Wages and Capital

The results of the prolonged inquiry may now be summed up: both the positive conclusions reached in the first part of the volume, and the outcome of the historical and critical chapters of the second part.

We began, in the first chapter, with the proposition that all laborers, and all the members, of any community m which the successive division of labor has been developed far, are supported chiefly by the product of past labor. When once attention is fastened on real wages, the enjoyable and consumable commodities which satisfy human wants; and when the mode in which production is carried on in any but the most primitive communities is considered, — it becomes clear that present labor does not produce present real income.

Whether labor is to be regarded as paid from capital or not, depends on what is meant by the term capital. The most consistent and significant meaning of that term is, wealth not yet in enjoyable shape. In this sense, labor clearly is not paid from capital: for by definition things yielding satisfaction or constituting real income are not capital. But real income is constantly emerging from capital. Labor is steadily putting the finishing touches to wealth not yet in enjoyable form, and so advancing it to the stage where it becomes a source of real wages as well as of real interest and real rent. Considering any but the shortest period in production, the resources from which the community must look for support and enjoyment exist at any one time mainly in the form of capital, not in the form of enjoyable wealth. Income now earned or now acquired has its real source in the continuous flow of consumable commodities which is steadily emerging from the capital of the community. Such was the result of the second chapter.

The third chapter considered the special case of hired laborers, and the relation between the capitalist employer and his workmen. If all laborers were independent, — if all were owners or tenants of land, or artisans carrying on production at their own risk and charge, — no ground would exist for saying that their share of enjoyable wealth and real income came from the available total by a process differing in essentials from the process by which others secured their income. But in fact, in most modern communities, a very large number, often the larger number, among those who, earn their living by manual labor are not in this independent situation. They are dependent, for their share of real income, on being hired by some one else. With the advantages or disadvantages of this situation our inquiry is not concerned. As the industrial situation stands, ownership of wealth is in fact unequally divided; the greater part of the capital and of the steadily accruing wealth of the community is owned by a comparatively small number of active capitalists; and the money rights derived from the sale of the endless variety of marketable commodities flow first into their hands. Hired laborers are dependent for their money income, and therefore for their share of real income, on a bargain with those owners of capital. The body with whom hired laborers deal directly, consists of their immediate employers only; but the body whose dealings are really decisive as to the extent to which laborers shall be hired, is much larger. It includes the middlemen, merchants, bankers, who form so influential a contingent in the ranks of the active managers of industry. In a larger sense, and in the long run, it may be said to include also the idle investor, who invests his money means, — his claim on the community’s possessions, — by putting them in the hands of the managing class, and who gets from that class a stipulated income. At all events, hired laborers are dependent on a wages fund (if one chooses so to call it) which is in the hands of the capitalist class. Their money income is derived from what the capitalists find it profitable to turn over to them.

This is a wages fund doctrine, and a conclusion as to the relation of capital to wages, quite different from that reached in the first two chapters. It bears not on the permanent and unalterable relation of real capital to real wages, but on the relations of certain kinds of laborers to the capitalists of our modern communities. It would not be applicable to a society in which all workmen were independent producers, or in which the centralized administration of production was secured by cooperative methods; still less in a society organized on a collectivist or socialist basis. It explains some of the phenomena of modern advanced communities, and applies to them the more, in proportion as the régime of employing capitalists and hired laborers is the more fully developed.

The remaining chapters of the first part gave some further applications and illustrations of the main conclusions reached in the first three. On the one hand, the much-debated question as to the elasticity of the proximate source of wages was examined in its double aspect, — as to the source of the real wages of all laborers, and as to the sources of the money wages which hired laborers get from employers. In either case, there were found to be wages funds which were roughly predetermined, yet were so elastic, and elastic within such considerable limits, that the predetermination served chiefly to illustrate the nature of the. reasoning applicable to questions of general wages, and could not give guidance as to any concrete difficulties or practical problems.

In the concluding chapter of the first part, it was then pointed out that, in its relations to other economic questions, whether practical or theoretical, the whole wages fund controversy was of comparatively little significance. Practical questions, — on strikes, trade unions, combinations, — invariably arise as to particular wages, not as to wages at large; while it is only to the questions of wages at large that general reasoning as to wages and capital can apply. So far as the deeper problems of distribution are concerned, it appeared again that these have little to do with the general wages fund. More particularly, the residual theory of wages, which has been much associated with attacks on the old wages fund doctrine, has no real connection with the questions as to the sources either of real wages or of any other sort of real income. In fact, the wages fund doctrine, or what there is of truth in it, has to do rather with production than with distribution. It serves to describe the process by which the real income of the community emerges from a prolonged process of production; and it serves to describe in what manner the hired laborers of advanced industrial communities get their share of this accruing real income. It thus describes important parts of the machinery of production and of distribution. But it can tell us little as to the forces which move that machinery, — as to fundamental causes which make the real income of the community large or small, or which determine the share of that real income which in the long run shall go to wages or interest or rent. Its truth has been misconceived, its importance exaggerated.

In the critical and historical chapters of the second part, the long and often wearisome controversy has been followed from Adam Smith to the present time. For near a century, indeed, there was little in the way of controversy. Adam Smith pointed out that, with the division of labor, the relation between productive exertion and its enjoyable result becomes indirect and prolonged in time; and he laid it down that wages are therefore paid from capital. In this very first stage of the discussion the confusion appeared between money wages and real wages — between the payment of the hired laborer from the money resources of the employers, and the derivation of real income from social capital. Adam Smith explained at length that money was but “the wheel of circulation,” and that the true source of all income was consumable goods; but he failed to examine what was the relation of consumable goods to capital.

His successors did not go farther. For one reason and another, they failed to do more than repeat the vague and general proposition that wages depended on capital. The main cause of this unsatisfactory treatment was the emphasis which, after Malthus and Ricardo had made their influence felt, was given to “natural” wages, to the standard of living, and to the principle of population. This caused questions as to “market” wages to be dismissed with brief mention, and so to receive no more careful examination than had been given this topic by Adam Smith. The formula that wages depended on the ratio between capital and population was handed on from writer to writer with no important variation and no real development, throughout the period of the ascendency of the English school.

The unsatisfactory and ambiguous character of the accepted formula is clearly shown by the mode in which it was applied at the hands of John Stuart Mill. By this authoritative writer the lengthened period of production is referred to in the briefest terms, and the dependence of labor on “capital” in the sense of real capital is rather implied than expressed. On the other hand, “capital” in relation to wages is usually described as funds, sums, money resources, and spoken of as if it were all in the hands of the direct employer. The latter meaning was fastened on by the critics who first began to question the soundness of the traditional view. Longe and Thornton began to ask whether the funds which employers could turn over to laborers were predetermined, and so were led to deny the rigidity of the wages fund. Cairnes tried to answer them; but, while continuing to speak chiefly of employers’ resources and money funds, he never fully faced the question whether those funds were or were not predetermined. In the end, this almost exclusive attention to employers’ funds and laborers’ money wages, led to a denial not only of the rigidity of the wages fund, but of the payment of wages out of any fund of capital at all. It was maintained that wages were paid from current pro. duct, not from capital.

In the closing chapter we have compared this last turn in the wages fund controversy itself with the new mode of approaching economic theory which is associated with the Austrian school, and which has served, unexpectedly and undesignedly, to bring once more into the foreground the mode in which real income emerges from social capital. The examination of these two currents of thought has brought into bold relief the question which underlies the whole controversy. The two propositions, — the one, that labor gets its reward from a product that is its own, or at least is current product; the other, that present labor represents in the main a future result and gets its immediate reward from products of the past, — both have directed attention to that relation in time between exertion and result, which had been so lightly passed over in the older literature of the subject. It is not too much to hope that on this topic, at least, there may be substantial agreement among economists. It has been said that the controversy over the wages fund is a barren one; and so it is, as an effort to settle the causes which finally determine wages and shape distribution at large. But as a mode of describing the methods and sequence of production, the concrete structure of society in its economic aspects, the manner in which a prolonged and complicated series of exertions brings at last the flow of real income, the place which capitalists have in the distribution of income, — on these topics something can still be gained from the discussion. The inquiry here undertaken as to the true relation of wages to capital, and the summary of the historical development of the old doctrine, may put into truer light old views and modern criticisms, and may be helpful for that restatement of economic doctrines on which the present generation is so busily engaged.