Wages and Capital

In the ferment of economic discussion which followed the appearance of the Wealth of Nations, other subjects than those with which the present investigation is concerned, were uppermost: Attention was given chiefly to external and internal commerce, and so to the questions of free-trade without and of unshackled industry within. Adam Smith’s was a catholic mind, and he had the interests both of the scientific thinker and the practical agitator. But his immediate followers laid stress mainly on those parts of the subject in which he had called for prompt legislative reforms. It was the drift of the time, too, to treat economics chiefly with reference to production. The path of progress was believed to be by the increase of the production of wealth. This was to be secured chiefly by freeing exchange from all restrictions. So much done, general prosperity must follow. Not until the middle of the present century, when the complaints of the socialists began to demand attention in louder and louder tones, did distribution become the central problem in economic reasoning.

The urgency of some immediate loosening of restrictive legislation, and the importance attached to problems of production, thus caused Adam Smith’s treatment of wages and capital to receive comparatively little attention. What was said by his immediate successors on this topic, was chiefly in acceptance of his views. So far from carrying his reasoning further, the economists of the next thirty years rarely succeeded in getting as far as he did. What was the general situation, will appear from an examination of the more prominent writers, both among those who accepted the doctrines of the Wealth of Nations with unquestioning loyalty, and those who ventured to differ, on one point or another, with their acknowledged master.

In France, the leavening influence of the Physiocrats, and the upheaval of the Revolution, prepared the way for a more rapid advance in economic thinking than at first appeared in England. Among the writers who took up the cause of reform, none was more enthusiastic than the historian Sismondi; none was more eager for the advance of freedom than he in the earlier stage of his remarkable intellectual career. In 1804, he published at Geneva two volumes, De la Richesse Commerciale, ou Principes d’Économie Politique, which are expressly stated in the preface to do no more than expound what Adam Smith had discovered. Much the larger part of the book is given to foreign trade and the subjects that go with it; though the wide range of interest which Sismondi showed in later life, appeared at this stage in the attention given to the other topics. Following Adam Smith, he points out that the division of labor brings a departure from the simple conditions of primitive industry. Rich and poor emerge; “comme tout homme est foré de consommer avant de produire, l’ouvrier pauvre ce trouve dans la dependance des riches.” And later:

Toutes les fois qu’on met à l’ouvrage un ouvrier productif, et qu’on lui paye un salaire, on échange le présent contre l’avenir, les choses qu’on a contre celles qu’on aura, l’aliment et le vétement qu’on fournit à l’ouvrier contre le produit prochain de son travail. L’argent trentre dans ce marché que comme signe: il représente toujours une richesse mobiliaire, applicable à l’usage et à la consommation de l’homme, c’est cette dernière qui est le vrai capital circulant. Le numéraire est comme une assignation, que le capitaliste donne à l’ouvrier, sur le boulanger, le boucher, et le tailleur, pour qu’ils lui livrent le denrée consommable qui appartenoit déja en quelque sorte au capitaliste, puisqu’il en possédoit le signe.*

The laborer and capitalist find it to their advantage to make the bargain, because the laborer has “rien enfin pour se nourrir ou se vêtir”; while the capitalist wants a profit. Sismondi notices that the laborers almost always have “quelque petit fonds accumulé” with which to subsist for a day or a week, until their wages are paid. But this fund only suffices until “l’échange de !’objet qu’ils ont produit soit accompli”: and in any case it is capital, the laborers being in so far both laborers and capitalists.

This is a neat and compact statement of what Adam Smith had worked out; in some respects it is perhaps an improvement on what Adam Smith had said. There is a touch of originality, perhaps even a presentiment of modern ways of stating the situation, in the description of the laborer as bargaining away the future for the present; and the function of money in regard to wages could not be better put. On the other hand, Sismondi, like his master, evidently regards the period during which advances must be made to the laborers as that only which elapses until a salable product is made.

Thenceforth, in the brief attention he gives to wages in general, Sismondi speaks of them as determined in the first instance simply by the quantity of capital compared with the number of laborers: while other forces, again, are at work to determine them in the long run.

Quelque soit le nombre des ouvriers proportionellement au capital qui doit les nourrir, ils ne pourront se contenter longtems d’un salaire moindre que celui qui leur est absolument necessaire pour vivre: la misère seroit bientôt suivie de la mortalité, et l’equilibre seroit rétabli par ce contrepoids aussi redoutable qu’efficace. Quelque soit d’autre part le nombre ou la valeur des capitaux destinés a maintenir le travail, ils ne pourront jamais être réduits à ne donner aucun profit net. … Le propriétaire préféreroient alors de les dépenser en objets de luxe.*

This consideration of the permanent causes which determine wages still rests mainly on Adam Smith. There is again an original turn in the mention of a minimum and maximum of wages; which bears a curious similarity to a mode of stating the theory of wages common among German writers of our own time. But the treatment is summary; the subject enlisted Sismondi’s interest much less than free-trade, internal and external, and the French legislation restricting it.

In later years, Sismondi recanted many of the doctrines of his first book. In the Nouveaux Principes d’Économie Politique, published in 1819, he joined the reaction against the optimist advocacy of the wonder-working effects of unfettered industry, and set forth the doctrine of over-production and “engorgement des marchées.” His anxiety as to the excess to which free competition could lead colored his conclusions on international trade, corporations, population, poor-laws, and other subjects. But on wages he did not find occasion to modify what he had said. Indeed, the subject is treated even more briefly than in the earlier book. Capital is analyzed as resolvable ultimately into food: it is rather implied than explicitly stated that laborers must be supported out of capital. When the independent treatment of wages is taken in hand, the relation of capital to wages is not mentioned. Sismondi there discusses chiefly the need of high wages as a means of putting larger purchasing power into the hands of the masses and so supplying a market for the threatened over-supply of goods. Indeed, it was hardly to be expected that he should find occasion for revising what he had said in the earlier book on the relation of wages and capital; for the course of discussion in the interval,* while it had elicited differences of opinion on other subjects, had tended to strengthen the hold of Adam Smith’s views on this one. Practically nothing had here been done to advance or develop the results reached in the Wealth of Nations.

The same remark may be made of the treatment of economic theory at large by two other Frenchmen, — Say and Ganilh. Say’s famous and popular Traité d’Économie Politique, published in 1803, was in the main an exposition of the doctrines of Adam Smith. Capital, according to Say, consists of tools, materials, and subsistence. Subsistence must be advanced to the laborers, and must be replaced in the product: “he [the employer] is obliged continually to make the advances.”† The husbandman’s capital must include, besides buildings, tools, and cattle, “seed, ground, provisions, fodder for cattle, and food as well as money for his laborers’ wages, etc.”‡ Here we find Adam Smith’s farmer, and the subsistence for the laborers as part of the farmer’s capital, without further analysis of the character and functions of this form of capital. When Say, in a later part of his treatise, discusses wages independently, the subject of capital, notwithstanding the earlier analysis of it, does not reappear.* Wages are said to depend on the laborer’s subsistence as modified by his habits. They are adjusted by bargain between master and man; and Adam Smith is followed in the statement that the bargain usually works to the advantage of the master. But the part which the master’s capital plays in the bargain is not considered: Say does not attend to the lead, uncertain as it was, which his chief had given. In truth, Say’s books, wide as was their circulation and influence, were thin in intellectual quality, and could hardly be expected to reflect more than the current ideas of the time.

Ganilh’s Inquiry into the Various Systems of Political Economy is in many ways not unlike Say’s Traité; it is neat and lively, and shows the skill of the French in exposition. An eclectic performance, it yet follows in the main Adam Smith, differing with him only on a few topics, like the distinction between productive and unproductive labor and the doctrine of labor as a measure of value, on which Say and Lauderdale had undertaken to correct their acknowledged leader. On capital, Ganilh paraphrases Adam Smith without effort at independence. Capital is an accumulation of the produce of labor, including not only machines and instruments, but “the advances and raw materials necessary to all kinds of labor ... and produce kept in store for present, future, and distant consumption.” But of capital in its relation to wages Ganilh has nothing to say. In the chapter on Wages,* the fluctuation of wages with the price of provisions receive attention: but the proximate source of the demand for labor is not treated as it was by Adam Smith. The demand for labor varies with the progressive, stationary, or retrograde state of national wealth. This is an echo of the doctrine of the Wealth of Nations that wages are high only in advancing communities: it does not touch the detailed analysis of the demand for labor with which Adam Smith had begun. Neither Ganilh nor Say touched the really intricate and difficult parts of their subject.

Among English writers of this period, there was even less of direct discussion than among the Frenchmen of the relation of capital to wages. In England, as elsewhere, Adam Smith’s attacks on the mercantile system chiefly attracted attention. What he said of capital in general, abstruse as it was, and far removed from the pressing problems of the day, aroused little discussion: what he said of capital and wages, apparently none at all.

Lord Lauderdale, to mention one of the ablest and most independent of Adam Smith’s immediate successors, in his Inquiry, protested against several of Adam Smith’s doctrines, notably those on labor as a measure of value, and “parsimony” as the mainspring of public prosperity. Lauderdale was a keen and able thinker, and his corrections of some of Adam Smith’s doctrines deserved more attention than the later classic school gave them. But on the subject of capital and wages he made no advance, and indeed did not fairly attend to what Adam Smith had said. Capital he regarded as consisting only of tools and machinery, and (perhaps) materials; and these were treated as simply “supplanting” labor. Lauderdale failed to see that tools do not supplant labor, and that they are simply a different mode of applying labor. But this view of capital had no bearing on the relations of labor and capital; in fact, it tended to prevent a consideration of that relation. Commodities advanced to laborers were apparently not considered to be capital by Lauderdale. This is certainly a tenable view; but it does not obviate the need of considering the problem how the finished or nearly finished commodities, which are not dubbed capital, get into laborers’ bands. To that problem Lauderdale gave no attention. His Inquiry, indeed, makes no pretence at covering the whole ground. It is a series of detached essays on certain points on which the author had thought for himself and had reached conclusions different from Adam Smith’s. Like others of his time, he was concerned with questions of production rather than with those of distribution. His writings are of interest to the present subject because of the evidence they give that Adam Smith’s discussion of it, when not followed in express terms, aroused no adverse comment.

Malthus is the most important figure in the interval between Adam Smith and Ricardo. The Essay on Population far surpasses any other economic publication of that time, both in the attention which it aroused with the general public, and in the influence it exercised on the subsequent course of economic speculation. Directly, it said little or nothing on capital, or the relations of capital and wages; indirectly, it had a very marked effect on the discussion of this part of economic theory.

Directly, Malthus in the Essay on Population touched very lightly on general economic questions. Indeed, he was then very slenderly equipped for doing so. He had drifted, as it were, into the discussion of economic topics, publishing the first edition of the Essay (1798) as a pamphlet against Godwin and Condorcet; and the pamphleteering spirit did not entirely disappear even when he enlarged it, with the second edition (1803), into the formidable volume which established his fame. Malthus had read Adam Smith, and even in the first edition of the Essay made reference to Adam Smith’s discussion of wages; but it was not until a later period that the questions of wages and profits, and the theory of distribution proper, engaged his attention. Of his contribution to these questions in his later years, when he had become a professor of political economy, and had begun to write more on economic subjects at large, something will be said when the development of thought after the time of Ricardo comes to be taken up. For the present, it will suffice to note what Malthus had to say when his thinking still turned almost exclusively on the question of population. The only passage on the general theory of wages is in the sixteenth chapter of the first edition of the Essay, — a chapter which, though revised and rewritten in later editions, remained unchanged so far as the gist of the reasoning went.* Here Mal thus attacked, with a diffidence that was quite unaffected,† the doctrine which he attributed to Adam Smith, that the demand for labor increases pari passu with the growth of the total wealth, or the combined stock and revenue of society. Malthus maintained that the demand for labor came from “the real funds destined for the maintenance of labor,” — a phrase evidently derived from Adam Smith, and often repeated by Malthus. These real funds, in Malthus’s opinion, must be mainly food; and so he brings the emphasis to the point about which the whole Essay centres, — the possibilities and probabilities of the relative growth of population and of food.‡ Malthus was on the right track, as Adam Smith had been before him, in saying that the real funds which constituted the demand for labor were the consumable commodities which constituted real wages. But he hardly got as far as Adam Smith in analyzing these funds. He simply told the world that mankind, physiologically considered, had the potentiality of multiplying much faster than the most important element in real wages-food-could probably increase. Other constituent parts of real wages, as manufactured goods, might be increased in quantity with comparative ease, and wealth in this form might advance rapidly; but such an increase would not mean a greater supply of food, and would not enlarge the real funds for supporting and maintaining labor. This was the only point of view from which Malthus approached his predecessor’s doctrine of wages. Evidently it does not touch in any way the theory of capital, or of capital in relation to wages, or of the connection between the acts of the capitalist employer in hiring laborers and the mode in which the laborers’ real income is determined. As we shall presently see, Malthus hardly got any further than this even in his later writings, directed though these were to a wider field than the Essay on Population. At all events, nothing that he said in this earlier period made any direct advance in the discussion.

Indirectly, however, the Essay on Population had a very great influence on that discussion. Malthus fastened attention on the standard of living as the determining cause of wages. Population tended, within the limits set by the standard of living, to press on subsistence; changes in wages, unless the result of a changed standard, were unimportant. However explicitly Malthus admitted the possible effect of moral restraint in checking the pressure of population, and however eloquently he preached the virtue of such restraint, he retained throughout a conviction of the strong probability that every increase in food would bring a corresponding increase in numbers, and that wages, in terms of the habitual food of the laborers, would remain at one dead level. When, twenty years later, Senior, in his correspondence with Malthus, maintained that as an historical fact food had increased faster than population, Malthus, admitting that this might be true, pointed out that his theory would not thereby be impugned.* He was thus ready to say, when squarely brought to the issue, that the simple tendency to pressure was the essence of his teaching. Yet the very need of such a question as Senior’s showed how firmly he had impressed on his contemporaries the belief that the tendency to pressure was strong, and so little likely to be mitigated or counteracted as to leave it practically true that wages depended on a fixed low standard of living, and that an increase in subsistence meant simply an increase in numbers. The consequence was that the inquiry which Adam Smith had begun, as to the immediate causes determining wages, seemed superfluous. It was sufficient that wages were regulated by the “principle of population.” The effect of Malthus’s teaching in the Essay was to fix attention on the ultimate causes which determined wages, and to divert attention from the proximate causes and the exact mode of their operation.

The result of this chapter is thus mainly negative. No writer of the period between Adam Smith and Ricardo got beyond the point reached by the former in his analysis of capital at large, and of the place of capital in the payment of wages. Anything new that may appear on this topic in the period that begins with Ricardo, may therefore be treated as a direct advance from the Wealth of Nations anything old and familiar as derived from that source. It will be seen that the additions were, for a long series of years, slight in substance, and not even considerable in the mode of statement. The influence of Adam Smith, on his later followers as well as on those closer to his own time, was here greater and more lasting than on the treatment of almost any other parts of the theory of distribution.

• *De la Richesse Commerciale, vol. I, pp. 36, 53.
• *Ibid, vol. I, p. 63.
• *Nouveaux Principes, Book II, ch. iv, on the return from capital, and Book IV, ch. v, on wages.
• *Ibid., Book II, ch. vii, § iv.
• *Book II, ch. vii.
• *This chapter became chapter VII of Book III in the second edition of 1803, and is chapter XIII of Book III in the last edition. Its caption is: “Of Increasing Wealth as it affects the Condition of the Poor.”
• *See the correspondence between Senior and Malthus, appended to Senior’s Two Lectures on Population (London, 1829).
• †Traité, Book I, ch. iii.
• †“I can not avoid venturing a few remarks on a part of Dr. Adam Smith’s Wealth of Nations; speaking at the same time with that diffidence, which I ought certainly to feel, in differing from a person so justly celebrated in the political world.” Essay on Population, first edition, p. 302. The diffidence seems to have been no longer felt when Malthus reached his second edition; for these apologetic sentences do not appear in the volume of 1803.
• ‡Ibid., Book I, ch. x.7
• ‡“Little or no doubt can exist that the comforts of the labouring poor depend upon the increase of the funds destined for the maintenance of labour; and will be very exactly in proportion to the rapidity of this increase. The demand for labour which such increase would occasion, by creating a competition in the market, must necessarily increase the value of labour; and, till the additional number of hands required was secured, the increased funds would be distributed to the same number of persons as before the increase, and therefore every labourer would live comparatively at his ease. But perhaps Dr. Smith errs in representing every increase of the revenue or stock of a society as an increase of these funds. Such surplus stock or revenue will, indeed, always be considered by the individual possessing it, as an additional fund from which he may maintain more labour; but it will not be a real and effectual fund for the maintenance of an additional number of labourers, unless the whole, or at least a great part of this increase of the stock or revenue of the society be convertible into a proportional quantity of provisions; and it will not be so convertible, where the case has arisen merely from the produce of labour, and not from the produce of land. A distinction will in this case occur, between the number of hands which the stock of the society could employ, and the number which its territory can maintain.” Essay on Population, first edition, pp. 305, 306.
  In the second edition, this passage is retained with no substantial change; but Malthus now was more sure of his ground, and stated roundly that “the error of Dr. Smith lies in representing” and so on. Essay, second edition, p. 421.