Wages and Capital

The conclusions reached in the preceding chapters, if not of universal application, are at least of very wide application. They hold good of any community which has got beyond the most primitive stages in the arts, and in which the development of the arts has brought any complicated series of productive acts. They would hold good of a socialist community as well as of one maintaining the régime of private property. They are conclusions as to real income and real wages, which have nothing to do with the ownership of capital or the inequalities of wealth, or with the money incomes and money wages which are such important elements in the existing machinery of distribution in modern communities.

In the present chapter we have to do with precisely this machinery. Here money and money income play a vital part. Money wages, money interest, money rent, arc the only avenues to the real income of consumable commodities. We can make our conclusions concrete, can follow them out in all their ramifications, only by following the actual working of the intricate money machinery of exchange and distribution. In doing so we shall find, as is the case with every investigation that goes beyond first principles, new premises, new points of, view, new conclusions.

For the simplification of the inquiry, let it be assumed at the outset that the money régime has reached its complete development; let it be supposed that the division of labor, and its consequences of exchange, money, and sale, have been carried so far that no one consumes any of the things he produces. Every article produced comes to market and is sold. This is so largely the case in the advanced communities of modern times that conclusions reached on the assumption of its being universally the case can not diverge seriously from the truth. It follows that the total product or output of the community is sold for money. It follows also that all income of every sort appears first in the form of a money receipt. All real income is thus derived from the use of money income. The inquiry as to money income becomes an inquiry as to the first step, and a most important step, toward the final receipt of consumable goods.

But while real income under these conditions is derived only by the expenditure of money income, the total money income of the community is by no means the same as the money price of the real income. This total is much greater; it is the money price of the entire output of the community. Real income is the flow of consumable goods which are regularly reaching completion, including also a due fraction of the value or utility of the stores of durable finished goods. The output of the community, while including this real income, includes in addition all the inchoate wealth or capital which is being steadily produced. But this clear distinction between output and enjoyable income does not appear either in the case of the individual’s money income or in that of the community’s total money income. Here income and output, in the first instance certainly, run together. Whatever is produced, no matter in what stage it may be with reference to the final emergence of enjoyable wealth, is sold. Every form of output is measured by its owner in terms of money, and is reckoned as a receipt. The gross money income of all the individuals in the community is thus the money yield of the total output. Each producer’s net money income is some part, possibly the whole, of the receipts from the things he happens to make and sell, irrespective whether those things do or do not belong to the real net income of the community.

Let us now suppose a simple case, perhaps never to be seen in the actual world, yet largely typical of what goes on in it, and at all events serviceable as a first step toward understanding its complexities. Suppose a capitalist, active in the conduct and management of a productive enterprise, to own all of his plant, and to start at the outset with funds sufficient to pay all laborers and buy all materials until sales are made. Such a capitalist buys for cash and sells for cash, pays laborers out of funds in his own possession, and has his assets always under complete and ready control. His product, whatever it be, whether an article nearer or farther removed from completion so far as the community’s real income is concerned, yields him an available income as soon as sold.

That income he is free to spend as he pleases. He may spend the whole of it for his own immediate pleasure; he may reinvest the whole of it, or, rather, may reinvest everything over and above what is necessary for his support and the support of those whom he cherishes as part of himself. If he reinvests, he devotes this gross money income to the purchase of more materials, the enlargement of plant, or the payment of more laborers. If he spends, he devotes it to the purchase of real income, of enjoyable wealth, for himself and those dependent on him. The mode in which he shall apportion his money income between these different objects is a matter at his discretion.

We should not usually think of such a person as unfettered, or as free to spend for immediate enjoyment as much or as little as he pleased of his money receipts. We think of him as committed to maintain his capital intact. Even if he has not borrowed, and so is under no obligations to provide out of his receipts for principal and interest of a debt, he is expected to keep his own principal unimpaired. The habit of maintaining accumulations intact is so strong in the social strata to which the managers of business belong, that we forget that it rests on the steady and recurrent exercise of a choice. The capitalist would ordinarily set aside out of current receipts enough to replace the funds which he has spent for wages and supplies, and to repair his plant or accumulate in due time enough to replace the plant when it had worn out. Only the excess over what is needed to maintain the principal intact is thought of as free income, available for expenditure on enjoyable things. In reality, however, it is all free. The fact that a choice is usually exercised in a particular way does not prove that no choice exists. If the man is not prosperous for a season, he may very likely fail to keep up his plant or to replace in full his working capital, trusting that better times will come. He then exercises his freedom in such a way as to trench on his capital and get a share of the community’s real net income, even though he has secured no net income in the sense in which that term is used with regard to an individual. On the other hand, if he has been prosperous, he may add to his capital, and spend for the necessaries and luxuries of life less than his private net Income would bring within the bounds of prudence. On the average, the latter is the typical case. As a class, the active men of affairs get as net income more than they spend for enjoyable wealth. They exercise their freedom in such manner as to add to capital, or, in the everyday phrase, make money: a fact which is of no small importance in the working of the machinery of distribution.

Let us now stretch still further this supposition of simple conditions. Let it be assumed that all the capitalists of the community are of the sort just described: that there are no idle investors, no bankers or other lenders, and that all buying and selling are for cash. Every active producer owns his own plant and materials, and every shopkeeper and every merchant his stock. All these persons collectively own the capital of the community: that is, the real capital of the community, the inchoate wealth which is to be advanced by successive stages to fruition. Further, let it be assumed that all laborers are hired by these capitalists. None work on their own account, or sell anything but their labor. None own capital, or have any source of present income, beyond pay for the labor of the day. They may have some accumulations in present enjoyable form, such as houses, furniture, and food in the closet; but these must have been derived from income of the past. Their income for present work comes exclusively as pay from the capitalists. The older English writers constantly assumed, by implication if not explicitly, that such was the situation of all laborers. The assumption may be used advantageously as a point of departure in reasoning about the social conditions of modern times, if only it be not forgotten that the complications of real life and their divergence from the simple assumed conditions must receive in due course a careful consideration.

In such a society, then, the total money income would flow in the first instance entirely into the hand of the capitalist managers. All things produced, whether real capital or real income for the community, would be their property. Under a completely developed division of labor, all things produced are sold; and the money yield of all the output would be the gross income of the capitalists. That income they can use as they please. They may spend it all for themselves or invest it all. They may spend only their net income, i.e., the excess over what they must use to keep intact their capital (and so the community’s capital); or may spend less than their net income, and so cause capital to be added to.

The laborers, on the other hand, would be dependent for their present income on the manner in which the capitalists chose to spend their gross income. If the capitalists were frugal, spent little for personal pleasure, and added much to their accumulations, then more money income would go to the purchase of plant and materials, and more to the hire of laborers. If they chose to spend much for present enjoyment, less money income would go to the laborers. There is, indeed, a case, of no small importance in actual life, in which it would be immaterial to the laborer, at least for the time being, whether the capitalists turned their income to enjoyment or to investment. This is where the enjoyment of the capitalists takes the form of abundance of personal service: where they take their pleasure not in food, clothes, and adornments, but in footmen and maids. Here the alternative is not whether more shall be spent on goods and less turned over to laborers as wages, but whether wages shall be paid for one sort of work or another. The tendency in modern times, however, is for luxurious expenditure to take the form of personal service less and less. In the main, an increase of expenditure for enjoyment means proximately that a smaller part of money income is turned over to laborers; while an increase of investment and a disposition to add to capital mean that more is turned over to them. At all events, what the laborers get under the conditions here assumed would be determined by the use which the capitalists made of the money income.*

It will be observed that money income alone has so far been spoken of. That money income, to serve its real end for laborers or capitalists, must be spent on commodities. But if we examine in what manner capitalists can spend the gross income which has just been described as freely disposable by them, important limitations to the conclusions just stated appear.

Real income, to repeat, is enjoyable commodities; and if the capitalists wish to enjoy, they must buy the finished goods which alone constitute the real income of the community.* The quantity of such real income existing at any time is limited; for the moment it consists of the finished goods now purchasable. For the season, it consists of such supplies of partly finished goods as can be got to the stage of completion within the season. It is limited by the quantity of materials, worked up in part or in whole, which may be on hand, and by the tools and machinery existing wherewith to carry on operations. The total real income available in any season is obviously less than the output of that season. In a community which has reached a high stage of industrial organization, which has spread the operations of production over a considerable stretch of time, and in which a large part of labor is steadily given to the earlier stages of production, the output IS very much larger than the real income. But the total money value of the output is the total money income of the capitalist, in the case now assumed. The real income which they can buy is therefore, in its normal money value, very much less than that total income which has been described as freely disposable by them. Even the whole of the real income available for the community is not, in any substantial sense, at the disposal of the capitalists. They can get enjoyment only from finished commodities of the kind and in the variety that their tastes and needs call for. A large part of the commodities now on hand would not serve their turn. The supply of bread and flour and grain at any moment is adjusted to the expected needs of the whole mass of consumers; and after our capitalists had had their fill, the rest of the breadstuffs would be virtually incapable of giving them any satisfaction. Other commodities would be too coarse for their tastes, or would pall long before the total available quantity was used. The effective choice which the capitalists would have as to the disposal of the gross money income which was freely theirs, would then be confined, for the time being at least, within limits not very elastic.

Limitations of the same sort appear as to the real wages and real income of the laborers. Like the capitalists, they can get for the money turned over to them only such consumable commodities as exist or will be ready within the season. We may suppose, for example, that the capitalists have been moved to abstain from personal expenditure, and have reinvested largely and heavily, the process involving a transfer of an increased part of their money income to the hired laborers; or we may suppose — to put a case that has played no small part in the history of the wages controversy — that a general trades union of all the laborers has put the capitalists in a position where, under pain of ceasing investment entirely, they must raise money wages. Whatever the ultimate outcome in this much-debated case, it may be averred without hesitation that the laborers’ combination might win a victory in the first step in their campaign, — the advance of money wages. That step is’ the only one of which laborers or capitalists usually think, and, it must be confessed, is the step with which alone economists have too often busied themselves. But the real gain (apart from the joy of victory) for the laborers must come in the purchase of more commodities in the way of food, drink, clothes, shelter; and of these no more can be bought than there are. How elastic the inflowing supply of such commodities is for any season, how great and rigid are the obstacles to an immediate or rapid change in the available real wages, we need not yet discuss. What is plain is the existence of some limits in the nature of the available supplies of finished and half-finished goods. The capitalists, in the case supposed, can turn the money income in any direction they please: keep it all for themselves, or turn more or less of it over to laborers; but the real income which can be secured and enjoyed is in some degree predetermined in quantity and quality.

All this means simply that the machinery of production at any given time is arranged for the supply of the habitual and anticipated wants of the community. Each individual capitalist produces the commodities which he has sold before, and which experience leads him to expect to sell again. The pig-iron maker has a reasonable faith that his iron will be bought by the maker of machinery, and he again that his machinery will be bought by the person who means to use it in making one product or another. That process of investment and accumulation by which existing capital is maintained and new capital is added, is thus prepared for and virtually accomplished before the individuals commit themselves to the decisive step of turning their money income to investment rather than to enjoyment. The producers of luxuries go their way in the same fashion. Some create or maintain machinery for silks and satins, others prepare the raw material, others finally buy the products from the manufacturer and arrange them in the shops of the cities for the expected purchases of the consumers, who will presumably do as they have done in times past, — spend part of their inflowing money receipts for enjoyment. Not least, the makers of the commodities for laborers continue to produce these on the accustomed scale, anticipating the transference of money income by capitalists to laborers in the course of that continuance of investment of which the purchase of machinery and materials is the other part. The output of the season, produced and owned under our supposition by the capitalists as a body, is sold again to these capitalists as a body. They own the whole output at the start, and get the whole money income. A part of the output they buy directly, either as plant and materials for further production or as commodities for enjoyment; a part is sold to them indirectly through their transference of money income to the hired laborers. But the assortment of goods, finished and unfinished, that is on hand at any time depends, not on the apportionment of their money income which is then made by the capitalists as spenders, but on the apportionment which these same capitalists as producers have been expecting and planning for during a considerable stretch of time in the past.

So much as to the nature and the causes of the limitations by which the capitalists would find themselves fettered during any one season in the really free disposal of their incomes. Over a longer stretch of time the case would be different. Here their choice would be effective not only as to the disposal of money income, but of real output and real income as well.

The steps by which this real control over the product and the income of the community would be exercised need no elaborate explanation. Assume that there is a sudden change in the manner in which the capitalists choose to use their money income; for example, that they become more frugal and more disposed to invest. Less of luxuries and comforts will be bought by them; the merchants who deal in such commodities will find trade dull; the series of producers who make them will in turn feel the depression. Eventually less will be made, and the constitution of the real income of the community will in time conform to the new apportionment of the money incomes of the capitalists. On the other hand, the money formerly spent on the luxuries and comforts will be turned in other directions. The makers of machines and materials will find a brisker demand for their products. More money income will be turned over to laborers, and the makers of the commodities consumed by them will similarly find trade good and profits “satisfactory.” A shift will eventually take place in the direction in which the productive apparatus of the community is turned. In the long run it is thus true that not only the money income of the community is freely at the disposal of the active capitalists, but that its real income and its real output exist in such forms and in such apportionment as their choice determines. Allowing for the time needed to enable the productive apparatus to accommodate itself to demand, we shall find so much real income for capitalists and laborers, and inchoate wealth in such quantity and variety, as the capitalists’ use of the total money income calls for.

Before going on to the next stage in the analysis of the machinery of distribution, one corollary from the preceding proposition may be noted. It is true that the supposed simple community of completely independent employing capitalists and completely dependent hired laborers is still under consideration here. As to the complex phenomena of the actual world, we shall find here after occasion for much qualification of the preliminary results. But one part of the conclusions holds good for any community in which the institution of private property exists: it is, that the maintenance and accumulation of capital depend on the disposition and the will of those who become recurrently the owners of the money income and so of the real output of the community. This was what the old economists had in mind when they said that it depended on the will of the owner whether a commodity should be capital or not capital. They sometimes spoke as if his will could become operative at once; as if by magic he could convert a pack of hounds into a cotton mill. But the truth which underlay their dissertations on this topic is an important and solid one. In every community in which private property exists there are inequalities in wealth; in almost all, great inequalities. The money income of every season flows first, in very large part, into a comparatively few hands, and is directed by them at their discretion into one channel of purchase or another. The inequality in possessions may be regrettable, and the stewardship which it involves of the community’s capital may be well or ill administered; but the facts are not to be gainsaid, and must be faced if we would get a true understanding of the industrial world. The importance of this force, as of others that are constant and familiar in their operation, is often forgotten. The recurrent exercise of the choice of the capitalist takes place habitually in much the same way: changes in the direction of greater or less expenditure, or greater or less (usually greater) accumulation, come slowly and gradually. The motive power which thus drives and controls the apparatus of capitalistic production works in the main so steadily that we forget that it consists of the collected volition of hosts of individuals, each and all of whom are free to do as they will with their own.

We may now proceed to make our conclusions fit more closely to the facts of real life, by introducing, step by step, the complications which appear in the actual organization of the machinery of production and distribution.

In the first place, no active capitalist is in that position of complete independence which has been assumed: of neither borrowing nor lending, of buying for cash and selling for cash. He buys on credit, and thus is under obligations to turn over part of his money income, as it flows in, to his creditors; while those to whom he has sold on credit are under similar obligations to him. As between the direct managers of industry, the obligations which thus follow each one do not change the case for the mass. Collectively, they are still free and uncontrolled as to the disposal of the general money income. But quite as important as their relations inter se, are their relations to the great body of bankers, brokers, moneylenders, middlemen of all sorts and degrees, whose business it is to make advances to the more immediate directors of business affairs. The banks of discount and deposit find their chief function in such advances, and are the great types of this factor in the industrial world. Side by side with them are to be found, in every considerable centre, other parts of the same credit organization. Brokers negotiate loans whenever they find funds offering for investment over those short periods for which the regularly recurring debts of the business manager are contracted. The great wholesale houses play a most important and effective part. They buy on credit, make advances on consignments, nurse this producer and drive that one to the wall; they themselves meanwhile borrow largely from the banks. Their action goes far in settling when and how and where money income shall flow into the hands of those who are in the more direct and obvious sense the directors of production and the employers of labor. In other words, the body of persons whose judgment and discretion determine how the gross money income shall be used, and what part of it shall be turned over to laborers, is much larger than the group of the immediate employers. In the discussion of the wages-fund doctrine, and indeed in most academic disquisitions on wages and business management, this has been often lost sight of. The immediate employers are thought of as the only persons who decide primarily how and where laborers shall be hired, and whose resources determine what direct advances of wages shall be made them. In fact, the immediate employer is controlled, in greater or less degree, by his relations with this large and complex body of lenders and of middlemen. He can sell rapidly to the merchants who are his first customers, if their judgment approves of his wares, and he can get advances from them if they have faith in his capacity and integrity. Similarly, he can borrow from the bankers and brokers according to his repute for success and character. If a long career of successful ventures and of punctual probity has given him not only large means of his own, but a high standing in the business world, his immediate resources are almost limitless; he can secure at a moment’s notice the command of millions. On the other hand, a rumor of disaster, a revelation of dishonesty, may practically wipe out his means.

Thus we must consider the resources of a large and varied body of persons, if we would examine the immediate source of the money wages of hired laborers. Such an examination at best is incomplete; the inquiry as to the source of real wages remains the important one in the background. But the questions as to the machinery of immediate money wages are important enough; and, to repeat, they are to be answered only by examining the doings of the whole array of employers and middlemen and lenders who collectively form the active managers of industry. In recent discussions as to the source of wages, it has been asked not infrequently whether the funds of the immediate employers, available for paying money wages, are predetermined or limited. If any question of this sort is to be raised, it should be, not whether the funds or means at the disposal of the individual employer, but whether those of the whole complex body, are limited. The answer will be considered in the next chapter: it may be said at once that the degree of elasticity and indeterminateness is much greater for the individual member than for the whole group. However this may be, it is clear that the control of the total output of society, and so of its gross money income, which was assumed at the outset to be entirely in the hands of the immediate producers and employers, is exercised in reality by a much larger and more varied body.

Next we have to consider another difference between the real world and assumed conditions-one of far-reaching importance for many questions of social organization, but less important for those here under review. The employing capitalists, — we may now mean by that phrase the complex body which directly or indirectly is active in business management, — were supposed to own all the capital. But in fact we find, separate from them in the main, a great number of investors, who own capital and derive an income from it, but take no direct part in its management.

The investors have made loans to the active businessmen. They have received an engagement for the payment of interest at stated terms, and for the eventual repayment of the principal. They may be conceived, for many social purposes, as the owners of a great part of the community’s capital. When a plant is erected with borrowed capital, the lender is in so far virtually its owner. While legally but a creditor, in the eye of the economist he may often be regarded as an owner of real capital. As it happens, however, the legal relation fits exactly the economic relation, for the purposes of the present inquiry into the working of the machinery of distribution. If it is asked, who, in the end, owns the capital of the community? the answer must be, the idle investor as well as the active business manager. But if it is asked, who controls the capital of the community and first becomes owner of its total income? the answer must be, the active manager, indebted though he may be to his creditor. The output became his as it goes to market and is sold, and the gross money income passes first into his hands. He must simply pay the stipulated interest to his creditor. In so far only is he subject to a direct and immediate limitation in his control of the inflowing money receipts.*

It may be suggested that the business man is subject to a further important limitation in that he must repay the principal when due. But while this is clearly the case so far as the individual is concerned, it is not the case for the whole body of active managers. Investors usually spend for enjoyment only their income, not their principal. The principal, as it falls in, is reinvested — that is, the funds are turned back into the hands of one or another active capitalist, to be again at his free disposal. Substantially, therefore, it remains true that the existence of a separate class of investors affects our supposed case only in one point — the money income which the capitalists get is not wholly at their disposal, but is subject to periodic drafts for interest payments to investors.

It may not be amiss to refer for a moment to the mode in which the operations of the investors are connected with that determination of capital through the choice of its owners, which was the subject of some of the preceding paragraphs. At any moment the investors have put their principal beyond control; it has been turned over to the active capitalists, who have spent it for plant and materials or have paid it out in wages.* Usually, funds borrowed for a considerable time from investors are spent for plant and other durable forms of capital, while loans for purchase of materials and for wages payments are obtained from the bankers and other middlemen who are the active co-operators in business management. The plant lasts a long space; the investors have put their means beyond control. This irrevocable commitment of the investor’s means finds its other side in the irrevocable commitment of part of the community’s gross income to the form of capital. As time goes on, the plant wears out and is renewed, the loan falls due, and the principal is reinvested. These two operations go on side by side; not in the sense that the renewal of actual capital and the reinvestment of investors’ funds coincide in individual cases, but in the sense that, for the community at large, they form two aspects of the one process by which capital is maintained. Here again the actual making of concrete capital, — of buildings, machines, apparatus, materials, — does not take place as the direct consequence of the investor’s decision to keep his principal intact. It precedes the decision, or takes place pari passu with it, in anticipation of that habitual reinvestment which goes on as a matter of course in modern communities. Like other habits, it rests on the repeated exercise of volition in the same direction; the effect, while almost invariable, being none the less caused by the exercise of a choice which, time enough being given, is unfettered.

What has been said of interest payments holds good of rent payments. Important and fundamental as is the difference between interest and rent, the machinery by which they reach the hands of their owners is the same. If the business man uses for his operations a site which enables him to achieve a given result with less outlay than his competitors, he will pay the price of the advantage to the fortunate owner of the site, in the same manner as he would pay interest on borrowed capital. If he happens to own the site, the inflowing receipts are so much the more completely under his control; precisely as, if he owns all his capital, he is not fettered in his expenditure of the gross receipts by the obligation to pay interest. In neither case is there a distinguishable part of the total income, appearing at the outset as separable interest or separable rent. Both represent, so far as they are distinct payments at all, obligations which the active business manager has incurred for a specified diversion of a part of his total money income. They are independent of what may in fact be received by him in consequence of his possession of the capital or the site; they are often different from that usual or “normal” gain accruing from their use, which economists call true interest or true rent. They are simply money payments which the business man has promised to make out of the general inflow of his income.

The reader will readily follow the same line of reasoning in other directions — to monopoly receipts, royalty payments, and other sources from which the idle well-to-do and the prosperous business men get accretions of income. So far as the business man is owner, he gets in these ways additions to his unfettered means; so far as he has borrowed, he has undertaken stipulated payments to others. The business corporation of modern times presents all possible varieties of the relation between active manager and idle investor. Nominally, the stockholders are a group of associated active capitalists. Practically, they range from shrewd managers to the most helpless of inactive investors. Throughout, in all the complexity of the meanings and final causes of these various payments, we find the machinery for effecting them to be the same. In the last analysis, the payments may be regarded as interest, or interest plus earnings of shrewdness, or rent, or monopoly extortion; but they all come from gross receipts flowing first into the hands of the active capitalists, who may then be under bonds to make the payments to other persons.

So much as to the mode in which the simple conditions assumed at the beginning of this inquiry are affected by the varied and scattered ownership of capital and other instruments of production. A different modification, and a more important and instructive one, comes in another direction. At the outset, as all capital was supposed to be in the hands of active business men, so all laborers were supposed to be hired by them. It is time now to consider how far laborers in fact are in this condition, and how far the conclusions derived from the analysis of the simple case need to be modified in regard to the laboring classes.

Clearly, in almost every country great numbers of persons who are usually spoken of as laborers are not hired by capitalists. It happened that in England, at the time when the classic economists were developing their system, a larger proportion of manual workers were in this situation than has been the case in any other time or place; hence, the easy assumption of such conditions by these writers, and hence (in good part) their easy acceptance of the wages-fund doctrine. But even in England there were and are unmistakable exceptions. Cobblers, carpenters, cabmen ply their trades independently, either owning or hiring their tools. In other countries the exceptions are more important and numerous. The tillers of the soil, who in England are employed by capitalist farmers, elsewhere are very commonly owners or tenants. In countries like France or the United States, millions of men whose work is mainly hard, monotonous manual labor, are owners of plots of land, and as independent of hire and of stipulated wages as any great employer. On the continent of Europe generally, production on a large scale has not permeated manufacturing industry as much as in English speaking communities, and the independent artisan holds his own in larger degree against the capitalist producer. The blacksmith, the carpenter, the shoemaker, the weaver, have nowhere been entirely crowded out by the factory, with its régime of hired workmen. In many countries such laborers still form a large part of the body of persons whose income is essentially reward for physical exertion.

The question may be raised whether such independent workers can be said to get simply wages. They usually have some capital; indeed, they must have some small possessions of their own in order to maintain their position of independence. They may perhaps be described as capitalists, and as receiving something different from wages; this term being confined to the hired workmen who get stipulated sums from employers. Any one who is familiar with the traditional plan of economic textbooks, inherited as it is from the classic days, will see with how uncertain a voice most writers have spoken on this topic. Distribution is usually set off under the rubrics of wages, interest, rent; profits being sometimes added of late years as a fourth independent constituent. Wages are described to mean any reward for immediate exertion, regardless of the mode in which the reward comes. In the detailed discussions of wages, however, the case of the hired laborer and of what the employer will pay him occupies the chief place. In everyday speech, too, this is the person whom we think of as receiving wages; and the large array of persons who get a return for labor in a different way are left without any distinctive designation.

The same question of classification and nomenclature appears in the suggestion that the independent workman is not a laborer but a business man, — an entrepreneur. So considered, he would be said to receive, not wages, but that mixed and vexed income which Mill called wages of superintendence, and which in our own day is entitled sometimes business profits, sometimes profits simply, sometimes managers’ earnings. And certainly a good degree of justification for this course is to be found. The gap between the poorest independent craftsman, and the great employer whom we think of as primarily a capitalist and as earning something different from wages, is filled by a series of different workers, among whom it is hard to find any sharp line of division. Where do business profits cease and mere wages begin?

We need not stop for any prolonged consideration of this question, which involves not only matters of terminology, but very substantial problems. Probably the best plan for the exposition of distribution at large is to describe all reward for exertion as wages; thereafter pointing out, however, how various are the forms of exertion, and how different the causes which affect the reward of different forms; and in the end going so far as to give a special name, such as business profits or managers’ earnings, to the wages for some peculiar kinds of work. Certainly for most purposes of classification we should not be consistent if we drew the line between wages and not wages according to the bare independence of the workman. The cobbler who works alone in his petty shop gets, in the main, a return for labor as much as the workman in the shoe factory; the peddler and the shopkeeper’s assistant, the small farmer and his hired workman, all earn an income by labor. No doubt the shrewdness and judgment of the farmer or peddler affect his income, as the skill and capacity of the hired workman affect his. No doubt, too, the class of which the farmer and peddler are types own some of the instruments of production, capital or land, and get their earnings in the course of using such instruments. But the earnings come, in a multitude of cases, without that conscious consideration of the income-yielding possibilities of capital and land which accompanies the work of the large capitalist and large landowner. Theoretically the earnings may be parcelled off as partly interest, partly rent, partly wages. Practically they come in as the return for so much work, shrinking or swelling with the fortunate or unfortunate use of such labor and capital as the individual may have at his disposal.

But in one important respect the receipts of the independent laborer, even though they be regarded for most purposes as wages, are to be put in the same class as those of the well-to-do capitalists who were supposed at the outset of the present inquiry to be the only owners of capital and the employers of all laborers. The independent workman gets a primary and not a derivative share of the total income of society. With regard to the machinery by which distribution is accomplished, he belongs in a different class from the hired laborer, and belongs in the same class as the active capitalist. He becomes legal and absolute owner of a part of the output of society, and so comes into direct control of part of the gross money income. He may be fettered by debt, as his fellow on a large scale may be; but he is dependent on no fixed bargain for the money income which will serve him to procure a share in society’s real income of consumable goods. Herein his situation differs essentially from that of the hired laborer, and herein the phenomena of real life differ essentially from those assumed at the beginning of this inquiry. The hired laborer gets his money income as the result of a bargain by which he sells his working power for a space. The independent workman gets his money income directly from the sale of what he makes. The situation is not always advantageous to the latter. The peasant proprietor and the petty craftsman do not necessarily prosper more than the hired mechanic. But the hired workman is directly dependent for his money income on an employing capitalist; the independent workman is not.

For an understanding of the machinery by which distribution is accomplished in modern times, the classification of sources of income should thus be different from that to be adopted for an explanation of the fundamental causes. For the latter purpose the different sources of income may still be appropriately divided into wages, interest, rent, with possibly business profits as a fourth term. But so far as the concrete mode in which money income (and this is the first step to real income) reaches different hands, we must put on one side all the independent producers, whether they conduct operations on a large scale or on a small; on the other side, all receivers of stipulated interest or stipulated rent, and all hired laborers. The former get a primary, the latter a derivative share of the total income of society.

Both the primary and the derivative shares, as they appear in fact, may or may not be what the economist would analyze as simple incomes. The independent producers may be great capitalists, and their net receipts, separated into the constituent parts which are important for the permanent explanation of things, may be made up of interest, and rent, and wages ordinary and extraordinary; or they may be small fry, in whose earnings wages for very common sorts of labor play so large a part that the other constituents may be dropped from consideration. The other dependent persons may similarly get mixed or simple incomes. The interest paid by a corporation may stand in part for natural advantages which have been capitalized and converted into a bonded debt; that which is interest in form being thus rent in substance. On the other hand, the payment which, in ordinary parlance, is rent for building or for a plot of land, is usually a mixture of the rent and interest of the economist. Concrete wages, too, may be a complex return, including in the case of a highly trained workman not only wages for labor but interest for the capital sunk in his education. Thus distribution, as analyzed in its last elements, is an abstraction: its demarcations rarely correspond to the actual receipts which are seen in the industrial world. It may explain the situation, and in that larger sense describe it; but it does not describe with accuracy the direct phenomena. On the other hand, the analysis of distribution which has formed the subject of this chapter presents the literal facts of the case. The incomes of independent producers, large and small, are the primary sources of distribution; interest payments, rent payments, wages of hired laborers, are derivative, and their recipients may be described as dependent.

The point has now been reached where we can observe the differences, in their relation to capital, between the wages of the hired laborer and those of the independent workman. The hired laborer is undoubtedly dependent on capital, and gets his wages from capital, in a sense in which the independent workman does not. His money income, the first and the essential means toward getting a real income, is turned over to him by capitalists. It comes from funds in the possession of a body of which his immediate employer is a member, and which includes all the active co-operators in the management and control of industry. Except in so far as he has made a contract covering some length of time, his wages depend recurrently on their disposition to use for productive operations their inflowing money receipts. In this sense his earnings depend on a wages fund — on the sums which the employers judge it expedient to turn to the hire of labor; and in this sense the independent workmen evidently do not depend on capitalists or on a wages fund.

In another sense, all workmen, whether hired or independent, get their wages from capital and are dependent on a wages fund. This is in the sense that all real income is derived from consumable commodities; that these are the product of past labor; that the supply of them available for fresh use at any time is small; and that the supply for any considerable stretch of time exists mainly in the form of inchoate wealth. The real income of all classes in the community comes from past product, and in the main from real capital. This is a very different wages-fund doctrine from the other. It will hold good under any conditions of society, so long as the arts are carried on in such manner that a long stretch of time elapses between the beginning and the end of the successive steps in production.

These two things have been curiously interwoven and confounded in the long controversy over the source and measure of wages. The wages-fund doctrine, in the form in which it so long held sway, was supposed to apply primarily to laborers hired by capitalist employers. It was supposed, rather than explicitly stated, so to apply, for the limitation was more often tacitly assumed than pointed out in terms. Adam Smith’s brief but pregnant paragraphs had directly connected the payment of wages from capital with their payment from the funds of employers. Scarce one workman out of ten in Europe, says he, is an independent artisan; hence the wages of the great mass depend on what the masters can and will pay them. Later English writers had the same organization of industry in mind, though they did not often say so. While their theories were stated in general terms, they were framed with an eye to the conditions and the needs of the England of that day, where, as it happened, the great mass of laborers were of the hired and dependent class. At a later stage in the discussion it was more often pointed out in express terms that hired labor alone was meant to be within the scope of the wages-fund doctrine. When the whole subject then came to be overhauled, it was seen that this assumption had been more or less overtly made, and the avowed scope of the doctrine was accordingly limited. Its advocates set forth that it pretended to do no more than explain how the wages of hired laborers were determined. Its opponents accepted the limitation, and retorted either by pointing out how large was the number of cases so left unconsidered and unexplained, or by questioning whether it could be maintained even within the chosen limits.*

Yet, in fact, for the solid truth which underlay the doc­ trine as to real capital and real wages it was not necessary to exclude from its pale all other than hired laborers; while, on the other hand, so far as these hired laborers were concerned, the support which it got from their relations with their immediate employers was a treacherous one. None other than these direct employers were usually referred to as the holders of the funds on which laborers were dependent. When it began to be asked whether the money funds which they could pay laborers were rigid or elastic, the only possible answer was that nothing in the nature of a predetermined fund existed, and that the sums which they had at command, whatever causes might affect them, were not in the nature of an accumulation that was fixed once for all when the bargain between them and their workmen was made. With this negative answer the whole traditional mode of dealing with wages and capital was given up. It was forgotten that in an important sense hired laborers are primarily dependent for their wages on the funds which the whole body of active capitalists can and will turn over to them; and that in a still more important sense all laborers, hired or independent, get their real remuneration from that product of past labor to which the earlier economists had given the name of capital.

One further topic may be touched before this lengthened inquiry is brought to a close. So far as the machinery of distribution is concerned, the receivers of rent and interest payments and the hired laborers have been described as alike getting derivative incomes, and as in that sense alike dependent. It may be asked whether there is any greater degree of dependence for the laborers than for the others.

In one respect the laborers are certainly more dependent. The engagements with them are usually for a shorter period of time. The active capitalist often binds himself for years with those to whom he pays rent or interest; for weeks only, as a rule, with those to whom he pays wages. This is not always the case. The growing strength of organization among hired laborers has led in modern times to more permanent engagements, in which both sides bind themselves for months or a year. Usually, however, the contract with the hired laborer covers a brief period. He is liable to be called on at short notice to show his strength in bargaining with the employer.

The longer term over which the rentier (to use that convenient Continental term) makes his bargain is not always to his advantage. He commits his principal irrevocably for a series of years, and takes his chances that his debtor, the active capitalist, will repay it when the loan falls due, being meanwhile powerless so long as the interest instalments are met. That investor whose stipulated income would be called by the economist rent is indeed usually in a more assured position. The natural site or resource which enables him to get the business man’s promise of stated payments is likely to endure in another’s hands as well as it would in his own; and if his rent does not appear punctually, he usually finds its source unimpaired when he retakes possession. But so far as the investor of capital proper, the recipient of true interest, is concerned, the advantage which he may have over the laborer from the more permanent nature of his contract with the business manager, is conditional on the care and judgment with which he selects his debtor. Economic history, ancient and modern, presents a plenty of cases in which the greater security of the investor’s position over short periods has proved his ruin in the long run.

Much has been said of late years in regard to another phase of the hired laborer’s dependent position: the importance of his strength in bargaining. Recurrently, — as a rule at short intervals, — the contract on which his income depends must be renewed. If he stands alone; if he has no savings from past income which would enable him to wait and see what the market offers; if he is ignorant and generally helpless, — he bargains at great disadvantage. If he is banded with his fellows, if he possesses the wherewithal to make a trial of strength, and if he has shrewd and well-informed leaders, he bargains to the best advantage. The strength which the trades union gives the hired laborer in dealing with his employers was not doubted even in the days of greatest faith in the natural laws which were supposed to regulate economic phenomena in general, and wages in particular. No one would question it in these less conservative times. The bargaining of the outside investor with his active debtor is not affected at bottom by factors so very different from those just mentioned. Usually he can wait a bit for his income: therein his ordinary position is better than that of the hired laborer. He is often, but by no means always, reasonably shrewd and intelligent, and knows what the general market affords. He gets advice, which may or may not be good, from the large class of bankers and brokers who make a business of placing investments As to his legal position and the mode in which the machinery of justice enables him to enforce his claims, he may have been in former days better cared for than the hired laborer who is also a creditor of the active capitalist; but the mechanics’ liens of modern legislation give the workmen much the best of it here, apart from the fact that the more rapid recurrence of his stipulated payments diminishes the sum which at any one time is at stake.

This brief notice of some aspects and effects of the hired laborer’s dependent position will serve to explain the sense in which the term dependence is to be understood. We may keep far from that pessimistic view which finds its expression in the turgid description of the laborer as the slave of the employer, without going to the opposite extreme of concluding that the laborer is no worse off than the investor, because both alike are dependent for income on what the active business manager has promised or will promise to pay them. Neither the helpless widow and orphan, nor the down-trodden laborer, — two familiar figures confronting each other in the literature of social controversy, — are really typical of the practical outcome of this dependence. As to the hired laborer, his position does indeed show that the ownership of wealth in modern societies is very unequally divided, and in so far is not consistent with that ideal organization which, under ideal conditions, would doubtless bring the maximum of human happiness. But it is consistent with a steady improvement in his condition, in his place and power in the community, and in his sources of happiness; and therefore we need not despair if, men, manners, and morals being what they now are, it is perhaps the only position he is likely to have for a long time in the future.

• *a*b*c*d*eWhat is aid in the text applies, of course, to the immediate effects of a change in the direction of the capitalist’s expenditures. After the first stage, the change from investment to enjoyment means simply that laborers are employed in one way rather than another. The later effect is on real income: laborers make commodities for the enjoyment of the potential capitalists, rather than for the enjoyment of other laborers.