Chapter XII. Long — Thornton — Mill — Cairnes

We come now to the most dramatic episode in the history of the wages fund doctrine, — the attacks on it by Longe and Thornton, and Mill’s surrender to the latter. Immediately after, came Cairnes’s endeavor to reshape and rehabilitate the doctrine; the first attempt, since Adam Smith’s day, at a deliberate and careful statement of its meaning. All this stir was due, as is usually the case with such a burst of active discussion, to the pressure of practical problems. The trade union question had entered on a new phase: the great commission of 1867 was both a result and a further cause of the concentration of public opinion on disputes about wages. Naturally the theory of wages in general received a larger share of attention.

Francis D. Longe, a London barrister, not known before or much noted after as a writer on economic subjects, published in 1866 an eighty-page pamphlet under the title, A Refutation of the Wages Fund Theory of Modern Political Economy, as enunciated by Mr. Mill and Mr. Fawcett. As the title indicates, Longe made no pretence of examining the history of the theory, or its presentation by any long series of writers. He took the two books then most in vogue, and examined the current doctrine as there expounded. To that doctrine, he found three objections to make: (1) that there is no definite fund, distinct from the general possessions of the community, devoted to the payment of wages; (2) that the laborers do not constitute a body among whom the aggregate fund could be divided by competition; (3) that the wages fund doctrine “involves an erroneous notion of the demand and supply principle.” Of these objections, we may consider for the present the first only. The second, as to the distribution of the wages fund among different classes of laborers, does not deal with the essence of the old doctrine, whose expositors had always referred, more or less clearly, to the multiform causes that might influence the particular share of the general fund which might go to one set of laborers or another. In any case, this part of the controversy was not handled by Longe in a manner to attract, or indeed to deserve, much attention. The third objection, as to the general law of supply and demand in relation to wages, was put more effectively, and had a wider hearing; but its consideration may be postponed until we reach, in a later part of the present chapter, the same line of reasoning in the pages of Thornton and Mill. It is the denial of a definite wages fund which marks most signally the new phase on which the discussion now entered. This first objection is the beginning of a long series of similar attacks on the old doctrine; and at the same time it hinges directly on what Mill and other of Longe’s immediate predecessors had said.

Longe denies that there is “a definite fund, distinct from the general wealth, destined for the purchase of labour.” He has a brief word of criticism on Mill’s two funds, of “capital” for productive laborers, and “unproductive” funds for servants and the like; but like Mill, gives attention chiefly to the analysis and definition of capital. He denies that it is intention which determines whether a given portion of wealth shall be capital and shall be used in paying wages. He quotes passages from Mill, and from Fawcett, Mill’s alter ego, in which the intention of the owner is described as the decisive factor; and, following the more obvious meaning of these passages, conceives this intention to be applied directly to the money and potential money proceeds at the disposal of capitalists. To treat such a cause as decisive, he urges, “excludes the very cause which in real life governs both the quantity of wealth which is from time to time used as capital, and the particular mode of production in which it is used.” That cause is “the existence or prospective existence of a purchaser.” “The wealth or capital available for the maintenance of labour” is not the fund which limits wages; “the wealth available for the purchase of their work” is the real fund.*

This reasoning presents itself in two ways: negatively, as to Mill’s discussion of the nature and limitation of the funds available for the immediate employer of labor; and positively, as to the real sources from which these funds are regularly replenished. The replenishment, according to Longe, comes from the purchases or the demand of the consumers who buy the articles made. Something has already been said as to this phase of the controversy; something more will be said of it when we take up, in a later chapter, the treatment of the wages fund at the hands of German economists.† The welfare of any particular set of laborers depends so obviously on the demand for the commodities which they make, that the same force is easily inferred to apply to laborers and to wages at large; and Longe could find a sufficiency of respectable company in this part of his reasoning. And the same may be said of the negative part, — of that which is concerned with the constitution of the wages fund, the relation of capital to wealth, and the significance of the capital of the immediate employers. Here Longe was on much-trodden ground; and what he said on these topics connects itself most directly with the turn which the controversy next took.

All the funds which serve to employ laborers are constantly treated by Longe in terms of money and of money value. This was a natural, an almost inevitable, result of those passages in Mill’s Political Economy which were noticed in the last chapter. Mill’s volumes contained the economic gospel of the day, alike for the faithful and the heretic. Longe had read and re-read the chapters which bore directly on his subject, and, not being versed in all the phases of economic discussion that bore on it more remotely, took Mill’s words in their simplest and most obvious meaning. For him, the wages fund never appeared in any other light than that of funds or means in the hands of employers, available for paying immediate money wages. Hence he was easily led to deny that there was any fixity, or predetermination, in the fund; or any importance to it whatever. The farmer is limited as to his payments for wages “only by the amount of money for which his crops or stock will sell.” Employers, we are told, really pay laborers after these have done their work; and laborers are maintained from what they have been paid on every preceding Saturday, “or from what they have inherited from ancestors.” Coal is often bought when it is at the bottom of the pit, and the money is paid as soon as the coal reaches the pit bank: a case in which laborers, it is supposed, clearly need not get their wages from capital. So, many journeymen are paid by the fortnight or month, while the employers get the money some days before they pay their men.* The reader conversant with more recent discussions of capital and wages will find here some familiar suggestions. To repeat, the presentation by Mill, the authority of the day, of the mode in which funds of capital were turned over to laborers, invited the sort of attack which Longe made.

Substantially the same view as that of Longe was adopted by another writer, whose position may be briefly referred to as another indication of the turn which the controversy was taking. Henry D. MacLeod published in 1873 his Principles of Economical Philosophy.* Like his other writings, this book had weight and value for the elucidation of the phenomena of credit and banking; but on the general principles of economics, Macleod had not much to say that gained or deserved a great deal of attention. As to the wages fund, he quoted with approval Longe’s proposition that purchasers’ demand determined the amount that would be paid in wages; but, for himself, laid most stress on the effect of credit in enlarging the sums that can be paid out to laborers. Here the conception of the source of wages as simply money funds appears in the most unequivocal form. “Thus we see that the true ‘wages fund’ is not the actual amount of specie in the manufacturer’s pocket, but the price which the consumers pay for the complete product. And how is this to be obtained before it is actually received? By means of Banking Credits. This is the precise use and function of Banks which issue notes. It is to issue notes to form this ‘wages fund’ in anticipation of the price paid by the consumers. And thus we see the gigantic importance of a Solid banking system to the labouring classes. It multiplies the’ wages fund’ a hundredfold. ...”†

Precisely the same point of attack as Longe’s was also chosen by William Thomas Thornton, a writer who was of the inner circle among the reigning economists, a close friend of Mill’s, well known by earlier publications, and in every way able to command an attentive hearing. Thornton published in 1869* his book On Labour: Its Wrongful Claims and Rightful Dues, Its Actual Present and Possible Future. His predecessor Longe is not referred to in the book, and very likely was not known to Thornton; yet both on the law of supply and demand as affecting wages, and on the determinateness of the wages fund, he might have got hints from Longe. The supply and demand discussion, which was much the more prominent in Thornton, we may still postpone for a moment, in order to follow without a break that as to the nature and limit of the wages fund.

Thornton never thought of denying that wages were paid from capital. Nor, for that matter, had Longe done so explicitly; though some of his objections, carried to their logical outcome, must have involved such a denial. But Thornton, quite as explicitly as Longe, conceived this fund of capital to be money means wholly in the possession of the immediate managers and employers of the laborers. Naturally he concluded at once that, as such, it was not a fixed or inelastic fund. He was brief on this part of the subject, but none the less clear:

“Determinateness or indeterminateness is the one point of difference between those who affirm and those who deny the wages fund. ... If there really were a national fund the whole of which must necessarily be applied to the payment of wages, that fund could be no other than an aggregate of smaller similar funds possessed by the several individuals who compose the employing class of the nation. Does, then, any individual possess such a fund? … Of course, every employer possesses a certain amount of money, whether his own or borrowed, out of which all his expenses must be met, if met at all. …”*

and Thornton goes on to ask whether the employer may not spend more or less for a dozen different purposes, on his family, on buildings, on repairs. The whole inquiry rests on the assumption that the money funds of the employers constitute the real and important capital applied to the payment of wages; and on such an assumption, he remarks, truly enough, that ‘’ it sounds like mockery or childishness to ask these questions.”

To this attack, Mill surrendered. He reviewed Thornton’s book in the Fortnightly Review for May, 1869, accepted Thornton’s version of the question in dispute, and admitted that his objections were unanswerable. “The capitalist,” says Mill, “starts at the commencement with the whole of his accumulated means, all of which is potentially capital.” Doubtless Mill had in mind here the common definition of capital, as set forth in his own volumes: it depended on the intention of the owner. Thence he might have reasoned, looking merely at the money means of immediate employers, that there could be no wages fund distinct from any of the other possessions of the capitalist. Yet some thought of real capital, and of the irrevocable commitment of at least some part of it to other things than wages fund, seems to have remained in his mind; for the flexible element, which makes him concede that the. wages fund is an indeterminate thing, is found by considering, not all the possessions of the employer, but certain available funds or uncommitted assets. How much be shall advance to laborers, how much expend for himself and his family, is undetermined and free. “There is no law of nature making it inherently impossible for wages to rise to the point of absorbing not only the funds he intended to devote to carrying on his business, but the whole of what he allows for his private expenses, beyond the necessaries of life.” Here again it is difficult to make out exactly what Mill was thinking of. It may be some version of the old doctrine of capital as fixed by intention; or an echo of the Ricardian doctrine that all capital was resolvable into advances of wages; or simply the naked case of the individual capitalist and his possible expenditure of money. At all events, it was the last mentioned that was uppermost. In the Political Economy, as we have seen, Mill had sometimes considered food, clothes, shelter, as constituting the wages part of circulating capital; sometimes had spoken of “funds” or “income” or cash. Here the latter view is taken unequivocally. The surrender of the rigid wages fund then becomes inevitable. The result is not satisfactory to one who would follow Mill’s own advice of disregarding the outward mechanism of paying and spending, and attending to the realities of the phenomena.* Longe and Thornton had gone astray, in a direction which Mill himself, consciously or unconsciously, had pointed to in the Political Economy. Now he followed them into hopeless confusion between real capital and real wages on the one hand, and the money mechanism of nominal wages on the other.

The explanation of Mill’s loose thought and hasty surrender is not far to seek. Personal regard for Thornton probably counted for something: he was disposed to make every possible concession to his old friend. But the main cause was a change in his interests and sympathies, which led him to get quit of the wages fund discussion as promptly as possible. In his later years, social problems, in their bearing on the wider questions of philosophy and ethics, engrossed his attention more and more. By far the larger part of the review of Thornton is given to the ethical aspects of trade-unionism, the other topics being passed over with a comparatively light touch. He cared much more for the right and wrong of trade-unionism, as tested by some final standard, than for the mechanism of market wages and the elasticity of the wages fund.

No doubt, too, another circumstance helps to account for his ready acceptance of Thornton’s version and refutation of his older doctrine. He had himself never stopped to consider that doctrine with much care. We have seen how briefly he had stated it in the Political Economy, and how ambiguously he had applied it. When he was confronted by Thornton’s objections, he had no well-defined views of old standing to fall back on; and he was too much interested in the larger social questions, perhaps was too old, to overhaul the whole theory of wages and capital from its foundations. On other topics -thus on the law, or equation, of supply and demand, which we shall presently consider-he had reached clearer thought in his younger days, and, not being taken unawares, was able to weigh Thornton’s objections more critically. On the wages fund doctrine, he had no accumulation of critical thought to draw on.

The law or equation of supply and demand, just referred to, occupied much space in this discussion. As we have noted, Longe and Thornton had found it necessary to say something on the bearing of supply and demand on wages and the wages fund. Mill did the same; though he yielded less to Thornton here than on the nature and elasticity of the fund. The controversy branched off into fields somewhat beyond the scope of the present inquiry; but some review of this phase of it may be advantageous.

Longe had begun by questioning whether the general law of supply and demand had anything to do with wages and the wages fund. He had no difficulty in showing that the writers then in vogue, and more especially Mill and Fawcett, supposed that law to be in point: they conceived of the immediate determination of wages as being a simple application of supply and demand. Ricardo long ago had set the example of distinguishing between market and natural wages: market wages being determined by the ratio of capital to population, and natural wages by their “cost,” — i. e., by the price of food, or the quantity of labor given to the production of a given quantity of food. His successors had worked out a neat and harmonious formula, applicable alike to labor and to commodities: supply and demand determined marked or temporary rates, while cost determined natural or permanent rates. Mill had given precision to the phrases about supply and demand by putting the law in the form of an equation: quantity demanded varies with prices, and price must be such that quantity demanded equals quantity supplied.* Longe questioned the real working of the principle even in this version; but he maintained that in any case the wages fund theory alleged a relation between supply and demand very different from that set forth in Mill’s equation. Under the wages fund doctrine, demand in relation to labor means quantity of capital offered, not quantity of labor demanded. The ratio or equation is the simple one of comparing a given quantity of offered capital with a given quantity of labor in the market, and not the more complex one of ascertaining at what price the quantity demanded of labor will be equal to the quantity that happens to be supplied.

Thornton, like Longe, found it necessary to analyze the phrases about supply and demand which formed the whole of the philosophy of wages for Cobden and the public at large, and were used by the economists in a way not much less superficial. Unlike Longe, who had taken up this topic very much by the way, Thornton took it up deliberately and systematically, and tried his hand at a complete restatement of the law of supply and demand. We need not follow the intricacies of his reasoning about supposed cases of horses at one price and another, of corn and gloves, Dutch auctions and so on. With the application of the principle of marginal utility, this whole phase of economic theory has become much simplified. Mill’s equation of demand and supply is stated in better terms, and with fuller considation of all the elements involved, in the now familiar proposition that price depends on marginal utility. Mill himself, in admitting the justice of some of Thornton’s criticisms, pointed out that one important condition had not been mentioned in the Political Economy, which yet must be present if the equation of demand and supply is to fix price at a definite point. Quantity demanded must vary with price continuously. The same condition, it 1s clear, must be present if the modern version of the law of demand and supply is to bring a determinate answer. If marginal utility is to fix price without a range of possible variation, each added increment of the article offered must have a less utility than the portion preceding it. These are now commonplaces; they make Thornton’s discussion antiquated, and leave Mill’s significant only as showing that, on topics which he had st9pped to think over with care, he reasoned with severe accuracy.

For the subject of the present volume, this general discussion is pertinent because it shows both Mill and Thornton. following in the path which Longe had declared to be the wrong one: approaching wages and wages fund as a narrower problem within the larger one of demand and supply in general. And here Longe was right. Mill’s equation of supply and demand assumes a demand, or quantity offered, which varies with the price of the thing on sale. Supply is supposed to be given; demand, in the sense of quantity offered, is uncertain. The problem then is, at what price the whole supply will be carried off. But in the version of the wages fund doctrine which was then current, both supply and demand were fixed. Supply was the number of laborers; demand was the quantity of capital, or of circulating capital. Bring the two together, and the average or general rate of wages must be the result.

This difference between the strict wages fund doctrine and the general law of supply and demand may be made more clear by considering another case of a similar sort, where also the usual formula of demand and supply was applied, and yet was inapplicable. The proposition that the value of money varies inversely with its quantity was traditionally presented by the classic writers as an ordinary case of the working of demand and supply. The permanent or natural value of money (i.e., of specie) was supposed to be determined by its cost of production; its market or temporary value, by demand and supply. Supply was the total quantity of money, due account being taken of “its rapidity of circulation,” or the quantity in use for purchases at any moment. Demand for money consisted of all the commodities on sale. Clearly, demand here was a thing fixed from the start, not a thing varying as the rate at which the money was offered might be high or low. The value of money was determined in the simplest way possible: divide the total of money by the total of commodities. That the operation of demand and supply as to money was peculiarly simple, had been pointed out often enough, most clearly by Mill himself. He had none the less presented demand and supply, or the play of forces that fixed the “market”. value of money, as analogous to the play of forces that determined the value of individual commodities at any moment: whereas the two cases differ in essentials. Needless to say, we are not concerned here with the truth or untruth of the quantity theory of money. Its treatment by Mill and his contemporaries, whether right or wrong, shows that even on a subject which, like the theory of money, had received their deliberate attention, they made an indiscriminating use of the formula of supply and demand as the universal determinant of “market” values. Naturally, they did the same with regard to the wages fund, which had rarely received deliberate attention. In strictness, the theory of their wages fund was like that of general prices. Demand and supply, that is, capital and population, were both at any given time fixed: there was no play for a varying demand and no possibility of more than one point of equilibrium.

Mill, as we have seen, was brought to admit the indeterminateness and the elasticity of the wages fund, in the sense of money funds available for the direct employers. Hence he accepted, in some degree, the criticisms which Longe and Thornton made, in different ways, on his former off-hand application of demand and supply to the problem of market wages. He agreed with Thornton so far as to admit that here was a case where more than one point of equilibrium in the equation of demand and supply was possible, and where therefore no certainty existed that one rate or another should emerge from the forces directly in operation. It followed that workmen might get better terms, — higher wages, — by means of combinations and strikes, than they could get otherwise: and thus Mill was led to the question which he had most at heart, the right and wrong of trades-unionism. The theoretical and more strictly economic questions as to demand and supply, like those as to the nature and limitation of the wages fund, received but a scant and unsatisfactory examination at his hands.

In truth, it may be questioned whether, under any form, an analogy can be usefully drawn between the immediate forces determining the general rate of wages, and the immediate causes determining the price of this or that commodity. Needless to say, a connection does exist between the causes that determine the wages of any one class of laborers and those that determine the prices of the commodities they make. Making allowance-often it must be a large allowance-for the friction caused by the position of employers as middlemen between laborers and consumers, we may say that the play of demand and supply in determining prices also determines proximately the share in general wages which shall go to one set of laborers or another. But this belongs to the problem of particular wages, not to that of general wages. As to general wages, Mill had come to the conclusion that the money funds which constitute the proximate demand for labor were indeterminate. We may go further, and admit that there is elasticity not only as to the money funds which go to hired laborers, but as to the consumable commodities which go to the laborers. Yet the variations which take place in the money wages or the real wages which may be turned over to laborers at large, present but a loose analogy to the changes in prices of commodities under the play of the motives analyzed in the doctrine of marginal utility. There is no sign of that continuous diminution of utility with each increment offered the purchasers, which is of the essence of the law of demand and supply as to commodities. In the concrete world, the expectations and calculations of the employing class, the manœuvres and combinations of laborers, a confused medley of causes acting in multiform ways, may bring about in any one season a greater or less of total wages, always within those limits of predetermination which have been elsewhere set forth.* Here we have phenomena of a sort that do not readily reduce themselves to any rule, or fit into any general law of value.†

Fairly weighed, Mill’s review of Thornton thus marks no real advance in the discussion. The curious acceptance of reasoning by which the wages fund is supposed to be made up by the money means of the immediate employers, rendered it unfruitful as to the really difficult question at issue. The discussion of demand and supply added little to what Mill had said in the Political Economy, and certainly made no helpful application of old views or new ones on the topic in hand. Even on that question of the right and wrong of trade-unionism, which now chiefly appealed to him, Mill simply applied the familiar formula of his utilitarianism. Had it not been for the brief and summary recantation of a form of the wages fund doctrine which he had never really maintained, this paper would have had no prominent place in his economic or philosophic writings.

The next important step in the controversy was taken by John Eliot Cairnes. A year or two after Thornton and Mill had threshed the matter over, and almost immediately after Mill’s death, Cairnes published his volume on Some Leading Principles of Political Economy, Newly Expounded.* As the title indicates, it is an attempt at a restatement and modification of more than one part of the economic theory. The rate of wages is the subject of the second book; the passages pertinent to the present inquiry being partly in the opening chapter, which considers the theory of wages directly, and partly in the later chapters on Trade-Unionism, which apply and illustrate the theoretic conclusions.

As to the nature and constitution of the wages fund, Cairnes goes at the matter virtually in the same way as Longe and Thornton and Mill. The case of the individual employer and the means at his command are analyzed.

“Why does A. B. employ his wealth in productive operations? and why does he employ so much and no more in productive operations? … This point having been settled, he has yet to consider in what proportions the amount shall be divided between Fixed Capital, Raw Material, and Wages. What is to prescribe the respective quotas? Manifestly, in the first place, the nature of the industry in which he proposes to embark his capital. … Now the considerations which weigh with the individual capitalist are those which weigh with a community of capitalists; and we are therefore justified in concluding that the main circumstance governing the proportion which the wages fund shall bear to the general capital of a nation is the nature of the national industries.”*

This clearly rests on the assumption that the fund for paying wages is held by the capitalists who directly employ labor, and that, in Thornton’s language, it can be “no other than an aggregate of smaller similar funds possessed by the several individuals who compose the employing class of the nation.”†

The same assumption is made more specifically when Cairnes goes on to examine further in what manner capital is divided into its three constituent parts of Fixed Capital, Raw Material, and Wages. A capitalist starts with £10,000; with £5,000 he can buy fixed capital and raw material, with the other £5,000 he can employ 100 workmen at £50 a year. This example might indeed be supposed, if it stood alone, to be merely illustrative, and not meant to give a literal account of the where and what of the wages fund. But Cairnes uses it as perfectly significant of the details and realities of things; for he proceeds at once to draw from the supposition as to employers’ means in hand, a general conclusion of importance. Some simple arithmetic applied to the £10,000 shows that if laborers are plenty, a less proportion of the cash can go to wages, and a larger proportion will be needed to furnish the plant and materials required to keep the many laborers busy. The details of this odd bit of reasoning, and its validity, are not of great significance; what is important for the present subject is the use of the money illustration as a means of drawing large conclusions. Cairnes generalizes from it to the effect that the larger the supply of labor, the smaller the proportion of wages fund to other sorts of capital. The outcome of his reasoning is finally stated thus: “Our analysis accordingly issues in the following conditions as the determining causes of the Wages Fund, viz.: the total capital of the country; the nature of the national industries; and the supply of labor,” — a conclusion which rests simply on an analysis of the mode in which an individual employer would be likely to use his money means.

Cairnes, as was just noted, divided capital into three parts, — fixed capital, raw materials, and wages fund. He thus got rid of the phrase “circulating capital,” which Ricardo and his followers had often used to denote that part of capital which was “destined to the maintenance of labor.” But the change was one of language rather than of substance. Like his predecessors, Cairnes failed to keep clearly in mind the distinction between the real wages fund of commodities, and the money funds of the immediate employers; or rather, he neglected the former almost entirely. The threefold division was indeed made, in terms, with reference to the capital of the community at large; but when Cairnes proceded to any detailed reasoning as to the wages fund part, he gave attention solely to employers and to the money means they dispose of.

Reasoning so, how could Cairnes maintain that the wages fund was in any way fixed? that the employer could not borrow, or retrench on his personal expenditure? Within a few pages of the passages just quoted, in which the wages fund is described in terms of cash, he turned to Thornton’s questions as to the determinateness of the fund, and might fairly have been expected to answer them directly. He did not do so. He then changed the point of view; found it needful to enter on an explanation of a larger and wider question, — the nature of economic laws; and at last came back to answer Thornton by setting forth, not whether the wages fund was determinate, but in what sense there was an economic law which made it indeterminate within limits.*

As to the nature of economic law, and the kind of determination which it may be expected to bring about, Cairnes wrote justly and truly. “What an economic law asserts is, not that men must do so and so, whether they like it or not, but that in given circumstances they will like to do so and so; that their self-interest or other feelings will lead them to this result.” The application of economic law in this sense to the wages fund was that the habits and desires of capitalists would lead them to maintain accumulation and investment at a certain rate. Individual capitalists might cut down wages and swell their private expenditure; but, “the character of the wealthy classes remaining on the whole what it is, increased accumulations in other quarters would neutralize exceptional extravagance in some.” The disposition to accumulate being thus fixed, a certain proportion of the sums invested must (Cairnes italicizes the word) go to wages. At the root of the argument we find the theory of what Mill called the effective desire of accumulation, — that, with a given return to capital, accumulation will be maintained; and so a determination and even predetermination of a certain amount of capital to wages.

This is familiar doctrine: that high profits increase accumulation, low profits check it. But it does not apply to wages hic et nunc. Without stopping to inquire just how accurately and promptly accumulation in fact responds to a rise or fall in the return to capital, we may be sure that the process takes some years at least to work itself out. Clearly the old version was that this factor had nothing to do with “market” wages. At any given time, according to Ricardo and all the array of the English writer-s down to Cairnes’s time, it was the ratio of capital ,o population that determined wages. If high profits were the result, more capital would be accumulated, and after a space wages would rise: but only after a space. Economic laws acting through the desire of capitalists to reap high returns, — “covetousness held in check by covetousness,” as Cairnes himself elsewhere expressed it, — perhaps determined wages in a cycle of years. But here was no answer to Thornton’s question: was the wages fund at any given time or at any given season determinate or indeterminate?

Thornton put his question by asking how the funds of capitalists Smith and Jones were determined. Cairnes also, when he tried to restate the doctrine, asked how the funds of A. B. would be distributed and used. But when he came to answer Thornton’s question, he set up a different kind of “determination “: one that was settled not once for all this season, but after a while through slowworking causes. Thornton would have admitted freely — indeed did admit, — what Cairnes said about capital and accumulation and profits. He, too, maintained that in the end high profits stimulate accumulation and increase wages; and, conversely, that low profits check accumulation and in the end lower wages. But Thornton asked whether there was not flexibility in the funds immediately available for paying wages, and whether trade-unions could not squeeze from the employer something he would not otherwise give; and here Cairnes, with his rehabilitated wages fund, did not squarely meet the question.

Cairnes himself had in mind the trade-unions, and the application of his theory to their doings. Here the point of view just described is even more distinctly taken: the real limits to the action of trade-unions being found, not in any rigid wages fund, but in the fact, or supposed fact, that profits are at the minimum necessary to induce accumulation. At the very outset, to be sure, Cairnes notes incidentally that there are certain quasi-physical limits to the wages fund. “In order to maintain the stock of commodities of all sorts which in any civilized community goes to support the laboring population, a certain large proportion of the general wealth must exist in the form of fixed capital and raw material. The wealth available, therefore, for the remuneration of labor can not at the utmost be more than the balance which remains after those indispensable requirements have been provided for, under pain of complete failure of the fund.”* This is not so far from a statement of the true question as to the wages fund proper: whether the tangible commodities that can go or will go to laborers are at any moment limited. By proceeding on this line Cairnes might have been able to give a direct answer one way or the other to Thornton’s questions as to determinateness. But he passes at once to the other problem, — as to “the limits arising from the action of human interests operating under the actual circumstances of man’s environment in the world.” These “economic” limits are simply that “profits are already at or within a handbreath of the minimum”: here is the effective obstacle to the endeavor of trade-unions to raise general wages.

When he got to this point, Cairnes said explicitly that the reasoning applied only to “the average rate of wages, as a permanent state of things” (the italics are his own). For a while, trade-unions may secure a general rise in wages, even though profits be at the minimum: but after a lapse of time, and in consequence of a shrinkage of capital, they will find they have killed the goose that laid the golden eggs. Under favorable conditions, when the progress of industry makes a gain possible in one direction or another, they may secure a rise in wages at once, instead of waiting until a rise in profits brings greater accumulation of capital, and thus, eventually, higher wages. Either of these admissions assumes a wages fund that for the moment is not determinate.* By implication, Thornton’s questions are answered just as he would have answered them; and the wages fund is rehabilitated by restating a doctrine as to the relation of wages and profits, and the effects of profits on accumulation, which had been preached by almost every English writer of the century.

It may, indeed, be maintained that there never was more than this to the wages fund doctrine: namely, Ricardo’s teaching that profits were the leavings of wages, and his further teaching that accumulation was increased by high profits and diminished by low. Historically, there may be ground for this contention. We have seen that the whole doctrine of wages as determined by the ratio of capital to population was crystallized by Ricardo’s handling of capital as resolvable into a succession of advances to laborers. We have seen, too, that the rigidity or determinateness of the capital from which wages came was not often prominent in the minds of the writers who maintained its importance. But none the less, the wages fund doctrine is a different and distinct one from that of. the determination of wages by product, via capital. It applies to wages in any one season; and presents primarily the question whether at any given time there is an amount of capital available for paying wages which can or can not be increased. That wages in the long run are determined by product, with enough deduction for interest to induce the accumulation of capital, is stoutly maintained by plenty of writers who sweep the wages fund out of the way with scorn. It is virtually Cairnes’s doctrine; and, while he insists on an advance from capital as an intermediate step in the settlement of wages by product, he adds nothing to what his predecessors had said as to the manner and degree of the determination of the advance of capital, or as to the position of employers and hired laborers in the social use of capital and in the social distribution of finished goods.

Before leaving this last stage in the old-fashioned way of reasoning on the subject, it may be pointed out how, notwithstanding his professed maintenance of the older doctrines, Cairnes had diverged far from them in his final conclusions. He marks the last stage in a change of emphasis, so great as to be a change of opinion, which had been going on gradually and almost imperceptibly among the English writers since Ricardo’s day. Ricardo had laid it down first, that market wages depend on the ratio between capital and population; second, that if the result of the momentary ratio were wages higher or lower than was “necessary” or “natural,” population would increase or decrease until wages were again at the normal point; third, that if the result of this process again were high profits, accumulation of capital would be stimulated, until at last a stage of equilibrium might be reached. In Cairnes, we find that the second and third propositions have changed places. The first step in the analysis remains practically the same, though the phrases are changed a bit: wages depend on the ratio between the number of laborers and that part of capital which constitutes wages fund. The second step now is that if the process results in higher or lower profits than are needful to induce accumulation, capital will grow more or less rapidly, and its return will be brought back to the normal level. Capital gets a certain minimum return: wages get the rest. The third step is that which Ricardo had put second: the Malthusian theory of population, regulating the supply of labor, and eventually bringing wages to the point fixed by the standard of living. The two writers, at either end of the line, agree in giving scant attention to the step which they put third in order. Ricardo said little of the accumulation of capital and the likelihood of its responding to a high or low rate of profits: he conceived that wages adjusted themselves to their natural rate more quickly than profits to their point of equilibrium.* Cairnes, on the other hand, makes but brief and off-hand mention of the supply of labor as determined by the principle of population; while the increase or decrease of capital, in correspondence with the rise or fall of profits above the normal point, is presented and emphasized at length. In Ricardo, profits appear as the residuary legatee; in Cairnes, wages.

This change in emphasis appeared gradually. Torrens and M’Culloch had approached the later point of view when they confronted laborers’ combinations with the same objection as Cairnes’s: an enforced rise in wages would check accumulation. Mill stood half-way, on this subject as on others. He gave much space to the effective desire of accumulation, and the rate of return on capital as a measure of that desire; and he presented the tendency of profits to a minimum in a manner to imply that accumulation responded rapidly and easily to changes in the rate. Elsewhere, and more commonly, he remains on the Ricardian ground: wages are the element that is stationary, and profits vary. In Cairnes, the assumed fixity of wages at last becomes only a remoter possibility, not dwelt on at all in the treatment of concrete questions. This final abandonment of a doctrine fundamental in Ricardo’s reasoning on distribution brought with it a complete change of front, and new vistas on every aspect of the social questions: a change of which all the consequences in economic theory have not yet been fully worked out.

• *Longe, pp. 37–47.
• *Longe, pp. 48, 49, 53.
• *This book was mainly a new edition of the Elements of Political Economy, published in 1858.
• *The preface to the first edition is dated Dec. 31, 1868.
• *On Labour, pp. 84, 95.
• *See above, p. 232.
• *See the familiar passage in the Political Economy, Book III, ch. ii § 4.
• *Compare what was said in Part I, Chapter IV, pp. 82–94.
• *London, 1874. The preface is dated March, 1874. Mill had died in 1873.
• *Leading Principles, Book II, ch. i, § 8. The first two of the extracts here quoted are separated by a page or two in Cairnes’s text; but they are parts of a continuous thread of reasoning.
• *See § II of the chapter just cited.
• *Cairnes, Book II, ch. iii, § I.
• *A capitalist, for example, who has committed himself to an industrial enterprise by making large purchases of building and plant must find labourers to work for him or suffer heavy loss. … Under these circumstances, supposing the workmen on whom he relies to strike for higher wages, and that he has reason to believe they possess the resolution and are in command of funds sufficient to enable them to maintain a prolonged strike, it may be wisdom to concede to their demands. … It is evident, therefore, that workmen have, by means of combination and by accumulating sufficient funds, very considerable power of acting upon the rate of wages.” —Cairnes, Leading Principles, Book II, ch. iii, § 3. This was all that Thornton maintained. Compare the passage cited above, at p. 257, about the employer with the £10,000, which he is supposed to assign in certain fixed proportions to plant, material, and wages. In the extract just given, Cairnes admits that the sum available for wages may be stretched without affecting the other parts of capital: and, as the context shows, extends the admission to wages at large.
• *Ricardo generally dismissed the question as to profits in a footnote, as in the Essay on the Influence of a High Price of Corn, Works, p. 377; or briefly referred in his text to the fact that of course accumulation would be checked long before profits got to zero. Works, p. 67. The chapter in the Political Economy entitled “The Effects of Accumulation on Profits” (chapter xxi) is chiefly given to other subjects than its title indicates: to some criticisms of’ Adam Smith, and to the relation between gross profits and interest.
• †See Part I, Chapter V, pp. 106–109; and Chapter XIII, below.
• †MacLeod’s Principles of Economical Philosophy, vol. ii, ch. xiii, pp. 126, 127. As to the direction in which such arguments as these of MacLeod’s are pertinent, compare what was said above, Part I, Chapters III and IV, pp. 63–65, 83–85.
• †Possibly, in an analysis of the succession of advances made to laborers over a long series of years, a general formula of demand and supply, or of final utility, may be applicable. Over a whole lengthened cycle of production, and in view of the total advances made during the cycle, it may be helpful to conceive of successive increments of capital as turned over to laborers, each with less and less utility for the capitalists as there are repetitions of the process. This mode of approaching the problem of the return to capital was suggested by Jevons, and has been followed with various modifications, by other writers since his time. But obviously it is applicable only to the problem of the final division of the proceeds of a complete productive cycle, not to the narrower question of “market” wages which is the essence of the wages fund problem. At best, I suspect that this mode of approaching the general problem of capital and interest, and so of wages, needs to be both amplified and qualified before it can yield a sufficient explanation of the realities of industrial life. Like the older formulae of the classic writers, it brings a temptation to be content with large general principles, and a danger that their concrete application shall suffer neglect.
• †See the passage as quoted above, p. 246. Cairnes later quotes the same passage from Thornton.