Wages and Capital

We may now conveniently consider the treatment of the wages fund doctrine by the economists of Continental Europe; and among these, chiefly by the Germans. Chronologically, this phase of the history of the doctrine should have an earlier place; for an unmistakable departure from the lines of reasoning traditional among the English was made by Hermann before the days of the younger Mill. But the insular condition of social and political speculation in Great Britain in the middle of the century, and the stagnation of economic thought in particular, prevented any breath of influence from reaching English thinkers. The Germans went their way, unnoticed by their English-speaking contemporaries, until, in very recent times, links of connection were formed, and the international exchange of thought has rebegun.

Outside of Germany, there is, before our own days, practically nothing on the subject. The French never were much influenced by Ricardo; and consequently that simplification of the theory at Ricardo’s hands, by which wages were assumed to be paid once for all from a specific quantum of capital, never appeared among them in emphatic form, and never received great attention. They commonly said that wages depended on capital; but with less emphasis and less definiteness of statement than among English writers. To go through the hasty and uncertain versions of the relation of capital to wages, which are to be found from Say to Bastiat and Cherbuliez, would be to repeat, with even less satisfactory results, the story of inconsequent thinking which we have found in the English successors of Ricardo. Among Italians, also, nothing of interest or importance appears; and we may turn at once to the Germans.

Hermann has already been referred to as the writer who began the breach with the English theorists. Before his time it is difficult to find much that is promising in German economic thought, beyond the work of popularizing and spreading the views of Adam Smith. Hermann was an incisive and original thinker; and his reasoning on wages and capital is as unquestionably the source of the treatment of this subject in German text-books, as Ricardo’s on international trade is of the handling of that subject among the English. He was, moreover, one of the few Continental writers who, before the present movement in economics began, had read Ricardo with care, and had been affected by his example of rigid analysis and unrelenting reasoning; and he approached the subject, unlike Jones and Sismondi, in a mood to develop rather than to question the classic doctrines. The first edition of his Staatswirthschaftliche Untersuchungen was published in 1832. The second and enlarged edition of 1874 served rather to amplify his reasoning than to add anything substantially new. The high intellectual quality of the book and the independence of its thought are beyond question; and the German economists are certainly not without justification in their admiration of Hermann’s work and in their willingness to accept his doctrines.

As to wages, Hermann objects to the doctrine then current in England on several grounds. First, the number of laborers paid directly out of the income of consumers is too large to be overlooked; and Hermann notes with approval that Adam Smith had made “revenue” as well as “stock” a source from which wages are paid. Next, the proportion of wages fund to other capital is not defined in the current statements. This objection had been sporadically presented in England before Hermann made it; but neither there nor in Hermann’s reasoning is it given the prominent place which it received in later times. The radical objection is the last one. Capital, after all, is not the real source from which wages are paid. That real source is the income of those who buy the products made by the laborers, or, briefly, the income of consumers. Here is the objection accepted as conclusive by Hermann’s followers in Germany, and serving as the basis of their own statements of the causes determining wages.*

To understand the views of any writer on the whole range of subjects of which the wages fund doctrine is a part, it is needful to consider his views on the nature and functions of capital at large, and more particularly on the place in the analysis of capital of finished commodities consumed by laborers. Unfortunately, on this vital topic we find Hermann speaking with uncertain sound. Not that he had failed to give careful thought to the analysis of capital. To the word “capital” he gave that larger significance which has already been referred to.† Virtually all wealth he regards as capital: classifying it as consumer’s and producer’s capital, according as it is or is — not yet in the hands of those who are to derive enjoyment for it. This suggestive distinction has been permanently incorporated into most German text-books; while his description of the mode in which circulating capital (a part of producer’s capital) constantly passes into commodities for immediate use, and so into consumer’s capital, anticipates much modern thought as to the steady ripening of inchoate wealth into enjoyable commodities. Clearly Hermann meant by consumer’s capital what has been described in these pages as enjoyable wealth; while producer’s capital signifies what. has here been described as simply capital. For a consideration of the fundamental relation of capital to wages, it would be necessary for Hermann to set forth clearly what place he would assign to the enjoyable commodities constituting the real reward of laborers: whether they are to be regarded as producer’s capital or as consumer’s capital.

But on this topic he did not fully work out his conclusions. In agricultural operations he classes food for laborers as part of circulating capital, i. e., as producer’s capital.* Elsewhere he clearly implies that all consumable commodities of a perishable sort, whether used by laborers, by capitalists, or by idlers, are not part of producer’s capital at aII.† In discussing wages, he speaks of the employers’ capital as a fund which could act but once in paying wages, and which would be dissipated unless constantly replaced from the sale of the product, — a statement which implies that this capital is at least the immediate source from which the laborer’s wages are first derived. Here are doctrines not clearly formulated and not entirely consistent with each other; defects which illustrate once again the difficulties which beset the thinker in this tangled subject.

We are compelled, therefore, for our guidance in following Hermann’s views, to rely on the comparatively brief passages in which he advances directly the doctrine that consumer’s income is the real source of wages. This, as we have seen, was virtually the doctrine put forth by Longe, at a much later date, though with much less consistency of statement. Something has already been said in explanation and criticism of it; but in view of the prominent place it has had in the theoretic literature of Germany, something more may be added.

The difficulty with a view like Hermann’s is that it does not clearly distinguish between particular wages and general wages, — between the causes which affect the wages of one class of laborers as compared with another, and the causes which determine the wages of all laborers. The nature and extent of the consumer’s demand for the products made by a particular set of laborers have an obvious effect on the wages of these laborers; and the inference is easy, however unwarrantable on closer thought, that all wages depend on consumer’s demand or income. The transition is made the more natural by the habit of considering capital in terms of money, and the capitalist employer as the possessor of a fund of cash which represents the apparatus of production controlled by him. Even before the time of the younger Mill, the English economists, whom Hermann followed and criticised, frequently spoke of it as a money fund. Ricardo had set the example of reducing all capital to terms of money; his immediate successors did more, and spoke of wages capital as if it consisted of cash and nothing more. Hermann saw that the wages fund, in this sense, so far as it existed at all, was constantly replenished from the sale of the disposable product; and he was naturally led to regard those who bought the product as the real payers of wages. And, to repeat, the wages of any particular set of laborers do depend precisely on this. Their money income and their share of the goods available for consumption are settled by the terms on which their products sell in the market. The appearance of the capitalist employer as a middleman between them and the purchaser does not alter this situation, so long as the competition between capitalists is free. What the employer can pay the individual laborer, or the group of individual laborers, and what he will pay if competition is free, depends on what the consumers pay him.

of the disposable product; and he was naturally led to regard those who bought the product as the real payers of wages. And, to repeat, the wages of any particular set of laborers do depend precisely on this. Their money income and their share of the goods available for consumption are settled by the terms on which their products sell in the market. The appearance of the capitalist employer as a middleman between them and the purchaser does not alter this situation, so long as the competition between capitalists is free. What the employer can pay the individual laborer, or the group of individual laborers, and what he will pay if competition is free, depends on what the consumers pay him.

Bearing in mind that the wages fund doctrine is worth discussing, or replacing by something else, only as an attempt to discover the causes determining general wages, we find very great and very obvious difficulties in the way of applying Hermann’s reasoning to the wider question. At bottom, he presents the old question whether demand for commodities is demand for labor; and on that question the reasoning of the classic writers was in essentials so simple and so sound that there is no escape from answering, as they did, in the negative. We may intelligently measure the remuneration of an individual section or class of society in terms of money, and so may seek the measure .of particular wages in the Zahlungsfahigkeit, or money demand, of those who buy the laborers’ product. But for society as a whole, and for laborers as a whole, consumable commodities are the only measure of income, — money and exchange being but devices for sharing this real’ income among the different members. The ultimate source can only be the output of real goods from the labor of society, — the steady flow of enjoyable things which issues from the exertions of men. This is the total consumer’s income, — the source from which all of us, whether laborers or idlers, get remuneration or tribute or alms. It is clear that Hermann did not mean to lay down the proposition that wages come from consumer’s income in this sense. He had in mind the money payments of those who buy goods from the employer, and so recoup him for his outlays. But these purchases are of importance only in determining the share of real wages or real consumer’s income got by a particular group of laborers: they play no part in the causes determining wages at large.

The same fundamental difficulty emerges from another point of view. Laborers are themselves consumers, in many countries the largest and most important body of consumers. They buy commodities with their wages; and their demand, according to Hermann’s reasoning, is an ultimate source of wages. Wages are thus an important source of wages, — reasoning which runs so obviously in a circle that we must be surprised to find it unnoticed by a mind as acute as Hermann’s. If it be objected that there are consumers, like rent receivers or pensioners, who are not laborers, the situation is not bettered. Unless we suppose the laborers to produce only commodities bought by these separate consumers, and to buy among themselves no commodities made by other laborers, we still find that consumer’s income includes in its constituent parts a larger or smaller element of wages, and that an undefined portion of the source of wages is simply wages.

Hermann’s doctrine, ineffective as it is in grappling with the question of general wages, nevertheless has found its way into almost every German book on general economics. On the one hand, the confusion between money and real wages; on the other, the natural disposition to fasten attention to the dealings between the immediate employers and their hired laborers, — make its acceptance easy of explanation. Moreover, in Germany economic discussion has always been, much to its advantage, more concrete than that of Ricardo’s followers in England; and the liberal space given to an enumeration of specific causes affecting the wages of different sets of laborers, indicates an attitude toward the whole subject such as would make natural the ready acceptance of an apparently straightforward and practical explanation of wages as determined by consumer’s demand. At all events, hardly a book on economics from a German hand since the time of Hermann can be found in which his lead on the subject of wages is not more or less closely followed.

While Hermann himself, so far as spirit and method are concerned, did not diverge far from the classic school, his views on wages seem to have gained acceptance in proportion as the breach with the English writers became wider. In Rau’s treatise, which expounded economic principles to two generations of German students on the familiar English lines, we still find the old doctrine that wages depend on the quantity of capital. In later editions Rau referred to Hermann’s doctrine in his notes, and there admitted, with caution, that the latter had rightly divined the ultimate source of wages; but the classic theory maintains its place in the text in the dignity of large type.* In Mangoldt’s Volkswirthschaftslehre, which, though not published until 1868, represents the methods and traditions of an earlier date, the subject is discreetly given a wide berth. Apparently, Mangoldt was not disposed to commit himself either to the old doctrine or to Hermann’s modification.† But in a book like Roesler’s on Wages, which, though it made no deep impression on German thought, reflected the drift of things at the time of its publication (1861), Hermann’s views appear with marked emphasis. We are told, in italics, that the employer’s capital is indifferent to the laborers, who draw their wages solely from the consumers, the employer being merely a middleman.* Roscher’s Political Economy, in which the independent German movement first took shape in a general text-book, also accepts Hermann’s view. Roscher’s statement is sententious, in accordance with his general practice; but it is none the less clearly an adoption of Hermann’s view.† The year of his first edition (1854) may be noted as a date after which Hermann’s doctrine appears in almost every German book on general economics.

The next important and independent step, with effects clearly traceable in the theoretic parts of current German treatises, was taken by a writer still active among us, Professor Lujo Brentano. Shortly after the publication of Thornton’s book On Labour, and of Mill’s review of Thornton in the Fortnightly, Professor Brentano printed in the Jahrbücher für Nationaloekonomie a paper on the theory of wages as developed by English economists.‡ Some further discussion of the subject was undertaken by him in the second part of his book on the English trade unions (Zur Kritik der englischen Gewerkvereine, 1872); and it is again considered briefly in the volume on Die Arbeiterverhältnisse demass dem heutigen Recht (1877). The later publications add little to the theoretic matter of the paper in the Jahrbücher, which deserves careful attention, as being, after Hermann, the most influential of German contributions to the theory of wages.

Professor Brentano’s paper divides itself into three parts. First comes a sketch, admirably done, of the history of the wages fund doctrine among English writers; then a consideration of that doctrine; and, finally, an effective criticism of Thornton’s theory of wages. It is the second part, on the wages fund doctrine, which chiefly concerns us here. With it goes a discussion of the theorem that demand for commodities is not demand for labor. That theorem had been used by the classic writers, and especially by Mill, chiefly as an answer to the notion that the luxurious expenditure of the rich was beneficial to the poor; but Professor Brentano rightly treats it as a simple corollary of the doctrine that wages are paid from capital, and as significant in its relations to that doctrine.

Like Thornton, Professor Brentano is on one point more conservative than some later critics of the old doctrine. Wages he admits to be paid in the first instance from capital. “There must be a stock of accumulated products of previous labor — that is, of capital — sufficient to feed the laborers engaged in production.” But, like the English writers of earlier and later date, Brentano does not linger over the why and how of this need of an “accumulation” of real commodities. The point of view is soon shifted to that of the advance of capital by employers to hired laborers, without notice of the difference between this and the advance from an accumulated stock of products. In the book on English trade unions, the importance of capital as the proximate source of wages is again admitted; but it is urged that it is only a vehicle which serves to convey wages to the laborers from their real source. It is on the fixity of the fund, and the ultimate source whence it is replenished, that he professes to differ with Mill and Mill’s teachers. He points out with truth that the predetermination or fixity of the wages fund was never laid down emphatically by Mill in the Political Economy; and, at all events, he reaches unreservedly his own conclusion that there is no such fixity. The capital which employers will turn over to laborers is an elastic quantity. It can be swelled by the use of credit, or by trenching on the funds which the employer had meant to use for his own consumption; and it accommodates itself readily to changes in the ultimate source of wages. As to that ultimate source, Brentano expressly accepts Hermann’s views: the source lies in the income of those who buy the laborer’s product.

The essential thing to note in Brentano’s ingenious and able discussion is, that the capital which is described as the proximate source of wages is still conceived as wholly in the hands and at the disposal of the immediate employer of labor. It is still a” fund,” though one which can be swelled in one way or another. The best illustration of this limitation of his analysis is to be found in the treatment of the mode in which the capital at the disposal of employers can be enlarged.

As was noted a few moments ago, he examines Mill’s statement of the proposition that demand for commodities is not demand for labor. Mill had asked how, even with a high demand for velvets, they could be produced, or a demand for labor could set in, unless there were food, the product of former labor and therefore capital, wherewith to support the laborers who make the velvet. Brentano’s answer to Mill is a simple tu quoque. In an advanced community there can never be any difficulty in securing or augmenting capital; for, according to Mill’s own doctrine, the distinction between capital and non-capital lies only in the mind of the owner. An increased demand for velvets would cause some owners to change their minds, and so transform part of their possessions into capital; thus an effective demand for labor would appear. This turns the tables on Mill very neatly; for Mill had expounded his doctrine as to the determination of capital by the mere intent of the owner, in language which perhaps fairly warranted Brentano’s use of it. But that doctrine itself is tenable only in the limited sense which has already been indicated.* In the long run, unquestionably it is true that, under a régime of private property, the disposition of the owner decides whether wealth shall be used for immediate enjoyment, or for producing further wealth, that is, as capital. At any given moment, however, tools, implements, and materials are of necessity capital; while finished commodities and food exist in a quantity which, whether rigidly fixed or not, certainly cannot be augmented ad libitum by a mere change of intention.

Brentano had in mind more or less clearly the case of the individual capitalist, who can sell his house or his diamonds or his factory, and can use the money-proceeds in hiring laborers; so transforming, by a mere change of intention, his luxuries or fixed capital into wages-capital. Mill perhaps had a similar possibility in mind; at all events, his language, not only in the passages referred to by Brentano but in plenty of others, looked to the funds and means of the direct employers of labor. As to the funds of an individual capitalist and employer, it is mockery, as Thornton said, to ask whether they are fixed or predetermined. Brentano could have no difficulty in disproving the fixity of the wages fund from this point of view. But such an inquiry can tell us nothing as to the constitution and limits of the total money funds which the whole class of active capitalists have at their disposal for the hire of laborers; still less can it tell us anything as to quantity or the predetermination of the consumable commodities from which laborers get their substantial reward.

We have but another phase of the same difficulty when Brentano refers, as others had done before him, to the possible use of credit as a means of swelling the sources from which wages are paid. He remarks that the capitalist will always be willing to grant larger wages, provided he can get them back through higher prices paid him by the consumer; and, if it happens that he does not himself possess the funds for the larger payment, he simply borrows them. Of the individual employer this is unquestionably true; and of the process by which a particular set of laborers may get better terms for themselves it is an accurate account. But it is hardly necessary to point out, after what has already been said, that a stretching of credit can not possibly affect the supply of commodities from which real wages must come, nor serve to increase wages at large. This mode of approaching the problem of general wages is as hopeless as that which makes the wages fund expansible by a change in the intentions of employers. When Brentano, in his book on trade unions, gives a statement of the wages fund doctrine, preparatory to a refutation of it, he defines the fund as “the property [Vermögen] of a country which can by possibility be used, either directly or as a means of obtaining credit, for the payment of wages.”* Here the word Vermogen is used with the same connotation of money available for paying wages that appears in the traditional use of the word “funds” by English writers. The refutation of the doctrine in this form does not advance matters more than the advocacy of it did.

If the negative part of Brentano’s reasoning is thus unsatisfactory as to the real difficulties of the subject, the positive part is no more conclusive. It is true that Hermann’s theorem is cited in terms, and is accepted: consumer’s demand and income, we are told, are the real source of wages. But Brentano does not fail to see the difficulty arising from the fact that laborers themselves are consumers. A rise in wages, he points out, may be secured partly at the expense of other wages, and so may be nugatory for laborers as a class. It may be secured also, in part or in whole, from the incomes of other classes, — from those of employers or investors or rent-receivers, and so may represent a substantial change in distribution to the advantage of the receivers of wages. All this is true; and followed out to its last consequences, would bring the writer face to face with the problem of the elasticity of the total money funds and the total real funds which may go to laborers as a whole. But Brentano does not proceed to this stage. He accepts Hermann’s theory as a needed correction of that version of the wages fund doctrine which had been brought into renewed prominence by the attacks of Longe and Thornton; he hints at the deficiencies of Hermann’s solution, so far as general wages are concerned; and then remarks that after all wages at large are an abstraction, a vague and indeterminate generality, and that the only thing worth discussing is the concrete rise or fall in the wages of specific sets of laborers. This is not an unnatural conclusion, in view of the unsatisfactory character both of the old views and of the substitutes offered by writers like Thornton and Longe. It is obviously natural, more especially, to a writer who, like Brentano, had given detailed study to the history and doings of trade unions, and thus had been brought into contact with the effective causes that bear on the fluctuations of particular wages; causes which, as has been pointed out elsewhere,* have little to do with the general flow of the real wages fund.

The final conclusions reached by Brentano are thus sensible enough, so far as application to practical questions goes. The source of general wages is elastic; there is no iron-clad obstacle in the way of an advance in wages for any particular set of laborers; such an advance does not necessarily mean a corresponding loss to other laborers; a general simultaneous advance for all laborers is not indeed theoretically impossible, but is not worth discussing because outside the practical possibilities of real life. All this is true; and if there is ambiguity as to the cause of the elasticity of wages, — whether of general or particular wages — it does not affect the truth of the conclusions as to the limits to trades — union action. But the theoretical basis of the whole does not go deep. There is no complete statement of the function of capital in. the production or distribution of wealth, or of the relation between the operations of the individual employer and the source of real wages.

Hermann and Brentano are the two writers who have taken the lead among the Germans in the discussion of wages; and the result of their combined labors has been to push aside, in the text-books and hand-books of the Germans, the simple formula of the older English writers, and to leave nothing very distinct in its place. It would carry us beyond the scope of the present inquiry to examine the variations of the theory of wages as they appear in the different text-books of recent years.† In most of them a “relative” truth in the wages fund doctrine is admitted, or at all events something is said as to the importance of capital for the immediate payment of wages: and then there is some further reference, more or less explicit, to Hermann’s proposition as to consumer’s demand as the ultimate source or determinant of wages. On this topic, as on others, the theoretic views of the German economists of the last generation mark a transition stage. The clear-cut doctrines and unqualified statements of the Ricardian school in England were found inconclusive and unsatisfactory. But nothing very precise and definite took their place. The old sharply-defined conclusions were sometimes rejected without attempt to put anything in their place; sometimes the edge was taken from them by qualifications and corrections which made it difficult to say how much was really left. This tentative mode of expounding the subject was unquestionably better than the bold and uncompromising dicta of M’Culloch, and in many ways was preferable to Mill’s exposition, with its emphatic elaboration of the Ricardian deductions. But it could not lead to anything definitive; and certainly on the wages fund it served rather to bring out the deficiencies of the English writers than to substitute any new doctrine of substantial value.

• *a*b*c*d*e*f*gStaatswirthschaftliche Untersuchungen, first edition, pp. 280–285; second edition, pp. 474–477. It is significant of the change in social conditions in the interval between the two editions (1832–1874) that in the first Hermann says the wages fund doctrine is practically harmful, because it encourages arrogance among the employers, who are taught to think themselves the real payers of wages, and so entitled to favors and bounties; while in the second he finds it harmful because it teaches laborers to look on employers as the real wages-givers, and so lures ignorant workmen into hopeless strikes.
• †a†b†c†d†eSee above, Part I, Bk. II, p. 39.
• ‡Die Lehre von den Lohnsteigerungen mit besonderer Rücksicht auf die englischen Wirthschaftslehrer. Jahrbücher für Nationaloekonomie, I Fogle, vol. xvi, pp. 251–281 (1871).