Wages and Capital
Chapter IX. Ricardo
Next in order, for the development of the wages fund doctrine, as for economic theory at large, comes Ricardo. In regard to the direct relation of capital to wages, he reflected faithfully the views of his own generation; while the mode in which he stated that relation, and connected it with other parts of economic theory, served to impress these views strongly on the generation that followed.
Ricardo was a brief writer, and sometimes an awkward one. Moreover, he was concerned, especially in his writings on value and distribution, with permanent causes and permanent results. He was convinced of the fundamental validity of certain premises, such as the effective working of competition, the equality of profits, the adjustment of money wages to the price of food, the law of diminishing returns from land; and the bent of his mind was to follow out these premises to their conclusions by quasi-mathematical reasoning. Ricardo was perfectly conscious — when he stopped to think about it — that his conclusions could be true only in the rough, in the long run, “hypothetically”: but he was so intent on working them out that he usually spoke and reasoned as if they were absolutely and unqualifiedly true. In any case, it was the conclusions reached in this manner as to eventual results, that he habitually looked to; saying little or nothing of the phenomena which, rightly or wrongly, he regarded as temporary and comparatively unimportant.
Another cause served to add to Ricardo’s habitual brevity of statement, so far as the immediate relations of capital to wages were concerned. Neither Ricardo nor his contemporaries were much concerned with the questions of distribution as they appeal to us. Wages, profits, rent, did not interest them from the social point of view, or because great inequalities in the means of enjoyment might be explained, and either justified or not justified, by analyzing them. They were interested mainly in the ways and means of increasing the production of wealth. Ricardo himself, as he went further in economic study, gave more and more attention to questions of distribution, which gradually assumed greater theoretical and practical importance in his mind.* But in the main, they did not strongly appeal to him; they were attractive largely because they presented complex problems for logical solution. It was natural, therefore, that he should concern himself little with the causes which might directly determine the welfare of the laborers.
Hence we find in Ricardo’s writings no such detailed discussion of the relation of capital to wages, as we find of value, rent, changes in wages with the price of food, the causes and effects of international trade. The questions involved in the wages fund doctrine, bearing as they do on the phenomena of the moment, are precisely such as Ricardo was in the habit of passing by. We must make out his views partly from brief statements and incidental remarks, still more from suppositions and premises which, though tacitly assumed rather than expressly stated, are yet of the essence of his reasoning. While his opinions were thus briefly stated, they were none the less clear and explicit. Precision and accuracy of thought are in everything that he wrote; and his chief contribution to the wages fund doctrine was in the precision with which he stated it, and in the example of unqualified statement which he set for his successors.
The first thing to be noticed in Ricardo’s treatment of our subject is the simple assumption that wages as a matter of course are paid from capital. Why this should be, he never thought it necessary to explain. Nothing more clearly shows the hold which Adam Smith had on the economists who followed him, than their unquestioning acceptance of this cardinal proposition. A writer having the wider historical interests of Sismondi might indeed stop to explain why wages must come from capital; but most of Adam Smith’s successors simply accepted his doctrine.* Ricardo treated it as he did many other conclusions of Adam Smith’s: accepted it as a thing settled, and needing no further discussion. All his reasoning shows that he perceived clearly the fundamental fact on which it rested, — the fact that the operations of production are spread over a considerable period of time. Much of his reasoning, indeed, rests squarely on this fact. But its importance as the foundation of the doctrine of the payment of wages from capital, he never mentioned, and probably did not fairly realize.
Next it may be noticed how the problem is simplified at Ricardo’s hands. The laborers whom Adam Smith had described as paid out of “revenue,” drop entirely out of his ken. Only laborers who are hired by capitalists aiming to make a profit are considered. This simplification of the problem may be due in part to changing conditions in society, — the more complete disappearance of the feudal practice of large arrays of retainers, and the increase in more modern forms of luxury. Chiefly it is due to Ricardo’s mental habits: his tendency to cull out the central problem, and consider that only, and in its fundamental aspects only. The laborer producing commodities under the guidance of a capitalist middleman is the typical figure; the one, too, whose case gives opportunity for the intricate figuring and reasoning in which Ricardo was in his element. Hence not only retainers, but independent workmen producing commodities for direct sale, disappear. Adam Smith had noted that laborers are not necessarily hired by masters, but may sometimes work independently; Sismondi too had remarked that such a situation would present peculiarities. Ricardo never mentions the case. He considers only the laborers hired by capitalists.
The industrial conditions under which he wrote undoubtedly contributed very greatly to this limitation of Ricardo’s treatment. In England, during his time and since his time, the bulk of the laboring population has been divorced from the capital and the land. Perhaps a writer of academic training and of larger historical attainments might have been led to consider that this was not a necessary or universal state of things; though the procedure of Ricardo’s successors hardly encourages the belief that a wide academic culture would have prevented the narrow point of view. But certainly in a country where many laborers had some land and some capital, it would not have been so easy to treat the agricultural laborer, who was the type of all labor in so many of Ricardo’s illustrations, as necessarily hired by a capitalist employer. The unfortunate position of Hodge caused English economists with hardly an exception to do as Ricardo did: accept as a matter of course the dependence of all laborers on capital owned by others.
The problem, thus simplified and reduced to its barest elements, was naturally answered in more precise and unqualified terms. Not only, as Adam Smith put it, are wages paid out of capital, and determined by a bargain in which the demand for labor comes from employers’ capital: but the amount of that capital, compared with the number of the laborers, fixes wages definitely. It is one thing to say that wages are paid out of capital; another thing, to say that the amount of capital determines wages once for all. Ricardo’s habit of close calculation and unflinching reasoning might be expected to bring forth a more sharply defined statement than Adam Smith’s. In fact, he made wages dependent directly on the amount of capital, and put forth a wages fund doctrine as unqualifiedly as any of the later writers with whom that doctrine is usually associated.
We may proceed now to consider more in detail Ricardo’s conception of capital, and of the manner in which wages depend on capital. “Capital,” he says in the chapter on Wages in the Principles of Political Economy, “is that part of the wealth of a country which is employed in production, and consists of food, clothing, tools, raw material, machinery, etc., necessary to give effect to labor.” The last clause was the important one in Ricardo’s mind. Capital was needed to give effect to labor: and the essential form in which it gave effect to labor was by supporting it. Capital was ultimately resolvable into food, or into advances to labor.
This proposition became, consciously and unconsciously, a corner stone of the Ricardian structure; it underlies all the reasoning of Ricardo and of his followers on distribution. It can be applied, however, in very different ways. It can be easily translated into the statement that wages at any time depend simply on the proportion of the total capital of the community to the total number of laborers of the community. This simple proposition we shall find commonly laid down by the later writers of the classic school; having its roots partly in Adam Smith’s first discussion of the subject, but quite as much in Ricardo’s identification of capital with advances to laborers. Ricardo himself, however, used it chiefly in other ways and for other purposes.
The mode in which he drew conclusions directly from the analysis of all capital into advances to labor, appears most clearly in the third, fourth, and fifth sections of the opening chapter of the Principles. The chapter deals with value; and in the sections mentioned he considers how far the employment of capital affects his fundamental doctrine that value depends solely on the quantity of labor necessary to obtain a commodity. Under the simplest conditions, or, as Adam Smith and Ricardo put it, “in that early and rude state of society, which precedes both the accumulation of stock and the appropriation of land” it is clear that, if “competition operates without restraint,”* commodities will exchange in proportion to the labor necessary for producing them. The accumulation and employment of capital do not change the situation; because they simply bring a different mode of applying labor to production.
If we look to a state of society in which greater improvements have been made, and in which arts and commerce flourish, we shall still find that commodities vary in value conformably with this principle: in estimating the exchangeable value of stockings, for example, we shall find that their value comparatively with other things, depends on the total quantity of labour necessary to manufacture them and to bring them to market. First, there is the labour necessary to cultivate the land on which the raw cotton is grown; secondly, the labour of conveying the cotton to the country where it is to be manufactured, which includes a portion of the labour bestowed in building the ship in which it is conveyed, and which is charged in the freight of the goods; thirdly, the labour of the spinner and weaver; fourthly, a portion of the labour of the engineer, smith, and carpenter, who erected the buildings, by the help of which they were made; fifthly, the labour of the retail dealer, and of many others, whom it is unnecessary further to particularize.*
The modern reader would expect to find this description of the successive division of labor, in a discussion of the sequence of production or of the functions of capital. But Ricardo mentions it and uses it for a different purpose. He proceeds to point out how his principle that value depends on quantity of labor bestowed, is modified according to the mode in which capital is advanced to laborers; applying the reasoning to a consideration of value in a community where all laborers are employed by capitalists. We are not concerned with the details of the proof that value, in such a community, will not depend on quantity of labor alone, and that a general rise or fall in wages will affect the value of commodities made with the aid of much fixed capital, compared with commodities made by the more direct application of tabor, — a proposition which both Ricardo and his followers set forth at wearisome length. The point essential for the present subject is that the reasoning rests simply on the assumption that capital means nothing more than advances to labor. In general, if more labor of one sort or another is needed to make a given commodity, more capital needs to be advanced in the same proportion; the profit to capital is in proportion to the advances to labor, or to the quantity of labor; hence the fact of production under the lead of capitalists, and the appearance of profit, do not per se modify the principle that value depends on labor bestowed. “Fixed capital,” in fact, is only “accumulated labour.”*
We have only another phase of the same line of thought when, in the familiar and much-abused proposition, profits are said to depend on wages. Profits are high when wages are low, and are low when wages are high, simply because the investment of capital is ultimately resolvable into advances to laborers. All the advances of the capitalists as a body consist at bottom of payments to laborers; what capitalists get back in return for their advances, is what the laborers produce; profits at large depend on the relation between what is turned over to laborers and what is produced by them. Perhaps Ricardo’s meaning is best expressed (Ricardo himself did not so put it, but Senior and other writers of later date did so for him) by saying that profits depend on the proportion between wages and product; profits being high or low, according as the proportion of general wages to general output was small or large. However stated, there is a solid and unquestionable basis to the proposition: it brings into bold relief the essential fact in capitalist operations and the essential cause of profits and of interest. In so far economic science owes a permanent debt to Ricardo, however his own deductions may need correction, and however much his theorem may have been twisted by later interpreters. Ricardo deduced conclusions from it on the assumption that wages fluctuated closely with the price of food, and that the price of food rose regularly, under the law of diminishing returns, with every addition to the supply; assumptions to which the historical facts correspond so little that many of his conclusions have, even in the long run, but a very limited application. On the other hand, the proposition that all capital stands for advances to laborers, when stated in the questionable phrase that capital is “accumulated labor,” has been twisted by the optimists into a defence of profit, and so has been, not unfairly, the occasion for plentiful ridicule by the socialists. But the essential truth in it remains incontestable. Without it the phenomena of capital and interest can not be understood.
This, however, is not the wages fund doctrine, nor is it of service in answering the question which that doctrine tried to answer: namely, what are the proximate causes determining wages at any one time. Its bearing is on profits, not on wages. The total advances to labor, represented by the total capital of any one time, have been spread over a long period. Some advances were made years ago, and are represented by tools and machinery still in use. Some were made within the year, and are represented chiefly by wheat on the fields. When all the tools are gone, and all the wheat has become bread, it will appear how much the laborers have produced during the whole prolonged period, in comparison with the total which has been turned over to them. But the demand for labor, in any given season, comes only from the fresh advances then made. For the question of “market” wages, it is necessary to cull out from total capital that part which is effective at the moment in rewarding laborers.
To this special part of the subject, Ricardo never stopped to give much attention. His phraseology is loose and uncertain. Frequently, he used language which would imply that market wages depended simply on the proportion of laborers to capital at large, so giving color to the opinion, not seldom maintained since his time, that the wages fund doctrine is but another version of the doctrine that wages and profits vary inversely. Thus, — to cite but one passage from many of the same tenor, — he says, in so many words, that “profits might increase, because, the population increasing at a more rapid rate than capital, wages might fall.” Yet the remainder of the same sentence shows that he conceived of the demand for labor at the moment as identical not with total capital, but with a part of capital: ‘’instead of the value of 100 quarters of wheat being necessary for the circulating capital, 90 only [out of a total capital of 190] might be required.”* Here we have the phrase “circulating capital,” used to designate that part of capital which serves directly to yield wages. Ricardo rightly declared the distinction between fixed and circulating capital to be “not essential, and in which the line of demarcation can not be accurately drawn.”† Nevertheless he accepted the convenient use of circulating capital as meaning wages-capital. He so used it in the passage just cited; and in another, on the very page which in a note criticises the distinction between circulating capital and other capital, the text says that in in. some trades “very little capital may be employed as circulating capital, that is to say, in the employment of labour.” Ricardo was not trained to great nicety in phraseology. Sometimes he used circulating capital to stand for the part of capital which constitutes demand for labor; quite as often, as has just been noted, he used capital alone. He speaks roughly of ‘’the impulse which an increased capital gives to a new demand for labour”; “in proportion to the increase of capital will be the increase in the demand for labour”;‡ “experience teaches that capital and population alternately take the lead, and wages in consequence are liberal and scanty.”* The demand for labor is frequently mentioned rather as proportioned to the total amount of capital than as equal to that amount; and such a mode of stating the relation, it may be observed, is more common in the Principles than in the earlier writings. We have thus a considerable variety of phrases, strictly consistent only in that the immediate source of wages was regarded as some part of capital.
That Ricardo was thus careless in his language, arose in part perhaps from lack of literary training,† but more largely from the fact that his attention was fastened mainly on permanent profits and permanent wages. As to permanent profits it was immaterial whether capital at any one time consisted in large or in small part of “circulating” capital or wages fund. The essential thing was that the whole of capital represented advances to laborers. Whether the advances were made earlier or later, and whether spread over a longer or shorter period, profits depended in the end solely on what the laborers produced over and above what had been turned over to them. Permanent or “natural” wages, on the other hand, depended simply on the price of food. The immediate advance of “capital” or “circulating capital” to laborers determined only market wages, which adjusted themselves to “natural” wages by the process, believed by Ricardo to be comparatively rapid, of a variation in the number of laborers. It thus made no difference, either as to permanent profits or permanent wages, how much of total capital happened to take in any one season the form of fresh advances to laborers.
Up to this point, the conclusions of the present chapter are not of any precise sort; showing indeed that Ricardo emphasized, in one way and another, the proposition that wages are paid from capital, but not showing that he held to the doctrine of an inelastic and predetermined wages fund. It was intimated at the outset of the chapter, however, that he had laid down, even though in brief terms, a doctrine of a more specific and rigid sort. It remains to be seen what further and more detailed views on this part of the subject he can be shown to have entertained.
Ricardo follows Adam Smith in speaking of “the funds destined for the maintenance of labour”; using this phrase quite as often as “capital” or “circulating capital,” when he is speaking of the proximate causes determining market wages. What he conceives these funds to be, he says most explicitly, not in his chapter on Wages, where we might expect to find the statement, but in the later chapter which treats of taxes on raw produce and food. Incidentally to the discussion of the incidence of such taxes, we have a deliberate and detailed explanation of the nature and the limitation of the funds for the maintenance of labor.*
A tax on food will not permanently affect real wages. One of the simplest applications of Ricardo’s doctrine on “natural” wages was that such a tax would raise the price of food; that “wages would inevitably and necessarily rise”; and profits would have to shoulder the tax. The dependence of profits on the price of food, via wages, is the cornerstone of Ricardo’s theory of distribution, — and, at the same time, it may be admitted, its weakest part. But it might be objected “that there would be a considerable interval between the rise in the price of corn and the rise of wages, during which much distress would be experienced by the labourer.” The objection leads Ricardo to consider how close is the connection between the price of food and money wages, and so to consider the causes which at any one time determine real wages.
“The wages of labour are really regulated by the proportion between the supply and demand of necessaries, and the supply and demand of labour; and money is merely the medium, or measure, in which wages are expressed.” This is the sound view, which Adam Smith had stated so emphatically; but Ricardo carries it to consequences which Adam Smith never dreamed of. Anything which decreases the supply of necessaries (the real “funds for maintaining labourers”) lowers wages, so long as population is the same; anything which leaves that supply fixed, can not affect them. A bad harvest reduces the quantity of necessaries; and however money wages may be made to rise “through misapplication of the poor laws,” real wages must fall. Any attempt to regulate wages in such time by the money price of food “affords no real relief to the labourer, because its effect is to raise still higher the price of food, and at last he must be obliged to limit his consumption in proportion to the limited supply.”
The situation is different if a tax is imposed on food. Then the quantity remains unchanged; real wages are not affected even for the moment.
“A tax on com does not necessarily diminish the quantity of com, it only raises its money price; it does not necessarily diminish the demand compared with the supply of labour; why then should it diminish the portion paid to the labourer? Suppose it true that it did diminish the quantity given to the labourer, in other words, that it did not raise his money wages in the same proportion as the tax raised the price of the corn which he consumed; would not the supply of com exceed the demand? — would it not fall in price? and would not the labourer thus obtain his usual portion?”*
The result is the same in any other case in which the price of food is raised, but the quantity of it constituting the demand for labor remains unchanged. Thus, there may be a general rise of prices, and so a rise in the price of food,
“in consequence of an influx of the precious metals from the mines or from the abuse of the privileges of banking. It leaves undisturbed too the number of labourers, as well as the demand for them; for there will be neither an increase nor a diminution of capital. The quantity of necessaries to be allotted to the labourer, depends on the comparative demand and supply of necessaries, with the comparative demand and supply of labour: money being only the medium in which the quantity is expressed; and as neither of these is altered, the real reward of the labourer is not altered.”*
It would be difficult to find in the writings of the classic economists a more direct statement of a predetermined fund, all of which must go to the laborers. The demand for labor is here treated as that part of capital which exists in the form of necessaries or food. No doubt Ricardo is discussing primarily the effects of a tax on food, not of capital and market wages. But he habitually spoke of wages as consisting of food which the laborers can not dispense with, and, in the very passages cited, identifies the food with their real reward. At any moment, there is just so much food on hand, and all of that the laborers will certainly get. No tax on food, no artificial rise in prices, can prevent them from getting, during the season, what is on hand for the season.
Another question would naturally be asked by one who followed Ricardo so far. If the laborers must get at least so much, does it follow that they can not get more? Ricardo never was led to give a clear intimation of his opinions on this further point. In the course of the same discussion of taxes on food, he remarks that “an accumulation of capital naturally produces an increased competition among the employers of labour, and a consequent rise in its price. The increased wages are not always immediately expended on food, but are first made to contribute to the other enjoyments of the labourer.”* This might perhaps be interpreted to imply an elastic supply of commodities which, though not food, yet constituted part of “the real funds for maintaining labourers.” But it is more in accord with Ricardo’s general reasoning to interpret him as speaking here of the results of several seasons of higher wages. At first, higher money wages could not bring higher real wages; but after a season or two, the increased money demand for” other enjoyments” by laborers and the consequent higher prices of these “other enjoyments” would lead to a greater production of them. Eventually, the laborers would increase in numbers, and demand more food. The other enjoyments would disappear, food would be more costly from the resort to poorer land, money wages would permanently rise, real wages (in the sense important for the laborers) would return to the point from which they started. Such are the details by which, if this interpretation of his views is sound, Ricardo would have described the changes in wages resulting from a greater demand for labor.*
It would be a mistake to infer too much from these passages. They intimate, undoubtedly, a rigid sort of wages fund, — an inflexible predetermination of the wages of the moment. But they are incidental to another topic, and Ricardo probably was not reflecting at all on the question of market wages except in its connection with the price of food. They are important, not so much in the specific content, as because they bring into vivid relief the unflinching manner in which Ricardo carried his reasoning to its last consequences. His habit of mind, and his general doctrines, would have led him easily to maintain the existence of such a fund; but, except in such incidental discussion as has just been noticed, Ricardo never made any careful statement of his views as to a clear-cut and predetermined wages fund.
At all events, it is in the example which he set of rigid reasoning and unqualified statement, that Ricardo exercised greatest influence on the presentation of the wages fund doctrine by later hands. The particular passages just discussed were not referred to, in their bearing on wages, by any of the writers of the next generation. But his modes of reasoning and of statement affected his successors powerfully, and gave economic theory a method and a direction which were retained, in England at least, for half a century. The prominent place which the analysis of capital into advances for laborers held in his writings at large, probably affected the wages fund discussion more than did the comparatively brief passages in which the question of market wages is specifically considered. The operations of capitalists consist in making advances to laborers; market wages depend on the ratio between population and capital, — these two general propositions, combined with the example of rigid deductive reasoning, had most effect on the treatment of the theory of wages by Ricardo’s successors and followers.
To summarize. Ricardo developed the theory of capital and wages in two directions. He put forth the doctrine that all capital is resolvable into advances to laborers, and that therefore wages and profits are inverse to each other. Faint germs of the doctrine are to be found m Adam Smith; the conclusion as to the inverse relation of wages and profits is explicitly stated by him; but the ground on which Ricardo reached it was never really touched by the earlier writer. Ricardo himself stated it rather by implication than explicitly; but it runs so plainly under all his reasoning on distribution that no one thereafter could fail to consider it. Next, Ricardo laid it down that” market” wages depended on the demand and supply of labor, and that the demand for labor came from the capital of those who hired laborers for production. Here Adam Smith had done more than to furnish the germs of the doctrine: the doctrine itself is prominent in the Wealth of Nations. But Ricardo gave it sharper outline, and a more universal application. He brushed aside all laborers except those hired by capitalists. If asked whether other laborers existed, he must have replied in the affirmative; and if asked whether their remuneration presented problems to which his theories on wages gave no sufficient answers, he must at least have hesitated, and considered the case further, — with what result every student of Ricardo will make his own guess. But the questions were rarely asked and, if asked, got no attention. The insular horizon of almost all the English economists of that period prevented them from touching other phenomena than those presented in their own country. Ricardo’s simple formula as to the proportion of capital to population, reinforced as it was by what Adam Smith and his immediate successors had said, seemed to answer all questions worth the asking about the proximate forces determining wages. And, finally, there is evidence of a distinct opinion on Ricardo’s part as to the rigidity of the part of the capital which could go to laborers in any one season; but this bears rather on Ricardo’s own conclusions than on the influence which he exerted on the generation of economists who followed him.
