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be self-destructive in the long run. It must lead in time to such a scarcity of capital and of business power that the total Wages-and-profits Fund will be insufficient to afford high wages to labour, even while capital is getting a low rate of interest, and business power is receiving low Earnings of Manage


§ 3. But it is not necessary that a rise of wages which labourers may obtain by the aid of their combinations, should be self-destructive. For even if it is got at the expense of profits in the first instance, it may be used in such a way as to prevent any diminution of the Wages-and-profits Fund, and to throw no permanent burden on profits.

Firstly, if labourers saved as large a part of their income as capitalists and employers do, a rise of wages at the expense of profits would scarcely affect the accumulation of capital. But the working classes consume nearly the whole of their income on their immediate wants. The wages of hired labour in the United kingdom amount to nearly £500,000,000; or about one half of the total net annual income of the country. But their annual savings, even when allowance is made for the houses and furniture which they buy, and for their contributions to provident societies, form a very small part of the two hundred and forty millions which are added yearly to the wealth of the country. It is true that in those parts of England in which wages have long been high, many artizans own their own houses: and a rise in wages leads in the course of time to an increase in the will to save, as well as in the power to save. Still it must be admitted that the immediate effect of a rise of wages at the expense of profits will be to check the growth of Material capital.

Secondly, we have seen that an increase in Time-wages, if it leads to such an increase of efficiency that Task-wages are no higher than before, will not lower profits, but raise them. In other words a rise in wages almost always leads to an increase of Personal capital; and the increase of the Wages-and-profits Fund depends on the Personal as much as on the Material capital of the country.

A rise of wages may then to a great extent be devoted to adding to the Material and Personal capital of the working classes, and increasing their efficiency: and if so spent, it will not lead to any diminution of the Wages-and-profits Fund, it will not be self-destructive even though it has been obtained at the expense of profits in the first instance.

It must however be noticed that in supposing the rise of wages to increase the efficiency of labourers, it has been taken for granted that the measures by which they obtain the rise do not to any great extent diminish their efficiency. It has been

taken for granted that they do not insist on such regulations with regard to apprenticeships as tend to prevent the number of skilled labourers from increasing; that they do not oppose improvements in machinery, in the process of manufacture, or in its arrangements; and lastly that they are able to attain their ends without many strikes. Of course the expense which workmen incur in a strike must be deducted from their gains before the real value of the rise can be found. But a further and perhaps more important deduction must be made on account of the indirect injury which strikes and the fear of strikes inflict on production. For production is checked, and therefore the Wages-and-profits Fund is diminished, by everything that hampers the enterprise of employers, or that makes them design timidly and carry out their designs imperfectly : the more their energy is diverted from their proper work in production to vexatious controversies with those whom they employ, the less will be the Wages-and-profits Fund.

We conclude then that it is not impossible for trades unions to enable labourers to obtain a general rise of wages which they would not have otherwise got; but that this rise will itself bring into operation causes which will lower wages, and that it cannot be permanent, unless it be obtained by means which do not seriously hinder production, and unless it be used in such a way as to largely increase if not the Material yet the Personal capital of labourers, and to add a great deal to their efficiency.

[§ 4. This result helps us to interpret the proposition:"Industry is limited by capital1"—a proposition which has been often used as a way of stating what has been called the WagesFund theory. This theory has been much misunderstood, and has been the occasion of many popular fallacies. But even as explained by its ablest and most careful exponents, it seems to be unsatisfactory; because it rests on the assumption that all wages are paid out of wealth that has already been set by as capital. This was first assumed for the sake of simplicity, rather than with the intention of being made a basis of economic science. But from the habit of using it for convenience, some economists drifted into the habit of thinking and writing as though it were a necessary law of nature that wages should be paid entirely out of wealth that has been set by as capital. Starting from this basis they shewed that the circumstances of the country determine in what proportion capital is divided into the two parts, Auxiliary and Remuneratory. They called the Remuneratory capital in the country its "WagesFund;" and they argued that no change could increase this Fund, unless it either increased the total amount of capital in the country, or caused the Remuneratory capital to increase at the expense of the Auxiliary.

1 See Book I. ch. iii. § 3.

When therefore trades unions claimed to be able to raise wages at the expense of profits, the upholders of the WagesFund theory answered that the action of unions cannot increase, but must rather diminish capital; that they cannot alter the circumstances that determine the ratio in which capital is divided into Auxiliary and Remuneratory1; that as they can do neither of these things, they cannot increase the Remuneratory capital which forms the Wages-Fund; and that therefore any rise that their efforts may obtain in the real wages of one trade, must be compensated by a fall of at least equal amount in the wages of other trades. In fact as Mill says, "In the common" or Wages-Fund "theory, the order of ideas is this. The capitalist's pecuniary means consist of two parts-his capital, and his profits or income. His capital is what he starts with at the beginning of the year, or when he commences some round of business operations: his income he does not receive until the end of the year, or until the round of operations is completed. His capital, except such part as is fixed in buildings and machinery, or laid out in materials, is what he has got to pay wages with. He cannot pay them out of his income, for he has not yet received it. When he does receive it, he may lay by a portion to add to his capital, and as such it will become part of next year's wages-fund, but has nothing to do with this year's.


"This distinction, however, between the relation of the capitalist to his capital, and his relation to his income, is wholly imaginary.... His own advanced from his capital and replaced from the returns, pari passu with the wages he pays. we choose to call the whole of what he possesses applicable to the payment of wages, the Wages-Fund, that fund is co-extensive with the whole proceeds of his business, after keeping up his machinery, buildings and materials, and feeding his family; and it is expended jointly upon himself and his labourers. The less he expends on the one, the more may be expended on the other, and vice versa."

This is the reason which Mill gives for wishing to introduce into the theory of wages contained in his Political Economy "those qualifications and limitations which are necessary to make it admissible." Instead of holding that there is a certain amount of wealth deliberately set by to be used as Remuneratory capital, he regards wages and profits alike as coming from that net produce of land, labour and capital which, after deducting rent and taxes, we have called the Wages-and-profits Fund: he

1 We have seen that a fall in the rate of interest increases the use of machinery and other fixed capital, and therefore tends to increase Auxiliary capital relatively to Remuneratory. But the exponents of the Wages-Fund Theory seem generally to have overlooked this argument on their side.

argues that it is the division of this Fund into the two parts of profits and wages which determines how much of the produce shall become Remuneratory capital.

The difference between the new doctrine and the old can be well illustrated by the case of immigration of labour into a country. According to the old doctrine wages have to be paid out of wealth that has already been set apart as capital: and since the labourers will require some raw material and implements to work with, there must be an increase of Auxiliary capital, and therefore a diminution of Remuneratory; and therefore the total amount of wages got by the larger number of labourers must be less than that which has been got by the smaller. According to the new doctrine this result will not necessarily follow: indeed the opposite result is the more probable. For the increase in the supply of labour will increase the net produce of capital and labour, and therefore the Wages-and-profits Fund. It is true that employers will compete less keenly than before for the hire of labour, partly because there is more labour to be hired; and partly because it will answer their purpose to divert some of their means from hiring labourers to providing more Auxiliary capital; and therefore the rate of wages will fall. But it is not certain, nor even very probable, that the whole share which labour gets of the Wages-and-profits Fund will amount to less than before1.

The old method of stating the wages problem led working men to regard their wages as paid out of a fund of capital already stored up, the amount of which is, for the time at least, fixed independently of their exertions. The new doctrine shews how their wages depend not only on the capital which others have stored up, but also, and to a greater extent, on the efficiency of their own work.]

1 Cairnes (Leading Principles, Part II. ch. i.) has argued that there was no sufficient reason for Mill's changing his position. He has ably restated Mill's old theory and guarded it against some common misinterpretations; but he has not caught the point of Mill's new argument, as is shewn by his going on to contend that ". an the supply of labour, when it is of a kind to be used in conjunction with Fixed capital and raw material," would cause the Wages-Fund to undergo "diminution as the number who are to share it is increased."

On the other hand Professors Jevons, Cliffe Leslie, Hearn and Francis Walker, and Mr Shadwell, have all adopted the same general idea that wages are the share of the produce which the laws of supply and demand enable the labourer to secure (see Jevons' Theory of Political Economy, second edition, preface, p. 50). Professor Walker has collected some instructive instances in which it is the labourer who lends his labour in advance to his employer, and not the employer who advances his wages to the labourer. See also Thornton On Labour.



§ 1. WE have seen that it is not impossible for labourers, by forming themselves into trade combinations, to obtain a general rise in wages; and that this rise may be maintained, provided it is so used that the Wages-and-profits Fund is not diminished. The next point to be observed is that when a combination in any trade obtains a rise of wages, this rise is seldom entirely at the expense of profits; the employers are almost always able to shift nearly the whole of the burden on to others. Part of it falls on the consumers of the things produced by the trade, and many of these generally belong to the working classes; part falls on other trades which are directly or indirectly associated with this trade in the process of production.

For instance when carpenters by a strike or a threat of a strike get their wages raised, the master builders seldom bear the chief part of the burden. The rise is generally got when the price of houses is rising; and by checking or threatening to check the supply of building it causes a further rise in the price of building; and this rise in price checks the demand for building. A check in the demand for building checks the demand for the labour of bricklayers, masons, plasterers, painters and other workmen who are directly associated with the carpenters under the same set of employers; and also for the labour of brickmakers, quarrymen and others who, though not working under the same employers with the carpenters, are indirectly associated with them in the work of production. In fact the interests of the carpenters are related to those of the bricklayers and masons, and to those of the brickmakers and quarrymen, in very much the same way as they are to those of the master builders. In matters that affect the demand for building and its price, the interests of all these classes are in harmony; and in questions connected with the way in which this price is shared, the interests of carpenters are very nearly as much in opposition to those of bricklayers and masons, and

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