That is, a day's labor of a farm hand, if exchanged for a pair of boots upon which a day's labor had been put by the shoemaker, tanners, etc., involved in its production, would be securing not only that day's labor, but a capital use. "But if n labor in product A exchanges for n labor in product B, how can n labor in B at the same time buyn in A?" If it be argued that materials and subsistence are necessary to make labor effective and that therefore past labor is used, it is thereby conceded that there is an element in production beyond labor, namely, the use of capital; and if the product has an exchange value in excess of the labor cost, its existence is explained by the fact that this capital use has not only value in use, but also exchange value. (4) If one overlooks or abstracts the capital-use element and regards it as equal in each product, labor may be thought of as determining; but, in fact, these uses are hardly alike in any two products. (5) In truth, Ricardo's rule, as expressed by M'Culloch, merely says A = A and does not explain the essence of exchange value.

Conclusion.-There is no need for a detailed criticism of the views of Lauderdale and Hermann. The former was in error in positing a limited demand based upon an assumed body of "needs "; and his notion of the function of capital, while containing a correction of Smith's ideas, was crude. Hermann's chief mistake appears to be an undue minimization of the differences that exist among productive agents. First, he too nearly overlooks the significance of the question of directness of yield, which results in the inclusion of durable consumers' goods in his classification of capital ("use capital "). But chiefly this minimization is seen in his denial of the significance of cost differences between the factors which are ordinarily called land and capital. He virtually omits any recognition of the importance of the fact that the supply of land in general is limited, and that this is especially true for any one of the different grades of land. His treatment of undertakers' gains, too, is open to the objection of including payments for diverse

1 Cf. the argument on Ricardo's theory of profits, above, p. 230.

functions,' and he is sometimes classed as one of those who attempted to combine the English and French theories.

The more modern tendency would be to classify a part of the rewards given to the undertaker by Hermann as wages and part as "pure profits."

The merits of the two writers have perhaps been sufficiently indicated.

The similarity between their views upon important points and the probable influence of the earlier author upon the other do not seem to have been recognized. Resemblances have been noted in the independent place given to capital, the subjective element in value, and the treatment of consumption. Both also point to the distinction between public and private wealth, Hermann undoubtedly following Lauderdale to some extent.

1 Mangoldt's theory is open to a similar criticism.

CHAPTER XXVII

THE DOWNFALL OF THE WAGES-FUND THEORY

DURING the space of a generation, roughly covered by the lifetime of John Stuart Mill, that method of explaining wages rates known as the wages-fund theory played an important part in the history of economic thought. Some account of this theory has already been given.1 Though a faint trace of it may be found in Turgot's writing, it is an English product, dating from the time when capital and a capitalist class began to be of prime importance in industry. Following the Industrial Revolution there came a certain new dependence of labor upon capital - as advances of subsistence and direct aid to production - which the economists soon exaggerated. Passages from Smith, Ricardo, Malthus, and M'Culloch 3 might be cited, showing a suggestion of the idea that wages depend on a wages fund of circulating capital, the two writers last named being clear and definite in their expression of it. Senior, as already seen, puts it quite clearly, and is commonly named as the father of the theory. But it was James Mill who stated the theory in a hard and fast manner, and his son John fitted a somewhat modified form of the doctrine into his restatement of the classical political economy.

Passing over some early criticism in Germany which had no influence in England, that interesting series of assaults by English writers which sapped and overthrew this dogma may be taken up at once.

Perhaps the first came from Richard Jones, who wrote in 1831. At this time the theory had not gained such prominence as it later

1 See above, pp. 228, 236, 267, 356. Political Economy (1836), p. 234.

3 Political Economy, p. 379.

4 Above, pp. 273, 381, 431.

66

attained, and Jones was chiefly concerned with rent; therefore his treatment was too brief to give him the honor of a definitive attack. Jones' words were as follows: We should take a very false view of the causes which regulate the amount of their [the laborers'] earnings, if we merely calculated the quantity of capital in existence at any given time, and then attempted to compute their share of it by a survey of their numbers." For, as laborers "produce their own wages, all the circumstances which affect either their powers of production, or their share of the produce, must be taken into the estimate." These ideas were not expanded, and Jones' judgment appears to have had small effect.

A similar lack of effectiveness, so far as recognized and avowed, at least, attended the much more conclusive work of Francis D. Longe. Longe was an Oxford man and a lawyer, being admitted to the bar in 1858. Through a connection with the Children's Employment Commission he became acquainted with the labor problem; in 1860 he published a treatise on the law of strikes; and this was followed, in 1866, by his pamphlet, A Refutation of the Wages-fund Theory of Modern Political Econ

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Longe quotes passages from Mill and his follower, Fawcett, to show that they believe (1) in a definite fund destined for purchasing labor; (2) that the laborers form a group within which competition can distribute wages; and (3) that the factors controlling this distribution are demand and supply. These things Longe denies. Even as an abstract principle, he holds, the theory is false. The fallacy lies in treating the fund taken to represent demand for labor as a sum which would all be spent in labor, notwithstanding the purchase of a part of the supply with a smaller portion of it than would represent the proper price of the part bought, as determined by the proportion between the whole supply and the money-measure of the original demand." Even if the circulating capital of a country were a certain per cent of its wealth, there is nothing to insure that the laborers would get all. And he shows that Mill falls

1 Essay on the Distribution of Wealth, Chap. VI.

into some confusion by using " demand," now as money demand, now as the quantity demanded. As to the existence of any such fund, Longe himself maintains that the mere psychical process of "destining" a thing cannot bring it to pass; it is demand in the sense of quantity of labor demanded that enters into the determination of the wage rate.

The whole fallacy, he states, lies in a confusion of two funds: one consisting of the goods available for maintaining laborers during the productive process; the other, of the amount of wealth available for purchasing the product.1 The former may come from the laborers' own resources or be borrowed, as well as be advanced by the employer directly; the latter might come from consumers, from the goods produced, or from the employer. It is the latter "fund " alone that is significant.

Mr. Longe sent copies of his Refutation to Mill and Fawcett, but it provoked no reply.

Two years after the appearance of Longe's pamphlet, another concise refutation of the doctrine under consideration was published, being found in the North British Review for March, 1868.2 The article is unsigned. Its writer begins by stating that the fallacy of the wages-fund theory lies in its premise that everything which decreases profits thereby decreases the means of paying wages. But he calls attention to the fact that manufacturers do not all receive a bare minimum profit, the inference being that wages could be increased by drawing upon surplus profits; and he goes on to argue that diminished profits may lead to an increase in saving and capital. For one thing, the fund for paying wages is mostly drawn from the price of the product, and is reinvested without conscious effort. "A manufacturer will generally work his mill or factory to the utmost so long as he does obtain a profit; he does not voluntarily set aside a certain sum for wages, diminishing and increasing that sum according to profits, but he employs as many men as he can, and pays them what he must." In the second place, there is another class of savings, coming from investors, and this increases when the in

1 Ibid., p. 47.

2 Pp. 5 ff.