the discussion of the wages fund doctrine at the hands of the many writers of our own time who have expressed their views on the never ending controversy. The varieties of opinion are endless; on no topic in the range of economic theory would it be so difficult to extract any consensus of opinion. But, to understand the stage at which the discussion stands, it will be advantageous to follow two main trains of thought which have become conspicuous and important during the last twenty years.

After the weakness of the old doctrine had been made plain by Thornton's and Longe's criticisms, Mill's recantation, and Cairnes's attempt at rehabilitation, the attack was continued by a series of English-speaking writers of whom President Walker was the acknowledged leader. Not only was it continued; but it was carried farther than by Longe or Thornton. Not the rigidity and predetermination of the wages fund, but the significance of the payment of wages from capital in any form was doubted or denied. The initial step in distribution was thus declared to be, not the payment of wages from capital, but the division of shares in the current product of labor. On the other hand, a new mode of approaching economic theory was advocated in an entirely different quarter, without immediate reference to the old controversy, yet with important and unmistakable effects on it. The Austrian school developed a new theory of value, and from that a revised statement of the relation of capital to wages.

The most significant presentations of the first-mentioned train of thought, in which the payment of wages out of capital is absolutely denied, came from two American writers. The most unqualified was that of Mr. Henry George; the most influential and weighty that of President Francis A. Walker. An examination of their arguments will show how far the revolt from the old doctrines proceeded, and how much need there was for a complete revision of this part of economic theory.

George's attack on the old views was the later of the two in point of time; but it was the more extreme and uncompromising; and its consideration will most advantageously open this stage of the controversy. Progress and Poverty, published in 1879, has for the subject of its first book "Wages and Capital," and there handles the wages fund doctrine without gloves. The aim of the book is to show that all the evils of the social body arise from private ownership in land, and are to be cured by the virtual confiscation of land on the part of the state. As a preliminary to this result, it was necessary to dispose of current explanations of existing difficulties, and among them the explanation of low wages as caused by relative scarcity of capital.

The arguments against the wages fund doctrine are twofold, negative and positive. They are meant to prove both that the old doctrine is false in itself, and that another doctrine is sound.

The first argument to show that the wages fund doctrine is false is its incompatibility with an unquestionable fact, — the co-existence of a high return to labor and to capital. George points out that in new countries both interest and wages are high. High wages, according to the wages fund theory, denote a plenty of capital. High interest denotes a scarcity of capital. Therefore, if the theory be sound, high wages and high interest can not exist together. If in fact they do exist together, — and every one knows that sometimes they do, — the theory must be false. The same dilemma is presented with regard to the fluctuations of wages and interest in times of depression as compared with times of activity. When there is industrial activity, wages and interest are both high; yet if plentiful capital be the cause of the high wages, how can interest be high also? The converse case appears in times of industrial depression, when we have low wages, and yet an indication of a plenty of capital in the low rate of interest.

This would be promptly answered on the part of a writer like Cairnes by the suggestion that "capital" was used in different senses in the two conjunctions. Plenty of capital with reference to wages meant plenty of "circulating" capital, in the phrase of the older writers; or plenty of the wages fund part of capital, in the language of Cairnes. It is quite possible that capital itself should be relatively not plentiful, and yet that a large part of it should be "circulating capital," or wages fund. Cairnes so explained those conditions in new countries which George presented as inconsistent with the old-fashioned reasoning. In a country like the United States a larger part of capital is in the form of wages fund, a smaller in the form of plant and material.

This is a fair answer to a question like George's, even though, as an independent explanation of the high earnings of laborers in new economies, it does not cover the whole case. George at all events meets it indirectly rather than directly. This reply to his objections can not be maintained, he avers, as to the second part of his argument, — that high wages and high interest come together in "good times."

It is not improbable that the ordinary upholder of the classic doctrine would have been somewhat taken aback even by the first part of George's attack. Doubtless he would have found it still less easy to give a prompt answer to the objection in its second form. For in this reasoning as to capital in good times and in bad times, the term "capital" is used with that vagueness which was so characteristic of the usual statements of the wages fund doctrine: the quantity of capital being noticed as having a bearing both on wages and on interest, with no great discrimination as to the how and why in either case. In fact, looking simply at the surface phenomena of money wages and of the money market, it is easy to see that capital means different things in the two cases. In relation to money wages, it refers to the total money funds turned over by employers to the hire of laborers; in the other, to the money funds in the hands of lenders, chiefly for short-time loans, and offered by them to the active managers of business. It is quite conceivable that the one sort of fund should be large as compared with the laborers, while the other should be small as compared with the borrowers. At best, this sort of consideration gives attention only to the surface phenomena, — to money wages on the one hand, and on the other to the bargaining between one class of business men and another. Neither real wages nor the substantial return to capital at large can be brought into clear light by such reasoning.

There is another side to this particular phase of the slow-dragging discussion. George evidently had in mind that opposition between wages and profits which all the followers of Ricardo descanted on: high wages made low profits, and low profits high wages. The connection of this theorem with the wages fund doctrine has been touched on already. The manner in which it led George to think he had found a dilemma is not far to seek. A thinker of George's slender training, absorbed in his own panacea for the cure of all social ills, could not be expected to construe with accuracy Ricardo's involved expressions. Wages, like other words, was used by Ricardo in a peculiar sense: he meant by the word not money wages, not even real or commodity wages, but wages as representing the product of so much labor. When Ricardo said wages were high, he meant that wages got the product of much labor; when low, the product of little labor. So understood, it follows very simply that high wages make low profits, and it by no means follows that high wages, in the sense of high commodity wages, make low profits. Ricardo's proposition, moreover, applies only to the relations between laborers and capitalists in what may be called a completed cycle of production: it applies to the total of the advances made to a given series of laborers in the succession of seasons over which their productive labors extend, as compared with the total of finished commodities produced by this series during the cycle. It has nothing to do with that part of the advances which happens to be made to the laborers of any one season; while just this is the narrower question of the wages fund and of market wages. Here, as on other topics, Ricardo's definite and narrow proposition, stated in the obscure fashion of its author, had been mechanically repeated by the writers of the next generation, and had been applied to all sorts of cases with which it had nothing to do. George was hardly to be blamed if he used the much abused formula against those who understood its real bearing no better than he.

We may turn now to the positive part of George's reasoning: that which undertakes to show that wages are paid from product.

Here the basis of the argument may be stated in George's own words. "The fundamental truth, that in all economic reasoning must be firmly grasped and never let go, is that society in its most highly developed form is but an elaboration of society in its rudest beginnings, and that principles obvious in the simpler relations of men are merely disguised and not abrogated or reversed by the more intricate relations that result from the division of labor and the use of complex tools and methods.” Now the first laborers, in the simplest state of society, must have been supported from the product of their own labor; here is the key to the problem; all laborers are paid from the product of their own labor.

In this sort of reasoning, George doubtless walks in a well-trodden path. Ricardo had reasoned from the primitive fisherman and huntsman to the fundamental principles of value and exchange; and in very modern speculations on the same topic, the analysis of the simplest case is supposed to supply the key to all the phenomena. To give such reasoning validity, it must be shown that there is no essential difference between the conditions of the simple case and the complex. In George's deduction, the primitive workmen, — the gatherer of shell-fish or of berries, — gets a consumable commodity in the interval between meals; the laborer of the great civilized community does work which may not result in enjoyable goods for years. The element of time enters in the one case, not in the other; the difference is world-wide.

Too much space should not be given to the various turns which the reasoning took at George's hands. We are told that laborers always produce something: hence it is inferred that they produce what they live on. We are given a vivid description of "butter churned but a few days before, vegetables fresh from the garden, and fruit from the orchard"; as if all these commodities had been produced by present labor. We are told that the laborers always add to the wealth of their employers before pay-day comes around; which is supposed to show that they are paid from what they produce. In truth, the vogue of Progess and Poverty is not due to any solid and consistent reasoning, or to any novelty in principle. It is a consequence of the tide of social unrest, on which an earnest man, made eloquent by faith in a gospel of his own, has been carried to a commanding position and not undeserved fame. As to the wages fund doctrine, George's attacks are chiefly significant of the ease with which the old statements could be shaken, and of their failure to put in any clear light the basis of truth and fact on which the doctrine might rest. At all events his share in the controversy had little visible effect on the development of economic theory. Though effective in shaking the hold of the old doctrines among masses not usually touched by theoretic controversy, his writings exerted no great influence on trained students; a result due in part to the thinness of his thought, but perhaps quite as much to the ruthless sweep of the social remedy which he finally proposed.

A much deeper influence on the course of thought has been exercised by the other American writer whom we have associated with George, — President Francis A. Walker. This distinguished soldier, scholar, and administrator is justly regarded with respect, and with something more, by his associates in these various fields of activity. So far as economic science is concerned, whether or no all of the doctrines and measures advocated by him shall prove to stand the test of time, no one can deny that his independence and vigor powerfully stimulated discussion at a time when something very like stagnation had been reached in English-speaking countries, and that his writings in many ways mark the beginning of a new and fresher stage.

President Walker's views on the wages fund doctrine were matured at a comparatively early date. They are set forth in an article in the North American Review for January, 1875; and are repeated in the book on The Wages Question, published in 1876. They appear again in his contributions to more recent periodical literature, especially to the Quarterly Journal of Economics, and in the various editions of his text-book on political economy. The later publications handle the wages fund doctrine in a somewhat perfunctory and indeed contemptuous manner, the assumption being more or less explicitly made that it had already received its coup de grace. Hence the earlier discussions are the more significant; and, among them, the two chapters of the volume on The Wages Question may be selected, as containing the fullest and most careful statement of the author's views.

First in order, as the case is presented in that volume, comes a statement or argument that may be readily accepted, but hardly bears on the real problem in hand. "An employer pays wages to purchase labor, not to expend a fund of which he may be in possession." And again: "The employer purchases labor with a view to the product of the labor; and the kind and amount of that product determine what wages he can afford to pay. ... It is, then, for the sake of future production that the laborers. are employed, not at all because the employer has possession of a fund which he must disburse. ... Thus it is production, not capital, which furnishes the motive for employment and the measure of wages." So much is unquestionably true; and as to ,hat not uncommon version of the old view, by which the individual employer is supposed to have funds irrevocably committed to the hire of his laborers, it is valid and unanswerable. But the argument here is mainly as to the motive which influences the employer; and it may be readily admitted that the attainment of a product at a profit is his motive, without any admission one way or the other as to the nature or limitation of the funds which pay wages or form the measure of wages.

Next comes another point. An objection that might come from an upholder of the old view is stated and refuted. "It may be said: we grant that wages are really paid out of the product of current industry, and that capital only affects wages as it first affects production, so that wages stand related to product only in the first degree and to capital in the second degree only; still, does not production bear a certain and necessary ratio to capital?" This question Walker rightly answers in the negative, pointing out that production is affected by other things than the volume of available capital. The land, the natural resources, the industrial quality of the laborers, are important factors. So much is clearly true; and if it be granted that wages are primarily determined by product, it must follow that they are affected by capital only as one among many factors. But the adherent of the old view would never make the supposed admission, or resort to the supposed reply. The kind of connection between wages and capital which is to be disproved is the direct and immediate one. Wages depend, according to the old view, not on capital via product, but (if on product at all) then on product via capital; and the connection with the capital link of the chain is not to be brushed aside as lightly as this. To assume that wages are paid in the first instance from product, disposes of the whole question at issue.

This assumption becomes clearer in an illustration presented in the next paragraph. "Given machinery, raw materials, and a year's subsistence for 1,000 laborers, does it make no difference with the annual product whether those laborers are Englishmen or East Indians?" Clearly the question is to be answered in the affirmative; the quality of the laborers does affect the product. But the adherent of the wages fund doctrine would point out that, by supposition, there was but a year's subsistence on hand; and be would suggest that this was the "capital" important for the purposes of his doctrine. Until a new stock of subsistence could be got, — which presumably would require a year, — the laborers, whether Englishmen or East Indians, could get no more than there was to be had. Assuming that the capital, of all sorts, was owned by a set of employers, and that the only way for laborers to get the subsistence on hand was by bargain with the employers, the rate of wages during the first year would be a simple matter of division. These assumptions, as to the ownership of practically all wealth by one class, were made rather by implication, than in so many words, by the classic writers; but they should fairly be accepted for the purposes of their reasoning, and make it difficult, as to the first year's wages in such a case as Walker supposes, to find a flaw in that reasoning. The growth of capital, after the first year, under the influence of high profits, might make probable a new supply of subsistence and other things, and an eventual adjustment of wages to product. But this is very different from the direct determination of wages by "current product," which is assumed as the basis of Walker's argument, and is by no means proved as the result of it. Whether a case like that here supposed, with its fixed year's subsistence, is typical of the real course of production and distribution in modern communities, or even instructive in their analysis, is another matter. So far as the wages fund doctrine goes, the example is of the sort that serves to strengthen more than to weaken it.

The assumption of the thing to be proved, which appears in this argument as to the industrial quality of the laborers, is made again in the next chapter: where it is pointed out in more detail and with more emphasis, that the nature of the soil, the possibility of a stage of increasing rather than diminishing returns from land, the course of invention, the growing division of labor, may result in changes in product connected but loosely with changes in capital. Thence it clearly follows that these things directly affect wages, if product directly determines wages. Such reasoning, to repeat, may be set aside, as not pertinent to the case; and we may concentrate attention on the arguments which really touch the points at issue, — the relation of capital to wages, the extent to which advances are made from capital, and the exact mode in which wages are paid out of product or capital.

President Walker's attempt to deal with this crucial question begins with the proposition that, while" wages are to a very considerable extent, in all communities, advanced out of capital," they "must in any philosophical view of the subject be regarded as paid out of the product of current industry." What is meant by a" philosophical view" is not quite clear. It can hardly mean that wages, while in fact paid out of capital, are to be philosophically regarded as paid out of something else; though such an interpretation might be consistent with some of the speculations presented by philosophers of all ages. It may mean that wages are paid of product, not indeed for the time being, but in the long run. Yet in this sense there is nothing essentially inconsistent with the wages fund doctrine. We have seen that Cairnes's conception of profits as always within a handbreadth of the minimum, and as certain to be kept there by prompt accumulation consequent on higher profits, means simply that wages are determined, in not a very long run, by product: while yet Cairnes holds them to be proximately determined by the capital available for paying wages. It must be said that Walker appears not to be fairly conscious of this turn of the older reasoning, and sometimes speaks in a manner to imply that he too believes wages to depend on product in the indirect way there stated. Thus in the second of the two chapters now under consideration, we are told that "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 him," — a phrase which might be interpreted to mean in substance very much what a writer like Cairnes would lay down on the theory of wages.

But Walker at bottom means something different from this: "current product" is the phrase which he prefers in describing the source whence wages are paid; the advance from capital is an accident; and we must inquire further as to his conception of the advance from the one source and the payment from the other.

"In all communities wages are, by the very necessity of the case, advanced to a very considerable extent out of capital. ... The tiller of the soil must abide in faith of a harvest, through months of ploughing. sowing, and cultivating; and his industry is only possible as food has been stored up from the crop of the previous year. The mechanical laborer is also removed by a longer or shorter distance from the fruition of his labor. So that almost universally, it may be said, the laborer as he works is fed out of a store gathered by previous toil, and saved by the self-denial of the possessor." Much seems here to be conceded to the old-fashioned economists. Almost universally, laborers are supported by the product of past labor; and the source whence they get their support is conceived to be food and other tangible things of a previous season's making.

But this admission is at once limited: "to the extent of a year's subsistence, then, it is necessary that some one should stand ready to make advances to the wage-laborer out of the products of past industry." And only subsistence need be provided: "this by no means involves the payment of his entire wages in advance of the harvesting of the crop or the marketing of the goods." Here we have the beginning of a shift in the point of view: the "marketing of the goods" appears as the last stage in production. Almost at once, thereafter, it is questioned whether wages are, after all, largely advanced out of capital; for the laborer does not get his money until after he has done his work for the employer, or indeed after the employer has sold the product. The employer may "realize" on his product before he pays wages to the workmen. Railways and steamboats are instanced as collecting cash daily, i. e., securing their "product," while paying wages monthly. "Quite as common, probably, even yet in countries which we may call old, as weekly payments are monthly payments; and here the probability that the laborer may receive his wages out of the price of this marketed product increases with the quadrupled time given the employer to dispose of it."

Observe the gradual transition here. First, we have the tiller of the soil, who gets his food, — his real wages,from the labor of the past. Here the securing of a consumable commodity is regarded as the last stage in completing the product. Next, we have the harvesting of the crop, without precise statement as to when this harvesting brings a "product" and yields wages: whether at the stage when bread is finally got, or at that when the crop of grain is sold. Last, we have the money view full fledged: the "marketing" of the goods and the "price" of the product are described as yielding wages. It is the old story in the wages fund, controversy: sale and money receipt are confounded with the .final attainment of food and other enjoyable goods, and the fund whence wages are paid is conceived as money or cash in the hands of the individual employer.

The railway company is said to pay wages out of product because it takes in cash before pay-day; though clearly its real product is the transporting of goods or men from one place to another, and so ordinarily no more than the advancement of productive operations by one small stage. The manufacturer who sells pig iron (say), pays his laborers out of the price of the product; yet the pig iron can not become a product, in the sense of being eaten and enjoyed, of satisfying any human want, until a long succession of further steps are taken with it. President Walker might fairly argue that, for polemical and negative purposes, he was justified in using "product" indifferently in the two senses here noted; because those who had long maintained and expounded the wages fund doctrine so often confined themselves to the money view of capital and product. But for progress in getting at the truth of the matter, reasoning which confounds these two things leaves matters in as ill plight, at the least, as they were before.

One further case, much made of by Walker, may be considered, because it presents the same question in a somewhat different way. Among the facts of concrete industry which he finds inconsistent with any necessary or universal advance of wages out of capital, are cases of partial advances of wages by employers. In the South and West of the United States, at the time of his writing, he notes that "the employer advances to the laborer such provisions and cash as are absolutely required from time to time; but the 'settlement' does not take place until the close of the season or of the year, and final payment is often deferred until the crop is not only harvested but sold." Here the provisions and cash first turned over in part payment are apparently regarded as coming from capital; while the cash paid when the crop is sold, comes from product. Yet it is obvious, if we once get beyond the money point of view, that the cash advanced out of capital is spent on finished, consumable commodities; and the cash paid out of the product, or crop sold, is spent on like commodities; that in either case these commodities constitute the real wages, whose amount and determination it is important to ascertain. What we need to know is whether these consumable things, whenever secured, and whether bought with money on hand before or after the sale of the crop, are to be regarded as product or capital; whether they are the current product of the laborers who buy them and enjoy them; whether they are rigid or flexible in amount. These essential questions President Walker nowhere touches.

The proposition that wages are paid out of product, supported in this unsatisfactory way, became the starting point of President Walker's theory of distribution, set forth in his text-books, now so much in vogue in English-speaking countries. It simplifies the perplexing problems so temptingly; it is so obviously true of the individual employer and of those direct wages which he pays his men in money, and which every one first thinks of when questions about wages confront him in concrete life, — that we need not be surprised if the theories of distribution which rest on it, presented as they are with rare skill in exposition, are found eminently teachable and a welcome substitute for the older beclouded views. But they do not really solve the problems in hand. Certainly, so far as the wages fund doctrine was concerned, this attempt at revision settled nothing. There is indeed a sense in which it is true that real wages, like real interest and real rent and real business earnings, are paid out of current product. But as a first step in the theory of distribution, the proposition that wages are derived from current product gives an inaccurate picture of the ways and processes of production; while the determination of wages as a residual share is even more unreal than its supposed payment out of product. President Walker's service in the wages fund discussion, and in economic theory at large, has been rather that of compelling a thorough overhauling of old views than that of substituting a new economic system of solid and permanent value.

Nevertheless, the general theory of distribution set forth by Walker gained an acceptance and influence probably greater than that of any writings in the English tongue since the days of the younger Mill. The textbooks in which they were set forth came into very wide use; and the virtual adherence of a large circle of eminent economists was a proof of more solid success. Jevons in England had reached similar general views at a somewhat earlier date, and readily fell into line. Professor Sidgwick, the weight of whose opinion was deservedly great, adopted the same mode of approaching the theory of distribution, and the same general conclusions as to wages. Followers were many, and dissidents few, in English-speaking countries. In France, where the old rigid views had never had much vogue, the new ones were welcomed by a considerable and influential circle; though sometimes with a certain Gallic courtesy in the admission of a degree of truth on both sides, which made it difficult to classify the French writers in one way or the other. The controversy waxed hot in Italy, where the books both of Cairnes and of Walker were translated, and a long series of books and of articles in periodicals maintained the views of the old school and of the new. Among the Germans less attention was given to the controversy; not because the old views held their own with any tenacity, but because, in this case, the Germans were singularly neglectful of an important phase in the development of economic thought. On the whole, the trend of the discussion for a decade or more was such as to justify President Walker in the assumption that there was nothing left of the wages fund doctrine, that the payment of wages from current product was an established theorem, and that the problems still unsolved were concerned with the details of the share in this current product which went to laborers.

Meanwhile another current of thought was being brought to bear on the wages fund discussion, from a very different quarter, and with very different objects and results. The speculations which are associated with the Austrian school, while directed mainly to the phenomena of value and exchange, have also led to important attempts at the reconstruction of the theory of capital, and these again, explicitly or implicitly, to a reconsideration of the theory of wages.

We are concerned here only with that part of the general theory of value developed by the new school which bears on capital and wages. The value of all economic goods, — to recall summarily the essentials of the new views, — is defined as their "importance" to the person whose wants they are to satisfy; and the exchange value of goods is made to depend on the play of such subjective importance in the minds of those who sell and buy. The diminishing importance of successive increments of any one commodity leads to the theory of final or marginal utility; and final utility becomes the main force acting directly on exchange value. It is probable that in this train of speculation, undue attention has been given to suppositions of fortuitous barter, in which the seller has possession of articles which might be used by himself; whereas too little attention has been given to the conditions of an advanced division of labor, in which the producers and sellers practically want none of the articles they make, and in which final utility to buyers alone has effect on the exchange values of commodities. It is part of the same defect that the consequences of the changing quantities offered by producers under the stress of competition, have been unduly thrust in the background. But these are matters not material for the present inquiry. For this, the essential thing is that value is conceived as affected primarily, not by the cost of articles, but by their importance, or final utility, as means of satisfying human wants.

The direct satisfaction of wants being thus the starting-point in the inquiry, it was inevitable that attention should be turned to the fact that a great mass of goods do not serve directly for such satisfaction. Inchoate goods, not ready for enjoyment, have in themselves no importance or utility. They serve wants only by being converted into commodities capable of yielding direct satisfaction. Hence they find their place in the revised theory of value as having a'' derived" importance and utility, dependent on the importance and utility of the enjoyable commodities which they serve to make. This train of thought led naturally to the consideration of the interval of time that must elapse for the conversion of inchoate goods into completed commodities; and this again to the relation of present labor to present product, the functions of capital, and that whole series of inquiries as to the nature of civilized production, which had been so long and so unhappily divorced from the discussion of the wages fund.

Some of the more significant steps in the development of this train of thought may now be mentioned; with a view not to sketch the history of the new doctrines, but to point out how they have tended to give a new course to the discussion of wages. At the outset there was no hint of connecting them with the old-fashioned theory of wages; and the unexpected manner in which they finally came to connect themselves with the old views, is one illustration the more of the slow and faltering steps by which even the shrewdest of men must feel their way to the results of a departure from familiar lines of thought.

The first careful and deliberate statement, in the terms of the new doctrine, of the relation of dependence between enjoyable and inchoate wealth seems to have been made by Gossen. The work of this erratic genius bore little fruit at the moment, and perhaps had no marked influence on the subsequent course of thought; but it may be referred 'to as an indication of the mode in which the remodelled theory of value gradually connected itself with the subject of wages and capital. Gossen worked out the theory of subjective value, of diminishing subjective value with the increase of quantity, and so of final utility; and applied to these topics the mathematical treatment to which they lend themselves so naturally. What is more pertinent to our subject, he divided goods into different classes, according to their availability for the satisfaction of human wants. The classes were three: ( 1) consumable goods ready for enjoyment; (2) goods not having all the adaptations necessary for enjoyment, as wheat and rye, which need to be made into bread, or a carriage, which needs a horse and driver before sufficing for final satisfaction; (3) goods which serve to make other goods, but never themselves minister to enjoyment, as tools and machines, and fuel consumed to make power. This classification, whether or no advantageous for the inquiries which Gossen conducted, would not be satisfactory for an investigation of the successive steps in production: for the carriage (which is ready for use) and the wheat (which still needs to be ground) are put together by Gossen, yet stand in different stages; while the fuel and the wheat may belong close together. But Gossen was concerned only with the dependence of the various incomplete goods, for their effectiveness in satisfying wants, on the finished commodities; for this purpose his divisions may be helpful, and at all events they brought out clearly the chain of connection. A point most essential for the theory of wages and capital was, however, not touched by him: the interval of time between the successive links in the chain. The idea of a succession in time between the several classes of goods seems not to have been in Gossen's mind, and certainly was not made prominent by him. This first step in the psychological theory of value thus did not bring into view that aspect of it which connects it with the theory of wages and capital.

It is curious that the next writer who followed the methods of Gossen in general economics, while again contributing virtually nothing to the direct application of the new reasoning in the theory of wages, yet also promoted that application indirectly. Jevons, in his Theory of Political Economy, of which the first edition appeared in 1871, worked out, independently and originally, the reasoning as to the general dependence of exchange value on final utility, and essayed with equal originality the application of mathematical methods to economics. In addition, he said some things that were true and important, even. if not entirely novel, on the theory of capital. But the theory, of final utility did not lead Jevons to consider the different ways in which inchoate goods and enjoyable commodities satisfy human wants; and he was thus prevented from making any satisfactory application of his new methods to the problem of general wages, or at least that part of the problem of general wages with which the wages fund discussion is concerned.

While no classification of goods according to the nearer or remoter fruition of enjoyment appears in Jevons, an essential function of capital is there grasped and stated with a directness which is refreshing after the long series of vague generalities among his English predecessors, and which had its strong effect on later thinkers of the same school. Jevons lays it down that capital is nothing but subsistence: it serves only to feed laborers over a lengthened process of production. The element of time is its essence. He states in italics that its effect is "to allow us to expend labour in advance." Not only is this fundamental fact emphasized, but the further fact is noted (though not so fully) that there is connection between the supply of capital, the march of improvement, and the length of time over which the period of production extends. "Whatever improvements in the supply of commodities lengthen the average time between the moment when labor is exerted and its result or purpose is accomplished, such improvements depend on the use of capital. And I would add, that this is the sole use of capital." Here the conception of an average duration of the period of production, and the function of capital in the lengthened course of production, are clearly set forth.

This is not new doctrine; but it is stated with fresh and needed emphasis, and indeed is soon carried almost too far. We have seen that the analysis of capital as a succession of advances of food to laborers was at the basis of Ricardo's reasoning as to value and as to distribution. It was set forth more or less distinctly by most of his followers. But it had been often buried under other matter, and obscured by deductions that were half true or applications that were false; and it had hardly ever been brought into clear connection with the wages fund doctrine. Thus it needed to be simply and emphatically restated and reapplied. But Jevons did no more than restate it, and took no further steps in its application. Indeed, he may be said to have stepped back; for not only did he lay it down that all capital is subsistence, — which is true if properly explained, — but he came perilously near to saying that all which is not subsistence is not capital, — which requires still more explanation to be intelligible and true. "I would not say that a railway is fixed capital, but that capital is fixed in the railway. The capital is not the railway, but the food of those who made the railway."* Elsewhere Jevons approaches the subject from a different point of view, and with a result substantially the same: maintaining that all forms of wealth, whether completed or uncompleted, whether in consumer's hands or not, are equally capital. His views, in truth, were not fully developed. He did not affect, in this volume on the theory of economics, to have reached definitive conclusions on the subject at large. He was concerned chiefly with advocating a new method and a new point of view: the method of mathematics, and the point of view of final utility. On capital, he had no well-matured opinions, and thus did no more than to redirect attention to its connection with the lapse of time between the beginning and the end of productive exertion.

This failure to mature his conclusions appears strikingly in what Jevons says specifically of the wages fund doctrine. That doctrine he professes to reject; yet with qualifications which, while professing to save something, show that he did not really see what was good in it and what bad. He sets forth in general a residual theory of wages. The laborers are paid from product and get what is left after interest and rent are provided for. He qualifies this by noting a temporary stage during which the wages fund theory applies. Such temporary application of the wages fund, however, has nothing to do with that lapse of time between the beginning and the end of production which he emphasized in his earlier analysis of capital. It has to do with a much briefer period. During the early stages of new enterprises or new industries, involving risks and uncertain profits, he finds that the anticipated outcome of the enterprise, rather than the actual product secured, will determine wages. This anticipated result will determine how much capitalists will then pay out to laborers. Only during this temporary stage of risk and uncertainty, he conceives the wages fund to be in operation. But when stable conditions are reached, and it is known what the outcome of a business — enterprise is to be — and such is assumed to be the usual and normal state of things — the laborer will receive "the due value of his produce after paying a proper fraction to the capitalist for the remuneration of abstinence and risk."*

This curious and indeed unique version of the applicability of the wages fund is completely divorced from what Jevons had said, a few pages before, of the function of capital and its relation to time in production. As a statement of the final outcome of distribution, it is much the same as what would be laid down by either Cairnes or Walker, — in fact, by any writer who believed the return to capital to be sharply fixed by a minimum reward for abstinence. It is not very material, for this ultimate result, whether wages are conceived to be paid from capital or from product. But as to the process whereby the result is brought about, if at all, it is very material to remember that laborers in fact are not paid from what they produce, but from that capital which, in Jevons's own language, serves to sustain them through the period over which their exertions are spread. Evidently Jevons had in mind, in this sally on the wages fund, the case of individual laborers and their immediate employers, and the determination of money wages by the money value or exchange value of the product. He thought of the doctrine as referring solely to these proximate relations between capitalists and laborers. It has been sufficiently shown how much warrant he had, in the writings of the economists who had set it forth, for this conception of its scope. His general reaction — certainly a healthy one — from what he called "the maze of the Ricardian economics" disposed him to fling aside once for all a mechanical doctrine such as, in the current and authoritative versions, the wages fund theory was. On this topic, as on others, his impatience with the self-satisfied English political economy of his day led him to flat denial rather than to careful sifting of the true from the false. At all events, he contributed less than might have been expected, m view of his own conclusions as to capital, to the satisfactory statement of the relation of capital to the present reward of laborers.

Thus neither Gossen nor Jevons, who were the most important forerunners of the new mode of approaching economic theory, linked together the two chains of thought which were to lead to a fresh consideration of the theory of wages. Gossen pointed out that incomplete commodities derive their utility from those complete and enjoyable. Jevons, while following Gossen in the theory of final utility, and taking another forward step in the emphasis he laid on the element of time in its connection with capital, gave no attention to the relation between inchoate wealth and consumable commodities.*

The gap between the two lines of thought was soon closed. In 1871, the same year in which Jevons published the first edition of his Theory, Professor Carl Menger published his Grundsätze der Volkswirthschaftslehre, which contains, more or less explicitly, the characteristic doctrines of the Austrian school, and is rightly regarded by its members as the main source of their inspiration. With every allowance for the suggestions contained in the works of previous writers, such as Gossen, Walras, and Jevons, it must be admitted to be an original and powerful book. How far the general doctrines set forth in it will prove a complete substitute for the older views, how far will serve only to correct and qualify them, remains still to be seen. For our subject, however, the situation is comparatively simple: and what Menger contributed toward its elucidation can be stated in brief terms.

At the outset Menger distinguishes between different classes of goods. Things consumable and enjoyable are "Güter erster Ordnung," as bread; those not quite in the stage of enjoyment are of the second order, as flour, fuel, stoves; those of the third order are still farther removed from enjoyment, as grain and flour mills; and so on. He adds that the precise classification of goods, as being in the first, second, or third order, is not essential. The lines of demarcation can not be rigidly drawn; the classification is no more than an aid for the clearer explanation of a difficult subject. Thereafter he speaks, as a rule, simply of goods of lower order or of higher order: those of lower order being nearer the stage of completion and enjoyment, those of higher order more remote from it.*

The next step is in a direction already pointed out by Gossen: the value of goods of higher order is dependent on that of the goods of lower order which they serve to make.

Then comes the step important for the present discussion. Time must elapse before goods of higher order can be converted into goods of lower order. Menger criticizes Adam Smith for having ascribed the progress of the arts and the growth of wealth to the division of labor alone. The great cause of material progress he finds in the development of an extended chain of labor, by which enjoyment, instead being secured without delay, is the result of the orderly and progressive advance of goods of higher order to the later stage of consumption and enjoyment. Whether or no this criticism of Adam Smith is entirely just (Menger himself notes incidentally that an "appropriate division of labor" must concur to make effective the process described by him), the passage gives due emphasis to what we have called the successive division of labor, and so to the true relation between present work and present exertion.* Later this whole train of thought is still more fully developed. The succession of stages in production is sketched: first, the present, when goods of the first order are on hand and available; then a second period, during which goods of the second order can be advanced to the stage of completion; and so on. The conception of a general production period is also defined, — of the average length of time elapsing between the beginning and the end of the whole series of laborious acts by which the present supply of enjoyable commodities has been produced. Chiefly concerned, as he is, with the value of inchoate goods as derived from that of finished commodities, Menger does not enlarge on the element of time and the extension of the production period; but the essential truths are none the less clearly set forth.*

On capital Menger does not seem to have fully matured his thought, and certainly had not fully settled his choice of phraseology. It is said that the function of capital is to provide for present needs, and to make possible the devotion of present labor to the satisfaction of future needs; and that "capital" should refer to the stores of goods available for the use of the present and the future, enabling mankind to secure the gain which accrues from an extension of the period of production. This would indicate that the line of thought suggested by Jevons was uppermost in his mind We are told explicitly that the division of goods into those of higher order and of lower order does not coincide with the division between capital and not capital. Many years later, Menger expressed himself again on the meaning of capital, but again with very brief statement of his own views; intimating only that the true conception was to be found rather by the analysis of the various ways in which property was made to yield income, than by a consideration of the intrinsic uses of economic goods. Whether or no his views on this part of theory; if developed in detail, would have much affected the trend of thought, must be uncertain. The question proximately is one of phraseology, and so far not essential. On the crucial question of the relation in time between inchoate wealth and consumable commodities, Menger set forth clearly the important truths.

Finally, this phase of economic theory received its fuller development at the hands of a disciple of the Austrian school who may be fairly ranked with the leader. In 1888 Professor Böhm-Bawerk published the Positive Theory of Capital.* Here again, however unmistakable and considerable may be the indebtedness to previous writers, we have the marks of vigorous independent thought; combined, moreover, with a skill in exposition not found in the leader of the school, and conducing not a little to the powerful impression which the volume made on economists the world over.

Much of the analysis of industrial operations which is contained in the Positive Theory of Capital has been accepted in the first part of the present essay; and it will therefore not be necessary to give so full an account as would otherwise be called for. On the other hand, we are not concerned with the refinements of the theory of interest which it aims to establish. That theory must indeed have a bearing, on the causes that determine wages in the end, and on the final outcome of distribution. The essential truths which it involves can be stated in much simpler terms than its author thought well to use; and so stated, would probably be found to involve a less radical departure from familiar ideas than we are told to expect. But as far as the immediate relations between capital and labor are concerned, it is not necessary to follow the ramifications of the reasoning by which the exchange of present goods for future is explained. The mode in which the particular subject of the present inquiry has been dealt with by this brilliant writer is comparatively simple, and can be described in brief terms.

The relation between present labor and present product; the successive stages in production; the yield of consumable commodities as the outcome of a lengthened series of exertions, — all is set forth methodically and in detail, in such manner as to make this part of economic theory henceforth an established and unquestioned possession of the science. The increase in the productiveness of labor with the advance in the arts of civilization is indeed linked perhaps too closely with the lengthening in time of the general process of production. We are told that, as a fact of experience, the greater the length of the period of production, the greater the final outcome in consumable commodities; while yet each prolongation of the period brings a less increment of commodities than that which preceded. This supposed close and regular connection between the period of production and the final yield of enjoyable wealth becomes later an essential postulate of the theory of interest: it being assumed that the extension of the period of production will always increase the final output, yet always increase it in diminishing ratio. It has been elsewhere intimated that we have here an unduly rigid version of the direction which is likely to be followed by progress and invention.* But so far as the relation of present labor to its product is concerned, it is not material whether we admit unreservedly, or qualify carefully, the proposition that the longer the time over which labor is spread, the greater will surely be the final yield. It suffices to have it established once for all that in civilized industry there is always the long interval between labor and fruition.

Next, capital is defined as the "future goods" of the community, — as the wealth not yet available for consumption. This is the community's real capital; whereas its real income consists of the utilities derived from completed consumable things. Whether or no the definition so chosen be found acceptable — and to the present writer, as has already appeared, it seems in its central idea convenient and consistent* — it has the merit once again of bringing into clear light the real course of production in modern communities, and of getting rid of the difficulties which arise from considering capital in its relations to money wealth or to individual income.

Last among Böhm-Bawerk's contributions to the questions closely connected with the wages fund doctrine, we have the conception of the general subsistence fund. The total possessions of the community are reduced to a common basis by the description of all wealth as available sooner or later for enjoyment or subsistence. Omitting the land and other natural agents, all goods, whether now enjoyable or not, are conceived as serving in due time to satisfy wants. The machine ripens into the consumable commodities which, so long as it lasts, it helps to produce: some of the utilities it yields are thus available at an early date, some not till the distant period when it is finally on the point of being thrown away as old metal. Materials reach the stage of fruition more quickly and evenly. Goods whose more obvious physical manipulation has ceased, and which are awaiting purchase in dealers' hands, are nearly ready and available. All, however, are alike as containing more or less ripened utilities, and serving to provide for the wants of the community over a longer or shorter space in the future. They thus constitute in the aggregate one indistinguishable subsistence fund on which the community draws for the present and future; while present labor can do no more than advance commodities in their due order through the successive steps in production.

This is not an entirely novel conception. Indeed, its author does not present it as such. He remarks that it has some resemblance to the old theory of the wages fund. Like that, it emphasizes the stock of wealth already produced as the source. whence laborers are maintained and rewarded; though with a clearer conception of the nature and function of capital than had been reached by any of the older writers. It is clearly unlike the old view, in that it has regard to the whole period of production, and not to any one season.* On the other hand, it has more than a family resemblance to Ricardo's analysis of capital as a succession of advances to laborers, — a resemblance to which the author does not call attention, hut which is none the less clear. It thus proceeds, in some part, on old lines; with yet a mode of statement of its own, and certainly an important advance in the understanding of the complex course of industrial operations.

The application of this conception to the theory of wages is not fully worked out, and criticism and comment must therefore be tentative. So far as its application to wages as a separate item in distribution is concerned, there is an obvious difficulty in the fact that the general subsistence contains the income not only of laborers, but of the whole community. So much is expressly pointed out by the author himself. It is true that this difficulty is sought to be avoided; but not with signal success. The fund is assumed at first, for the purposes of abstract reasoning, to yield advances to laborers alone. We are promised at a later stage an exposition of the manner in which other shares of distribution will then emerge.* But that exposition is never fully carried out with regard to the subsistence fund. What we find, is that analysis of the exchange of present goods for future, and of the consequent emergence of interest as the inevitable result, which had already been set forth in essentials even before the discussion of the subsistence fund was reached. The causes which determine interest can probably be stated in simpler terms than we find in the elaborate analysis of the superiority of present goods over future, and the equally elaborate attempts to apply to them the psychological theory of value. In any case, these refinements go but a very little way toward explaining just how the total subsistence fund and its ripening instalments are diverted to one and another class in the community. No doubt, for the explanation of the fundamental forces which shape distribution, a sound theory of interest is essential. This, however, even supposing it to have been reached by our author, does not suffice for the purposes of that investigation of the machinery of distribution which is the essential part of the wages fund problem.

But, to repeat, the conception of the subsistence fund is advanced briefly by Böhm-Bawerk, and its application to the direct questions of wages is avowedly not completed. Criticism is therefore both difficult and likely to be unjust. No attempt is made to consider the concrete mode in which the fund reaches laborers. Still less is any attempt made to consider separately the special case the great and preponderating class of hired laborers, and the dealings with them on the one hand, and with the idle investor on the other hand, of the active manager of industry. Such a more detailed and concrete examination of the machinery of distribution is an essential part of the discussion ·of the wages fund question and all that hangs thereby.

We must be content, therefore, to accept as it stands the contribution which Böhm-Bawerk has made to the general position of the laborer in relation to past and present product. So far as he goes in his treatment of the relation in which the real reward of laborers stands to the capital and the total possessions of the community, it would be difficult to find a flaw in the analysis. The marshalling of the possessions of the social body; the mode in which these constitute a stock available for the needs of the present and the nearer future; the advance of present supplies to laborers who produce for future needs; the diversion of part of the inflowing real income to other classes than laborers; the determination of the share that goes to laborers by the play of motives among those who own the existing stock, — on these topics economic theory will gam by following the main trend of the exposition which has finally resulted from the labors of the Austrian school. It is not all new; but it is freshly and luminously stated; and it is deserving of all praise.

  • *. a. b. c. d. e. f. g. h. i. j. k. Theory, p. 264.
  • †. a. b. Compare what was said on this topic in Part I, Chapter II, p. 39.
  • ‡. In an article "Zur Theorie des Kapitals" in the Jahrbücher für Nationaloekonomie, Neue Folge, vol. xvii, pp. 1–49 (1888). The article undertakes a critical review of the various conceptions and definitions of capital; repeats what was said in the Grundsätze, that the distinction between capital and other wealth is not the same as the distinction between inchoate and enjoyable wealth and suggests that the way to a solution of the question is by considering" das werbende Vermögen überhaupt," and the "Ertragserscheinungen jeder einzelnen Kategorie des werbenden Vermögens in ihrer Eigenart." This points to a different sort of inquiry and conclusion from that followed in Böhm-Bawerk's Positive Theory of Capital, which was in press when Menger's article appeared.
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