Chapter IV. The Elasticity of the Wages Fund

The results reached in the preceding chapters, while different in important respects from those usually associated with the wages fund doctrine, have yet been largely conservative. It has appeared that all wages are paid from the products of past labor, and that the supply of products of past labor exists mainly in the form of real capital. It has appeared, too, that the class of hired laborers not only derive their wages from capital in this sense, but that they are dependent, for their share of the real income into which capital steadily ripens, on the funds which the employing class find it advantageous to turn over to them. It remains now to consider another aspect of the old doctrine, — whether the capital from which wages come is rigid, or elastic; predetermined, or easily adjusted to present demands. This question may be considered as to both sides of the doctrine: as to the sources of the real income going to all laborers, and those of the money income going to manual laborers, and more especially to hired manual laborers.

It will be convenient to begin by inverting the former order, and to consider first the case of the hired laborers. Are the money funds which employers can turn over to them limited? Are they so determined by previous happenings that a given sum must go to laborers, and no more can go? Or are they elastic, swelling easily when employers are led by competition among themselves or by pressure from their workmen to advance wages, and shrinking promptly when their niggardliness or ill fortune leads them to retrench?

One part of the answer has already been given.* As to the direct employer, considered by himself, it is clear that there is no rigidity or predetermination. He sells and borrows, adjusts his payments and receipts, and nurses his bank account. Within limits that are certainly not narrow, he can make his available funds fit new conditions and new demands. In the language of Thornton, who was among the first to face squarely this phase of the problem, it sounds like mockery or childishness to ask if the funds which he can apply to wages are limited or predetermined.†

Consider, however, the whole employing class, as it was described in the last chapter. For the hired laborers as a whole, the money wages of a season came from the large body of active capitalists: from the merchants who buy goods or make advances on them, from the bankers who discount and lend, as well as from the immediate employers. Is the total of funds which they can pay in wages limited?

No doubt there are some limitations here. There is a general limit of some sort, in the total of money means which the sale of output or product brings into the hands of the managing class. There are more specific limits within this general one. Contracts of long standing and duration compel the payment of certain sums to investors, in the way of interest or rent. Further, the funds directed to production must be apportioned with regard to existing methods and existing supplies. That workmen may be employed, machinery and buildings must be on hand, and materials must be provided. In other words, a large part of the gross money income of the season must go to purchases which may indeed in the last analysis be resolvable into a succession of advances to laborers, but which involve no present payments to laborers. This was what one of the last defenders of the old doctrine had in mind when he divided capital into the three constituent parts of plant, materials, and wages fund, and pointed out that only the wages-fund part was available for paying laborers.* While the individual employer, supported as he is by the multiform apparatus of credit and connection, is not compelled to make any hard-and-fast apportionment of his directly available means between these different uses, the body of employers must divide their purchases and advances in a manner which is determined in its main lines by the state of the arts and the succession of the productive operations.

But, with all this admitted, it still remains clear that nothing in the nature of a predetermined and rigid wages fund can be found. While the payments due to outside investors for interest and rent may be fixed for the moment, the sums which the active capitalists can set aside for their own enjoyment are flexible. The apportionment of those sums, again, which go to the maintenance of the settled course of production can not be said to be rigorously predetermined for the different channels of advances to labor on the one hand, the purchases of tools and materials on the other. The limits are elastic. Even the total money income at the disposal of the capitalist class can not be described as a fixed thing. It has been spoken of as the total price of the output; and such it is. But that total price depends on the relation of the circulating medium to the whole volume of things sold. The modern machinery of credit as a substitute for money makes prices and total money payments for commodities vary under very short-lived influences Banks of deposit and issue, which form so important an element in the whole body of the active managers of industry, can swell their loans, and so can add effectively to the total of money funds received in exchange for the industrial output and available for fresh operations. In almost every direction the causes which determine the advance by the active capitalists of a part of their funds to laborers, operate in the rough, and with no machinelike precision.

If therefore we put the case of a general trades union embracing all the hired laborers, and a general strike by them for higher wages, — a case which, improbable and unreal as it may be, has rightly been made to play a prominent part in the theoretic controversy, — the answer must be that nothing in the proximate conditions of industry stands in the way of their success. Success, that is, in the sense which alone is here under consideration: an advance in money wages. A larger share of the total inflowing receipts of the active capitalists might be diverted into the hands of the hired laborers. Possibly those total receipts would be simply swelled by an increase of the bank credit part of the circulating medium. Possibly the employers might be compelled to submit to a reduction of their net profits. Possibly a diminution of the funds applied to the purchase of materials and plant might shift the shrinkage of profits more particularly to those who happened at the time to be in largest part the holders of these forms of inchoate wealth. The outside investor, though usually shielded by the length of his contract from the contingencies of the season, might yet feel in some degree the effects of the general pressure; here and there he would encounter defaults, reorganizations, new and harder terms on old loans falling due and on fresh funds seeking investment. At all events, there are no cast-iron obstacles to the attainment of the immediate end of the universal strike: higher money wages.

As to the eventual outcome, the situation doubtless might be different. The forces which permanently determine distribution would come into play. To follow their working is not within the scope of the present inquiry, and is called for the less because economists are here much more nearly in agreement than they are on the machinery by which the result is brought about. The general rise in money wages (which may be assumed not to be offset by any corresponding change in general prices) would bring down the returns of the capitalist class. How the loss would be divided among the different members of this class, temporarily and even permanently, would be hard to foresee. Among the active capitalists, some would be at first hit harder than others; and the distribution of the loss among them, through the transfer of capital and the working of competition, would be no simple or certain matter. As between active capitalists and lending investors, in the course of the recurrent renewal of their loans and contracts, there would again be a tendency to distribution of the loss, whose outcome could not be clearly foreseen. At bottom, the mode in which these two classes would act in face of the loss would depend on whether the business men had been getting, before it set in, just enough to induce them to undergo the labor and risk of production; and whether the investors, in their turn had been receiving just enough to induce them to forego immediate expenditure and enjoyment

On these limits the last word has perhaps not been said. The minimum which the two classes of capitalists, under a real dilemma between cessation of operations and submission to a smaller income, would accept, probably goes lower than is suggested in the usual expositions of this part of economic theory. But wider questions are here touched than those connected directly with the proximate sources of money wages, and it is not necessary to attempt to go further in their consideration. Some aspects of them will be touched again in the next chapter; and, at all events, enough has been said to indicate that they carry us far from the wages fund controversy proper.

From this digression we may return to the main subject, and summarize the results of the investigation up to this point. Briefly stated, the main conclusion so far has been, that for a season the resources immediately available for capitalists in their employment of laborers, while obviously not indefinitely extensible, are not limited or predetermined, and that the money-wages fund which goes to hired laborers is not a rigid one.

Next comes the question as to the source of real wages — the important and essential question as to the welfare of laborers. An increase of money wages is of no advantage unless there are more commodities to be bought. Are the commodities available at any given time predetermined in amount?

As to the source of real wages, it will be recalled, no distinction can be made between different classes of laborers or between different classes of the community. All alike, whatever the channel through which their money incomes are derived, get their real reward from the finished and enjoyable commodities which appear at the end of the lengthened processes of production. To this general proposition there is, indeed, an exception of some interest and importance. When savings are made, purchases for immediate enjoyment do not take place. The proximate source of real income is then not found in the flow of consumable commodities. The consideration of this case, however, may be postponed. Let it be assumed that the whole of money income is devoted to the purchase of presently enjoyable things. On the elasticity or predetermination of the real income thus available for the community at large two sets of questions may be raised: one, as to the limits of the total available for all; the other, as to the limits of the share which can go to wages.

First, as to the total real income of the community. That this is at least in large degree predetermined, is obvious from a consideration of the form in which at any moment it exists and the mode in which it recurrently appears. The form in which that part exists which is most immediately available, is in the stocks of the retail dealers. It is here, in the great mass of cases, that money income is converted into real income. The stocks which the dealers possess are a given quantity. The reserves of things ready for sale which are held by the wholesale dealers and the manufacturers are again so much, and no more. New supplies can be got only by working up more materials; and the materials on hand, as well as the tools and machinery for working them up, are for the time being unchangeable. Machinery can indeed be made to work more or less quickly, and this suggests at once an elastic rather than a rigid limit. But materials, such as wool, cotton, hides, grain, timber, are usually dependent for the variation of production on the return of the seasons; and some considerable time must elapse before the existing supplies can be substantially changed. What is now available, and what will be available for a year or two to come, has been determined once for all. If all the active members of the community work harder or more effectively, they may secure more enjoyable things after a space; but present income depends on the manner and the extent to which the earlier preparatory stages of production have been carried on.

Not only are the present available supplies so predetermined, but the tendency must be to arrange them in such manner as simply to meet the habitual rate of consumption, and leave no great margin or reserve. It may be suggested that in the stocks of: merchants and producers there is a reserve fund which can be drawn on more or less rapidly, and which can be replenished from further reserves of half-finished goods and materials. Unquestionably such a reserve exists. The whole series of goods, from those barely begun to those almost finished, constitutes the stock from which the necessaries and comforts of the period must come; but the tendency of every individual holder of the stock is to have no more than is needed to meet the usual demands from consumers, or from the producers who stand next in the order of transmission to consumers. Every dealer keeps enough in stock to meet current demands, and tries to keep no more. It is to his advantage to diminish his holdings to the minimum consistent with satisfying his customers. For every business manager, whether merchant or manufacturer, a needlessly large stock similarly means a needlessly large committal of his funds. The nature of the trade and the accident of individual choice and judgment must affect the extent of the holdings in the different storehouses which contain the community’s varied fund for more or less immediate enjoyment and subsistence; but the drift in all must be to accommodate the supplies to habitual and expected demands, and to keep no excess. If, therefore, a very rapid increase of consumption were suddenly to take place, a corresponding deficit would ere long appear. An increase in the productive power of the community can issue in a real increase of the sources of satisfaction only by giving the lengthened methods of production time to work out the result. It can not be anticipated by making immediate larger drafts on the existing supplies, for these are adapted only to meet the usual rate of consumption.

So much is in general true; but it is equally true that we can speak here only of tendencies and drifts, of limitations that hold good against great and rapid changes, but are not of a rigid and unalterable sort. The habitual stocks of dealers may be purchased by consumers a bit faster or a bit slower. Commodities on the way to completion may be hurried forward somewhat. Materials on hand may be drawn on more rapidly, and a period of scanty holdings may be tided over by some straining and ingenuity until fresh supplies can be made to appear. An increased satisfaction to consumers may be yielded by more elaborate manipulation of the materials already on hand. In various ways of this sort some stretching of the existing store of available goods is possible. That it has unmistakable limits, and not very distant limits, is not inconsistent with its being elastic within those limits. How great the degree of elasticity is, can not be stated in exact terms or measured by any conceivably practicable mode of statistical investigation.

On this topic, then, as on so many others in economics, we must be content with conclusions stated in general terms. The real income of the community for any season depends mainly on forces which have operated in the past. It is settled and predetermined, in the sense that it can be no greater than is made possible by the past labor given to machinery, to materials, to all the earlier stages of production. It is not made elastic by any great stocks kept in reserve beyond what the usual rate of consumption makes necessary. Yet it is not rigidly predetermined. It may become in some degree larger or smaller under the influence of forces coming into operation to-day; it is elastic within limits which, if not great, are not so small as to be safely set aside as of no practical import.

The second and narrower part of this question, as to the elasticity of that portion of the real income of the community which goes to wages, has been largely answered in what has been said on the broader topic. Real wages are limited and predetermined in general as much as other sources of income, and no more Any force which is to bring about a substantial advance in the real remuneration which laborers shall get must bring about its effects through the slow-working machinery of production. Like other classes, they may get some immediate increase of real enjoyment by a defter use, a better combination, the temporary bridging over of gaps, in the existing resources; but a considerable advance must begin at the beginning, and go through the orderly stages of the successive steps which lead to the final attainment of a consumable commodity.

In this regard it is immaterial what is the form of the remuneration of the laborer: whether he gets his wages from an employer once for all, or earns an independent income which is substantially all of it return for present exertion, or gets a mixed income which is in good part resolvable into interest or rent. Whatever the channel through which his income in money first comes, it is spent on an elastic but by no means indeterminate mass of finished commodities.

Still a further question presents itself: Is the share of real income which the laborers can get, as compared with the total available for all classes, more flexible than this total itself? It is conceivable that though the whole income of the community were predetermined within narrow limits, the part of it which some members got might be very flexible, swelling or diminishing according to forces of immediate operation. Something may be said as to the situation of the laborers in this aspect of the case.

The first step in such a changed division of the total income must be an advance in money wages. This we may suppose to have been effected, as to hired laborers, within the limits already set forth as to the possible money advances which they can secure from their immediate employers; as to others, within the limits made possible by the conditions of demand for the things they have to dispose of. The money wages, in whatever manner obtained, go to the purchase of commodities the whole mass of which is not susceptible of rapid enlargement. If, now, among the mass, the commodities which they can buy and will buy are of a particular kind, of different materials, and of different fashioning from those sought by other classes, their share is as much predetermined as the whole supply. If, on the other hand, they buy very much the same sorts of things that their employers and other supposed betters buy, they can get a larger slice of real income at once.

Evidently a great existing inequality of wealth, and a great disparity of tastes and habits, would make the substantial change more slow and difficult of accomplishment. More democratic conditions would make it more rapid and easy. As between the great mass of manual labor and the well-to-do, the disparity of tastes and habits is in most communities considerable, and a great shift of the real sources of satisfaction from the one to the other could not easily take place. There is, to be sure, a large constituency among the well-to-do whose members do work for their living and get a return which, while euphemistically termed salary or income, is as clearly wages as is the pay of the day laborer. As between these and the prosperous receivers of interest and rent there can be nothing in the way of a predetermined separation of the real sources of income. Even as between the manual laborers with whom the word wages is usually associated, and the well-to-do classes who are separated from them by habits of greater ease and usually higher culture, the line of cleavage as to commodities bought is not unmistakable. There is some margin of interchangeable things, broader or narrower according to the more or less democratic character of the society. The staples of food are alike for nearly all the members pf the advanced communities of our day, and many materials forming a large part of the available supplies of a season can be worked up in one fashion or another to meet at short notice the tastes of the eventual consumers.

Thus we find again limits that are elastic, not rigid. The total real income of the community, while predetermined in the rough, has some degree of elasticity. The share of real income which shall go to wages in general, or to wages of the great mass of manual laborers, is to a certain extent predetermined by the character of the commodities on hand or in the making. But in no small degree it is indistinguishable and inseparable, forming part of a mass of things that may be diverted to one set of persons or another according to their command of money income for the time being.

The question has sometimes been raised, in the course of the controversy over the wages fund, whether laborers can get an immediate or early benefit from the results of improvements made at the time when their wages are earned. On the one hand, it has been maintained that a general increase in the productiveness of labor, due to advance in the arts or to greater strenuousness or intelligence among the workmen, inures to their advantage at once. On the other hand, it has been denied that they can secure an immediate gain. In essentials, the reasoning of the preceding pages clearly supports the negative answer. The solid effects of greater efficiency in production can appear only after the interval made inevitable by the complex and slow-working machinery of production. Improvements now made do not inure to the benefit of present real wages: always subject to what has been said as to the degree of elasticity which does exist in the sources of real income. But this holds good of wages, simply because it holds good of all real income. It is the total volume of ripening real income which is determined by the causes of the past. Advances in the arts increase the total more or less rapidly, according to the point at which they take effect in the successive stages of production and the extent to which they require a larger supply of supplementary tools or materials for their full fruition. It would be a rare case in which a considerable interval must not elapse before a sensible effect on the flow of consumable commodities could appear. If the extreme case of a sudden doubling of all productive efficiency be supposed, it may be said with confidence that laborers and others would not receive at once, or for some little time to come, a double portion of real income.

There is another possibility, and a significant one, of more practical importance in regard to other forms of income than those usually called wages, but not without its importance for wages also. It has been assumed hitherto that money income is spent as soon as received, and goes at once to the purchase of consumable commodities. But purchases may be postponed and savings made: modification in the assumed conditions which we may now proceed to consider.

The simplest form of saving is hoarding; and it is an easy matter to trace the modifications which would ensue from hoarding. The real income for labor comes when the money income is spent. If it is spent a year after the work is done, the consumable commodities then existing are the source of real income. In the meanwhile, some of these commodities may have become more abundant and cheaper; in which case wages, as to the part postponed, are subject to the conditions of supply of the later date, not to those existing at the time when the work was done. So far as the conversion of money wages into real wages is put off, the laborers thus have a clear field for participation in the results of improvements going on while they work, or in those of greater strenuousness of their own labor.

But the usual form of saving in modern communities is investment, not hoarding. Investment means, not a postponement of all purchases, but only a postponement of direct purchases for immediate enjoyment. Through one or another of the many channels which modern society offers, the funds saved are turned over to the active managers of industry: through the savings bank of the poor, or the purchase of securities by the well-to-do, or the operations of life-insurance societies. By the active capitalists who thus get control of the funds, they are used for the purchase of materials, plant, labor, as their judgment suggests. They are additions to the funds that would in any case be turned in these directions for the maintenance of existing capital. They go in part to wages; and in so far they are not abstracted from the money income which goes for the season to the purchase of finished commodities, but simply shifted from hand to hand. In the long run, indeed, not the part only, but the sum total of the invested savings, goes to wages, by a succession of advances to labor; but this holds good only of the operations of a lengthened cycle. For any one season, the process of investment means, in large part, the purchase of inchoate wealth, or real capital. Such inchoate wealth is usually on hand to meet the new demand. Not only is enough being produced to make good the waste of existing capital as it wears away or becomes useless, but additional supplies of real capital are constantly being made in our modern communities, in anticipation of the fresh accumulation of individual capital. New investment, as well as reinvestment, takes place so regularly that the concrete change in the community’s possessions has usually taken place before the decisive committal of his means to accumulation has been made by the individual investor. Saving thus usually means a transfer of purchasing power from the immediate receiver of money income to other hands. Partly it means a transfer to the laborers whom the managing capitalists may employ with the additional funds, and thus a simple shift in the demand for consumable goods; partly it means the buying of tools and materials, and so a real postponement, for the time being at least, of any purchase of enjoyable things at all.

As to the individual saver, the postponement is usually permanent. He does not ordinarily avail himself of the recurrent opportunity for spending which comes as the loans made to the active managers fall due. He reinvests, repeating the decision to save. He spends only the money income handed over to him as interest on his accumulations. With this he becomes each year (assuming that he does not again save out of income) a purchaser of real income, and a sharer in the inflowing supplies of consumable goods. The quantity and quality of these supplies may vary from year to year, and the possibilities of his real income may thus vary. But so far as the reward for his labor is concerned, he is independent of those present limitations on real income which we have found to exist for such as spend their whole money income at once for the satisfaction of immediate wants.

How great is the importance of this additional element of elasticity in the real reward of labor must depend on the extent to which savings are in fact made from money wages. As to the great mass of hired laborers, and even the great mass of those independent workmen, in agriculture and in the crafts, to whom also we commonly apply the term wages, the savings are probably very small as compared with their total earnings. More especially is this the case with hired laborers. It is true, the accumulations in the savings banks of the more advanced countries form an imposing mass; but they are to be compared with the much more imposing mass of the total earnings of the laborers. They come only in part from savings by receivers of wages; and in any case they are small as compared with the whole sum which is paid in wages. It can not be far from the truth to say that virtually the whole of the wages of hired manual laborers is spent at once on consumable commodities, and therefore is subject to the causes by which the supply of consumable commodities is so largely predetermined.

The class in society as to whom the fact of saving is of most importance is that of the successful managing capitalists or business men. It is from them that the largest habitual accumulations of capital are derived. Hired laborers may save a bit from their wages; independent laborers, when prosperous, may save a bit more. The investor, again, getting his fixed income from a capital which is expected to remain intact, is likely to put aside only a small part of his receipts. The professional classes of lawyers, physicians, and the like, do indeed usually save some considerable proportion of their income. But the active managers of industry, more than any other set of men, find the main object of their ambition and the one test of their success in” making money”; in acquiring larger money rights than they spend; in accumulating, and in adding to their possessions. The prosperous business man sets aside for the enlargement of his wealth a greater proportion of his income than any other member of society; and of the total accumulations of fresh capital for the community, the greatest part probably comes from the eagerness of this class to acquire permanent wealth. While he is still in harness, the possessions of the active capitalist usually consist in large part of inchoate wealth directly owned, and of claims against fellow business men, offset more or less by cross-claims; the whole having an uncertain value, depending on the outcome of the operations still in progress. Each one, as he reaches the point (if ever he reaches it) where he thinks he has a competency, begins to wind up his enterprises, converts his possessions mainly into obligations due him by those who are still active in business, and retires to the position of a dependent investor. If he does not retire himself, his children are likely to do so. The existing generation of active capitalists gives way to a new generation, equally intent on large gains and large accumulations.

The fact of saving and postponed enjoyment thus leads to qualifications of our main conclusions chiefly in regard to the well-to-do classes, and, among those, most strikingly in regard to the successful business man. Those who save are pro tanto free from the conditions of present supply which, within greater or smaller limits, cause the available real income of all classes in society to be in some degree predetermined. The largest savers and the largest accumulators of capital are the successful men of affairs. These, then, may be said in a sense to have the most elastic, the least predetermined, real reward for their labor.

It need not be remarked that, in speaking of a predetermination of any sort, as to wages or any form of income, reference is made to wages in the mass, or other income in the mass. To say that the real wages of any particular set of laborers are predetermined, would be an entirely different proposition. The whole wages fund discussion, — the whole discussion of the relation of capital to wages or other forms of income, — applies to the general phenomenon, not to the particular. But of this qualification or explanation more will be said in the next and concluding chapter, whose object it will be to make clear, in other respects also, the scope and significance of the conclusions that have been reached.

• *See pages 62–64.
• *Cairnes, Leading Principles, Book II, ch. i. Compare what is said below at page 257. Cairnes apparently had in mind, when making this division, the money funds of the direct employers, which go to the one destination or the other; not the division of the actual possession of the community into finished and enjoyable goods on the one hand and inchoate wealth on the other.
• †Sec what is said of Thornton below, at pages 246–255.