Principles of Political Economy · John Stuart Mill
Chapter II. Of Wages.
As stated by Mr. Cairnes,(161) political economy is a science just as is any recognized physical science—astronomy, chemistry, physiology. The economic “facts we find existing are the results of causes, between which and them the connection is constant and invariable. It is, then, the constant relations exhibited in economic phenomena that we have in view when we speak of the laws of the phenomena of wealth; and in the exposition of these laws consists the science of political economy.” It is to be remembered that economic laws are _tendencies_, not actual descriptions of any given conditions in this or that place. Competition, in fact, has only become in any considerable degree the governing principle of contracts, at a comparatively modern period. The further we look back into history, the more we see all transactions and engagements under the influence of fixed customs. The relations, more especially between the land-owner and the cultivator, and the payments made by the latter to the former, are, in all states of society but the most modern, determined by the usage of the country. The custom of the country is the universal rule; nobody thinks of raising or lowering rents, or of letting land, on other than the customary conditions. Competition, as a regulator of rent, has no existence.
Prices, whenever there was no monopoly, came earlier under the influence of competition, and are much more universally subject to it, than rents. The wholesale trade, in the great articles of commerce, is really under the dominion of competition. But retail price, the price paid by the actual consumer, seems to feel very slowly and imperfectly the effect of competition; and, when competition does exist, it often, instead of lowering prices, merely divides the gains of the high price among a greater number of dealers. The influence of competition is making itself felt more and more through the principal branches of retail trade in the large towns. All professional remuneration is regulated by custom. The fees of physicians, surgeons, and barristers, the charges of attorneys, are nearly invariable. Not certainly for want of abundant competition in those professions, but because the competition operates by diminishing each competitor’s chance of fees, not by lowering the fees themselves. These observations must be received as a general correction to be applied whenever relevant, whether expressly mentioned or not, to the conclusions contained in the subsequent portions of this treatise. Our reasonings must, in general, proceed as if the known and natural effects of competition were actually produced by it, in all cases in which it is not restrained by some positive obstacle. Where competition, though free to exist, does not exist, or where it exists, but has its natural consequences overruled by any other agency, the conclusions will fail more or less of being applicable. To escape error, we ought, in applying the conclusions of political economy to the actual affairs of life, to consider not only what will happen supposing the maximum of competition, but how far the result will be affected if competition falls short of the maximum.
With these limitations of the terms, wages not only depend upon the relative amount of capital and population, but can not, under the rule of competition, be affected by anything else. Wages (meaning, of course, the general rate) can not rise, but by an increase of the aggregate funds employed in hiring laborers, or a diminution in the number of the competitors for hire; nor fall, except either by a diminution of the funds devoted to paying labor, or by an increase in the number of laborers to be paid. This is the simple statement of the well-known Wages-Fund Theory, which has given rise to no little animated discussion. Few economists now assent to this doctrine when stated as above, and without changes. The first attack on this explanation of the rate of wages came from what is now a very scarce pamphlet, written by F. D. Longe, entitled “A Refutation of the Wage-Fund Theory of Modern Political Economy” (1866). Because laborers do not really compete with each other, he regarded the idea of average wages as absurd as the idea of an average price of ships and cloth; he declared that there was no predetermined wages-fund necessarily expended on labor; and that “demand for commodities” determined the amount of wealth devoted to paying wages (p. 46). While the so-called wages-fund limits the total amount which the laborers _can_ receive, the employer would try to get his workmen at as much less than that amount as possible, so that the aggregate fund would have no bearing on the actual amount paid in wages. The quantity of work to be done, he asserts, determines the quantity of labor to be employed.
About the same time (but unknown to Mr. Longe), W. T. Thornton was studying the same subject, and attracted considerable attention by his publication, “On Labor” (1868), which in Book II, Chap. I, contained an extended argument to show that demand and supply (i.e., the proportion between wages-fund and laborers) did not regulate wages, and denied the existence of a predetermined wages-fund fixed in amount. His attack, however, assumes a very different conception of an economic law from that which we think right to insist upon. The character of mankind being what it is, it will be for their interest to invest so much and no more in labor, and we must believe that in this sense there is a predetermination of wealth to be paid in wages. In order to make good investments, a certain amount must, if capitalists follow their best interests, go to the payment of labor.(162) Mr. Thornton’s argument attracted the more attention because Mr. Mill(163) admitted that Mr. Thornton had induced him to abandon his Wages-Fund Theory. The subject was, however, taken up, re-examined by Mr. Cairnes,(164) and stated in a truer form. (1.) The total wealth of a country (circle A in the diagram) is the outside limit of its capital.
How much capital will be saved out of this depends upon the effective desire of accumulation in the community (as set forth in Book I, Chap. VIII). The size of circle B within circle A, therefore, depends on the character of the people. The wages-fund, then, depends ultimately on the extent of A, and proximately on the extent of B. It can never be larger than B. So far, at least, its amount is “predetermined” in the economic sense by general laws regarding the accumulation of capital and the expectation of profit. Circle B contracts and expands under influences which have nothing to do with the immediate bargains between capitalists and laborers. (2.) Another influence now comes in to affect the amount of capital actually paid as wages, one also governed by general causes outside the reach of laborer or capitalist, that is, the state of the arts of production. In production, the particular conditions of each industry will determine how much capital is to be set apart for raw material, how much for machinery, buildings, and all forms of fixed capital, and how many laborers will be assigned to a given machine for a given amount of material.
Suppose a cotton-mill established in one of the valleys of Vermont, for the management of which the owner has $140,000 of capital. Of this, $100,000 is given for buildings, machinery, and plant. If he turns over his remaining capital ($40,000) each month, we will suppose that $28,000 spent in raw materials will keep five hundred men occupied at a monthly expenditure of $12,000. The present state of cotton-manufacture itself settles the relation between a given quantity of raw cotton and a certain amount of machinery. A fixed amount of cotton, no more, no less, can be spun by each spindle and woven by each loom; and the nature of the process determines the number of laborers to each machine. This proportion is something which an owner must obey, if he expects to compete with other manufacturers: the relationship is fixed for, not by, him.
“I believe that, in the existing state of the national wealth, the character of Englishmen being what it is, a certain prospect of profit will ‘determine’ a certain proportion of this wealth to productive investment; that the amount thus ‘determined’ will increase as the field for investment is extended, and that it will not increase beyond what this field can find employment for at that rate of profit which satisfies English commercial expectation. Further, I believe that, investment thus taking place, the form which it shall assume will be ‘determined’ by the nature of the national industries—‘determined,’ not under acts of Parliament, or in virtue of any physical law, but through the influence of the investor’s interests; while this, the form of the investment, will again ‘determine’ the proportion of the whole capital which shall be paid as wages to laborers.”(166) In this excellent and masterly conception, the doctrine of a wages-fund is not open to the objections usually urged against it. Indeed, with the exception of Professor Fawcett, scarcely any economist believes in an absolutely fixed wages-fund. In this sense, then, and in view of the above explanation, it will be understood what is meant by saying that wages depend upon the proportion of the wages-fund to the number of the wage-receivers.(167) In applying these principles to the question of strikes, it is evident enough that if they result in an actual expansion of the whole circle B, by forcing saving from unproductive expenditure, a real addition, of some extent, may be made to the wages-fund; but only by increasing the total capital. If, however, they attempt to increase one of the elements of capital, the wages-fund, without also adding to the other elements, fixed capital and materials, in the proportion fixed by the nature of the industry, they will destroy all possibility of continuing that production in the normal way, and the capitalist must withdraw from the enterprise.
Francis A. Walker(168) has also offered a solution of this problem in his “Wages Question” (1876), in which he holds that “wages are, in a philosophical view of the subject, paid out of the product of present industry, and hence that production furnishes the true measure of wages” (p. 128). “It is the prospect of a profit in production which determines the employer to hire laborers; it is the anticipated value of the product which determines how much he can pay him” (p. 144). No doubt wages _can_ be (and often are) paid out of the current product; but _what_ amount? What is the principle of distribution? Wherever the incoming product is a moral certainty (and, unless this is true, in no case could wages be paid out of the future product), saving is as effective upon it as upon the actual accumulations of the past; and the amount of the coming product which will be saved and used as capital is determined by the same principles which govern the saving of past products. An increase of circle A by a larger production makes possible an increase of circle B, but whether it will be enlarged or not depends on the principle of accumulation. The larger the total production of wealth, the greater the _possible_ wages, all must admit; but it does not seem clear that General Walker has given us a solution of the real question at issue. The larger the house you build, the larger the rooms may be; but it does not follow that the rooms will be necessarily large—as any inmate of a summer hotel will testify.
But no one expects either of these states to be permanent; if he did, he would at the first opportunity remove his capital to some other occupation, in which it would still continue to employ labor. The capital remains unemployed for a time, during which the labor market is overstocked, and wages fall. Afterward the demand revives, and perhaps becomes unusually brisk, enabling the manufacturer to sell his commodity even faster than he can produce it; his whole capital is then brought into complete efficiency, and, if he is able, he borrows capital in addition, which would otherwise have gone into some other employment. These, however, are but temporary fluctuations: the capital now lying idle will next year be in active employment, that which is this year unable to keep up with the demand will in its turn be locked up in crowded warehouses; and wages in these several departments will ebb and flow accordingly: but nothing can permanently alter general wages, except an increase or a diminution of capital itself (always meaning by the term, the funds of all sorts, destined for the payment of labor) compared with the quantity of labor offering itself to be hired.
2. Again, it is another common notion that high prices make high wages; because the producers and dealers, being better off, can afford to pay more to their laborers. I have already said that a brisk demand, which causes temporary high prices, causes also temporary high wages. But high prices, in themselves, can only raise wages if the dealers, receiving more, are induced to save more, and make an addition to their capital, or at least to their purchases of labor. Wages will probably be temporarily higher in the employment in which prices have risen, and somewhat lower in other employments: in which case, while the first half of the phenomenon excites notice, the other is generally overlooked, or, if observed, is not ascribed to the cause which really produced it. Nor will the partial rise of wages last long: for, though the dealers in that one employment gain more, it does not follow that there is room to employ a greater amount of savings in their own business: their increasing capital will probably flow over into other employments, and there counterbalance the diminution previously made in the demand for labor by the diminished savings of other classes.
A clear distinction must be made between real wages and money wages; the former is of importance to the laborer as being his real receipts. The quantity of commodities satisfying his desires which the laborer receives for his exertion constitutes his real wages. The mere amount of money he receives for his exertions, irrespective of what the money will exchange for, forms his money wages. Since the functions of money have not yet been explained, it is difficult to discuss the relation between prices and money wages here. But, as the total value of the products in a certain industry is the sum out of which both money wages and profits are paid, this total will rise or fall (efficiency of labor remaining the same) with the price of the particular article. If the price rises, profits will be greater than elsewhere, and more capital will be invested in that one business; that is, the capital will be a demand for more labor, and, until equalization is accomplished in all trades between wages and profits, money wages will be higher in some trades than in others.(169)
When reference is had to the connection between real wages and prices, the question is a different one. General high prices would not change general _real wages_. But if high prices cause higher money wages in particular branches of trade, then, because the movement is not general, there will accrue, to those receiving more money, the means to buy more of real wages. And, as in practice, changes in prices which arise from an increased demand are partial, and not general, it often happens that high prices produce high real wages (not general high wages) in some, not in all employments. (For a further study of this relation between prices and wages the reader is advised to recall this discussion in connection with that in a later part of the volume, Book III, Chaps. XX and XXI.) 3. Another opinion often maintained is, that wages (meaning of course money wages) vary with the price of food; rising when it rises, and falling when it falls. This opinion is, I conceive, only partially true; and, in so far as true, in no way affects the dependence of wages on the proportion between capital and labor: since the price of food, when it affects wages at all, affects them through that law. Dear or cheap food caused by variety of seasons does not affect wages (unless they are artificially adjusted to it by law or charity): or rather, it has some tendency to affect them in the contrary way to that supposed; since in times of scarcity people generally compete more violently for employment, and lower the labor market against themselves. But dearness or cheapness of food, when of a permanent character, and capable of being calculated on beforehand, may affect wages.
(1.) In the first place, if the laborers have, as is often the case, no more than enough to keep them in working condition and enable them barely to support the ordinary number of children, it follows that, if food grows permanently dearer without a rise of wages, a greater number of the children will prematurely die; and thus wages will ultimately be higher, but only because the number of people will be smaller, than if food had remained cheap. (2.) But, secondly, even though wages were high enough to admit of food’s becoming more costly without depriving the laborers and their families of necessaries; though they could bear, physically speaking, to be worse off, perhaps they would not consent to be so. They might have habits of comfort which were to them as necessaries, and sooner than forego which, they would put an additional restraint on their power of multiplication; so that wages would rise, not by increase of deaths but by diminution of births.
In these cases, then, wages do adapt themselves to the price of food, though after an interval of almost a generation.(170) If wages were previously so high that they could bear reduction, to which the obstacle was a high standard of comfort habitual among the laborers, a rise of the price of food, or any other disadvantageous change in their circumstances, may operate in two ways: (_a_) it may correct itself by a rise of wages, brought about through a gradual effect on the prudential check to population; or (_b_) it may permanently lower the standard of living of the class, in case their previous habits in respect of population prove stronger than their previous habits in respect of comfort. In that case the injury done to them will be permanent, and their deteriorated condition will become a new minimum, tending to perpetuate itself as the more ample minimum did before. It is to be feared that, of the two modes in which the cause may operate, the last (_b_) is the most frequent, or at all events sufficiently so to render all propositions, ascribing a self-repairing quality to the calamities which befall the laboring-classes, practically of no validity.
The converse case occurs when, by improvements in agriculture, the repeal of corn laws, or other such causes, the necessaries of the laborers are cheapened, and they are enabled with the same [money] wages to command greater comforts than before. Wages will not fall immediately: it is even possible that they may rise; but they will fall at last, so as to leave the laborers no better off than before, unless during this interval of prosperity the standard of comfort regarded as indispensable by the class is permanently raised. Unfortunately this salutary effect is by no means to be counted upon: it is a much more difficult thing to raise, than to lower, the scale of living which the laborers will consider as more indispensable than marrying and having a family. According to all experience, a great increase invariably takes place in the number of marriages in seasons of cheap food and full employment. This is to be seen by some brief statistics of marriages in Vermont and Massachusetts. Year. Vermont Massachusetts 1860 2,179 12,404 1861 2,188 10,972 1862 1,962 11,014 1863 2,007 10,873 1864 1,804 12,513 1865 2,569 13,052 1866 3,001 14,428 1867 2,857 14,451 In Vermont, while the average number of marriages was reached in 1860 and 1861, it fell off on the breaking out of the war; rose in 1863, under the fair progress of the Northern arms; again fell off in 1864, during the period of discouragement; and since 1865 has kept a steadily higher average. In manufacturing Massachusetts the number fell earlier than in agricultural Vermont, at the beginning of the difficulties.
1856, July to Jan. 6,418 1857, Jan. to July 5,803 1857, July to Jan. 5,936 1858, Jan. to July 4,917 1858, July to Jan. 5,610 The effects of the financial panic of 1857, in Massachusetts, show a similar movement in the number of marriages. The crisis came in October, 1857. In the three months following that date there were 400 less marriages. To produce permanent advantage, the temporary cause operating upon them must be sufficient to make a great change in their condition—a change such as will be felt for many years, notwithstanding any stimulus which it may give during one generation to the increase of people. When, indeed, the improvement is of this signal character, and a generation grows up which has always been used to an improved scale of comfort, the habits of this new generation in respect to population become formed upon a higher minimum, and the improvement in their condition becomes permanent. § 4. Certain rare Circumstances excepted, High Wages imply Restraints on Population.
Wages depend, then, on the proportion between the number of the laboring population and the capital or other funds devoted to the purchase of labor; we will say, for shortness, the capital. If wages are higher at one time or place than at another, if the subsistence and comfort of the class of hired laborers are more ample, it is for no other reason than because capital bears a greater proportion to population. It is not the absolute amount of accumulation or of production that is of importance to the laboring-class; it is not the amount even of the funds destined for distribution among the laborers; it is the proportion between those funds and the numbers among whom they are shared. The condition of the class can be bettered in no other way than by altering that proportion to their advantage: and every scheme for their benefit which does not proceed on this as its foundation is, for all permanent purposes, a delusion.
In countries like North America and the Australian colonies, where the knowledge and arts of civilized life and a high effective desire of accumulation coexist with a boundless extent of unoccupied land, the growth of capital easily keeps pace with the utmost possible increase of population, and is chiefly retarded by the impracticability of obtaining laborers enough. All, therefore, who can possibly be born can find employment without overstocking the market: every laboring family enjoys in abundance the necessaries, many of the comforts, and some of the luxuries of life; and, unless in case of individual misconduct, or actual inability to work, poverty does not, and dependence need not, exist. [In England] so gigantic has been the progress of the cotton manufacture since the inventions of Watt and Arkwright, that the capital engaged in it has probably quadrupled in the time which population requires for doubling. While, therefore, it has attracted from other employments nearly all the hands which geographical circumstances and the habits or inclinations of the people rendered available; and while the demand it created for infant labor has enlisted the immediate pecuniary interest of the operatives in favor of promoting, instead of restraining, the increase of population; nevertheless wages in the great seats of the manufacture are still so high that the collective earnings of a family amount, on an average of years, to a very satisfactory sum; and there is as yet no sign of decrease, while the effect has also been felt in raising the general standard of agricultural wages in the counties adjoining.
Ideas discussed in this chapter
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