Wages and Capital

The fact that present labor gets its substantial reward from a product made chiefly by past labor was the basis of the reasoning of the classic economists. The products of the past which served to support and remunerate laborers they called capital. They inferred — indeed, assumed as a thing so obvious as hardly to need inference — that wages were paid from capital. In the second part of the present volume we shall have occasion to note how briefly and inadequately they presented this cardinal proposition. Here we shall proceed at once to consider how far it is sound; how far the products of the past are to be called capital, and how far the proposition that labor gets its reward from past product is equivalent to the proposition that wages are paid from capital.

The question of phraseology and definition, which we are thus compelled to face, is from one point of view indifferent, from another very material. From the first point of view any definition can be made to serve, provided it is used consistently. The term capital can be used in any desired sense, if only it be always remembered precisely what it is to connote. Thus a writer may freely use the term capital in a sense different from that of the older economists; only, if thereupon he should deny that wages are paid from capital, he would not squarely meet the question presented in the traditional theorem.* Yet — and here is the other point of view — something more than simple consistency is involved in the choice of phraseology. The object of definition and of classification is not fully achieved if we fail to group together under one head things that are alike, and to distinguish by different terms things that are unlike. One sort of labor, for example, maybe designated as productive, and another sort as unproductive; the distinction has its solid justification only if it appears in due course that some propositions hold good of the one sort which do not hold good of the other. The difficulty with the much-disputed terminology which Adam Smith and his successors adopted in their use of the phrase “productive labor” was of precisely this sort; it did not and could not point to substantial differences in regard to that satisfaction of human wants which is the object of all labor. And, to come closer to the present subject, one form of wealth may be called capital while another may be called non-capital; no logical difficulty will result if the terms are always used in the same sense. But the object in view, an understanding of the phenomena of wealth, — will not be effectually achieved unless we succeed in grouping under each term things that are alike, and as to which the same propositions hold good.

The mode in which these simple general principles bear on the subject in hand can be best illustrated by sketching the historical development of the conception of capital. Adam Smith, with whom the whole modern discussion begins, defined it as the wealth which yielded a revenue to its owner. This definition had a vogue for a while, and has not been without its adherents in our own time; and for some purposes it may still be used with advantage. To the individual, capital is that which he uses not for the immediate satisfaction of his own wants, but for securing in the future a revenue wherewith to satisfy them; whether the capital be in the form of ships and warehouses, materials or goods in stock, cash ready for investment or a dwelling let to a tenant. But for the community as a whole, and with regard to the mode in which different sorts of wealth bear on general prosperity, such a distinction is far from satisfactory. The dwelling owned by A and let to B is capital, under Adam Smith’s definition; but if bought and occupied by B it ceases, under the same definition, to be capital.* The place which it has among the possessions of the community does not change by its sale and transfer; it still forms part of the apparatus for shelter and enjoyment. Again: the horses and carriages of the stable-keeper would be capital, in Adam Smith’s sense, since he uses them as a means of securing revenue; but the equipages maintained by those rich enough to own such a luxury for themselves would not be capital. Here, too, both forms of wealth clearly belong together, so far as their position and effect in the welfare of the community are concerned. Since the causes that affect the prosperity of the community, and not those that affect the prosperity of the individual, primarily come within the scope of economic science, it is inadvisable to use a definition which, like Adam Smith’s, gives different names to things that have the same relation to the general welfare.

The next generation of the classic writers, under the lead of Ricardo, did not usually fall into the error of considering economic phenomena from the point of view of the individual rather than of the community. Indeed, their greatest errors often arose from an excess in the other direction: they regarded things so much in the mass that they neglected many important details. So far as capital was concerned, they gave up Adam Smith’s definition, and substituted one in more general terms: capital was the wealth used for the production of further wealth. What was to be included under capital was explained more explicitly by the retention of the division of capital into fixed and circulating. Adam Smith first applied this distinction and the words for indicating it ; but the later writers adopted a different line of division from that of the originator.* Fixed capital consisted of tools and implements used in a succession of operations. Circulating capital consisted of things that could be used only once and then were gone; it was divisible into materials on the one hand, and means of support for laborers on the other. Gradually there developed the tradition of separating capital into three constituent parts, — fixed capital, raw materials, and wages fund; an enumeration which gave point and precision to the vague phrase that capital consisted of the wealth used for producing more wealth.

The part of the later classic definition of capital which is pertinent for our purpose is the wages fund. For two generations no one thought of doubting that the food and other goods which supported laborers were part of capital. Even in the fir.st attacks on the wages-fund doctrine there was no disposition to proceed to a revision of the conception of capital. Yet no satisfactory solution of the controverted questions about wages is possible without some overhauling of the older classification and definition of capital.

Bearing in mind still that our point of view must be not that of the individual, but that of the community as a whole, we can readily see how the commodities which form the wages-fund part of the capital of the classic writers, in some ways at least, are of a different sort and perform a different function from the other constituent parts. Food, clothes, boots, house-room, ornaments, — any and all the commodities consumed by laborers, — constitute the wages fund. These are enjoyable and consumable commodities. Plant and materials, whether called fixed or circulating capital, are inchoate wealth. The former are real income — the latter are not. The question on which economists in our day differ, and in regard to which there are serious difficulties, is whether the enjoyable form of wealth called the wages fund is so like the inchoate as fairly to be grouped under the same general name of capital.

On the one hand, it may be urged in favor of the old-fashioned view that the laborers must have the wherewithal to live and to keep themselves in working condition in order that productive operations shall be continuous and effective: The succession of efforts which was described in the last chapter, and the extension of the working process over a long stretch of time, make it necessary that a considerable stock of commodities should exist in completed or partly completed form. In order that the successive division of labor may achieve its wonderful results, there must be not only tools, machinery, and materials, but bread, meat, and clothing for the active workers. Some such supplies there must be at once, for the needs of to-day; others must be ready, or nearly ready, for the morrow. A stock of enjoyable goods is as essential for effective and abundant production as is the array of inchoate wealth through all the stages of productive effort. The necessary enjoyable commodities are thus like the inchoate wealth, in being indispensable parts of the provision essential for any production advanced beyond the most rudimentary stage.

The view that such enjoyable commodities are to be regarded as capital was strengthened by the belief of the older writers as to the quality and quantity of real wages which laborers were likely to get. In the days when the wages-fund doctrine and all that went with it held full sway, the laborers were usually thought of as getting “natural” wages and no more. This, again, was rather assumed and implied than expressly and carefully stated. It was the result partly of a very old tradition; for before the days of Adam Smith and of the classic school the common statement in regard to wages, and indeed almost the only statement, was that they depended on what was needed to maintain the race of laborers. It was partly due to the conditions of the time when the wages-fund doctrine got its hold, day-laborers’ wages being doubtless little above the minimum in the early part of the century in most European countries. It was in good part due to the indelible impression which Malthus’s writings on population made on two generations of thinkers. At all events, for one reason and another, laborers were commonly described as getting “natural” wages, and no more; only so much as in the nature of things they must have.

Here, again, there was a curious intermingling of very different trains of thought. The “natural” wages, which Ricardo said laborers must have, were not stated to be the simple physical necessaries. They were the wages which habit and custom rendered necessary; the wages without which the laborers would not marry and rear children, and which, if exceeded, would lead them to marry earlier and have more children. In this sense, necessary or natural wages, as fixed by the standard of living, might be a great deal more than the bare necessaries of life. But while Ricardo and his followers of the wages-fund school said explicitly that natural wages were determined by the standard of living, not by the physical minimum, they thought of that standard as universally low. Any general statement they might make at the outset as to a possible high standard was usually forgotten or put aside as they went on. Half unconsciously, they converted the original conception of habitual “necessaries” into a conception of physical necessaries. Largely for this reason the wages which laborers got were thought of as needed in their entirety to maintain working strength. Thence it was a natural step to think of them as necessary for the maintenance of productive effort, and therefore as capital.

So much as to the grounds, and the reasons for the former easy acceptance, of the view that commodities indispensable for the workers are to be called capital. But that view is open to objections for the purposes of almost any economic inquiry, and to very serious objections for those of the inquiry here in hand.

In the first place, the situation of the laborers in general is not so desperate as Ricardo and his followers were apt to assume. Even at the time when they wrote there were great strata among the workers who got more than the minimum needed to keep them in working condition. In our own more prosperous days the large majority of laborers are in this better situation. Hence only part of the commodities which they get could be considered capital in the sense of being indispensable to production. Only what the older writers called “productive consumption” could be so classed, — the consumption without which the maintenance of efficient production was impossible. It would follow that, in the great majority of cases, wages must be regarded as paid in part not out of capital but out of some other source; the unproductive consumption having no resemblance to tools and other effective apparatus of production. The proposition that wages are paid from capital, stated and limited in this way, would be a different one from that of the classic school; for this school, to repeat what was said a moment ago, regarded all wages as paid entirely from capital. Modified as the proposition must be in view of a more prosperous condition of laborers, it makes an unexpected division, and on the face of things an illogical one, of real wages into two parts, derived from different sources.

This difficulty becomes even more serious if we enlarge the meaning of the terms “laborers “and “production,” in the manner likely to find acceptance among most economists of our own day. The older English writers, when speaking of wages in general and of the wages fund, commonly thought of those engaged in manual work alone as “productive laborers.” In every direction the conception, if it is to be consistent and satisfactory, must be enlarged. Not only those who work with their hands, but those who work with their heads, are productive; not only those who turn out a tangible product, but all who serve human wants. This is not the place for a disquisition on these much-disputed questions of terminology. It is clear that the engineer and the business manager are as productive as the hod-carrier and the mechanic. It is clear, too, — though not so universally admitted that there is no ground for real distinction between those whose labor does and those whose labor does not issue in a “material” commodity. The actor and the painter, the maid-servant and the maker of table linen, alike minister to the ease and enjoyment of life, and in this essential sense are alike productive. In neither of the directions here suggested did the older writers think of applying their reasoning as to capital and the wages fund. The income neither of the active business man nor of the house servant was thought to have anything to do with the payment of wages from capital. Yet the “productive” consumption of these, as well as of manual laborers, is essential for the procuring of the community’s enjoyable revenue. It may be a question how far we should extend the term “ productive “ as applied to labor; and some would doubtless not be disposed to go as far as the present writer.* But it would be impossible to stop, as the older economists did, with manual laborers. What is needed to maintain the active manager of industry and the merchant, the engineer and the inventor, the physician and lawyer (so far as the services of such are needed to keep laborers in health and business affairs smooth-working), — all this is surely capital in the same sense as the indispensable food of the ploughman. We thus should get a conception of capital and the wages fund applicable not to all the income of a part of the laborers, but to a part of the income of all of the laborers.

Once this conception is reached, however, it becomes more and more difficult to maintain that there is a real resemblance between wages-fund and other capital, and a real distinction between one and the other part of real income. After all, the commodities which go to one and another sort of laborers, whether necessaries or comforts or luxuries, are immediate sources of satisfaction. They are consumed, not to enable work to be done, but as the result of work being done. They represent, not a stage in the production of wealth, but the consumption and enjoyment of wealth. Men are not to be regarded as cattle, fed and tended as a means toward an end. Their consumption is the object of all production. Therefore it is to be regarded as income, and as single and indivisible income.

The total flow of enjoyable goods and services which is regularly coming into the possession of society is thus best considered as one great mass of homogeneous income, different from the inchoate wealth which is on all bands admitted to be capital. The members of the community, whether capitalists or landowners, headworkers or handworkers, idle or industrious, all form one body of consumers. There are, indeed, differences in the causes which bring income to one set or another; and even among those whose income is only a return for labor, there are important differences both in the forces affecting the size of the income and in the machinery by which it gets into different hands. But all together constitute the community, and the whole fund or flow of enjoyable things constitutes their real income. If we conceive the community to be organized on a collectivist basis — a procedure which often helps to bring out the essentials of social life — we readily see that the total of enjoyable things secured in any one season would be regarded as its real available income, apportionable among the various members in any desired manner, partly necessary for life and strength, partly luxury, but not to be called part capital and part non-capital.

It would seem best, therefore, to let the term capital stand simply for inchoate wealth: for all the possessions that do not yet serve human wants. Tools and machines, factories and warehouses, raw materials and half-finished and nearly finished goods, — these all go together as being not directly conducive to enjoyment; while all forms of finished commodities, — food, houses, clothes, ornaments, — belong together as enjoyable wealth and as income. The successive steps by which inchoate wealth is finally converted into enjoyable wealth were described in the last chapter; the same description would serve now to distinguish capital from wealth in general. Hereafter capital will be used in the sense indicated: the tangible apparatus for the production of wealth, and so all the goods still in the stage preparatory to final enjoyment.*

These questions of terminology and classification, however, happen to be of less importance for the purposes of the present inquiry than for some other parts of economic analysis. In whatever sense we use the term capital, it will still appear that current wages, considered with reference to any but a very short period of time, are derived in the main from capital. The grounds of this statement, apparently in contradiction with the outcome of the preceding discussion, need some detailed explanation.

In the last chapter it was pointed out that flow rather than fund was the word appropriate for describing the mode in which the community’s income of enjoyable commodities becomes available. If this is true in regard to the process by which productive labor yields its regular return, it is still more true in regard to the accretions of real income which form current wages.

Doubtless some of the enjoyable goods now available possess the characteristics of a fund rather than of a flow. Those of a more durable sort exist rather as a fund, those of a more perishable sort rather as a flow. Houses and house furniture are fully finished and ready, available now and likely to remain available for a considerable space to come. Food stands at the other extreme, being usually perishable, and existing in no great stock. Grain in the bin, flour in the merchant’s stock, cattle on the fields, — various half-way stages, — these are the more typical forms in which supplies of food available for the early future exist. Clothing stands midway: a present stock is immediately available, and will last some little time, yet needs constant renewal at comparatively short intervals. The difference clearly is one of degree, not of kind. One of the important commonplaces which the classic economists insisted on was that all wealth is being constantly consumed and reproduced, the differences in durability being simply differences of degree. But these differences are very great; so great that we may speak of the commodities of which dwelling houses are the familar and typical example as being for considerable stretches of time a present and permanent fund of enjoyment.

If these more permanent sources of satisfaction, now existing and available, were the things from which the real income of current work were regularly and mainly derived, they would have some resemblance to the “fund” of which the older writers spoke. But, in fact, they are usually the reward of the labor of the past. They have played their part in distribution, and are now the established possessions of those whose former labor, or other source of income, has enabled them to be bought. Clothes, household furniture and implements, food in the larder, these have been bought with the money income of former days, and now are the settled property of their owners. They have nothing to do with current wages or profits or rents. No doubt they can be sold, though usually at a disadvantage. But when sold, they merely pass from one hand to another: what one gains in the way of fresh real income another loses. The total available for the community becomes no more or less. Moreover, since their sale rarely causes them to shift from one class in society to another, the real income of the several classes becomes no more or less. They belong to the distribution of the past, not of the present.

It may be remarked, incidentally, that commodities of the sort now under discussion have sometimes been called capital in a sense different from any yet noticed, and perhaps deserving a moment’s attention. They are durable sources of satisfaction. While they may be described as a fund, because not needing prompt renewal, they may be also described as yielding a continual flow of utilities. The utilities which they yield can not all be enjoyed at once; they are of necessity distributed over some stretch of time. The house or suit of clothes may be considered as throwing off, so to speak, successive instalments of satisfaction. They are thus analogous to machines, which may also be considered as continually throwing off utilities, embodied in the enjoyable commodities which they serve to produce. Hence various thinkers, of curiously different schools and tendencies, have come to the conclusion that the durable sources of immediate satisfaction are capital, like machines and other means of providing utilities; and, since duration is only a question of degree, have concluded that all material commodities of any sort are substantially capital.* But there remains an essential and indeed all-important distinction between the commodities of which the dwelling house is the type, and those of which the machine is the type. While both may be said to yield successive utilities, the one does so without further human exertion, the other only after more or less of labor. The dwelling house is a completed enjoyable thing, available, until the moment for repair or renewal comes, without further labor. So are clothes and boots and household effects in their several degrees. They are in this important sense income, and so distinguishable from wealth still inchoate; even though they are income that from its nature stretches necessarily over some space of time.

To return from this digression to the main course of the argument. It has been said that durable sources of satisfaction usually belong to the distribution of the past, being secured and realized wages or profits or rents. To this general statement there is at least one important exception: in the case of dwelling houses occupied by others than their owners. Such houses are paid for by the tenants out of their current money income, and the shelter which they yield is thus a constituent of their current real income. They therefore play a part in the process of distribution which is going on in the present. The exception is particularly important in regard to those classes with whom we usually associate the word wages and with whom the wages-fund doctrine is supposed more especially to deal. Hired manual laborers are more often tenants than owners of their dwellings. Their clothing, household furniture, and some stock of food on hand they usually own, these having been bought with income of former days. But their dwellings are not commonly their own property. The shelter and comfort which their houses yield are thus paid for out of current income, and are part of current real wages. The dwellings themselves, being enjoyable at once without further labor, are part of the community’s real income and not of its capital. The source of this part of current wages is, then, not social capital, but social income.*

More commonly, however, the commodities which constitute real wages are, at the time when the work is done, still in the last of the inchoate stages: they are just on the point of emerging from capital into income. They are in shopkeepers’ hands, awaiting purchase. The last step in production is not completed until they reach the hands of the consumer whose wants they satisfy. Until that moment they are still strictly to be considered as capital. Hence, the source of real wages exists, in the main, in the form of capital at the time when the work is done.

This is more obviously and more completely the case if we consider not a short period, but any considerable stretch of time. It is not to be doubted that the wages of such a longer period exist now mainly in the form of goods not yet enjoyable. The bread for the coming season must come from the grain now in store; the clothes from the cotton and the wool, the yarns and the undyed stuffs; and so on. Whatever our conclusion as to the income of this day or this week, it is certain that the income of the current year is to be derived mainly from what has been capital during its course.

Lest there be misconception, some further aspects of the sources and constituents of real enjoyment may be briefly considered. It has been tacitly assumed in the preceding paragraphs that real income is secured, and enjoyment begins, when commodities pass from the counter of the retail shopkeeper into the hands of the purchaser. In literal strictness some modification of this assumption would be needed. Flour in the larder, though owned by those who are to enjoy it, is not yet a source of enjoyment; and a cooking stove or sewing machine belongs to the class of inchoate wealth as much as a baker’s oven or a spinning mill. Not a little apparatus is thus beyond the last stage in buying and selling, and yet still in the stage of inchoate wealth. In a strict enumeration and classification of the community’s income and capital, such apparatus would need to be put in the latter class. But for the purposes of everyday life, it may be questioned whether anything is gained by following the division between capital and non-capital beyond the last stage in the processes of exchange. The retail purchaser considers the commodities which he buys as serving for the direct satisfaction of his wants from the moment they pass into his possession. Even though they serve, like the cooking stove or the sewing machine, for an ulterior purpose and a later satisfaction, they do not stand in his mind side by side with the tools of his trade.

It often happens, indeed, that current income is intentionally used in a manner to postpone satisfaction: when it is saved and invested. Saving may take the form of a direct purchase of inchoate wealth, as when the manufacturer buys more machinery and materials out of his current gains. Quite as often it takes the indirect form of the purchase of securities and obligations, whence a fixed future income is expected. In either case there is a conscious postponement of enjoyments which might now be had. Some of the effects of this sort of postponement on the problems connected with the wages fund will receive attention at a later stage. They are referred to here by way of contrasting them with the postponement which is, so to speak, unconscious. For all practical purposes, real satisfaction and real income may be said to begin when the consumer buys goods or services for his own direct use; whether that use yield him enjoyment at once, or only after some further labor has been applied by himself or his household. The things so procured, bought ordinarily over the counter of the retail shopkeeper, may be considered, without sensible departure from the substantial truth, as real income; and that income does not emerge finally from the stage of capital until the moment of purchase.

In this sense, then, we may lay it down broadly that wages are derived from capital. In terms, the proposition is very similar to that which the classic writers had maintained; but the terms are used in different senses. Wages mean all the income of all laborers; capital means that supply of inchoate goods, in all the stages toward completion, from which the steady flow of real income is derived. In the main, the commodities from which the labor of the immediate present and the early future gets its reward exists not as a store of already enjoyable things, but as a varied assortment of things nearly finished. Those from which the labor of the present season — a longer stretch of time — gets its reward, exist as an assortment of things less nearly completed. Some of the more durable forms of enjoyable wealth, such as houses, furniture, clothing, do indeed form rather a store or fund, not needing still to be brought to the stage of fruition; but these are usually possessions in hand, the reward of past labor or the realization of past income, secured in a form which continues to yield satisfaction for a longer or shorter stretch of time. The case of house shelter presents an exception, where houses are hired and current income is spent for the use of a durable source of direct enjoyment. Bearing in mind such exceptions, it may be said in general that the labor of the present and of the near future, still more the labor of the current season or cycle of production, get their reward in some part doubtless from commodities which are now so fully finished as to be virtually enjoyable, but in much the larger part from commodities still in the inchoate stage, and therefore capital.

The proposition that wages are derived from capital, in the sense in which it has been developed in the preceding pages, evidently has a different meaning from the same proposition as it would he understood by one having in mind the relations between capitalists, employers, and hired laborers. Indeed, in any sense of the word “capital” which has regard to functions essential for the community, employers and hiring are of no consequence. Whether in the old sense of a stock of food and other necessaries, stowed away and essential for supporting laborers, or in the sense of a supply of inchoate wealth gradually being carried forward to the stages of fruition and enjoyment, — capital must refer to real and tangible things. It must mean food ready or soon to be ready, clothes in hand or soon to be in hand. It has nothing to do with money or with money wages, or with the hiring of laborers by employers, or with the wealth of the individual capitalists. The relation of wages to capital, as described in the preceding pages, would be the same under any social organization: whether under one where capitalists and laborers were completely separated and laborers got earnings only in the form of payments stipulated between them and their employers; or under a régime of co-operative production, where groups of laborers owned their own tools and materials and shared their earnings; or under a system of complete collectivism, where the community owned the inchoate wealth, and apportioned among the members only the accruing increments of enjoyable commodities. In all, production would be spread over a considerable stretch of time, and the reward of present work would have to come, for any longer period, mainly from goods still in the making.

But the payment of wages from capital has been closely associated, in most of the controversy on the wages fund, with the direct dealings of employers with the laborers whom they hire, and so with the organization of society typical of modern times. It has been supposed to be the result of the separation of capitalists from laborers, and of the payment of wages by the former. This association began almost with the first stages of the discussion. The classic economists started with a conception, incomplete though not without a solid basis in truth, of the relation between present labor on the one hand and product and capital on the other. But their conception was not only incomplete; it was vacillating. Most of them spoke, more or less often, of the funds in the hands of the immediate employer as capital whence wages were paid. The capital was sometimes described as food, clothes, and quantities of things consumed by laborers; but quite as often it was enumerated in terms of money and of millions sterling. This double use of the term, and the recurring confusion which ensued, will receive abundant attention in the second part of the present volume. But it may be well at this stage of the discussion to show how great is the confusion to which it leads, and how imperative is the need of keeping to a consistent use of the term capital: which can best be accomplished by considering one or two typical cases as to which it has been debated whether or in what way wages are paid from capital.

Perhaps the commonest case that has caused perplexity is where the employing capitalist sells his wares before he pays the wages to his laborers. Wages may be paid monthly or fortnightly; meanwhile the employer sells a part of the product, and so secures funds for paying the laborers. How, it is asked, can wages in such a case be said to be paid from capital? Clearly they are not paid from capital, if we mean by that term money funds on hand and accumulated when production begins, or if we think of capital as necessarily owned by the individual who pays wages. But it need hardly be pointed out that all such reasoning and questioning does not touch real capital or real wages. What is real capital? Under any rational conception, not money or funds, but things tangible or usable; under the definition accepted in these pages, tools, machinery, and materials, and all things not yet in enjoyable form. What are real wages? Again, not money, but the enjoyable commodities which the laborer gets. These he buys with his money wages; and the important question is the relation between real wages and the commodities, enjoyable and on the way to enjoyment, which form respectively income and capital for the community.

Another case may be mentioned. The question whether the source of wages at any given time is an elastic quantity or a rigid and predetermined one, has played an important, almost a decisive part, in the wages fund controversy. In discussing it there has been a constant tendency to run off to questions of the employers’ means and the direct money wages which employers pay to hired laborers. What the bearing of hiring and of employers’ activity is on the controverted questions, we shall presently consider. But it would never be denied, though it has often been forgotten, that the real and important question as to the elasticity or rigidity of a wages fund must refer to real wages, not to money wages. Larger payments by employers would not avail, unless there were more commodities ready for purchase. Whether there are more commodities; whether the supply of enjoyable goods, available or soon to be available, is settled by causes that have worked in the past, or is easily swelled by causes working in the present; these are the substantial questions. Whether employers can pay more or less, is only one step, and by no means the crucial one, in answering them. Still more inadequate for a satisfactory answer is the consideration whether the individual employer’s means for paying laborers are fixed or elastic. Of all this, to repeat, more will be said in one and another part of the pages to come. At present let the reader bear in mind that real income, real wages, and real capital are the essential things, and that any propositions which we may lay down must be applicable to the relations of wages and capital in this sense.

It has already been suggested that the conclusions of this chapter, as to the relation between capital and real wages, have a wider application than the old doctrine of the wages fund. The reasoning, while directed to wages, applies equally to every other form of income. Not only laborers, but all classes in the community, get their present remuneration from the now accruing increments of enjoyable goods. That these enjoyable goods form the total income of the community was, in fact, the first step in the reasoning. Hence everything that is true of wages is true of interest, and rent, and business profits. All are derived from capital in the same sense. Interest or rents received some time ago may have been put into durable forms of enjoyable wealth, and may still exist, as mansions or cottages, perfect works of art or primitive ornaments; and these things are not capital. But the interest and rent received from day to day are nearly all spent from day to day, and are spent, in the main, on commodities which do not reach the stage of enjoyment until the purchase is accomplished. In this sense all forms of present income alike, while made up of enjoyable goods, were capital but a moment before. If any law of wages has been reached, it is a law equally applicable to all present rights and claims. It is but a statement of the fact that all the enjoyment of to-day comes from commodities which are the product of past labor, and have ripened to-day, or yesterday at best, into the finished form which makes enjoyment possible.

Herein, again, certainly we have a conclusion different from that of the classic economists. They never dreamed of applying to profits and to rent the same reasoning that was applied to wages. Wages, according to them, came from a different source and were determined by different causes from those that affected the other sorts of income which are usually associated with prosperity and wealth. According to the views just developed, all alike come from the same source and are determined by a chain of past events whose general influence is the same as to all.

Not only are interest, rent, and wages to be considered together from this point of view, but the different sons of wages also go together. It is immaterial what the machinery is by which wages are turned over to the laborer: whether in the first instance in the form of money wages by an employer, or in the form of money received directly by the laborer for a product sold by him; whether daily wages to an unskilled workman, or a yearly salary to a high official. All get their real wages from the same source and in the same way, by spending their money receipts on consumable commodities. This was, again, by no means the scope of the older wages-fund doctrine, which was declared more or less explicitly to refer to hired laborers only, and was always stated and applied in a manner to show that, even among these, only manual laborers were thought of. Whether or no the old doctrine was meant by its authors to be limited in its scope to hired laborers, the important truth which has been set forth as underlying it holds good in the much wider sense which has been explained in the preceding pages. Past product, existing for any season mainly in the form of unfinished goods, is the source whence all laborers, hired or not hired, and all capitalists, and all the members of the community, get the income of the present and of the immediate future.

And yet there is something more to be said of wages and capital, and of laborers, hired or other, than this general proposition as to the source of the whole community’s income. It is obvious at the least that there are differences in the machinery by which this income reaches one hand and another. Hired laborers get the money incomes which constitute their claims to the accruing real income of the community in one way; independent workmen in another; rent receivers and interest receivers in still another. The unmistakable differences in the mode in which the various members of the social body get their share of the general income bring some important consequences, both as to distribution at large and as to wages and the wages fund. The examination of these differences and the consequences which flow from them will form the subject of the next chapter.

• *A neat example of this sort of procedure is furnished by Mr. Henry George in Progress and Poverty, who gives a meaning of his own to capital, and then denies with vigor that wages are paid from capital. The fact that his own definition of capital, when carefully considered, is not so different as it purports to be from the traditional one, does not redeem the operation. Compare what is said below of George’s position in the wages controversy (Part II, Chapter XIV).
• *Compare, however, what is said below, in Part II, Chapter VII, page 147, of the manner in which Adam Smith qualified his definition in regard to these forms of durable wealth.
• *For the history of this phase of economic speculation, which is touched here in the briefest way, the reader is referred to Mr. Cannan’s thorough and accurate History of the Theories of Production and Distribution from 1776 to 1848.
• ** If a distinction between productive and unproductive labor is still to be made, it would seem that it could be done only on the lines of separating that labor which is essential and effective for the processes of production as now organized, and that labor which is only an incidental and perhaps dispensable adjunct of them. No one would deny that the merchant whose activity serves to bring together commodities and then to despatch them where needed, is productive. But side by side with him is the speculator who but watches the tricks and turns of trade; indeed, the merchant himself is often, in half h1s activity, no more than a speculator. The banker, again, aids to put capital into the hands of those likely to make good use of it, and so is productive; but who would say that any and every “banker and broker” in our great cities performs functions really serviceable for the community? No doubt it is difficult to draw the line in all such cases between the activity which contributes to social welfare and that which does not; and some allowance must be made for the inevitable useless hangers-on in every occupation. Yet, when every allowance is made, it is difficult to believe that all the work of the crowds of speculators, brokers, “business men,” in the cities of modern times, is in any solid sense helpful for the organization and direction of industry. Much of it means simply that the conditions of a complicated division of labor make it possible to pick up, by shrewdness or by luck, large or small shares of income that represent no contribution to general welfare. Something of this sort doubtless underlies the distinction between unproductive and productive labor (and capital as well) wh1ch has been laid down by one of the most ingenious and suggestive of the theoretic writers of modem times, — Professor Loria, in the Analisi de la Proprieta Capitalista. Exaggerated and often forced as are the attacks on “unproductive” labor and capital by that writer, they yet seem to point out the way to an instructive line of distinction. Much of the activity of lawyers, of financiers, of those who buy and sell on ‘Change, can be said to be but incidental to the really effective work of modern industry, not essential or even perceptibly helpful.
• *Whether or no the term capital should be used in the narrower sense to which preference is given in the text, or in a wider sense to include the things needful for workers, it seems to be agreed that some phraseology should be adopted for distinguishing the two parts which in some regards are so essentially different. Thus Professor Marshall, many years ago, in his Economics of Industry, suggested the term “auxiliary” and “remuneratory” capital; and in the third edition of his Principles of Economics uses the phrases “production capital” and “consumption capital.” Such a practice may cause ambiguity when the word capital is used alone, and, on the whole, does not seem to me indispensable in order to bring out the fact that some supplies for the workers are needed for the operations of production.
• *See Hermann’s Staatswirthschaftliche Untersuchungen, 2d edition, pp. 221 seq.; Jevons’s Principles of Political Economy, 2d edition, pp. 280–287; Cohn’s Nationaloekonomie, § 147. In general, I have endeavored to avoid cumbering this first part with literary references, reserving such matters to their appropriate places in the second part. But this particular phase of the discussion on capital will not again be touched.
• ** It may indeed be contended that the final stage in the work needed for full enjoyment is not reached until the letting of the house is accomplished. As the labor of the shopkeeper is the last step in the long series of efforts which bring his goods to the consumer’s hands, so the house agent or active landlord does his share in the work of bringing the dwelling at last to serve the tenant’s wants. The relatively high rent of the tenements occupied by the poorest laborers, which require much care and repeated attention in the business of letting them and collecting the rents, is the concrete expression of this fact. The dwellings hired by tenants might thus be said to emerge from the stage of capital into that of enjoyment and income by successive slight acts of exertion. But it would be a mistake to make anything of refined reasoning of this sort. Substantially, the dwellings, whether hired or owned, may be regarded as available and enjoyable, and as present sources of real income. — For another case in which substantial truth is reached, even with some violation of theoretical nicety, compare what is presently said in the text, at page 42, of the purchases of household tools by retail buyers.