will be made equal to the quantity offered at that price,—the agency by which the equation is reached being competition.
But when we turn to other facts for the verification of the theory we easily discover apparent if not real contradictions. The case of Ireland after the potato famine affords an instance of a rapidly declining population without any corresponding rise in wages, whilst in new countries we often find a very rapid increase of population accompanied by an increase in wages. In a similar manner we find that the capital of a country may increase rapidly without wages rising in proportion—as, for example, seems to have been the case in England after the great mechanical improvements at the end of the 18th century up to the repeal of the Corn Laws—whilst in new countries where wages are the highest there are generally complaints of the scarcity of capital. But perhaps the most striking conflict of the theory with facts is found in the periodical inflations and depressions of trade. After a commercial crisis, when the shock is over and the necessary liquidation has taken place, we generally find that there is a period during which there is a glut of capital and yet wages are low. The abundance of capital is shown by the low rate of interest and the difficulty of obtaining remunerative investments. Accordingly this apparent failure of the theory, at least partially, makes it necessary to examine the propositions into which it was resolved more carefully, in order to discover, in the classical economic phraseology, the “disturbing causes.” As regards the first of these propositions—that there is always a certain amount of capital destined for the employment of labour—it is plain that this destination is not really unconditional. In a modern society whether or not a capitalist will supply capital to labour depends on the rate of profit expected, and this again depends proximately on the course of prices. But the theory as stated can only consider profits and prices as acting in an indirect roundabout manner upon wages. If profits are high then more capital can be accumulated and there is a larger wages-fund, and if prices are high there may be some stimulus to trade, but the effect on real wages is considered to be very small. In fact Mill writes it down as a popular delusion that high prices make high wages. And if the high prices are due purely to currency causes the criticism is in the main correct, and in some cases, as was shown above, high prices may mean real low wages. If, however, we turn to the great classes of employments in which the labour is embodied in a material product, we find on examination that wages vary with prices in a real and not merely in an illusory sense. Suppose, for example, that, owing to a great increase in the foreign demand for British produce, a rise in prices takes place, there will be a corresponding rise in nominal wages, and in all probability a rise in real wages. Such was undoubtedly the case in Great Britain on the conclusion of the Franco-German War.
On the other hand, if prices fall and profits are low, there will so far be a tendency to contract the employment of labour. At the same time, however, to some extent the capital is applied unconditionally—in other words, without obtaining what is considered adequate remuneration, or even at a positive loss. The existence of a certain amount of fixed capital practically implies the constant employment of a certain amount of labour.
Nor is the second proposition perfectly true, namely, that there are always a certain number of labourers who must work independently of the rate of wages. For the returns of pauperism and other statistics show that there is always a proportion of “floating” labour sometimes employed and sometimes not. Again, although, as Adam Smith says, man is of all luggage the most difficult to be transported, still labour as well as capital may be attracted to foreign fields. The constant succession of strikes resorted to in order to prevent a fall in wages shows that in practice the labourers do not at once accept the “natural” market rate. Still, on the whole, this second proposition is a much more adequate expression of the truth than the first; for labour cannot afford to lie idle or to emigrate so easily as capital.
The third proposition, that the wages-fund is distributed solely by competition, is also found to conflict with facts. Competition may be held to imply in its positive meaning that every individual strives to attain his own economic interests regardless of the interests of others. But in some cases this end may be attained most effectively by means of combination, as, for, example, when a number of people combine to create a practical monopoly. Again, the end may be attained by leaving the control to government, or by obeying the unwritten rules of long-established custom. But these methods of satisfying economic interests are opposed to competition in the usual sense of the term, and certainly as used in reference to labour. Thus on the negative side competition implies that the economic interests of the persons concerned are attained neither by combination, nor by law, nor by custom. Again, it is also assumed, in making competition the principal distributing force of the national income, that every person knows what his real interests are, and that there is perfect mobility of labour both from employment to employment and from place to place. Without these assumptions the wages-fund would not be evenly distributed according to the quantity of labour. It is, however, obvious that, even in the present industrial system, competition is modified considerably by these disturbing agencies; and in fact the tendency seems to be more and more for combinations of masters on one side and of men on the other to take the place of the competition of individuals.
The attempted verification of the wages-fund theory leads to so many important modifications that it is not surprising Wages paid from the produce of labour. to find that in recent times the tendency has been to reject it altogether. And thus we arrive at the development of Adam Smith's introductory statement, namely, that the produce of labour constitutes the natural recompense or wages of labour. The most important omission of the wages-fund theory is that it fails to take account of the quantity produced and of the price obtained for the product. If we bring in these elements, we find that there are several other causes to be considered besides capital, population and competition. There are, for example, the various factors in the efficiency of labour and capital, in the organization of industry, and in the general condition of trade. To some extent these elements may be introduced into the old theory, but in reality the point of view is quite different. This is made abundantly clear by considering Mill's treatment of the remedies for low wages. His main contention is that population must be rigidly restrained in order that the average rate of wages may be kept up. But, as several American economists have pointed out, in new countries especially every increase in the number of labourers may be accompanied by a more than proportionate increase in the produce and thus in the wages of labour. Again, the older view was that capital must be first accumulated in order afterwards to be divided up into wages, as if apparently agriculture was the normal type of industry, and the workers must have a store to live on until the new crop was grown and secured. But the “produce” theory of wages considers that wages are paid continuously out of a continuous product, although in some cases they may be advanced out of capital or accumulated stores. According to this view wages are paid out of the annual produce of the land, capital and labour, and not out of the savings of previous years. There is a danger, however, of pushing this theory to an untenable extreme, and overlooking altogether the function of capital in determining wages; and the true solution seems to be found in a combination of the “produce” theory with the “fund” theory.
An industrial society may be regarded, in the first place, as a great productive machine turning out a vast variety of products for the consumption of the members of the society. The distribution of these products, so far as it is not modified by other social and moral conditions, depends upon the principle of “reciprocal demand.” In a preliminary rough classification we may make three groups—the owners of land and natural agents, the owners of capital or reserved products and instruments, and the owners of labour. To obtain the produce requisite even for the necessary wants of the community a combination of these three groups must take place, and the relative reward obtained
