an accurate measure of the general rate of wages for practical purposes, there can be no doubt as to the value and necessity of the conception in economic theory. For, as soon as it is assumed that industrial competition is the principal economic force in the distribution of the wealth of a community—and this is in reality the fundamental assumption of modern economic science,—a distinction must be drawn between the most general causes which affect all wages and the particular causes which lead to differences of wages in different employments. In other words, the actual rate of wages obtained in any particular occupation depends partly on causes affecting that group compared with others, and partly on the general conditions which determine the relations between labour, capital and production over the whole area in which the industrial competition is effective. (See A. L. Bowley’s Wages in the United Kingdom in the Nineteenth Century (1900), § 3, for an account of the meaning and use of the average wage.)
Thus the theory of the wages question consists of two parts, or gives the answers to two questions, (1) What are the Wages-fund theory. causes which determine the general rate of wages? (2) Why are wages in some occupations and at some times and places above or below this general rate?
With regard to the first question, Adam Smith, as in almost every important economic theory, gives an answer which combines two views which were subsequently differentiated into antagonism. “The produce of labour constitutes the natural recompense or wages of labour,” is the opening sentence of his chapter on wages. But then he goes on to say that “this original state of things, in which the labourer enjoyed the whole produce of his own labour, could not last beyond the first introduction of the appropriation of land and the accumulation of stock.” And he thus arrives at the conclusion that “the demand for those who live by wages, it is evident, cannot increase but in proportion to the increase of the funds which are destined to the payment of wages.” This is the germ of the celebrated wages-fund theory which was carried to an extreme by J. S. Mill and others; and, although Mill abandoned the theory some time before his death, he was unable to eradicate it from his systematic treatise and to reduce it to its proper dimensions. It is important to observe that in the hands of Mill this theory was by no means, as was afterwards maintained by Elliot Cairnes, a mere statement of the problem to be solved. According to Cairnes (Leading Principles of Political Economy, bk. ii.), the wages-fund theory, as given in Mill's Principles (bk. ii. ch. xi. § i), embraces the following statements: (1) the wages-fund is a general term used to express the aggregate of all wages at any given time in possession of the labouring population; (2) the average wage depends on the proportion of this fund to the number of people; (3) the amount of the fund is determined by the amount of general wealth applied to the direct purchase of labour. These propositions Cairnes easily reduces to mere verbal statements, and he then states that the real difficulty is to determine the causes which govern the demand and supply of labour. But the most superficial glance, as well as the most careful survey, will convince the reader of Mill's chapters on wages that he regarded the theory not as the statement but as the solution of the problem. For he applies it directly to the explanation of movements in wages, to the criticism of popular remedies for low wages, and to the discovery of what he considers to be legitimate and possible remedies. In fact, it was principally on account of the application of the theory to concrete facts that it aroused so much opposition, which would have been impossible if it had been a mere statement of the problem.
The wages-fund theory as a real attempt to solve the wages question may be resolved into three propositions, which are very different from the verbal truisms of Cairnes. (1) In any country at any time there is a determinate amount of capital unconditionally destined for the payment of labour. This is the wages-fund. (2) There is also a determinate number of labourers who must work independently of the rate of wages—that is, whether the rate is high or low. (3) The wages-fund is distributed amongst the labourers solely by means of competition, masters competing with one another for labour, and labourers with one another for work, and thus the average rate of wages depends on the proportion between wage-capital and population. It follows then, according to this view, that wages can only rise either owing to an increase of capital or a diminution of population, and this accounts for the exaggerated importance attached by Mill to the Malthusian theory of population. It also follows from the theory that any restraint of competition in one direction can only cause a rise of wages by a corresponding fall in another quarter, and in this form it was the argument most frequently urged against the action of trade unions. It is worth noting, as showing the vital connexion of the theory with Mill's principles, that it is practically the foundation of his propositions on capital in his first book, and is also the basis of the exposition in his fourth book of the effects of the progress of society on the condition of the working-classes.
It has often been remarked that, in economics as in other sciences, what eventually assumes the form of the development of or supplement to an old theory at first appears as if in direct antagonism to it, and there is reason to think that the criticism of the wages-fund theory was carried to an extreme, and that the essential elements of truth which it contains were overlooked. In many respects the theory may be regarded as a good first approximation to the complete solution of the problem. The plan favoured by some modern economists of regarding wages simply as the price of labour determined as in the case of other prices simply by demand and supply, though of advantage from some points of view, is apt to lead to a maladjustment of emption in other directions. The supply of labour, for example, is in many ways on a different footing from the supply of commodities. The causes which the wages-fund theory emphasizes too exclusively are after all verae causae, and must always be taken into account. There can be no doubt, for example, that under certain conditions a rapid increase in the labouring population may cause wages to fall, just as a rapid decline may make them rise. The most striking example of a great improvement in the condition of the labouring classes in English economic history is found immediately after the occurrence of the Black Death in the middle of the 14th century. The sudden and extensive thinning of the ranks of labour was manifestly the principal cause of the great improvement in the condition of the survivors.
Again, as regards the amount of capital competing for labour, the reality of the cause admits of no dispute, at any rale in any modern society. The force of this element is perhaps best seen by taking a particular case and assuming that the general wages-fund of the country is divided into a number of smaller wages-funds. Take, for example, the wages of domestic servants when the payment of wages is made simply for the service rendered. We may fairly assume that the richer classes of the community practically put aside so much of their revenue for the payment of the wages of their servants. The aggregate of these sums is the domestic wages-fund. Now, if owing to any cause the amount available for this purpose falls off, whilst the number of those seeking that class of employment remains the same, the natural result would be a fall in wages. It may of course happen in this as in other cases that the result is not so much a direct fall in the rate of wages as a diminution of employment—but even in this case, if people employ fewer servants, they must do more work. Again, if we were to seek for the reason why the wages of governesses are so low, the essence of the answer would be found in the excessive supply of that kind of labour compared with the funds destined for its support. And similarly through the whole range of employments in which the labour is employed in perishable services and not in material products, the wages-fund theory brings into prominence the principal causes governing the rate of wages, namely, the number of people competing, the amount of the fund competed for, and the effectiveness of the competition. This view also is in harmony with the general principles of demand and supply. If we regard labour as a commodity and wages as the price paid for it, then we may say that the price will be so adjusted that the quantity demanded
