IjJ- The theory of wages and its application 
 
 3 1924 002 239 048 
 
THE LIBRARY 
 
 OF tHE 
 
 NEW -YORK STATE SCHOOL 
 
 OF 
 
 INDUSTRIAL AND LA^OR 
 
 RELATIONS 
 
 AT 
 CORNELL UNIVERSITY 
 
The original of tliis book is in 
 tine Cornell University Library. 
 
 There are no known copyright restrictions in 
 the United States on the use of the text. 
 
 http://www.archive.org/details/cu31924002239048 
 
THE THEOEY OF WAGES 
 
THE 
 
 THEOEY OF WAGES 
 
 AND ITS APPLICATION 
 
 TO 
 
 THE EIGHT HOUES QUESTION AND 
 OTHEE LABOUE PEOBLEMS 
 
 BY 
 
 HEEBEET M. THOMPSON, M.A. 
 
 PROPERTY OF LIBRARY 
 
 HEW YORK STATE SdimOL 
 tNOUSTPIAL ACQ LACQR RELATIONS 
 
 CORNELL UNIVERSITY 
 
 MAOMILLAN AND CO. 
 
 AND NEW YORK 
 1892 
 
 All rights reserved 
 
PREFACE 
 
 We are not likely to deal with wages questions in 
 the best way if we have no grasp of the general 
 theory of the subject. If we are groping in the 
 dark we shall not estimate aright the probable 
 amount of effects from given causes, perhaps not 
 even their direction. 
 
 The matter deserves attention even from the 
 general public, for few are unconcerned with it 
 directly or indirectly. To diminish the haziness 
 of view which is the dominant characteristic of 
 discussions concerning wages a closer study of the 
 topic than is generally vouchsafed is required. 
 Perhaps the most striking contemporary instance 
 of this necessity is the controversy on the Eight 
 Hours' Question. 
 
 But many smaller problems are constantly 
 
THE THEORY OF WAGES 
 
 arising in almost everybody's life, and in dealing 
 with these a lack' of clearness of view is equally 
 discernible. 
 
 For example it may be that we are asked to 
 subscribe to free meals for poor children, and when 
 we have committed ourselves to the subscription 
 list we are rendered uncomfortable by more en- 
 lightened philanthropists who tell us that our 
 action will in the long run tend, by the operation 
 of " the iron law of wages," to lower the general 
 rate of wages, so that it appears we are injuring 
 the very people whom we are seeking to benefit. 
 Eut we take comfort once more when we are in- 
 formed on still better authority that " the iron law 
 of wages " does not receive acceptance in instructed 
 circles. 
 
 If we are to act wisely in these matters we ought 
 not to be at the mercy of stereotyped phrases, or of 
 dicta ex cathedrd, but we ought ourselves to have 
 some grasp of underlying principles. 
 
 If for example we realised that a main cause of 
 poverty was the fact that so very few are working 
 on a high plane of intelligence and skill, compared 
 with the great multitude who are labouring inertly 
 
PREFACE vu 
 
 on a low one, we should see that the peril of the 
 free breakfasts lay in tranquillisi-ng the discontent 
 with the current depressed standard of living 
 amongst the very poor. We should indeed be able 
 to appreciate the contention that the vitality needed 
 for a struggle to a higher plane in the working 
 world is more likely to reside in a little frame 
 that is nourished than in one that is starved. 
 But we should nevertheless see the danger of 
 withdrawing an incentive acting on the parents 
 in a very genuine way and instigating . them to 
 accomplish work of a higher calibre, or at least 
 to refrain from acquiescence in employment on a 
 lower level of activity. 
 
 True there is no Iron Law in accordance with 
 which wage-earners are, for the same work, always 
 provided with the bare necessaries of life, neither 
 more nor less. At any rate none such exists for 
 wage-earners fully awake to what advantages their 
 position affords, and prepared to claim them to the 
 iittermost. 
 
 But nevertheless there is an analogous danger 
 that the lower orders of wage -earners may forge 
 iron fetters for themselves by never striving to 
 
THE THEORY OF WAGES 
 
 do a higher grade of work than the lowest which 
 at the moment happens to be the one which will just 
 bring them in the actual necessaries of life. 
 
 The idea requires impressing on their minds, 
 that by doing work that is more wanted by the 
 community, they can do much better than provide 
 these bare necessaries for themselves, but that by 
 not striving to do work of any but such a low 
 grade that it is already more than superabundantly 
 provided, even less than the bare necessaries of 
 life may be brought in to the domestic exchequer. 
 
 The free breakfast scheme certainly does not 
 enforce this idea, and it is a question whether, in 
 the abiding interests of the wage-earning classes 
 themselves, the severity of the punishment by which 
 the lesson is enforced should be tempered further 
 than mere humanity demands by such action as that 
 of the Poor Law. 
 
 The following pages do not claim to have a great 
 deal that is original in them, though their arrange- 
 ment is perhaps new. The economic statements 
 are for the most part those accepted by the 
 economists of to-day, but it has been my aim to 
 put together in a concise form the considerations 
 
PREFACE IX 
 
 essential to the case scattered through the manuals 
 of Political Economy. This I have endeavoured to 
 do in my first chapter; and in my last I have 
 applied the theory thus expounded to various wage- 
 problems with the view of showing how it can be 
 utilised in grappling with practical questions. These 
 two chapters contain all that is likely to interest 
 the general reader. 
 
 There intervene three chapters addressed to 
 economists which it has seemed necessary to 
 embody in order to make my position complete; 
 for, in an attempt to enunciate a wage -theory 
 capable of practical application, it would be in- 
 excusable to run counter to the received economic 
 doctrine of to-day, or even of yesterday, without 
 justifying one's position. 
 
 I do not apprehend however that either the 
 second or the third chapter will at the present time 
 encounter any serious dissent. With the fourth 
 chapter the case is different ; and it is certainly with 
 some agitation that I have attacked a position held 
 by a master of Political Economy like Professor 
 Alfred Marshall, who not only himself holds a 
 place in the first rank in the hierarchy of classical 
 
THE THEORY OF WAGES 
 
 economists, but is completely versed in contem- 
 porary writings, continental and American as well 
 as English. 
 
 It was not until after I had written this chapter, 
 that there came into my hands the monograph 
 written by the American economist, Professor J. B. 
 Clark, A.M., "Possibility of a Scientific Law of 
 Wages'' (Publications of American Economic Asso- 
 ciation, vol. iv. No. 1). The supplementary note to 
 that paper contains an argument based on a reductio 
 ad absurdum almost identical with one I have em- 
 ployed, and I confess it is reassuring to me to find 
 that other minds have been working in the same 
 direction as my own. 
 
 The theory of wages enunciated in this volume 
 regards the product of industry as being divided 
 up amongst the agents of production in shares all 
 of which are interdependent on each other; con- 
 sequently the notion that a certain share or certain 
 shares falling to one or more agents of production 
 are fixed, leaving the other shares or share to be 
 enjoyed as a residue of the total product of industry 
 (however great or however small that residue may 
 be), is rejected. The second chapter combats the 
 
PREFACE XI 
 
 theory that the share of labour is fixed ; the third 
 chapter is equally concerned to show that the share 
 of labour is not residuary;' the fourth chapter is 
 directed against the commonly received doctrine that 
 rent (the share of land) is merely residuary. No one 
 so far as the present writer knows maintains that 
 the share which goes to make up rent is fixed, or 
 that the shares which go to make up profits and 
 interest respectively are either fixed or residuary. 
 It has therefore not been necessary to devote special 
 chapters to disproving these positions. But the 
 reader will perceive that the ground would not 
 have been rendered clear for the theory which I 
 have tried to propound, without an attempted 
 refutation (1) of the wage-fund theory, (2) of the 
 theory that labour receives the residue of the 
 product of industry after certain fixed deductions 
 for rent, interest, and profits have been made, 
 and (3) that land is in a like residuary posi- 
 tion with regard to what is left after fixed 
 deductions have been made for wages, interest, 
 and profits. This must be my excuse for 
 the insertion of three chapters which are I 
 fear not only technical, but also dull (at any 
 
THE THEORY OE WAGES 
 
 rate to those who already grant what they seek 
 to prove). 
 
 With regard to the last chapter it may perhaps 
 be asked : " What good can result from working out 
 wage -problems in actual concrete numbers, when 
 it is admitted that the figures supplied are purely 
 arbitrary ? " My answer is that I have not en- 
 deavoured to furnish either statistics or facts. I 
 have confined myself to the attempt to show what 
 statistics and facts are relevant to the case, and the 
 sort of way in which they should he manipulated 
 when ascertained. A diminution of the hours of 
 labour for example might result in a higher rate 
 of wages per day as well as per hour, or in a lower 
 rate of wages per hour as well as per day or in a 
 higher rate of wages per hour and a lower rate per 
 day. I have made no attempt to predict what the 
 result of a nine or an eight hours' day at any given 
 time or place would be. I have simply pointed out 
 what it is essential to know before a judgment can 
 be formed of what consequence is probable, and 
 supposing certain stated data, what under those cir- 
 cumstances the effect would be. 
 
 As any particular problem which has to be dealt 
 
PREFACE 
 
 with must have its own set of figures and facts, I 
 have preferred simply to portray some few typical 
 cases not with the view of illustrating particular 
 circumstances, but in order to elucidate the kind of 
 investigation and argument that should be entered 
 upon in almost any circumstances. 
 
 H. M. T. 
 
CONTENTS 
 
 CHAPTER I 
 
 The Vnvmrsal Product of Industry and Abstinence {the " Uni- 
 versal Dividend " as it might he called) is a mass of wealth 
 varying in amount, and divided in varying proportions 
 amongst the agents to its p-oduction — 
 
 § 1. What the Universal Dividend is. It is to be noted that 
 it is a VAKTING product 
 
 § 2. There are an infinite number of contributories to the 
 Universal Dividend, but we may distinguish four 
 main classes, in one of which each will find itself in- 
 cluded, viz. : — 
 
 (1) Labour, 
 
 (2) Organising power, 
 
 (3) Use of Capital, 
 
 (4) Use of Land, Rivers, etc. 
 Amongst the providers of these four the varying pro- 
 duct of industry is divided 
 
 § 3. The division amongst the several agents of production 
 follows the play of supply and demand. It is there- 
 fore further to be noted that the share of the product 
 allotted to any one agent of production is itself a 
 TARTINQ PEOPOETION of that Varying product. If 
 any agent of production increases its contribution to 
 the universal dividend its aggregate reward is almost 
 certainly increased, but its reward if taken in propor- 
 tion to the service rendered is almost certainly dimin- 
 
 FAGE 
 
XVI THE THEORY OF WAGES 
 
 PAGE 
 
 ished. On the comparative importance of these two 
 counteractive variations depends -whether a given 
 economic development will or will not be advanta- 
 geous to a given agent of production ... 4 
 
 § i. Observe incidentally that an increase in the units of one 
 of the agents of production sometimes results in a, 
 more than proportionate, and sometimes in a less than 
 proportionate, increase in the Universal Dividend. 
 In the former case the Law of Increasing Returns is 
 said to be in operation ; in the latter case the Law of 
 Diminishing Returns. A " Unit of Efficiency " de- 
 iined and exemplified ... .5 
 
 § 5. Danger to the economist of taking account of the increase 
 or diminution of the total product without considering 
 the proportions of its distribution amongst the agents 
 of production ; ok on the other hand of paying exclu- 
 sive attention to the proportions of that division and 
 being unmindful of the growth or decrease of the total 
 product itself . . 8 
 
 § 6. The theory of wages is a particular application of this 
 general theory of the distribution of wealth. To dis- 
 cover the effect on wages of a given development we 
 must ascertain 
 
 (1) Its effect on the total product, 
 
 (2) Its effect on that share of the total product 
 
 secured by wage. 
 These two weighed the one against the other will give 
 the effect on aggregate wage ; but if the development 
 involves an alteration in the number of wage-earners, 
 to ascertain the effect on particular wage we must 
 further take account of 
 
 (•3) The changed relation borne by the aggregate to 
 
 the particular wage ..... 9 
 
 § 7. This Theory of the Distribution of Wealth assumes that 
 the agents of production are all rewarded by varying 
 proportions of a varying product of industry ; that 
 these rewards taken together make up the expenses 
 
CONTENTS 
 
 FAOE 
 
 of production ; that the expenses of production of 
 commodities are one side of a shield of which the 
 price of commodities is the other ; and that conse- 
 quently price can he ultimately analysed into rewards 
 secured by agents of production .... 10 
 
 i 8. The Theory runs counter to certain doctrines. The next 
 three chapters are occupied with its defence against 
 these :^ 
 Chapter II. considers the Theory of the Wage-Fund 
 
 and others logically deduced from it. 
 Chapter III. considers certain Theories about Pro- 
 fits, Interest, and Kent. 
 Chapter IV. considers the Theory that Rent does 
 not enter into the Expenses of Production . 10 
 
 J 9. The way is then clear for 
 
 Chapter V., which treats wages as one of the vary- 
 ing proportions of a varying product and under 
 this hypothesis considers various labour problems 1 1 
 
 CHAPTER II 
 
 The Wage-Fund Theory, and the dictum ' A Demand for 
 Commodities is not a DemMtid for Labour.'' Detailed 
 examination of examples taken from leading upholders 
 of these theories : — Mill, Fawcett, and Cairaes — 
 
 § 10. Enunciation by Mill of the Wage-Fund theory, accord- 
 ing to which wages are determined by a ratio between 
 circulating capital and population ... 12 
 
 § 11. Professors Walker and Sidgwick have demonstrated that 
 this theory is untenable, because more efficient labour 
 by the very fact of its greater eflSciency, creates an 
 additional fund out of which it will he recouped . 14 
 
 § 12. The adherents of the old Wage-Fund theory believed 
 that the average wage for an existent population de- 
 pended on the existent capital, and since existent 
 capital could be diminished in amount by unproduc- 
 
 i 
 
xvili THE THEORY OF WAGES 
 
 PAGE 
 
 tive expenditure, it followed in their view, that un- 
 productive expenditure diminished average wage. But 
 since labour whether employed productively or uupro- 
 ductively is equally rewarded with wages, if expendi- 
 ture always resulted in wage-paying, it would make 
 no difference to the wage receiver whether expendi- 
 ture were productive or unproductive. To reconcile 
 these two positions it was therefore necessary to prove 
 that expenditure does not necessarily result in wage- 
 paying. Hence the doctrine 
 A Demand for Commodities is not a Demand for 
 Labour . . 17 
 
 § 13. The discrediting of the Wage - Fund theory has not 
 heen followed up by the general abandonment of its 
 corollary as so enunciated ; hence arises necessity for 
 its detailed examination 18 
 
 § 14. Rehearsal and criticism of Mill's argument on the 
 
 subject 18 
 
 §15. One of Fawcett's examples examined. The conclusions 
 set forth in the fifth edition of his Manual rehearsed 
 and criticised 30 
 
 § 16. The chapter on the subject in the seventh edition of his 
 
 Manual 33 
 
 § 17. Cairnes's attempt to support the theory by a compari- 
 son of the wages paid in the United States with those 
 paid in Great Britain. Criticism . . . .35 
 
 § 18. Cairnes's attempt to support the Wage-Fund Theory 
 itself (the parent of the dictum "A Demand for Com- 
 modities is not a Demand for Labour ") by an histori- 
 cal instance Criticism 39 
 
 CHAPTER III 
 
 Professor F. A. Walker supports the theory that Labour is the 
 residual claimant to the pi-oduct of industry — 
 
CONTENTS xix 
 
 PAGE 
 
 § 19. Professor "Walker's exposition of his theory that Labour 
 
 is the residual claimant to the product of industry . 41 
 
 § 20. Professor Walker's argument that the residual claimant 
 to the product of industry is the Labourer, is equally 
 applicable to the Entrepreneur, the Capitalist, or the 
 Landlord. His argument used {mutatis mutandis) to 
 show that the Entrepreneur and not the Labourer is 
 the residual claimant. [This he would acknowledge 
 to be absurd.] 46 
 
 § 21. The fact is that no one of the claimants to the product 
 of industry can be regarded as residual. Such a view 
 assumes that a change in economic conditions leaves 
 the shares which fall to the other claimants of the 
 product of industry unchanged. This is not the 
 case . . 48 
 
 CHAPTER IV 
 
 A Criticism of the Economic Doctrine, that "Rent does not 
 enter into the Expenses of Production " — 
 
 § 22. Ambiguity of the phrase. It may be interpreted to 
 mean "Kent does not forjn part of the Expenses of 
 Production " or " Rent does nothing' towards deter- 
 mining the Expenses of Production." We will in the 
 first place take for examination the former interpreta- 
 tion 49 
 
 § 23. Diagram illustrating the Eioardian theory of Rent. 
 
 The argument which is founded on it . . .51 
 
 § 24. The argument fallacious, — for from premises which 
 hold good concerning acres, a conclusion is drawn 
 with regard to bushels of wheat, although by the 
 hypothesis the number of bushels grown per acre is 
 various .... .... 53 
 
 § 25. The diagram reconstructed — taking the efficiency or 
 productive power in the land instead of the area as 
 the unit of land 55 
 
THE THEORY OF WAGES 
 
 § 26. The diagram again reconstructed — taking land bearing 
 equal produce as the unit ; the equal produce is the 
 result of an unequal application of capital and labour. 
 The gi'eater the application of these the smaller the 
 rent will be ........ 56 
 
 § 27. Passing to the other interpretation of the phrase, viz. : — 
 that " Rent does nothing towards determining the Ex- 
 penses of Production " we note the alleged distinction 
 that units of efficiency of capital and labour tend to 
 adjust themselves to the demand, whilst those of land 
 do not. Professor Marshall on this point . . 58 
 
 § 28. Professor Sorley's enunciation of the doctrine which is 
 controverted in this chapter. He begins by laying 
 down that rent is determined by the price of the pro- 
 duct, but glides into a contention that rent forms no 
 part of the product, thus justifying the assertion that 
 economists do not keep the two questions distinct in 
 their minds. His argument examined . . 60 
 
 § 29. Contention that rent and prices are mutually deter- 
 mining elements .... .62 
 
 § 30. The contrary theory rests on the hypothesis that land 
 is limited, and that its inherent properties are in- 
 capable of increase by man's effort. But fertility and 
 accessibility (which are the qualities for which we pay 
 rent) aie both capable of increase by man's effort By 
 man's efforts then a diminution can be caused in rents 
 which will cause a fall in prices of commodities . 63 
 
 § 31. Examples of this and of the converse .... 65 
 
 § 32. The distinction sought to be maintained between the 
 "natural advantages" and the "artificial advan- 
 tages " of land are untenable, and since capital is 
 convertible into "artificial advantages,'' rent of laud 
 and interest cannot be treated as essentially different 
 in their qualities ....,,, 67 
 
CONTENTS 
 
 PAGE 
 
 § 33. The Theory of Rent now current legitimately applic- 
 able for purposes of comparison between various 
 pai-cels of land. But not adequate for the comparison 
 of aggregate rents with the aggregate products of 
 other Agents of Production, for it does not lay down 
 where the margin of cultivation shall be drawn . 67 
 
 § 34. The fact that the rent paid by one parcel of land is 
 higher than that paid by another does not show that 
 rent is doing anything towards determining prices. 
 But the fact that rents as a whole may rise or fall in 
 comparison with interest, wages, etc., shows that rents 
 in the aggregate take part in the determination of 
 prices. What is paid for the differeiices in the in- 
 herent efficiency of land does not, but what is paid 
 for the ax:tual inherent efficiency of land in the aggre- 
 gate does, constitute a determining element in prices 70 
 
 § 35. Close analogy between land and other agents of pro- 
 duction 71 
 
 § 36. Examples ... 72 
 
 §37. A " typical commodity " . ... 72 
 
 § 38. Changes in the demands of the community cause changes 
 
 in the composition of the ' ' typical commodity " . 73 
 
 § 39. This just as true when land is, as when any of the other 
 
 agents of productions are, concerned ... 75 
 
 § 40. No more true to say that "rent does not enter into the 
 expenses of production," than that wages, profits, and 
 interest do not 76 
 
 § 41. Does the Law of Diminishing Returns afi'ect the case ? . 76 
 
 § 42. No treatment of the consideration of Land radically 
 different irom that of the other Agents of Production 
 is called for on account of the law of Diminishing 
 Returns 77 
 
 § 43. A tax either on Rents or on Land- Area under cultivation 
 would to a certain extent affect the price of produce 
 from land 78 
 
xxu THE THEORY OF "WAGES 
 
 § 44. But if the price paid for commodities is susceptible of 
 being raised by a tax on rents, or on land, that shows 
 that not all the marginal advantage arising from the 
 use of land goes to the landlord, — a portion of it goes 
 to the consumers of commodities, or in other words 
 the general rate of rents takes its part in determining 
 the prices of commodities . ... 80 
 
 CHAPTEE V 
 
 Labour is neiflier limited for its reward to a Wage-Fund, nor 
 is it entitled to the residuum of a varying Product of 
 Industry. Wages [like Sent, Interest, and Entre- 
 preneur's profits) are a Varying Proportion of a Vary- 
 ing Product of Industry. Wages Problems worked out 
 on this basis — 
 
 § 45. The above is in substantial agreement with Professor 
 Marshall's Principles of Economics except that Rent 
 is here treated as being on the same basis as Interest, 
 Profits, or Wages . . .... 81 
 
 COMPARISON or VARIOUS CIRCUMSTANCES WITH 
 THOSE OF A STANDARD CASE 
 
 § 46. Case No. 1. (Imaginary circumstances adopted as a 
 
 standard of comparison) 82 
 
 § 47. Case No. 2. The population doubled .... 83 
 
 § 48. The effect on the total product of industry. This de- 
 pendent on the predominance of the law of diminish- 
 ing returns over that of increasing returns or vice 
 versd. The law of decreasing returns has as its ally 
 the stomach — that of increasing returns, the brain . 84 
 
 § 49. The eflfeot on the share of the total product of industry 
 
 secured by labour . . .92 
 
 § 50. Case No. 2 stated . . . .93 
 
 § 51. Case No. 3. Population doubled by sudden influx of 
 
 low-grade, unintelligent Labour .... 93 
 
CONTENTS 
 
 rAOK 
 
 § 52. Caso No. 4. Population doulilod. Education and divi- 
 sion of labour improvod .... .96 
 
 § 53, Cnso No. 5. Population halved by postilonco . . 98 
 
 § 64. Caso No. G. Ireland undur changed conditions of cul- 
 
 tivatiou 100 
 
 § 55. Caso No. 7. Ireland compelled to adhere to the old 
 
 state of cultivation, because emigration is impossible 102 
 
 SOME OONTEMPOEAllY LABOUR PROBLEMS 
 
 §56. Case No. 8. Eight Hours of Labour introduced . . 103 
 
 § 57. Case No. 9. An Eight Hours' Movement resulting in a 
 higher wage per capita, as well as per hour and per 
 unit of Labour Power exerted 109 
 
 § 58. Case No. 10. An Eight Hours' Movement resulting in 
 a lower wage per hour, and per unit of Labour Power 
 exerted as well as per capita 110 
 
 § 59. The calculation of the probable effect of the introduc- 
 tion of an Eight Hours' Day an exceedingly complex 
 problem. This insufficiently realised by the mass 
 meetings which vote resolutions on the subject . Ill 
 
 § 60. The assistance rendered to working-men, in coping with 
 
 economic situations by Trades Unions . . .114 
 
 §61. Professor Walker on this subject 115 
 
 § 62. Condemnation by Professor Walker, by Cairnes, and by 
 Thornton, of the exasperating rules for "making 
 work," etc. I of Trades Unions 117 
 
 § 63. Trades Unionism on the whole a help rather than a 
 
 hindrance to perfect competition . . . .118 
 
 § 64. Caso No. 11. Labour agrees to cotabine, and demand a 
 
 10 per cent advance on former wage . . . 119 
 
 § 65. Possible modifications of Caso No. 11 . 122 
 
THE THEORY OF WAGES 
 
 FAOE 
 
 § 66. Proposal to compel an advance in wages by a labour 
 combination, and simultaneously to prevent any 
 labourers being thrown out of employment by such 
 an all-round reduction of the hours of work, as will 
 necessitate the employment of all the labourers for 
 the due accomplishment of the work required. Data 
 essential to success of such a scheme . . 124 
 
 § 67. Case No. 12. Profit-sharing introduced . . . 126 
 
 § 68. The extent to which profiit-sharing would be intro- 
 duced by Entrepreneurs under a state of pure com- 
 petition 128 
 
 § 69. Case No. 13. Profit-sharing which does not pay for the 
 
 Entrepreneur 129 
 
 § 70. Case No. 14. The Philanthropic Employer distributes 
 
 a part of his profits amongst his Employes . 132 
 
 § 71. How far would the employed class be able to compel 
 unwilling employers to adopt such methods as are 
 supposed in Cases Nos. 12, 13, and 14 ? . . . 134 
 
 §72. "The Iron Law of Wages" inconsistent with the 
 Theory of Wages expounded in these pages, but 
 applicable to some extent to those who do not reap 
 the full advantages of their economic position. The 
 assistance rendered by Trades Unions in enabling 
 labourers to do this 135 
 
 § 73. Contributions to a wage-earner's pocket constantly in- 
 cidental to a particular employment, indistinguish- 
 able (from his point of view) from the wages of that 
 employment. They consequently are counted as part 
 of wages. Such cases must not be taken as applica- 
 tions of the " Iron Law of Wages " . . . 139 
 
CIIArTEE I 
 
 Tlie Universal Product of Industry and Ahstinince, 
 {the " Uidm-sal Dividend" as it might he adlcd), 
 is a mass of urnlth varying in amount, and 
 divided ill varying proportions amongst the 
 agents to its production. 
 
 § 1. Professor Alfred Marslmll {Principles of 
 Economics, vol. i. book vi. cliap. ii. § 1) ^ says : — 
 
 ' The references in this book made to Professor Marshall's 
 rrinciplcs of Economics are made to the Second (i.e. to the 
 rearranged) Edition. 
 
 For the convenience of those possessing the first edition only 
 who may wish to make reference to the work, the following table 
 shows the corresponding passages as regards the quotations made 
 in these p.igcs : — 
 
 Quoted Herein. 
 
 FiEST Edition. 
 
 Second Edition. 
 
 Book. 
 
 Chap. 
 
 Sootion. 
 
 2 
 note 
 1 
 3 
 1 
 3 
 
 Book. 
 
 Chap. 
 
 Section. 
 
 Chap. I. § 1 
 Chap. II. § 13 
 Cliap. IV. § -27 
 Chap. IV. § 27 
 Chap. IV. § 30 
 Chap. IV. § 30 
 
 VII. 
 YII. 
 VII. 
 YI. 
 VI. 
 VII. 
 
 3 
 3 
 3 
 
 o 
 
 3 
 8 
 
 VI. 
 
 vr. 
 
 VI. 
 V. 
 eli 
 VII. 
 
 2 
 2 
 
 1 
 
 8 
 
 mina 
 
 2 
 
 1 
 
 note 
 
 4-5 
 
 4 
 
 ted 
 
 2 
 
THE THEORY OF WAGES 
 
 "The labour and capital of the country, 
 acting on its natural resources, produce 
 annually a certain net aggregate of com- 
 modities, material and immaterial, including 
 services of all kinds. This is the true net 
 annual revenue of the country, or as we may 
 say the National Dividend. It is of course 
 unimportant whether we estimate it for a year 
 or for any other period ; the important point is 
 that it is a continuous stream always flowing, 
 and not a reservoir or store, or in the narrower 
 sense of the word a ' Pund ' of Capital." . . . 
 " This National Dividend is at once the 
 aggregate net product of, and the sole source 
 of payment for, all the agents of production 
 within the country ; it is divided up into 
 Earnings of labour. Interest of capital, and 
 lastly the Producer's Surplus, or Eent, of land 
 and of other differential advantages for pro- 
 duction. It constitutes the whole of them and 
 the whole of it is distributed among them ; and 
 the larger it is, the larger, other things being equal, 
 will be the share of each agent of production." 
 Por our purpose it will be more convenient not 
 
 to confine our attention to any particular country; 
 
 if we take the whole world instead of one 
 
I A VAKYING SHAKE OF A VARYmO "WHOLE 3 
 
 state we shall in just the same way get a product 
 of universal industry and abstinence, a Universal 
 Dividend. This product will vary according to the 
 efforts or abstinences of the various agents of produc- 
 tion ; the first important point we have to notice is 
 therefore that in the distribution of wealth we have 
 to deal with a Varying Product. 
 
 § 2. The agents of production which contribute 
 to make up this varying product are in reality 
 almost infinitely numerous, thus we might dis- 
 tinguish between various grades of labour, — profes- 
 sional labour, artisan labour, unskilled labour, and 
 so forth. As long as it is understood that what holds 
 true amongst the main divisions which may be dis- 
 tinguished amongst the agents of production, will also 
 hold true amongst the minor divisions, they may for 
 simplicity's sake be taken together in a very few large 
 classes which include the smaller classes. Professor 
 Marshall finds it convenient to take three such 
 classes only, viz. labour, capital, and land (includ- 
 ing with land " other differential advantages for pro- 
 duction"). In the following pages I shall only 
 diverge from this arrangement to the extent of 
 differentiating the entrepreneur^ profits from other 
 wages of labour, a distinction which I think it 
 is convenient to maintain. 
 
4 THE THEORY OF WAGES chap. 
 
 The varying product of industry then is divided 
 amongst : — 
 
 (1) Wages of labour 
 
 (2) Entrepreneurs' profits 
 
 (3) Interest on capital 
 and (4) Eent. 
 
 § 3. The share of the total product that each 
 agent of production is able to secure for itself 
 depends on the play of supply and demand. It will 
 be remembered by those familiar with the text- 
 books that an increase in supply of a commodity 
 (except under abnormal circumstances) results in a 
 decrease of price per unit of that commodity, — though 
 probably in an increase of its aggregate price. Sup- 
 ply in the case under consideration must be measured 
 by the amount of effort or abstinence exercised. 
 
 Thus if in a given state of things half the pro- 
 duct of industry goes to reward labour, an increase 
 of labour power (whether by numerical increase 
 amongst the labourers or otherwise) may be expected, 
 if the other agents of production remain unchanged, 
 to result in labour's securing an additional reward 
 less than the addition made to the total product. 
 Thus each of the agents of production is rewarded 
 out of the varying product of industry in a proportion 
 which itself varies. These two variations tend to 
 
I A A^ARYING SHARE OF A VARYING WHOLE 5 
 
 some extent to neutralise each other. If for instance 
 we imagine it possible that an increase of population 
 shall take place without changing the contributions 
 to the universal dividend of land, of capital, or of 
 organising power, we shaU with the larger number 
 of units of labour obtain a larger product ; but of 
 the larger product labour will be able to claim only a 
 share which is smaller in proportion to its contribu- 
 tion; the one goes some way towards counterbalancing 
 the other, and in considering the aggregate reward of 
 labour as a whole, the benefit or detriment of a given 
 event will generally depend on the relative import- 
 ance of an increased product to a diminished share of 
 that product, or of an increased share of the product 
 to a diminution of the product itself. 
 
 § 4. The universal dividend results from the 
 combined acting of a number of units of efficiency. 
 The unit of efficiency results from an effort or 
 abstinence which is not constant but variable. 
 Accordingly a numerical increase in the units of 
 efficiency of one of the agents of production is 
 sometimes accompanied by a diminution, but more 
 often by an enlargement of the effort or abstinence 
 that results in the unit itself. 
 
 If the increase of any one of the agents of 
 production results in a more than proportionate 
 
THE THEORY OF WAGES 
 
 increase in the universal dividend, it has been 
 necessary to exercise less effort or abstinence in 
 order to bring it about that the unit of efficiency 
 shall come into existence ; the law of increasing 
 returns is then said to be operative; for example 
 doubling the labour in a new country often more 
 than doubles its effective power ; less labour ^ then 
 goes to make up a unit of efiBciency. But if on the 
 other hand the numerical increase of units results 
 in a less than proportionate increase in the 
 universal dividend more effort or abstinence has 
 been necessary to create a unit of efficiency ; the 
 law of diminishing returns is then said to be in 
 operation ; to take an instance, doubling the labour 
 expended on an area of land already highly culti- 
 vated, does not double its produce ; more labour ^ is 
 now required to make up a unit of efficiency. 
 
 How then may we determine what a unit of 
 efficiency is ? It may be defined as accruing from 
 that amount of effort or abstinence the product of 
 which is at one given moment a given fractional 
 part of the universal dividend. So long as the 
 
 ' Not however necessarily less or more labour in exact proportion 
 to tte increased or diminished returns, for the "balance of power" 
 between labour and the other agents of production may be dis- 
 turbed, and it may consequently result that the more or less of 
 effort or abstinence required to generate a unit of efficiency is 
 affected in the other agents of production likewise. 
 
1 A VARYING SHARE OF A VARYING WHOLE 7 
 
 universal product remains unchanged the total 
 number of units of efficiency does not alter. But 
 they may result from increasing effort or abstinence 
 on the part of one agent of production, concurrently 
 with decreasing effort or abstinence on the part of 
 another ; and in such a case actual numerical increase 
 of those generated by one agent of production would 
 take place coincidently with a numerical decrease else- 
 where. Thus next year more men of given strength 
 and skill may work than this, and fewer thousands 
 of pounds may conceivably be industrially employed 
 than now ; the one change may counterbalance the 
 other, and the universal dividend remain unaltered. 
 
 But supposing there to be an increase in the 
 universal dividend the number of units of efficiency 
 must proportionately have increased, and con- 
 sequently there will have been a greater numerical 
 increase in the units of efficiency of some of the 
 agents of production, than there will have been 
 decrease (if any) in others. There may concurrently 
 have been a shrinkage in the amount of effort or 
 abstinence per unit of efficiency in some of the 
 agents of production, an enlargement per unit of 
 efficiency in others. 
 
 The number of units of efficiency is proportionate 
 to the universal dividend. 
 
THE THEORY OF WAGES 
 
 The enlargement or shrinkage in the amount of 
 effort or abstinence resulting in a unit of efficiency 
 p'roduced by the various agents of production, 
 depends on the play of supply and demand between 
 these agents of production. 
 
 If the money existent in the world were in 
 constant proportion to the universal dividend one 
 unit of efficiency would, in a state of perfect com- 
 petition, always command the same price.^ 
 
 § 5. In the study of economics there are few 
 things of more importance than to bear constantly 
 in mind the relation between the variation in the 
 total product and the variations in the division of 
 the product. One class of economists has been 
 accused of turning its whole attention to the im- 
 
 1 It will be observed that I take into account only tbe 
 universal dividend, or contemporary increase in the world's 
 wealth, — not the accumulation of ages actually in existence. It 
 might indeed be argued that efficiency that added to the wealth of 
 the world a certain definite amount must be considered less when 
 the world's store of wealth is great than when it is small ; but as 
 this treatise is concerned with the division of wealth that is being 
 actually produced amongst those who are concerned in its pro- 
 duction, there seems no objection to putting out of account the 
 accumulated wealth of the woi'ld, nor to considering eflicienoy pro- 
 portionate to the actual wealth - production irrespective of the 
 relation of that production to wealth already existent. 
 
 This last matter however is not so completely laid on one side as 
 at first sight appears, for capital which is taken into account as one 
 of the agents of production, bears some rough relation to the 
 accumulated wealth of the world. 
 
I A VARYING SHARE OF A VARYING "WHOLE 9 
 
 portance of increasing the product irrespectively of 
 how it may be divided. Others have been charged 
 with a neglect of concern for the total product, their 
 whole thoughts being engaged in how a distribution 
 may be secured which shall be advantageous to 
 capital, to land, or to labour, as the case may be. 
 But a complete view of economic problems cannot 
 afford to ignore either the solidarity of interests which 
 universally obtains in the increase of the universal 
 dividend, or the antagonism of human interests 
 which as constantly exists as to its division. 
 
 § 6. Of the general theory now exposed that of 
 wages is a particular case, and to discover the effect 
 on wages of any given development we must discover 
 
 (1) Its effect on the product of industry, 
 
 (2) Its effect on the proportion of that product to 
 
 which wages will be able to establish their 
 
 claim. 
 Even then it will be only of aggregate, not of 
 particular wages, that we shall have ascertained the 
 increase or diminution : and if the case to be con- 
 sidered is one of increased or diminished wage-earn- 
 ing power consec[uent on an increase or diminution 
 of population we shall have to consider 
 
 (3) The changed relation borne by the aggregate 
 
 to the average particular wage. 
 
10 THE THEORY OF WAGES ohap. 
 
 § 7. The theory then assumes that wages, entre- 
 preneurs' profits, interest, and rent are all varying 
 proportions of a varying product of industry, and 
 further that taken together they make up the ex- 
 penses of production — and that the expenses of 
 production of commodities are only one side of a 
 shield of which the price of commodities is the 
 other; consequently that price can be ultimately 
 analysed so as to trace therein the respective rewards 
 granted to the various agents of production. 
 
 § 8. The theory runs counter to a portion of 
 economic doctrine much of which has heen accepted 
 in the past, and some of which is current. The next 
 three chapters are therefore occupied in its defence 
 as a whole against doctrines which are inconsistent 
 with it. 
 
 Chapter II. considers the theory of the " Wage- 
 Fund " and others logically deduced from it. 
 
 Chapter III. considers Professor Walker's theory 
 that rent, interest, and profits of the entrepreneur are 
 fixed by economic considerations independently of the 
 products of industry. 
 
 Chapter IV. considers the theory that rent does 
 not enter into the expenses of production. 
 
 Each of these theories in turn endeavours rigidly 
 to determine the position that can be claimed by one 
 
I A VARYING SHARE OF A VARYING "WHOLE 11 
 
 or more of the agents of production irrespediveli/ of 
 the claims of the others. I believe on the other hand 
 that all their claims are mutually interdependent, 
 and that any theory which assumes the contrary is 
 fallacious. 
 
 § 9. If my contention is successfully maintained 
 in the next three chapters, then in my fifth chapter 
 I am free to treat wages as one of the varying 
 proportions of a varying product, and under that 
 hypothesis to consider various labour problems. 
 
CHAPTER II 
 
 The " Wage-Fund " Theory, and the dictum, — " A De- 
 mand for Commodities is not a Demand for 
 LahourT Detailed examination of exam/pies 
 taken from leading upholders of these theories: 
 — Mill, Faiocett, arid Cairnes. 
 
 § 10. The exposition of the Wage-Fund theory 
 long received as orthodox in this country, and 
 possibly even yet not quite extinct, is set forth by 
 Mill as follows :— 
 
 " Wages then depend mainly upon the demand 
 and supply of labour ; or as it is often expressed, 
 on the proportion between population and capital. 
 By population is here meant the number only 
 of the labouring class, or rather of those who 
 do work for hire ; and by capital only circu- 
 lating capital, and not even the whole of that, 
 but the part which is expended in the direct 
 purchase of labour. To this however must 
 
CHAP. II THE "WAGE-FUND" THEORY 13 
 
 be added all funds which without forming a 
 part of capital, are paid in exchange for labour, 
 such as the wages of soldiers, domestic servants, 
 and all other unproductive labourers. 
 
 "There is unfortunately no mode of ex- 
 pressing by one familiar term the aggregate 
 of what may be called the wages fund of a 
 country ; and as the wages of productive 
 labour form nearly the whole of that fund it 
 is usual to overlook the -smaller and less im- 
 portant part and to say that wages depend on 
 population and capital. It will be convenient 
 to employ this expression, remembering how- 
 ever to consider it as elliptical and not as a 
 literal statement of the entire truth." — (Mill's 
 Political UcoTwmy, book ii. chap. xi. § 1.) 
 Quoted also by Cairnes (Leading Principles of 
 Political Econamy, part ii. chap. i. § 5) as the 
 basis of his argument on this question. 
 According to this theory then wages are determined 
 by a ratio between capital and po"pulation, or in 
 other words the total sum paid to labourers as a 
 whole does not depend on the value of the work 
 performed by them, but on the amount of circulating 
 capital in existence,^ and the average amount obtained 
 ' According to Mill the reward of labour does not depend on the 
 
14 THE THEOKY OF "WAGES chap. 
 
 by each labourer will be in inverse proportion to the 
 
 total number of labourers. 
 
 § 11. Professor F. A. Walker in his book on the 
 
 Wages Question, and in his Political Economy, and 
 
 Professor Sidgwick in his Political Economy perhaps 
 
 more completely than their predecessors amongst 
 
 the opponents of the theory demonstrate that it is 
 
 untenable, because more efficient labour by the very 
 
 fact of its greater efficiency creates an additional 
 
 fund out of which it will be recouped ; — that in fact 
 
 "there is no wage-fund irrespective of the number 
 
 and industrial quality of labourers." 
 
 Professor Walker says : — 
 
 " If we assume that upon a cultivated island 
 
 are tools and carts and animals for draught and 
 
 other forms of capital adequate for a thousand 
 
 laborers, the production will vary within a 
 
 very wide range according to the industrial 
 
 quality of the laborers using that capital. 
 
 If we suppose them to be East Indians we 
 
 shall have a certain annual product; if we 
 
 suppose Eussian peasants to be substituted for 
 
 efficiency of the actual work contemporaneously paid for, though 
 no doubt he considered it was influenced by the efficiency of labour 
 that had taken place in the past ; for efficient labour would have 
 produced profits, and part of profits would have been used as cir- 
 culating capital, and part of this in turn would go to form the 
 "wage-fund." 
 
THE " WAGE-FUND " THEORY 15 
 
 East Indians we shall have twice or three 
 times that product ; if we suppose Englishmen 
 to be substituted for Eussians we shall have 
 the product multiplied two or three fold. An 
 Englishman will do from three to thirty times 
 as much work in a day as a Bengalee according 
 as the nature of the work makes smaller or 
 larger demands upon the skill and strength of 
 the laborer. By the wage -fund theory the 
 rate of wages would remain the same through 
 these changes inasmuch as the aggregate capital 
 of the Island and the number of the laborers 
 in the market would be unchanged, the only 
 difference being found in the substitution of 
 more ef&cient for less efficient laborers. Ac- 
 cording to the view here advanced on the 
 contrary, the amount to be paid in wages 
 should and would rise with the increased pro- 
 duction due to the higher industrial quality 
 of the laboring population" (because the em- 
 ployers would compete amongst each other for 
 the more efficient labor and would be willing 
 to pay more to secure it). " Whether it would 
 rise in exact proportion thereto is not the ques- 
 tion we are now considering." — (F. A. Walker, 
 Political Economy, part vi. chap. vi. § 404.) 
 
16 THE THEORY OF WAGES chap. 
 
 Professor Henry Sidgwick has a most luminovis 
 chapter on " General Wages " in his Principles of 
 Political Economy (book ii. chap, viii.), in which 
 he completely overthrows the wage-fund theory. 
 
 That hypothesis rests on the assumption that 
 labour whilst engaged upon an undertaking must 
 be supported by capital {i.e. the result of saving 
 from the proceeds of former undertakings) and that 
 this support by capital will constitute the whole of 
 the wage received. Now a certain amount (at least 
 enough to give a mere subsistence) it is true must 
 often be advanced in this way in the first instance, 
 but it by no means follows that the advance represents 
 the whole wage. Professor Walker says : — 
 
 " In new countries, by which we mean those 
 to which men have gone with the industrial 
 ideas and ambitions of older communities, but 
 with an amount of capital which from the 
 necessity of the case, is more or less inadequate 
 to the undertakings for which their skill and 
 labor qualify them, the wages of labor are paid 
 only partially out of capital." ..." From the 
 first settlement of the colonies down to the 
 discovery of gold in California, laborers whether 
 in agriculture or in manufactures were as a rule 
 hired by the year and paid at the end of the 
 
II THE " WAaE-FUND " THEORY 17 
 
 year. Bare subsistence might be furnished by 
 the employer meanwhile " . . . " but these pay- 
 ments were not to such an extent (except in case 
 of protracted sickness or sudden misfortune) but 
 that the employer was always in debt to his 
 laborer." ..." When the employer shall pay is 
 a financial question ; what he shall pay " ..." is 
 determined by the efficiency of labor under the 
 conditions existing at the time and place." [TIi^ 
 Wages Question, part i. chap. viii. " The wages 
 of the laborer are paid out of the product of his 
 industry."] 
 § 12. The advocates of the wage -fund theory 
 found themselves led to the following result. All 
 people consume wealth, but some replace it whilst 
 they are doing so, others do not, hence it comes that 
 there is what is called productive, and unproductive, 
 consumption of wealth, the latter alone permanently 
 diminishing the amount of wealth in the world. 
 According to the wage-fund theory the unproductive 
 consumption of wealth meant a diminution of the part 
 of the world's wealth which would be used as circulat- 
 ing capital, that was synonymous with a diminution of 
 the wage-fund, and that meant lower wages for the 
 bread-winners all round. What more natural than 
 that the supporters of this theory should show if they 
 
 
 
18 THE THEORY OF WAGES chap. 
 
 could that the expenditure in luxuries did not add 
 anything to the total wages received by the wage- 
 earning classes ? Hence arose the doctrine on which 
 so many of us were nurtured "A demand for 
 commodities is not a demand for labour." 
 
 § 13. This again I believe to be entirely fallacious, 
 and though we may perhaps be permitted to take it 
 for granted that the wage-fund theory has been satis- 
 factorily disproved, a detailed examination of the 
 chapters of Mill, Fawcett, and Cairnes in which the 
 latter dictum is expounded, is I fear necessary, 
 although the latest important authoritative work 
 on Economics, Professor Marshall's Principles of 
 Economics, summarily dismisses it (see conclusion to 
 the note at the end of the 2nd Chapter of Book VI.) 
 
 Examination of the proposition "A demand for com- 
 modities is not a demand for labour." Mill's 
 "Political Economy" book i. chap. v. § 9. 
 
 I 14. Mill supposes that at a given moment there 
 is a certain amount of capital in existence which will 
 set going a certain amount of labour, and apparently 
 that there is a certain amount of purchasing power 
 which, when the manufacturer is warned of the course 
 it is about to take, can influence the direction of 
 
II DEMAND FOE COMMODITIES AND FOR LABOUR 19 
 
 labour, " it determines the direction of the labour ; 
 but not the more or less of the labour itself." It is 
 unnecessary to analyse all his examples, but we will 
 examine some of those in which the issues involved 
 are most clearly brought out : — 
 
 Thus he says a consumer may employ part 
 
 of his income " in hiring journeymen bricklayers 
 
 to build a house, or excavators to dig artificial 
 
 lakes, or labourers to make plantations and layout 
 
 pleasure gardens ; or, instead of this, he may 
 
 expend the same value in buying velvet and 
 
 lace." 
 
 Mill holds that in the first case there is a direct 
 
 benefit to the working classes, by creating a demand 
 
 for labour by means of which wages are raised, or 
 
 the number of labourers in employment increased ; 
 
 but that in the second case there is Twt. The case at 
 
 first sight looks a fair one enough, for the man is 
 
 simply studying his own pleasure in either case, 
 
 whether he is digging fish-ponds or buQding a house, 
 
 or whether on the other hand he is buying velvet. 
 
 If then Mni can prove that the first course is more 
 
 advantageous to the working classes than the second, 
 
 it would seem to go a long way towards establishing 
 
 his position that a demand for commodities is not a 
 
 demand for labour. But really to put the cases on 
 
20 THE THEORY OF "WAGES chap. 
 
 an equal footing we must suppose that digging fish- 
 ponds, or let us say bricklaying, for that is the 
 example he follows out, requires as much fixed 
 capital, and also as much of that part of circulating 
 capital which is not spent in wages, as making velvet 
 does ; otherwise the comparison will not be between 
 a direct demand for labour and a demand for com- 
 modities, but between an occupation which requires 
 no fixed capital and no raw material, and one in 
 which these are necessary. As the latter is not the 
 problem we are considering, to make the example 
 a fair one, we must suppose that as much money 
 would be spent in mortar -machines and the like 
 as in velvet-making machines, etc., and that it costs 
 as much to buy the bricks from which the house is 
 built as it does to buy the raw material for the velvet 
 manufacturer. 
 
 We are now in a position to pursue Mill's argu- 
 ment. He supposes that the consumer who has 
 before spent his money in paying bricklayers 
 "determines to prefer velvet, for which he thus 
 creates an extra demand. This demand cannot 
 be satisfied without an extra supply nor can the 
 supply be produced without an extra capital ; where 
 then is the capital to come from ? There is nothing 
 in the consumer's change of purpose which makes 
 
II DEMAND FOR COMMODITIES AND FOR LABOUR 21 
 
 the capital of the country greater than it otherwise 
 was." This question " Where then is the capital to 
 come from ? " is asked us as if it were an enigma. 
 But surely the capital required by the velvet-manu- 
 facturer both fixed and circulating is liberated from 
 the bricklaying enterprise. The money that has 
 before gone to buy the mortar-machines and bricks 
 will now furnish forth a new annex to the velvet 
 factory and buy raw material ; the wages before paid to 
 the bricklayers will now be paid to the velvet operatives. 
 This indeed Mill proceeds in effect to remark : — " the 
 very circumstance which gave rise to a " demand for 
 velvet, "has set at liberty a capital of the exact 
 amount required." But at this point Mill instead of 
 completing the example in the way we should expect 
 by saying that just as the capital which formerly 
 went to make a house, now goes to make velvet, so 
 the labourers who formerly laid bricks, will now 
 make velvet (for in this example he presupposes 
 perfect mobility of labour), he takes the round-about 
 course of saying that the bricklayers will be thrown 
 out of work altogether, and the workers who formerly 
 made food for them will become velvet -makers. 
 Well be it so. The case for the poor ex-bricklayers is 
 still not so desperate as Mill would have us believe ; 
 he holds that they will either have to go without food 
 
22 THE THEORY OF WAGES chap. 
 
 and necessaries, or squeeze a competence by their 
 competition from the shares of other labourers. But 
 why not set them to produce food and necessaries 
 for the new velvet-makers (the men who formerly 
 produced food and necessaries for them) ? Happy 
 expedient ! Mill seems to be in the position of a man 
 who has taken three pegs out of three holes and 
 having replaced two of them in positions they did 
 not formerly occupy, wonders what on earth he shall 
 do with the third. But now a difficulty about the 
 capital crops up again. Mill says " There was 
 capital in existence to do one of two things, to make 
 the velvet or to produce necessaries for the journey- 
 men bricklayers," but " not to do both." Now as to 
 that there have already been two capitals in use, the 
 one employed in the plant of the master-bricklayer's 
 business, in buying the bricks, and in paying his 
 men's wages. The other in similar fashion as 'fixed 
 and circulating capital in the businesses of the pro- 
 viders of necessaries. These can now respectively be 
 invested in plant, stock, and wages in the velvet 
 manufacturer's business, and (as before) in the 
 businesses of the providers of necessaries. 
 
 Never surely was so hardy an attempt made to 
 draw a distinction where no difference exists ! 
 
 But probably attention may fasten itself on that 
 
II DEMAND FOR COMMODITIES AND FOR LABOUR 23 
 
 small part of the velvet-maker's capital whicli will 
 be required by him to buy raw material and support 
 his labourers tiU the returns from his business begin 
 to come in. Where is it to come from ? Surely it 
 will be found in undiminished returns in the brick- 
 layer's business contemporarily with reduced weekly 
 bills for labour. The master-builder will go on 
 letting new houses, and increasing his rent-roll for 
 some time after he has discharged his men. 
 
 In the instance our author takes next the circum- 
 stances are reversed, and the man who formerly spent 
 his money on velvet, amends his ways, and takes to 
 employing bricklayers. The passage reads thus : — 
 " Every one knows that the capital invested 
 in an employment can be withdrawn from it, if 
 sufficient time be allowed. If the velvet-maker 
 had previous notice, by not receiving the usual 
 order, he will have produced £1000 less velvet, 
 and an equivalent portion of his capital will 
 have been already set free. If he had no 
 previous notice, and the article consequently 
 remains on his hands, the increase of his stock 
 will induce him next year to suspend or 
 diminish his production until the surplus is 
 carried off. When this process is complete, the 
 manufacturer will find himself as rich as 
 
24 THE THEORY OF WAGES chap. 
 
 before, witli undiminished power of employing 
 labour in general, though a portion of his 
 capital will now be employed in maintaining 
 some other kind of it." 
 
 " "Where there was formerly only one capital 
 
 employed in maintaining weavers to make 
 
 £1000 worth of velvet, there is now that same 
 
 capital employed in making something else, and 
 
 £1000 distributed among bricklayers besides. 
 
 There are now two capitals employed in 
 
 remunerating two sets of labourers; while 
 
 before one of these capitals, that of the 
 
 customer, only served as a wheel in the 
 
 machinery by which the other capital, that of 
 
 the manufacturer, carried on its employment of 
 
 labour from year to year." 
 
 [That is to say that these two capitals were 
 
 previously the one of them circulating and the 
 
 other fixed, but that is just what is still the 
 
 case.] 
 
 I think we can put the case more tersely than 
 MiU does ; the £1000 formerly spent on velvet 
 went to pay cost of raw material, wages, and profits 
 in the velvet business. After the change it will 
 be spent in the price of houses and do just the 
 
11 DEMAND FOR COMMODITIES AND FOR LABOUR 25 
 
 same in the bricklaying business. The fixtd capital 
 released in the velvet manufacturer's business, will 
 also be required by the master-bricklayer. (Mill 
 seems to take for granted that a fixed capital will be 
 released in the velvet -maker's business, and that 
 none will be required in the builder's.) There 
 remains to be considered the small portion of the 
 velvet-maker's circulating capital that wiU accumu- 
 late during the time he is selling off his old stock, 
 that is to say whilst his wages bill is lessened and 
 his receipts are as yet undiminished. The newly 
 established builder will have to borrow this money to 
 pay his wages, etc., till he gets into full swing and 
 begins to realise returns from Ms business : — it is for 
 him a necessary initiatory expense. 
 
 Mill now summarises his results and I will quote 
 what he says in one column, and make my criticisms 
 in another parallel to it : — 
 
 " The proposition for wliicli i This proposition is a 
 
 I am contending is in reality truism if the abstention from 
 
 equivalent to the following, consumption is perpetual, 
 
 which to some minds will But it is a paradox if 
 
 appear a truism, though to consumption is merely post- 
 
 others it is a paradox : that poned. 
 
 a person does good to labour- The mere postponement of 
 
 ers not by what he consumes consumption does not make 
 
 on himself, but solely by the world richer, except to 
 
 what he does not consume.^ the extent of the interest 
 
26 
 
 THE THEORY OF WAGES 
 
 '■ If instead of laying out 
 £100 in wine or silk, I 
 expend it in wages, the 
 demand for commodities is 
 precisely equal in both cases: 
 in the one it is a demand for 
 £100 worth of wine or silk, 
 in the other, for the same 
 value of bread, beer, labour- 
 ers' clothing, fuel, and in- 
 dulgences,^ but the labourers 
 of the community have in 
 the latter case £100 more of 
 the produce of the com- 
 munity distributed among 
 them.' I have consumed 
 
 which accumulates in the 
 meantime on the tempor- 
 arily unconsumed capital. 
 But when consumption 
 eventually takes place the 
 interest is probably con- 
 sumed also. If NOT and a 
 man consumes £100 at the 
 end instead of at the begin- 
 ning of a year, he will be 
 in a position to make a 
 present of perhaps £4 
 interest to the community 
 if he chooses to do so, but he 
 does not necessarily take 
 this course. 
 
 2 This is not fair : in the 
 first instance Mill considers 
 the £lOO circulating capital 
 to be in the first hands which 
 it reaches, in the second 
 instance he takes it to be in 
 the second hands which it 
 reaches. In the first in- 
 stance, just as much as in 
 the second, the operatives 
 will have to pass on the 
 £100 to buy bread, beer, 
 labourers' clothing, etc. In 
 the second instance, just as 
 much as in the first, the 
 £100 will be paid in the 
 first place to the labourers. 
 There is really no differ- 
 ence whatever ' and it is 
 
II DEMAND FOR COMMODITIES AND FOR LABOUR 27 
 
 that much less,* and made 
 over my consuming power to 
 them. If it were not so, my 
 having consumed less would 
 not leave more to be con- 
 sumed by others ; which is 
 a manifest contradiction. 
 When less is not produced 
 what one person forbears 
 to consume is necessarily 
 added to the share of those 
 to whom he transfers his 
 power of purchase. 
 
 "In the case supposed I do 
 not necessarily consume less^ 
 ultimately since the labour- 
 ers whom I pay may build a 
 house for me, or make some- 
 thing else for my future con- 
 sumption. But I have at 
 all events postponed my con- 
 sumption and have turned 
 over part of my share of the 
 present produce of the com- 
 munity to the labourers.^ 
 If after an interval I am 
 indemnified it is not from 
 the existing produce, but 
 from a subsequent addition 
 made to it.^ I have there- 
 fore left more of the existing 
 produce to be consumed by 
 others ; ^ and have put into 
 
 not true that in the latter 
 case £100 more of the pro- 
 duce of the community is 
 distributed amongst the 
 labourers. 
 
 * Nor is it true that 
 I have consumed that much 
 less ; the labourers are 
 making for my consumption 
 commodities just as genuine 
 as wine or silk. 
 
 5 That is to say then that 
 according to 51111 a man does 
 in some circumstances do 
 good to labourers by what 
 he (eventually) consumes on 
 himself. 
 
 8 If the consumption is 
 postponed it simply means 
 that there is more of it. 
 Instead of paying £1000 
 for wine and silk at the 
 beginning of the year, I 
 have at the end of it a house 
 worth £1040. 
 
 '' On the contrary I am 
 indemnified by the produce 
 which formerly existed and 
 the subsequent addition made 
 to it. 
 
 ^ I have not left more of 
 the existing produce to be 
 consumed by others, or if I 
 have done so temporarily I 
 have demanded at the end of 
 
28 THE THEORY OF WAGES chap. 
 
 the period for wMch the 
 loan has been made a larger 
 share of existing produce. 
 If I consume the larger pro- 
 the possession of labourers duce at the end of the time 
 the power to consume it." ^ ^ I am not befriending the 
 
 community any more than if 
 I had consumed the smaller 
 produce at the beginning 
 of it. 
 
 Mill is not even yet satisfied that he has made 
 his case clear, and well may he be distrustful about 
 it. He says 
 
 " There cannot be a better rediictio ad ahsur- 
 dum of the opposite doctrine than that afforded 
 by the Poor Law. If it be equally for the benefit 
 of the labouring classes whether I consume my 
 means in the form of things purchased for my 
 own use, or set aside a portion in the shape 
 of wages or alms for their direct consump- 
 tion, on what ground can the policy be justi- 
 fied of taking my money from me to support 
 paupers ? " 
 The new element of confusion here introduced is 
 talking about wages and alms as if they were synony- 
 mous. 
 
II DEMAND FOE COMMODITIES AND FOR LABOUR 29 
 
 If the paupers are capable of earning wages 
 then the policy of the Poor Law can not be 
 justified. But if the paupers from whatever cause 
 are not capable of earning wages then they must 
 be given alms. For alms there is no return, and 
 the poor rate will have to be paid at a sacrifice 
 of what might otherwise have been expended in 
 commodities. 
 
 Mill now amplifies his argument in a long note 
 in which he supposes that " A expends a portion of 
 his income in wages or alms." There could not be 
 a more complete refutation of his theory than the 
 fact that it necessitates regarding expenditure in 
 wages and in alms as being economically the same, 
 i.e. it makes no difference whatever whether you get 
 a quid pro quo for your money or not ! If this were 
 so, philanthropy would become very cheap indeed. 
 I do not think it necessary to foUow the long course 
 of this note as it contains no new argument. If you 
 take it that A gives alms, all that it says is true ; if 
 on the other hand you take it that A gives wages, 
 the same fallacies appear as before ; B his successor 
 spends his money in luxuries, these " luxuries must 
 be produced not instead of, but in addition to the 
 food previously supplied to A's labourers " — this is of 
 course true, but so must formerly the quid pro quo 
 
30 THE THEOEY OF "WAGES chap. 
 
 whatever it was that A received in exchange for the 
 wages he paid. 
 
 We can sympathise with Mill when he remarks 
 with a sigh at the outset of his consideration of this 
 thorny theory, " A demand for commodities is not a 
 demand for labour " — "It is no wonder that political 
 economy advances slowly, when such a question as 
 this remains open at its very threshold." 
 
 Fawcett's "Manual of Political Economy" Fifth 
 Edition, hook ii. chap. iv. 
 
 § 15. Fawcett too declares that "the proposition 
 that a demand for commodities is not a demand for 
 labour, is a proposition which is perhaps more rarely 
 understood than any other in the whole range of 
 political economy." 
 
 We need not examine all his examples. We find 
 the same failure to define whether fixed or circulating 
 capital is being spoken of, and the same consequent 
 confusion. We find too the same assumption that 
 money distributed amongst the labourers as wages is 
 the same sort of benefit to them as if it were distri- 
 buted as alms without any quid p>'o quo. The idea 
 is one that would naturally shape itself in the mind 
 of economists who held the wage-fund theory, for 
 
It DIOMAND VOK COMMOnriMUS AND FOR LABOUK. 31 
 
 aiiylliing thai ndtliHl to that I'luid wimld bo ol' the 
 mitui'O of a five gift to Iho hibouring chisses. JUit 
 this iiood not wcigli with us luiw that it lias bocii so 
 cUiurly proved by Wnlkor, Sidgwiciv and others that 
 the wago-rund tlioory is ralliicioua. 
 
 Somo of Fii wccll's illustrations are however curious; 
 take for inslaiiee tho following, which he uslicrs in 
 with tho remark " The truth oi' tlie pro]>ositioii 
 shall be tested by tlie most extreme case wliieh even 
 an ojipouent ean suggest." 
 
 lie says that iC his propositit)n is true the purelmso 
 of XfiO worlli of some useless luxury like lace does 
 no more good to the community than if the inilividuol 
 wantonly destroyed £511 worth of property. "Well 
 this is of course true (if one con fairly put out of 
 account for tho moment the satisfaction of the buyer 
 of tho lace who is after all one of the ciimmunity), 
 but it does not in any way prove that the demand 
 for lace is not a denuind for labour. If the lace 
 numufaeturer is to replenish his stock he will have 
 to employ labour to do it, and similarly laboxir would 
 have had to be employed to make good the wanton 
 ilamage done to property. U is true that both cases 
 are on the same footing, but they ar'e both on a quite 
 diiVerent footing to that which he seeks to prove 
 they stand on. He holds that neither circumstance 
 
32 
 
 THE THEOEY OF "WAGES 
 
 causes a demand for labour ; the fact is that both 
 of them do. 
 
 We may here give in parallel columns Fawcett's 
 three conclusions and the corresponding conclusions 
 to which we have been led — 
 
 1. A man may spend 
 money on hixuries ; ^ then 
 wealth, is consumed in simply 
 giving Mm pleasure. 
 
 2. A man may spend 
 capital on labour that is not 
 reproductive of wealth ; 
 
 2 then capital is consumed 
 in simply giving food to 
 labourers. 
 
 3. A man may spend capi- 
 tal on reproductive labour ; 
 
 3 then capital is not only 
 reproduced but also gives the 
 same amount of support to 
 the labourers as in the second 
 
 1 Then wealth is consumed 
 in giving him pleasure and 
 (through the intermediary 
 of another person) he gives 
 employment to labour with 
 the object of producing wealth 
 of this kind, and this enables 
 the labourers to procure food. 
 
 2 Then wealth is consumed 
 in giving him pleasure and 
 (without the intermediary of 
 another person) he gives ' 
 employment to labour with 
 the object of producing wealth 
 of this kind, and this enables 
 the labourers to procure food. 
 
 [Note that there is no such 
 distiaction as is sought to be 
 established by Fawcett be- 
 tween the first and second 
 case.] 
 
 ^ Then the total of exist- 
 ing wealth is not dimi- 
 nished as in cases Nos. 1 
 and 2, but the advantage of 
 there being a greater amount 
 
II DEMAND FOK COMMODITIES AND FOR LABOUR 33 
 
 of wealth in existence does 
 not accrue to the community 
 as a whole, but to the man 
 who has not so far consumed 
 it in giving himself pleasure. 
 What he mil do with it — 
 whether he will devote it to 
 the good of the community 
 or not, remains an open ques- 
 tion. He gives direct em- 
 ployment to labour exactly 
 as in the second case and 
 with the same results. 
 
 Fawcett's Manual, Sixth and Seventh Editions — 
 (the same cha^pter). 
 
 § 16. The chapter which treats of this subject has 
 been considerably modified in the sixth and seventh 
 editions of Fawcett's Manual. It has been shorn 
 of many of the most striking passages on which 
 comment is made above. But though more circum- 
 spect in expression, and though it even suggests 
 that Mni's view that £1000 spent in velvet is much 
 less beneficial to the labourers than if it were spent 
 in making an artificial lake " requires considerable 
 modification," there is a want of clearness and grasp 
 in the treatment of the subject perhaps even more 
 marked than in the earlier editions, and the argu- 
 
 D 
 
34 THE THEORY OF WAGES chap. 
 
 ments are throughout vitiated by an undercurrent 
 of belief in the wage-fund theory. 
 
 The contention is that "unproductive consump- 
 tion of commodities diminishes the amount which 
 may subsequently be devoted to paying the wages of 
 labour" (Seventh Edition, p. 22). Now if by this 
 were meant that industry which is benefited by the 
 existence of capital will be benefited less by the 
 existence of less capital, and that consequently a 
 diminution of capital diminishes labour's share of the 
 total product, the truth of the proposition might be 
 admitted at once. This simply means that destruction 
 of capital tends to raise the rate of interest which in 
 turn handicaps industry. But this by no means 
 measures what is intended to be understood, which 
 is nothing less than that the wage-earners sufier to the 
 extent that there is unproductive consumption. Now 
 the amount of injury inflicted on the wage-earner by 
 the withdrawal of capital for purposes of unproductive 
 consumption in a well-established industrial organ- 
 isation is usually infinitesimal ; on the other hand in 
 a new country where capital is scarce in comparison 
 with the other agents of production the consequences 
 may be serious, but even under the circumstances 
 where the consequences would be worst the resultant 
 disadvantage to industry, or at all events to that part 
 
II DEMAND FOR COMMODITIES AND FOE LABOUR 35 
 
 of the total product of industry accruing to labour, 
 could hardly ever amount to as much as the actual 
 amount withdrawn. 
 
 The view set forth by Fawcett then both exag- 
 gerates the effect on industry of the withdrawal of 
 capital, and neglects to take into account the great 
 difference that there wiU be in such effect in varying 
 circumstances. In a state of industry ill supplied 
 with capital in proportion to the other agents of 
 production — (land, entrepreneur power, labour) — it 
 may be serious ; but in a state of industry super- 
 abundantly supplied with capital in proportion to the 
 other agents of production it will be trivial. 
 
 The withdrawal from investment for unproductive 
 consumption of a million of money if it took place in 
 New Zealand would more sensibly affect the wage- 
 earner's position than it would in England, but in 
 neither case would it affect it to the extent of 
 £1,000,000, or indeed to anything but a very small 
 fraction indeed of that amount. 
 
 CairTies's " Leading Principles of Political Economy" 
 part a. cha'p. i. § 7. 
 
 § 17. Cairnes attempts to reduce the theory that 
 a demand for commodities is a demand for labour to 
 
36 THE THEORY OF WAGES chap. 
 
 an absurdity, by comparing the actual statistics 
 relative to England and the United States ; ^ he con- 
 cludes that the gross produce per head of the popula- 
 tion in the two countries is approximately the same, 
 therefore that the demand for commodities is in both 
 countries about the same in proportion to popula- 
 tion; and that according to the theory which he is con- 
 troverting the quantity of wealth spent in the wages of 
 labour is therefore about the same per head.^ How 
 then comes it about that wages are so much higher 
 in America than in England? This certainly dis- 
 proves the assertion that all that is spent in com- 
 modities is spent in recompensing labour but it does 
 not as Cairnes asserts bring us to Mill's conclusion 
 
 ^ Cairnes begins his task by controverting Longe's proposition 
 that demand for commodities determines the quantity of wealth 
 spent in the wages of labourers. But (it would seem almost uncon- 
 sciously to himself) he slips into enlarging the scope of his conten- 
 tion, and goes on to argue that a demand for commodities does not 
 affed the demand for labour. The latter is a much less modest task. 
 
 That a demand for commodities is not a demand for labour only 
 may be granted at once, but it by no means follows from this that 
 it is not a demand for labour at all. A demand for one commodity 
 may be a demand for a great deal of labour and a little capital ; 
 a demand for another commodity may be a demand for a great deal 
 of capital and a little labour ; but it is always true that a demand 
 for commodities is a demand for some labour. 
 
 " Here again we must note the enormous assumption which 
 Cairnes gratuitously couples with the belief that demand for com- 
 modities affects demand for labour. He assumes that it is asserted 
 that the quantity of wealth spent in wages is directly proportionate 
 to the demand for commodities. 
 
II DEMAND FOR COMMODITIES AND FOR LABOUR 37 
 
 that the demand for commodities does not determine 
 the more or less of what the labourer on an average 
 receives. From the price of commodities we have to 
 make deductions of rent, and of interest on fixed 
 capital, and entrepreneurs' profits, (besides taking tax- 
 ation into account and this may not be uniform in 
 the two countries), and it is only what is left after 
 making these deductions that goes to recompense 
 labour. Now rents are higher in England than in 
 America,^ but it will be urged that on the other 
 hand, iuterest is higher in America than in England. 
 Yes, but though interest is higher, much less of it 
 has in the aggregate to be paid because the fixed 
 capital in proportion to labour is very much smaller 
 in a country which is largely agricultural than in a 
 manufacturing country like our own. 
 
 Cairnes himself by implication in the section we 
 are considering, and still more clearly a little later 
 in his book (§ 9), lays stress on this point : — 
 
 " It is obvious at a glance that a given 
 amount of capital invested in the Western States 
 of North America supports a larger laboring 
 population than the same amount invested in 
 
 ^ Though of course it does not follow from this that less aggre- 
 gate rent is on the average paid per individual in America than in 
 England. 
 
38 THE THEORY OF WAGES chap. 
 
 the New England States ; and the reason is 
 plain : the former states are more extensively 
 agricultural than the latter and consequently 
 . employ fixed capital and raw material less ex- 
 tensively in their staple industries." ..." Again 
 a comparison of an average investment in the 
 United States — it matters not in what part of 
 them — and in Great Britain would reveal anal- 
 ogous differences." 
 Most frequently a demand for commodities is a 
 demand in some measure for fixed capital, and some- 
 times for land, but it is always a demand for labour. 
 The commodities demanded in Great Britain necessi- 
 tate the employment of fixed capital, land, and labour 
 in different proportions to those demanded in the 
 United States, and this explains how it is possible 
 that an equal demand for commodities in each country 
 may result in labour's receiving a larger recompense 
 in one than in the other ; but it remains true that in 
 each country a demand for commodities is a demand 
 for labour. 
 
 Let A equal a certain amount of rent, interest on 
 fixed capital, and entrepreneurs' profits, and B 
 equal a larger amount of rent, interest on fixed 
 capital, and entrepreneurs' profits. 
 Let X represent the demand for commodities. 
 
II THE " WAGE-FUND " AGAIN 39 
 
 The demand for labour ia the United States is a; — A. 
 The demand for labour in England is a; — B. 
 as — A is greater than x — B. 
 But if X be increased, both x — A and x — B will be 
 increased. 
 
 § 18. An historical illustration adopted by Cairnes 
 requires notice, though it is aimed not so much at 
 showing that a demand for commodities is not a 
 demand for labour as to support the parent stem 
 from which that dictum springs — viz. the wage-fund 
 theory itself. He says that in Ireland " it became 
 necessary to pass from a crude regime of tillage to 
 one in which capital was extensively converted into 
 fixed and permanent forms." This he regards as a 
 conversion of circulating into fixed capital which 
 resulted in a sudden contraction of the wage -fund 
 " of which the unequivocal evidence is found in a 
 population reduced in a few years from eight to five 
 and a half millions." 
 
 But another way of regarding the phenomenon 
 equally consistent with the facts is that capital for- 
 merly fixed, now became fixed in another form, where 
 it gave scope for the employment[of fewer labourers ; 
 that is to say that in the new organisation of industry 
 a larger amount of fixed capital per head was required 
 by the population, there was not enough to " go all 
 
40 THE THEORY OF "WAGES chap, ii 
 
 round," so a large proportion of the population had 
 to emigrate (the matter is considered more in detail 
 in § 54). Suppose a farmer has a stock of fifty 
 scythes for cutting his hay. These he sells, and buys 
 a mowing-machine instead. Four men can now do 
 the work formerly done by fifty, and forty-six are 
 thrown out of employment, but there has been no 
 conversion of circulating into fixed capital. There 
 has only been a conversion of fixed capital from one 
 form to another. 
 
CHAPTEE III 
 
 Professor F. A. Walker supports the theory that 
 Labour is the residual claimant to tJie product 
 of industry. 
 
 Professor F. A. Walker's " Political Ecorumiy" 
 part iv. chap. v. ^ 293-297. 
 
 § 19. Professor Walker's book on the Wages 
 Question and the parts of his Political Economy which 
 treat of the same subject are most luminous and may 
 be considered to have finally disposed of the wage- 
 fund theory, but I do not discover that he follows up 
 his overthrow of that fallacy by what should follow 
 as a corollary from it, viz. the affirmation of the 
 theory that a demand for commodities is a demand 
 for labour. This I have endeavoured to do in the 
 above pages. 
 
 But Professor Walker's own theory of wages lucid 
 as it is, does not I conceive rest on a perfectly sound 
 foundation. He believes that there are for the pro- 
 
42 THE THEORY OF WAGES chap. 
 
 ducts of industry four main destinations, viz. rent, 
 interest, the profits of the entrepreneur, and wages. 
 Of these four he believes the first three are fixed 
 by economic considerations independent of the pro- 
 ducts of industry and that labour is thus left as 
 " the residual claimant to the prodzcct of industry." 
 He says : — 
 
 " First, rent is to be deducted. On the lowest 
 grade of lands there is no rent. On the more 
 productive soils rent, at its economical maximum, 
 equals the excess of produce after the cost of 
 cultivating the no -rent soils has been paid. 
 This rent, as we have seen, does not affect 
 the price of agricultural produce, and does 
 not come out of the remuneration of the agri- 
 cultural labourer. . . . 
 
 "We thus see that the first deduction to be 
 made from the product of industry is of a 
 perfectly definite nature, and that, on the 
 assumption of active competition on both 
 sides, the amount of that deduction is sus- 
 ceptible of arithmetical computation. Eent 
 "must come out before the question of wages 
 is considered. . . . 
 
 "Secondly, from the product of industry 
 must be deducted a remuneration for the use 
 
Ill WAGES "RESIDUAL" 43 
 
 of capital. That remuneration must be high 
 enough to induce those who have produced 
 wealth to save it and store it up, in the place 
 of consuming it immediately for the gratifi- 
 cation of personal appetites or tastes. This 
 may imply, in one state of society, an annual 
 rate of interest of eight per cent; in another 
 of five ; in another of three. The only reason, 
 industrially speaking, for interest being paid 
 at all is that by the use of capital production 
 may be enhanced ; and the interest so paid is 
 only a part often — such is the force of com- 
 petition among the would-be lenders of capital 
 — only a very small part, of the excess of pro- 
 duct so generated. 
 
 " Since the product remaining after the 
 payment of interest is always, in theory, equal 
 to what would have been the product, had 
 interest not been paid (that is, had the capital 
 for the use of which interest is paid, not been 
 employed), and since in fact, the product so 
 remaining is always greater, in general, vastly 
 greater, often inconceivably greater, than the 
 product would otherwise have been, that party 
 to the distribution of wealth whose claims are 
 residual, that is, which takes all that no other 
 
44 THE THEORY OF WAGES chap. 
 
 claimant carries away, is benefited by every 
 payment of interest on account of capital used 
 in the production of wealth. . . . 
 
 "The third and last deduction to be made 
 from the product of industry before the laborer 
 becomes entitled thereto, is what we have called 
 profits, the remuneration of the entrepreneur, the 
 man of business, the captain of industry, the 
 merchant, manufacturer, or banker, who sets in 
 motion the complicated machinery of modern 
 production." . . . The entrepreneur's profits 
 " are of the same nature as rent. As there are 
 no-rent lands, so there is a class of employers 
 who derive from the business they conduct a 
 bare subsistence, at the cost of much anxiety, 
 and perhaps also of discredit, many of them 
 living mainly at the expense of their creditors. 
 " These we call the no - profit employers. 
 From this point, when profits, if any, are so 
 small and so hardly earned that they may, for 
 scientific purposes, be disregarded, upwards 
 through many grades, we have employers 
 who derive moderate profits, liberal profits, 
 grand profits, monumental profits aggregating 
 in a life- time colossal fortunes, according to the 
 degrees in which they bring courage, prudence 
 
HI WAGES "RESIDUAL" 45 
 
 foresight, frugality, and authority over men, 
 to the organisation and conduct of business 
 enterprise. If I am right and not wrong in 
 this view of the nature of the entrepreneur's 
 function and of the source of his profit, those 
 profits would, under full and free competition, 
 not form a part of the price of commodities 
 (price being determined by the cost of pro- 
 duction under the most disadvantageous con- 
 ditions, i.e. in this case production by the 
 no - profits employers) ; while no economical 
 means whatever would suffice to carry any 
 portion of profits to wages, even were employers 
 forbidden by law to receive profits. In other 
 words, their profits consist wholly of wealth 
 created by the individual employers themselves, 
 over and above the wealth which would have 
 been produced, in similar industrial enterprises, 
 by the same labor-force and capital-force under 
 the control of employers of a lower grade of 
 economical efficiency. 
 
 "These three shares being cut off the pro- 
 duct of industry, the whole remaining body 
 of wealth daily or annually created, is the 
 property of the laboring class; their wages, 
 or remuneration of their services. So far as. 
 
46 THE THEORY OP WAGES chap. 
 
 by their energy in work, their economy in 
 the use of materials, or their care in dealing 
 with finished product, the value of that product 
 is increased, that increase goes to them by 
 purely natural laws, provided only competi- 
 tion be full and free. Every invention in 
 mechanics, every discovery in the chemical art, 
 no matter by whom made, inures directly and 
 immediately to their benefit, except so far as 
 a limited monopoly may be created by law, 
 for the encouragement of invention and dis- 
 covery. 
 
 " Unless by their own neglect of their own 
 
 interests, or through inequitable laws, or social 
 
 customs having the force of law, no other party 
 
 can enter to make any claim on the product 
 
 of industry, nor can any one of the three parties 
 
 already indicated, carry away anything in excess 
 
 of its normal share, as hereinbefore defined." 
 
 § 20. If from the four divisions of the product 
 
 of industry we deduct three, the fourth is in a sense 
 
 residual, but I fail to see that Professor Walker shows 
 
 labour to be the part which receives the residual share 
 
 by any argument which would not apply with equal 
 
 justice to any of the other agents of production. 
 
 Might we not for example argue that labour's share 
 
Ill WAGES "RESIDUAL" 47 
 
 was also fixed by economic considerations independ- 
 ent of the product of industry ? 
 
 ' From the point where the wages of labour, 
 if any, are so small, and so hardly earned that 
 they may for scientific purposes be disregarded, 
 upwards through many grades, we have labourers 
 who receive moderate wages, liberal wages, grand 
 wages, according to the degrees in which they 
 bring strength, skill, endurance, industry, in- 
 telligence, trustworthiness, etc., into their work. 
 These wages would under full and free com- 
 petition not form a part of the price of com- 
 modities (price being determined by the cost 
 of production under the most disadvantageous 
 conditions, i.e. in this case production by the 
 labourers who receive lowest wages). The 
 additional wages obtained by the superior work- 
 men consist wholly of wealth created by the 
 individual labourers themselves over and above 
 the wealth which would have been produced, 
 in similar industrial enterprises, by the same 
 entrepreneur-force and capital-force applied to 
 labourers of a lower grade of economical 
 efficiency.' 
 This argument is of course quite untenable, but is 
 it not a rediu>tio ad dbswrdmn of Professor Walker's ? 
 
48 THE THEORY OF WAGES ohap. m 
 
 ■ Professor "Walker argues that the advantage of 
 any improvement in the material conditions of pro- 
 duction is lost to the entrepreneur class by their 
 inter-competition for land, capital, and labour, to take 
 advantage of it, — but it may be urged with just as 
 much truth that it will be lost to the labouring 
 classes by the competition amongst each other to 
 annex themselves to the land, capital, and organising 
 power, requisite for their employment, and we might 
 accordingly then point to one of the other agents of 
 production as receiving the residual portion of the 
 product. 
 
 § 21. But the fact is that to regard any one of 
 the claimants to the product of industry as residual 
 is improper; such a view assumes that if changes 
 take place in economic conditions the shares which 
 fall to the other claimants to the product of industry 
 remain constant. This is not the case ; a change of 
 economic conditions may and in fact usually does 
 affect rent, interest, and entrepreneurs' profits, as 
 well as wages. 
 
CHAPTEE IV 
 
 A Criticism of the Economic Doctrine that " Bent does 
 not enter into the Expenses of Production." 
 
 § 22. Professor Alfred Marshall in his speech at 
 the meeting which inaugurated the British Economic 
 Association urged that those who were to control its 
 journal should " insist that all who wrote in criticism 
 of others should take the writings of those others in 
 the best possible sense." The chivalrous feeling 
 towards the work of others which prompted this 
 advice animates the first volume of the great work 
 which the Cambridge professor has recently added 
 to English economic writings. The broad tolerance 
 and appreciation of other thought and research in 
 economics which we find in it give its pages a great 
 charm, but this charm has nevertheless, we some- 
 times feel, the "defect of its quality." Doctrines 
 which have been authoritatively propounded and 
 impressed on the minds of at least one generation 
 
 E 
 
50 THE THEORY OF WAGES chap. 
 
 of economic students are referred to but slightly 
 and (as it were) by the way, when the author 
 has found them inconsistent with his own more 
 matured theory ; indirectly indeed one discerns that 
 they are discountenanced by him, but the discovery 
 that our last master of the science is not on im- 
 portant points at one with some of his great pre- 
 decessors of a couple of decades ago, is rather 
 concealed than emphasised by himself. 
 
 The effect on the mind of the reader is sometimes 
 puzzling : he takes what has hitherto very generally 
 been regarded as the authoritative doctrine some- 
 what for granted in a writer who does not expressly 
 or at any rate conspicuously disclaim it, and he 
 is consequently disconcerted when he meets with 
 propositions and theories inconsistent with it. 
 
 Professor Marshall would probably himself ac- 
 knowledge that his opinions on the subject (amongst 
 others) of the wage -fund theory, and the theory 
 that " a demand for coinmodities is not a demand for 
 labour,'' are essentially different from those that were 
 held by the best English economists in the middle 
 of the century ; surely it would have been well if these 
 differences had been a little more decisively indicated. 
 
 The treatment of the dictum at the head of this 
 chapter is perhaps an instance of the best interpreta- 
 
IV RENT, AND EXPENSES OF PKODUOTION 5] 
 
 tions being adopted in Principles of Economics with- 
 out making other than casual reference to another 
 interpretation which may be widespread, and there- 
 fore if inaccurate, may be in need of explicit contro- 
 version. "When Professor Marshall says that rent 
 does not enter into the expenses of production, he 
 means that rent does not do anything towards deter- 
 mining those expenses. But the phrase is ambiguous, 
 and may be construed to mean that rent does not form 
 part of the expenses of production. Some economists 
 indeed have not had the distinction between these two 
 meanings present in their minds and have treated 
 arguments aimed at proving the one, as applicable to 
 the other, and though it is possible that many econo- 
 mists would now disclaim the idea that rent does not 
 form part of the expenses of production, I should 
 be falling into the same error of judgment which I 
 seem to discern in Professor Marshall's writings, 
 were I to ignore their possible interpretation of the 
 dictum which we have before us for consideration, 
 and pass on at once to the examination of that more 
 interesting and more intricate inquiry as to whether 
 it is true to say that rent does not do anything 
 towards determining the expenses of production. 
 
 § 23. The Eicardian theory of rent may be illus- 
 trated by a diagram. Distance measured horizon- 
 
52 
 
 THE THEORY OF WAGES 
 
 tally. From Ai to B indicates acreage, thus Aj 
 to A2 represents 100 acres, Aj to A3, 200 acres, Ai 
 
 Diagram 1. 
 
 to B, 500 acres. The land is arranged according to 
 capacity for valuable product, and this is measured 
 by the perpendicular lines. Thus with an ex- 
 penditure of a like amount of capital and labour the 
 first hundred acres will give a product represented 
 by Ai Ci C2 A2, the second will give one repre- 
 sented by A2 C2 C3 A3, and the fifth hundred acres 
 win give one represented by the triangle A5 C5 B. 
 
 Now if we suppose that the farmer's average ex- 
 penses and profits on a hundred acres of land are 
 represented by the area enclosed between the lines 
 Aj Ag A3, etc., and Di Dj D3, etc., we shall see 
 that the landlord's surplus of rent on the first hundred 
 
IV RENT, AND EXPENSES OF PRODUCTION 53 
 
 acres is represented by tlie area Dj Ci C2 D2, on 
 the second by Dg G^ Cg D3, on the fourth by the 
 triangle D4 C4 D5, less the triangle Dj Dg C5 
 (that is to say by almost nothing; this hundred 
 acres is said to be about on the "margin of culti- 
 vation "), and the fifth hundred acres not only does 
 not pay rent, but it does not even produce enough to 
 recoup the farmer, and wUl therefore not be cultivated. 
 
 Now the first argument that we have to examine 
 is that a bushel of wheat raised on the margin of 
 cultivation is raised where no rent is paid, there- 
 fore rent cannot enter into its expenses of pro- 
 duction ; and as all bushels of wheat of like quality 
 and under like conditions are of the same price 
 whether raised on the margin of cultivation or on 
 rich and accessible soil such as A^ Ag, rent can in 
 no case enter into the expenses of production, 
 
 § 24. But in reality nothing could be more in- 
 consequent than this argument. The first part of 
 the Kicardian theory of rent lays down that land of 
 more value than the least valuable land cultivated, 
 pays rent to the extent of that additional value. 
 The argument up to this point is sound ; it concerns 
 acres and is applied to acres, and not, as is the case 
 with the second part of the contention, to bushels. 
 However safely we may cross this which Mill calls 
 
54 THE THEORY OF WAGES chap. 
 
 thepofis asinorum of economics it by no means follows 
 that if we are invited to trust ourselves to another 
 structure built on much less sound engineering prin- 
 ciples we shaU not do wisely to tarry on the hither 
 side ; and the argument that we are in some quarters 
 asked to endorse (viz. that because surplus value of 
 land whatever it may be, must be paid away in rent, 
 that therefore rent does not form part of the expenses 
 of production) is in fact thoroughly unsound in 
 construction. 
 
 It would be as reasonable to argue that if wheat 
 were raised from one farm on which £100 had been 
 expended in manure, and was sold at the same price 
 as produce raised from another farm on which 
 nothing had been expended in this form of capital, 
 because capital spent in manure did not enter into 
 the expenses of production of wheat from the latter 
 farm, therefore it did not enter into those of wheat 
 grown on the former. Or again we might argue that 
 if wheat grown by Coolie labour sold at the same 
 rate as wheat raised by European labour the surplus 
 of the cost of European labour over Coolie labour 
 could not therefore enter into the expenses of pro- 
 duction. What indeed could ? Under a process of 
 argument of this kind the expenses of production 
 would " softly and silently vanish away." 
 
IV KENT, AND EXPENSES OF PRODUCTION 55 
 
 The error will be found to lie in the inconsequence 
 with which an argument founded on acreage is with- 
 out apology applied to hushels. Now hy hypothesis 
 though the price per bushel is uniform the number 
 of bushels raised per acre is various, because 
 the productivity of the land varies, and so what 
 is true of acres will not necessarily be true of 
 bushels. 
 
 The acre is in fact a unit from which we can 
 learn nothing at all about land fertility any more 
 than we could about the productivity of labour if 
 we took a man as a unit irrespective of whether 
 he were a Coolie or an EngUshman; or any more 
 than we could about the productivity of capital if 
 we took a coin as a unit, irrespective of whether it 
 were copper or gold. 
 
 § 25. Let us reconstruct our figure but let distance 
 measured horizontally along the line Aj A^, etc., 
 represent instead of hundreds of acres, units of 
 efficiency in land, thus Aj to A^ measures one unit 
 of efficiency, Aj to A3, two units, and so forth. 
 
 The produce will always be the same, a fixed 
 proportion of it goes to rent, a fixed proportion 
 of it to reward capital, labour, etc., whatever the 
 acreage; whether it be a square yard in the heart 
 of the City of London or a square mile on a Scotch 
 
56 
 
 THE THEORY OF WAGES 
 
 sheep-run, with a like expenditure of capital and 
 labour the occupier can afford to pay a like rent. 
 
 _C5_ 
 
 Di 
 
 D2 
 
 D, 
 
 D4 
 
 D5 
 
 D 
 
 
 
 
 
 
 
 Ai 
 
 As 
 
 A3 
 
 A4 
 
 A„ 
 
 A, 
 
 Diagram 2. 
 
 § 26. Now we will let our line Aj A^ etc., instead 
 of representing units of land with like efficiency for 
 produce, equal expenditure of capital and labour 
 being made thereon, represent units of land giving 
 equal products, but with imequal application of 
 capital and labour. Distance measured horizontally 
 now marks units of land acreage, each of which 
 produces say 1000 bushels of wheat. Thus on Aj 
 Aj will be grown 1000 bushels of wheat, on A^ A3 
 1000 bushels, and so forth. The land is ranged as 
 in the first figure according to natural capacity for 
 valuable product, that from Aj to A^ being the most, 
 
RENT, AND EXPENSES OF PRODUCTION 
 
 57 
 
 and that from Aj to A^ being the least, fertile, 
 accessible, and so forth. 
 
 Of the produce raised on Ai A2, — A^ Cj Cg A2 
 goes to pay rent ; Ci D2 C2 goes to reward capital 
 and labour. Of the produce on A5 A^, — As C5 A^ 
 pays rent, C5 D5 Do Ae, pays for capital and labour. 
 
 Diagram 8. 
 
 Of the prices paid for the respective thousand 
 bushels of wheat, sometimes more, sometimes less, 
 goes to pay rent, but the more that goes to pay rent, 
 the less goes to pay for capital and labour, and vice 
 versd, and surely we cannot say that one more or less 
 than the other forms part of the expenses of produc- 
 tion. Eent forms part of the expenses of production 
 of wheat which is grown on land that pays rent, it 
 does not form part of the expenses of production of 
 
58 THE THEORY OF WAGES chap. 
 
 wheat raised on land that pays no rent, but in the 
 latter case the expenses of production on account of 
 capital and labour are larger proportionately, and 
 this accounts for the fact that the total expenses of 
 production in the two cases are identical. 
 
 § 27. But though the above considerations seem to 
 show that the doctrine that rent does not form part of 
 the expenses of production may be denied with a con- 
 siderable degree of confidence, we have stiU. before us 
 by far the most important part of our investigation. 
 
 We now have to consider whether it is true to 
 say that rent doeS nothing to determine the expenses 
 of production. 
 
 A distinction may be drawn in Diagram 3 between 
 the triangle Ai Ci Ae, which represents rent, and 
 the triangle Cj Dg Ag, which represents the reward 
 of capital and labour, on the following grounds. The 
 supply of units of ef&ciency of capital and labour tend 
 to adjust themselves to the demand, but it is main- 
 tained that it is impossible that the units of efficiency 
 of land should do so, because of land there is a certain 
 definite limited quantity. Professor Marshall says 
 (Principles of Economics, book vi. chap. i. §§4, 5): — 
 " The amount of the commodity and its price, 
 the amounts of the several factors or agents of 
 production used in maldng it, and their prices. 
 
IV RENT, AND EXPENSES OP PRODUCTION 69 
 
 — all these elements mutually determine one 
 another, and if an external cause should alter 
 any one of them the effect of the disturbance 
 extends to all the others. . . . Here however we 
 must call to mind a fundamental difference be- 
 tween earnings and interest on the one hand, 
 and rent on the other. For rent is not one 
 of those mutually determining elements, but is 
 determined by them. The rent or Producer's 
 Surplus of a differential advantage, not made by 
 man, is the excess value of the return which 
 can be got by its aid where labour and capital 
 are applied with normal ability up to the margin 
 of profitableness, over that which the same 
 labour, capital, and ability, would get if work- 
 ing without the aid of any such advantage." 
 The doctrine is expressed in another form (book 
 V. chap. viii. end of § 4) : — 
 
 " The price of agricultural produce taken as 
 a whole is governed, in the long run, and other 
 things being equal, by its marginal expenses of 
 production (or, to use the ordinary metaphor, 
 by the expenses on the margin of cultivation) ; 
 . . . these expenses are not in any way affected, 
 directly or indirectly, by the true rent (exclusive 
 of the quasi-rents for improvements) paid for 
 
60 THE THEORY OF WAGES chap. 
 
 the land ; and . . . therefore this rent does not 
 enter into the expenses of production of agri- 
 cultural produce taken as a whole." 
 § 28. It is again expressed thus by Professor 
 W. E. Sorley of the South Wales University College, 
 in his monograph on Mining Boycdties (Hy. Frowde, 
 Oxford University Press Warehouse) p. 16 : — 
 
 " The theory of agricultural rent is perfectly 
 precise " . . . " according to it rent does not 
 enter into the price of the product ; it is the 
 price of the product that determines rent. In 
 the perfect market there will be only one price 
 for commodities of the same quality, and that 
 price will be fixed by the expenses of the pro- 
 duction of the commodity under the most un- 
 favourable conditions — by that portion of the 
 article which is produced with greatest difficulty 
 or from the least fertile and advantageously 
 situated land. Such least fertile land will pay 
 no rent or a minimum rent that may be dis- 
 regarded. But the expenses of the production 
 there, will fix the price of the product, and the 
 more fertile or better situated land wiU pay a 
 rent corresponding to its greater advantages. 
 Were rents to be abolished to-morrow by a 
 stroke of the pen the abolition would but enrich 
 
IV RENT, AND EXPENSES OF PRODUCTION 61 
 
 the tenants of the more fertile soils. The same 
 amount of corn and cattle would be required as 
 before ; the conditions of production would be 
 the same in the least advantageous circumstances. 
 These would fix the price of the product ; food 
 would not be cheaper and wages would not be 
 raised." 
 " JVcre rents to he aholished to-morroio" — but in the 
 supposed case given by Professor Sorley rents are not 
 abolished. So far as the consumer is concerned, so 
 far as the wage -earner is concerned, landlords have 
 not been abolished at all ; there is simply a new set 
 of them. The quota of rent is paid out of the con- 
 sumer's payment for commodities as certainly now 
 to those who were formerly the tenants as it was 
 before to the landlords. It is therefore no matter 
 for surprise that food is no cheaper and wages not 
 raised. The only people for whom rent is really 
 abolished by this stroke of the pen are the quondam 
 tenants, and for them the expense of the pro'duce of 
 their farms is diminished by exactly that amount, 
 showing that rent did enter into their expenses of 
 production. Similarly if a law were passed that all 
 loans now contracted should be binding, but that the 
 agreement as to interest payable thereon, should not 
 be binding, this might be called doing away with 
 
62 THE THEORY OF WAGES chap. 
 
 interest by a stroke of the pen. It would not 
 cheapen food, it would not raise wages; it would 
 but enrich the borrowers. The more they had bor- 
 rowed the more they would be enriched. Yet no 
 one would adduce this as an argument to prove that 
 interest does not enter into the expenses of production. 
 
 Professor Sorley's argument is an excellent one if 
 aimed to show the impossibility of abolishing the 
 payment of rents by consumers, but it does not show 
 that rent does not enter into the price of the product. 
 
 Here it may be noted that whereas Professor Sor- 
 ley's contention began with laying down that rent is 
 determined by the price of the product, the argument 
 he has chosen as illustrative of his position is directed 
 in reality not to this point at all, but to the different 
 question as to whether rent forms -part of the price 
 of the product. This seems to justify my contention 
 that the two questions have not been kept distinct 
 in the minds of economists; at the same time it follows 
 that even though Professor Sorley's illustration maybe 
 logically defective, his original contention that rent is 
 determined by the price of the product may be correct. 
 
 § 29. Now unquestionably there is a connection 
 between rises and falls in general prices and rises 
 and falls in rents. The received economic doctrine 
 is that rents are determined by, but never determine. 
 
IV RENT, AND EXPENSES OF PRODUCTION 63 
 
 prices. "Whilst fully admitting that changes in prices 
 probably would affect rents, I propose to put forward 
 the unorthodox contention that it is also possible 
 that a change in rents may precede and be the cause 
 of a general change in prices ; that in fact rent and 
 prices are " mutually determining elements." 
 
 § 30. Now on what does the contrary contention 
 rest ? Undoubtedly it rests on the hypothesis that 
 land is limited and that its inherent properties are 
 " incapable of increase by man's effort in any period 
 of time however long." ^ Were this the case both 
 those who had land to let and those who wished to 
 rent it would be under the sway of the law of supply 
 and demand, but if the public desire for land in- 
 creased it would mean that there would be no means 
 of satisfying that increased desire and the only way 
 of equalising supply and demand would be by raising 
 rent. If we were considering not land, but Eaphael's 
 Madonnas, this would be true; but in the case of 
 land I hold that it is very far from being true. Even 
 the actual area of land is susceptible of increase to 
 meet an increased demand (land can be reclaimed 
 from sea or bog as in Holland or Ireland) but the 
 
 1 This is an expression used by Professor Marshall in the first 
 edition of Principles of Economics (book vi. chap. iii. § 1) in a 
 passage which has been eliminated from the second edition of the 
 book. 
 
64 THE THEORY OF WAGES chap. 
 
 actual area of land is of very little moment. What 
 we have to consider are those qualities in land for 
 which we are willing to pay. These qualities may 
 be roughly classed under the two heads of (1) fertility 
 and (2) accessibility. Palpably, both these classes 
 of desiderata can be increased by man's effort; 
 tillage, drainiQg, manuring, etc., will increase the 
 first; making new roads, new railways, new steam- 
 boats, wiU. increase the second. 
 
 "Other things being equal, the larger the 
 supply of any agent of production, . . . the 
 lower will be the demand price with which it 
 will have to be contented. . . . The extra pro- 
 duction resulting from the increase in that agent 
 of production will go to swell the National Divi- 
 dend, and other agents of production will benefit 
 thereby, but that agent itself will have to submit 
 toalowerrateof pay"(Marshall,bk. vi.ch.ii. § 2). 
 By the improvement of communication, land is 
 for all practical purposes rendered more plentiful, 
 and it is in consequence of this that rents fall. Eents 
 once having fallen, it follows that commodities can 
 be produced more cheaply, because a smaller pro- 
 portion of their price has to be allocated to the 
 payment of rent. Improved communication affects 
 the supply of one of the agents of production ; that 
 
IV RENT, AND EXPENSES OF PRODUCTION 65 
 
 is a sufficient explanation of a change in its remuner- 
 ation. The cause of a fall in rents is thus identified 
 and we must see in the fall of the prices of commodi- 
 ties, not another cause, but an effect of the fall in rents. 
 § 31. A passage from Mill, though of course the 
 instance is given by him in another connection, 
 illustrates my meaning. He says : — 
 
 "The roads, railways, and canals" (of Great 
 Britain) " were not constructed to give value to 
 land ; on the contrary, their natural effect was 
 to lower its value, by rendering other and 
 rival lands accessible : and the landlords of the 
 southern counties actually petitioned Parliament 
 against the turnpike roads on this very account. 
 The tendency of improved communication is 
 to lower existing rents, by trenching on the 
 monopoly of the land nearest to the places 
 where large numbers of consumers are as- 
 sembled. Eoads and canals are not intended 
 to raise the value of the land which already 
 supplies the markets, but (among other pur- 
 poses) to cheapen the supply by letting in 
 the produce of other and more distant lands; 
 and the more effectually this purpose is attained, 
 the lower rent will be. If we could imagine 
 that the railways arid canals of the United 
 
66 THE THEORY OF WAGES chap. 
 
 States, instead of only cheapening communica- 
 tion, did their business so effectually as to 
 annihilate cost of carriage altogether, and 
 enable the produce of Michigan to reach the 
 market of New York as quickly and as cheaply 
 as the produce of Long Island, the whole value 
 of all the land of the United States (except 
 such as lies convenient for building) would be 
 annihilated ; or rather the best would only sell 
 for the expense of clearing and the Government 
 tax of a dollar and a quarter per acre; since 
 land in Michigan equal to the best in the 
 United States may be had in unlimited abun- 
 dance by that amount of outlay " {Pn-miples of 
 Political Economy, book ii. chap. xvi. § 5). 
 The decrease in the value of agricultural land in 
 this country since the improved communication 
 with America, which (no longer counterbalanced 
 by corn laws) is equivalent to an enormous increase 
 in our own available agricultural land, is another 
 instance in point. Converse instances are more 
 difficult to find in actual experience. It is easy 
 enough however to imagine one. Supposing an 
 eccentric duke were suddenly to devastate half 
 London and enclose it as a deer park, industrial 
 enterprise would be compelled to seek less advan- 
 
IV RENT, AND EXPENSES OF PRODUCTION 67 
 
 tageously situated land, the industrial product of the 
 country would be diminished and prices would rise. 
 
 I 32. Practically then we can create, or we can 
 destroy, land, or those qualities of land for which 
 rent is paid. And if land can thus be created it 
 is to all intents and purposes a form of capital, and 
 it is surely unreasonable to maintain that the interest 
 on capital expended in making bread does, whilst 
 the interest on capital expended on "making" the 
 land on which corn is grown, does not, enter into 
 the expenses of the product, — bread. "Natural 
 advantages " and artificial advantages sell in the 
 same market, and are in fact indistinguishable from 
 each other, and since the latter can be increased by 
 man's effort, we cannot regard the former as being 
 in the same position as Eaphael's Madonnas, for 
 though other pictures may be produced which may 
 more or less enter into competition with them, it is 
 impossible that any shall be produced which shall 
 be iTidistinguishable from them and identical with 
 them as a commodity in the market. 
 
 § 33. It is quite true that the land, and that 
 the capital irretrievably sunk thereon, is completely 
 immobile and that it is therefore in a position of 
 absolute powerlessness as to determining prices. 
 But though this is true of particular cases in which 
 
THE THEORY OF WAGES 
 
 rent is paid, it is not true of the payment of rents as 
 a whole. 
 
 It is of course well recognised that (whether we 
 have under consideration an agent of production, or 
 a commodity) it is not needful for mobility to per- 
 vade the whole of that agent of production, or that 
 commodity, for it to continue in the sphere of 
 influence of mutually determining values. Thus 
 if Eaphael were still living, and in possession of 
 his powers, although those of his Madonnas which 
 are already in existence would be as economically 
 immobile commodities as they are at present, their 
 prices would cease to be monopoly prices altogether 
 independent of the cost of production. An analogous 
 state of things subsists with regard to land ; we may 
 continue, or we may cease from, reclaiming land 
 from bog or sea ; we may continue, or we may 
 cease from, making new railways and other means 
 of communication ; we may continue, or we may 
 cease from, sinking capital in draining, fencing, and 
 manuring lands, and in supplying and maintaining 
 farm buildings : and if we cease altogether from 
 activity in these respects not only wUl the units 
 of efficiency in land cease to increase, but they will 
 begin very rapidly to diminish. 
 
 Do we not here approach the heart of our diffi- 
 
IV RENT, AND EXPENSES OF PRODUCTION 69 
 
 culty ? If the received economic definitions of rent 
 were adequate then indeed the received economic 
 doctrine concerning rents not entering into the 
 determination of prices might be accepted. 
 
 Professor Marshall (as quoted above, § 27) defines 
 rent as the "Producer's surplus of a differential 
 advantage not made by man " ; as " the excess 
 value of the return which can be got by its aid 
 where labour and capital are applied with normal 
 ability up to the margin of profitableness, over that 
 which the same labour, capital, and ability, would 
 get if working without the aid of any such advan- 
 tage." This definition is sufficient when we are 
 considering the relative values of different pieces 
 of land; but it appears to me not to be sufficient 
 when we are considering the total remuneration 
 received by land, and the capital sunk in it, as 
 an agent of production, for here not only has a 
 large amount of the diiferential advantage been 
 made by man in the past, but in the present and 
 in the future the exact amount of efficiency avail- 
 able from this source will depend on man's effort, 
 and so we get a margin of production which is not 
 fixed either in extension or in intensity of cultivation. 
 Shortly my contention is that in comparing one 
 parcel of land (with its natural advantages, and 
 
70 THE THEORY OF WAGES chap. 
 
 with the capital that has been irretrievably sunk 
 on it), with another, the advantages possessed by 
 the one over the other may be treated (like mono- 
 polies) as being independent of the cost of produc- 
 tion. But that if rents in the aggregate are taken 
 they cannot be so regarded. 
 
 Professor Marshall's definition is useful in deter- 
 mining the reason for the payment of a certain rent 
 by one parcel of land, when another parcel of land 
 pays a less rent, or no rent at all, but it is, or appears 
 to me to be, useless for determining the total reward 
 of land as an agent of production, for it gives us no 
 help in determining where the margin of cultivation 
 shall be, and there is no means of determining the 
 amount of capital and labour to be applied. 
 
 § 34. My main point may be stated to be that 
 although what is paid for the differences in the 
 inherent efficiency of land does not, what is paid 
 for the actual inherent efficiency of the land does, 
 constitute a determining element in prices, and 
 since "rent" may be understood in the latter as 
 well as in the former sense, it is at least misleading 
 to say that "Eent has no part in determining the 
 expenses of production." 
 
 In the first signification it will be observed that 
 rent merely contemplates a comparison of values of 
 
IV RENT, AND EXPENSES OF PRODUCTION 71 
 
 different pieces of land ; in the second signification 
 it contemplates a comparison of the value of land 
 with that of the other agents of production. 
 
 Now when we say that wages enter into the ex- 
 penses of production, we mean the reward of labour 
 in the aggregate, not the advantage in reward which 
 a skOled labourer receives over an unskilled one. 
 
 Again when we say that profits enter into the 
 expenses of production we mean the actual reward of 
 the organisation of labour, not the advantage which 
 a skilled organiser receives over an unskilled one. 
 
 And again we say that interest enters into the 
 expenses of production meaning the actual reward for 
 lending capital, not the advantage which some forms 
 of capital possess over others. Why then in the name 
 of all that is consistent should we not say that rent 
 enters into, and has influence in determining, the ex- 
 penses of production, meaning thereby the aggregate 
 reward paid to landlords for the use of so much of 
 their land as is at a given moment required ? 
 
 § 35. I believe the analogy that subsists between 
 land and the other agents of production is a very 
 close one, and that disturbances in the industrial 
 equilibrium affect rents in a way which is quite 
 similar to that in which they affect profits, wages, 
 or interest. 
 
72 THE THEORY OF WAGES chap. 
 
 § 36. Supposing for instance that in consequence 
 of internal political disturbances bodies of labourers 
 are expelled from one country and make their 
 domicile in another, the aggregate reward of labour 
 in the latter country will probably increase, but 
 there is little doubt that the reward per unit of 
 labour will diminish. 
 
 How is this case dissimilar from that of a country 
 which in consequence of the invention of the loco- 
 motive is suddenly covered with a network of 
 railways, thus vastly increasing the amount of 
 accessible land ? The aggregate rents of the country 
 will probably increase and the reward per unit of 
 land diminish. 
 
 These are disturbances from the normal caused 
 from without : their occurrence though more dramatic 
 is less habitual than that of disturbances from the 
 normal arising from internal causes. 
 
 § 37. At a given moment the total product of the 
 world may be divided up into parts which shall 
 represent the respective rewards of the agents of 
 production. The clearing-house which effects this 
 is in fact the automatic action of the competitive 
 system; but were there an actual clearing-house 
 we should have on the one hand paid into it the 
 prices of all commodities, and we should have to 
 
IV RENT, AND EXPENSES OF PRODUCTION 73 
 
 pay out of it on the other rent, wages, profits, and 
 interest, in certain definite proportions. Now it 
 might be that a certain commodity would be found 
 whose price would be divided up in the clearing- 
 house into four parts to be paid respectively to the 
 landlords, labourers, organisers, and capitalists, in 
 exactly the same proportions as the total shares 
 receivable by these four controllers of the agents 
 of production-. Such a commodity we will for the 
 moment call the typical commodity. 
 
 § 38. Now if the demand of the community 
 increases or decreases for this typical commodity 
 no disturbance will take place in the economic 
 equilibrium because the proportions of the dis- 
 tribution to be effected will not be disturbed. But 
 the prices of most commodities will be distributable 
 in other proportions than these. In some a larger 
 proportion of their price than in that of the typical 
 commodity will be apportioned to rent; these we 
 may call land -commodities, in some a larger pro- 
 portion of their price than in that of the typical 
 commodity will be apportioned to wages ; these we 
 may call labour-commodities. Similarly we shall 
 get others that we may call organisation - com- 
 modities, and others that we may call capital-com- 
 modities. Now suppose that a change takes place 
 
74 THE THEORY OF WAGES chap. 
 
 in the demand of tlie community for commodities, 
 which increases the demand for lahour-commodities 
 concurrently with decreasing the demand for the 
 other three sorts of commodities. Labour will at 
 once be able to claim a larger share of reward from 
 the clearing-house, the prices of all labour -com- 
 modities will rise and those of all other commodities 
 will fall. With the increased reward to labour (per 
 unit of efiiciency) more labour wiU probably come 
 into the market; immediately labourers will seek 
 to increase the amounts of units of efficiency they 
 can produce, possibly by working longer hours, or 
 it may be (if they are working on piece-work) by 
 working more industriously ; and there will also 
 gradually be felt a tendency to a more rapid in- 
 crease of population. Ultimately something near the 
 old equilibrium may be restored but it is probable 
 that when the counteractive forces have had their 
 innings the then typical commodity will be found 
 to yield a larger share of its price to labour than its 
 predecessor before the disturbance did. 
 
 Suppose now that there is an increased demand 
 for capital -commodities. Capital -commodities in 
 general will rise in price, other commodities will 
 fall ; the consequent rise in interest will be righted 
 to a certain extent by increase in accumulation but 
 
IV RENT, AND EXPENSES OF PRODUCTION 75 
 
 as in the former instance the commodity typical at 
 the end of the cycle of disturbance will probably be 
 found to be one yielding a larger share of its price 
 to capital than did the commodity that was typical 
 before the disturbance. 
 
 All this is but another way of saying that wages 
 (in the aggregate) and that interest (in the aggregate) 
 each have a voice in determining the expenses of 
 the production of commodities. 
 
 § 39. Now when we come to examine land-com- 
 modities is there any essential difference which will 
 justify us in saying that rent (in the aggregate) unlike 
 wages, unlike interest, unlike profits, does not have 
 a voice in determining the expenses of the produc- 
 tion of commodities ? On the contrary the circum- 
 stances seem to be precisely similar. 
 
 If we suppose an increased demand for land- 
 commodities there will be a general rise in prices of 
 such, but the consequent rise in rents wUl be par- 
 tially counteracted by an exteinded margin of pro- 
 duction {i.e. less fertile and less accessible land will 
 be brought into cultivation). Similarly to what 
 occurred in the other cases the new typical com- 
 modity that takes the place of the old one wiU have 
 in its composition a somewhat larger proportion of 
 rent than the one it has displaced ; but to justify 
 
76 THE THEORY OF WAGES chap. 
 
 the doctrine that aggregate rents do not partly deter- 
 mine the prices of commodities, but are wholly 
 determined by them, it would be necessary to have a 
 state of things in which there was no tendency to re- 
 covery towards the composition of the first typical 
 commodity. The fact that the recovery does to some 
 extent take place witnesses to the ability of rent to 
 take its part in the settlement of prices. It is not 
 the limp incapable thing that we are persuaded to 
 believe, greedily licking up what is thrown to it, but 
 impotent to affect the greatness or the smallness of 
 the quantity thrown. 
 
 § 40. My conclusion then is that it is not true to 
 say that " Eent does not enter into the expenses of 
 production " except in a non-natural interpretation 
 of the phrase, which would make it equally true to say 
 that wages, that profits, and that interest do not do so. 
 
 § 41. "We have now to consider whether the case 
 under investigation is in any way affected by the law 
 of diminishing returns. The law is of the first im- 
 portance in connection with the subject, for without 
 its operation rent might be non-existent. As Ricardo 
 points out, no farmer would require more than one 
 field, and on that he might raise whatever amount of 
 crops he required by the simple expedient of apply- 
 ing continual successive " doses " of capital. 
 
IV KENT, AND EXPENSES OF PRODUCTION 11 
 
 The law of diminishing returns demonstrates 
 then the necessity of rent. Does it do more than 
 this ? Does it demonstrate that rent has no part in 
 determining prices ? At first sight it seems as if it 
 might ; we have seen how the valuable characteris- 
 tics of land can be brought into existence by man's 
 exertions, but it may be urged that although land 
 can be made more fertile and more accessible it 
 cannot be made naturally advantageous ; the start 
 can be made up but it cannot be given, and it may 
 be that the advantageous start is the valuable quality 
 which cannot be brought about by man's effort. But 
 this is like saying that a woman who made stockings 
 by hand could do nothing to affect the market of 
 those made by machinery ; if they were practically 
 one and the same article they would compete against 
 each other even though the manufactory started 
 with the advantage of turning out hundreds of pairs 
 to every single pair hand-knitted by the woman. 
 
 § 42. The law of diminishing returns does not 
 necessarily differentiate land from the other agents 
 of production. That law points to the fact that 
 where the community has an effective desire to get 
 more out of the land than it has previously done, it 
 will do so at greater proportionate cost. But just 
 the same phenomenon is observable (though not to 
 
78 THE THEORY OF WAGES chap. 
 
 such a large extent) wlien larger drafts are made on 
 otlier agents of production. A considerably increased 
 demand for capital, although it would encourage 
 saving, would have a tendency permanently to raise 
 the rate of interest, that is to say the community to 
 secure the additional capital would have to make a 
 sacrifice larger in proportion than that which they 
 had to make previously, to secure the smaller amount 
 of capital, or in other words the law of diminishing 
 returns would here be found to be in force. Even 
 in the case of labour, though some maintain that a 
 stimulated demand would be met by an increase of 
 population that would make units of efficient labour 
 as plentiful in proportion to the demand as before, 
 it is very doubtful whether this can be fully estab- 
 lished. Mill at any rate was of opinion that a 
 sudden raising of wages would increase the labourers' 
 " standard of living " and that it would therefore not 
 be followed by an increase of population sufficient 
 entirely to counteract the rise. But if Mill was 
 right we should only succeed in getting our increased 
 supplies of labour on terms that would be more dis- 
 advantageous to the whole community than before ; 
 and the law of diminishing returns would be found 
 to be in operation here also. 
 
 § 43. As a final consideration I would suggest 
 
IV RENT, AND EXPENSES OF PRODUCTION 79 
 
 our examining what the effect would be of the im- 
 position of a tax on rent-paying land. A tax on 
 such land or on rents would affect the general prices 
 of commodities, for it would prevent the units of 
 efficiency of land from being brought into service to 
 the same extent. A certain amount of land that 
 before would have been utilised for industrial pro- 
 duction will be converted into, or will remain as, 
 garden, park, or grouse-moor, or will not be reclaimed 
 from the sea by embankment, or from bog by drainage, 
 or from inaccessible wastes by railways. 
 
 A tax on rents would hinder the investment of 
 capital in the permanent improvement of land, be- 
 cause other forms of investment would become 
 relatively more profitable, consequently it would 
 diminish the efSciency of land, and raise the price 
 of all commodities of which land was one of the 
 agents of production. 
 
 If on the other hand the tax be levied not on 
 rents but on acreage of rent-paying land, prices 
 of commodities will still be affected though by rather 
 a different train of cause and effect. There wHl be 
 no check on the investment of capital in the per- 
 manent improvement of land, but there will be 
 a tendency to decrease the area under cultivation, 
 and ia this way the margin of cultivation will be 
 
80 THE THEORY OF WAGES chap, iv 
 
 contracted. The extension of the land will be 
 diminished, but to counteract the consequent diminu- 
 tion of produce the land still kept under cultivation 
 will be made to yield more intensively. But the 
 additional capital lavished on the smaller area of land 
 will, in consequence of the law of diminishing returns, 
 yield a smaller return than the same amount of 
 capital expended on the larger area would do ; con- 
 sequently the price of produce will rise. 
 
 § 44. It appears therefore that however a tax on 
 rent-paying land is levied it is calculated to affect 
 prices, or in other words that a part of it will be paid 
 by the general consumer. But the proposition that 
 rents do nothing to determine prices can be upheld 
 only on the supposition that the whole of the differen- 
 tial advantage arising from the use of land goes into 
 the pockets of the landowners. If this were so they 
 would be powerless to compel consumers to pay a 
 part of a land-tax ; the consumers would have no 
 interest in the matter and would have nothing to 
 gain by contributing. The fact that they do contri- 
 bute shows that they have a stake in the matter, and 
 that the general rate of rents, like the general rate 
 of interest, of wages, or of remuneration of organis- 
 ing power, takes its part in determining the prices 
 of commodities. 
 
CHAPTEE V 
 
 Labour is neither limited for its reward to a Wage- 
 Fund, nor is it entitled to the residuum of 
 a varying Product of Industry. Wages (like 
 Bent, Interest, and Untrepreneur's Profits) are 
 a Varying Proportion of a Varying Product 
 of Industry. Wages Problems worked out on 
 this basis. 
 
 § 45. The proposition above stated is in effect the 
 conclusion at which we arrived at the beginning of 
 Chapter IV., and that which we found to be in sub- 
 stantial agreement with Professor Marshall's book 
 Principles of Economics, except that that work treats 
 rent as being on a different basis to that on which 
 wages, interest, or profits rest. We may conclude 
 then that the product of industry will be divided in 
 certain proportions between rent, interest, profits 
 and wages, and it will be instructive if we endeavour 
 to work out wages problems on this basis, 
 
 G 
 
82 THE THEORY APPLIED chap. 
 
 The particular numerical proportions we take will 
 be perfectly arbitrary and of course no conclusions 
 can be drawn from the actual numbers. But 
 where in our analyses we are able actually to show 
 that there will be an increase or a decrease in 
 any particular, about such increase or decrease it 
 will be permissible to argue. The actual amount 
 of increase or decrease supposed will be arbitrary ; 
 on that therefore we must of course base no con- 
 clusions. 
 
 § 46. Let us take the following, which we will 
 call Case No. 1, as a standard for comparison with 
 other circumstances : — 
 
 No. I. 
 
 Dviriag an imaginary standard year : — 
 
 10 numerical Units of Labourers supply 10 Units of 
 Labour. 
 
 The total Product of Industry {x) = 1000 Units of 
 Products. 
 
 a is divided amongst tbe Four Agents of Production. 
 
 Rent (which we will signify by the letter R) is the share 
 of the Landlords. 
 
 Interest (which we will signify by the letter I) is the 
 share of the Capitalists. 
 
 Profit (which we will signify by the letter P) is the share 
 of the Entrepreneurs. 
 
 "Wage (which we will signify by the letter W) is the share 
 of the Labourers. 
 
A STANDARD CASE 
 
 83 
 
 We will suppose 
 
 10 Units of Land ^ to be 
 industrially employed 
 and that 
 
 10 Units of Capital to 
 be industrially em- 
 ployed and that 
 
 10 Units of Organising 
 Power to be indus- 
 trially employed and 
 tliat 
 
 10 Units of Labour to 
 be industrially em- 
 ployed and tbat 
 
 R= 80 Units of Products. 
 
 1=160 
 
 P=160 
 
 •W = 600 
 
 1000 
 
 Tlie average wages received by 1 numerical Unit of 
 Labourers will be 60 Units of Products. 
 
 In the case supposed the total product of 
 industry is 1000 units, out of which a share of 600 
 is secured by labour. 
 
 I 47. Now suppose we take another year, which 
 differs from the standard year in respect of the 
 population, which has doubled in numbers. To 
 estimate the effect on the reward of labour, we must 
 examine first the effect that will be produced on 
 the number of units of the total product, and 
 
 ^ A Unit of Land is measured by its area multiplied into its 
 fertility, accessibility, and other valuable qualities. 
 
84 THE THEORY APPLIED chap. 
 
 secondly on the share of that product to be secured 
 by labour. 
 
 § 48. Now with regard to the first, we have 
 already seen (chap. i. § 4) that efficiency (that is 
 to say increase or decrease of the total product) is 
 not always proportionate to the increase or decrease 
 of the effort exerted, or abstinence exercised, by or 
 through any particular agent of production. Where 
 efficiency increases in larger proportion than the 
 increase of the effort exerted, the law of increasing 
 returns is said to be in operation, in converse 
 circumstances, the law of diminishing returns. 
 
 Now the circumstance of a doubling of popula- 
 tion would undoubtedly be pronounced by many 
 economists as a case where the law of diminish- 
 ing returns would come into operation. They 
 would submit that the doubling of population cannot 
 be considered in relation to. labour power alone. 
 True the amount of effort that can be exercised by 
 labour is doubled, for there are twice as many arms, 
 and legs, and sets of muscles; but there are also 
 twice as many stomachs ; accordingly double the 
 amount of food must be raised, and the additional 
 quantity will be produced under less advantageous 
 circumstances, for less fertile land will have to be 
 brought into cultivation, or the land already in 
 
V DIMINISHING, AND INCREASING RETURNS 85 
 
 use will have to be more intensely cultivated, and 
 will give a less proportionate yield. 
 
 The reasoning is perfectly just ; without doubt the 
 law of diminishing returns will be operative. But 
 what is by no means clear is that the law of 
 increasing returns wiU. not also be operative, and 
 still more powerfully, so that taking the balance of 
 matters we shall have to say that the law of 
 increasing, and not that of diminishing, returns is 
 in operation. 
 
 Mr. Edwin Cannan in a recent number of the 
 Economic Journal (March 1892, " The Origin of the 
 Law of Dimiaishing Eeturns ") says : — 
 
 " Few historical facts can be better established 
 than that with the progress of wealth and 
 population in the present civilised world, 
 the labour of providing raw produce has been 
 performed by a steadily decreasing proportion 
 of the whole population, and till some one 
 brings forward statistics to show that an agri- 
 cultural labourer now employed at the margin 
 of cultivation actually produces less wheat or 
 beef than his predecessor in the time of King 
 Alfred, we may take this as sufficient proof 
 that the returns have increased, and not 
 diminished." 
 
86 THE THEORY APPLIED chap. 
 
 It would appear then that though the world is 
 constantly labouring under increased economic dis- 
 advantages by reason of there being an additional 
 number of stomachs to be supplied with food, which 
 can only be satisfied with augmenting difficulty, 
 it is not in fact experiencing greater difficulty in 
 existence. This points to there being some com- 
 pensatory force at work which admits of the law of 
 increasing returns coming into operation. What 
 then is the great source of increasing return from 
 like employment of effort? Surely new thoii^'ht 
 applied to the industrial system. From thought 
 results discovery and invention, — discovery in 
 the mechanical world, discovery in the chemical 
 world, discovery in the electrical world, discovery 
 in the geographical world ; from thought too 
 results better application and organisation of the 
 already existing industrial forces. It is thought 
 that results in giving men the power of commanding 
 better returns from the exercise of their energies ; 
 and the dwelling-place of thought is the human 
 brain. 
 
 To my apprehension it is not clear that an 
 increase in the number of the stomachs of even the 
 labouring classes does more to hinder the material 
 welfare of mankind, than does the increase in the 
 
V DIMINISHING, AND INCREASING RETURNS 87 
 
 number of their brains to further it. But the case 
 before us is an increase in the whole population, and 
 we may therefore assume an increase in the number 
 of entrepreneurs (whose brains provide much the 
 most fertile fields from which to reap thought 
 applicable to industrial concerns), as well as in that 
 of the labouring population. The life of a great 
 mechanical discoverer like James Watt, or of a 
 great organiser of labour, does much more to increase 
 the Product of Industry in proportion to population, 
 than the advent of many thousands of ordinary lives 
 does to decrease it. 
 
 It would be a difficult task to attempt to compute 
 what increase or diminution of the total product 
 would follow on alterations in the aggregate amounts 
 of the various agents of production in industrial 
 use, or in alterations in the proportions borne 
 by one or more of the agents of production to 
 others. 
 
 We however know that increase of cultivation 
 of land either in area or intensity brought about 
 by increased pressure of population, will yield a 
 proportionately decreasing return, but at the same 
 time we observe that this identical increased pres- 
 sure of population carries with it an increase of brain 
 power and that this results in an increasing industrial 
 
88 , THE THEORY APPLIED chap. 
 
 return. (We may note by the way that one of the 
 forms of activity pursued by brain power results in 
 the opening up of fresh land in new countries. An 
 increase of land brought about thus — consequent 
 that is to say not on the larger number of stomachs, 
 but on the larger number of brains, — yields not a 
 decreasing, but an increasing return.) 
 
 An increase of population then would affect our 
 four agents of production in some such way as the 
 following : — 
 
 Land would follow the law of diminishing 
 returns so far as greater pressure was exer- 
 cised on areas formerly available (whether 
 actually in industrial use or not) : 
 but would follow the law of increasing returns 
 so far as fresh areas were rendered avail- 
 able. 
 Similarly capital if expended on the land, or on 
 industrial enterprises in operation before the 
 increase of population, would follow the law of 
 diminishing returns : 
 but when the ingenuity of man opens up fresh 
 fields for its exercise, they are in a large 
 number of cases more profitable fields also. 
 So much for the two inanimate agents of produc- 
 tion ; their position is dependent on man, and follows 
 
V DIMINISHING, AND INCREASING RETURNS 89 
 
 the law of diminishing, or that of increasing, returns 
 according as to whether in man the wants of the 
 stomach or the creations of the brain obtain the 
 leadership. 
 
 We must also consider the animate agents of pro- 
 duction. We have classified the industrial powers 
 of mankind under two of these, — Labour Power, and 
 Organising Power. It would however be a mistake 
 to suppose that human beings can be very rigidly 
 separated into those that are to be regarded as 
 labourers, and those to be called entrepreneurs. 
 The labourer pure and simple is the man who works 
 as an animal works, not necessarily without intel- 
 ligence, but without initiative thought. He for 
 example, exercises the muscles of his arms and legs 
 in digging, in the same sort of way that a horse 
 exercises its muscles in pulling a plough; or 
 possibly he is a clerk whose employment is 
 mechanical copying of letters, or mechanical adding 
 of ledgers. Very little human work however is so 
 closely assimilated to that of the beasts as properly 
 to be regarded as pure labour power, without any 
 admixture of organising power. Probably the 
 nearest approach to it is to be found amongst the 
 labour of slaves and serfs ; but as we pursue our 
 examination higher in the industrial scale we find 
 
90 THE THEORY APPLIED chap. 
 
 that the entrepreneur element in man assumes 
 more importance. It is not merely that a certain 
 number of picked men will become actually in the 
 main organisers of the labour of others, but that ia- 
 genuity, admiaistrativeness, contrivance, and inven- 
 tion of new methods, are continually being exercised 
 in connection with the iudividual's own particular 
 work. 
 
 In the entrepreneur class there is on the other 
 hand a certain admixture of routine work with 
 which activity of brain has little to do. On the 
 whole however amongst the entrepreneurs the 
 importance of the brain vastly outweighs that of 
 the stomach ; and it cannot confidently be said that 
 amongst those who may roughly be classed as 
 labourers the importance of the stomach outweighs 
 that of the brain. 
 
 But it is on this balance of power between the 
 stomach and the brain in the animate agents of 
 production that depends the predominance when 
 increased quantities of land and capital (the inanimate 
 agents of production) are used, of the law of dim- 
 inishing returns, or of the law of increasing retiirns, 
 as the case may be. Is not the explanation of how 
 it is that in the opinion of Mr. Cannan the returns 
 of industry have not diminished since the times of 
 
V DIMINISHING, AND INCREASING RETURNS 91 
 
 Alfred the Great, that brain has kept pace with 
 stomach ? ^ 
 
 The problem of the actual effect on the total 
 product of industry of an increase of population is 
 one of such practical difficulty to determine, that I 
 incline to assume in the first place an increase of 
 product proportionate to the increase of population, 
 that is to say that the law of diminishing returns 
 which would be operative in some respects would be 
 counteracted by the law of increasing returns which 
 we see come into force in others. The assumption 
 (which for the sake of brevity I wiU in the remainder 
 of this chapter call the Assumption of Proportionate 
 Variation) is one of considerable magnitude, but one 
 which we are I think justified in making in the 
 absence of any reasonable grounds for assuming 
 variation either in the one direction or the other. 
 Such grounds would necessarily be based for the 
 most part on historical evidence, and the problem 
 is rendered more difficult when we endeavour to 
 establish a standard of equal effort or abstinence 
 applicable to different centuries. It is not for 
 
 1 May we not be helped to the often sought definition of Civilisa- 
 tion, so far as industrial matters are concerned, by remembering the 
 connection between man's intellectual power, and his command 
 over the industrial forces ? The " March of Civilisation ' ' corresponds 
 with increase of brain power, one of the results of which is to bring 
 into operation the law of increasing returns. 
 
92 THE THEORY APPLIED chap. 
 
 instance always easy to bring it down to terms so 
 comparable as the muscular effort needed to convey 
 a given weight a given distance without the aid of 
 machines. But even were the common measure 
 found and applied, we should still have to assess the 
 comparative appreciation of the rewards secured. 
 Possibly for example "The Eoast Beef of Old 
 England " would find more, and literature find less, 
 general appreciation in the time of King Alfred than 
 they respectively do now. 
 
 If then we make the assumption of proportionate 
 variation we must remember that we are making one 
 which may all the time be vitiating the results of our 
 problems, and we must certainly be prepared to 
 abandon it if in any particular case it can be shown 
 that fl^isproportionate variation is to be expected 
 either in the one direction, or the other. 
 
 § 49. But from the difficult attempt to estimate 
 the effect that will be produced on the number of 
 units of the total product we must now turn, and 
 endeavour to fix the share of that product which 
 will be secured by labour. 
 
 If the doubling of the population has taken 
 a considerable period of time and if intellectual 
 development has progressed commensurately and 
 we assume "Proportionate Variation" we might 
 
INCREASE OF POPULATION 
 
 93 
 
 possibly arrive at simply a .doubling of all the 
 numerical factors of our problem ; new countries 
 would have been discovered, new capital amassed, 
 and new organisers of industry would have come 
 to the front : the rates of rent, interest, profits, and 
 wages, would remain unchanged : — 
 
 § 50. Case No. 1. 
 Standard Year. 
 
 Product =1000 
 10 Units of Land . E= 80 
 10 Units of Capital I = 160 
 10 Units of Organ- 
 ising Power . P = 160 
 10 Units of Labour W = 600 
 
 1000 
 
 Tlie average wages re- 
 ceived by a numerical Unit 
 of Labourers will be 60. 
 
 Oase No. 2. 
 
 The Population has steadily 
 increased tiU it is now double 
 what it was in the Standard 
 Year. 
 
 Assuming Proportionate 
 Variation. 
 
 Product = 2000. 
 20 Units of Land E= 160 
 20 Units of Capital I = 320 
 20 Units of Organ- 
 ising Power P= 320 
 20 Units of Labour W = 1 200 
 
 2000 
 
 The average wages re- 
 ceived by a numerical Unit 
 of Labourers will still be 60. 
 
 § 51. Suppose however that the doubling of 
 the population takes place under circumstances quite 
 different from these, — suppose for example that it 
 results from a sudden influx of low-grade unintel- 
 ligent labourers. We shall now no longer be able 
 
94 THE THEORY APPLIED chap. 
 
 to postulate " Proportionate Variation," for brain will 
 not keep pace with stomach. The total product will 
 not be doubled. Let us suppose that it is increased 
 to 1800 units. The commodities which will at once 
 be rendered cheaper will be those the quantity of 
 which can be increased by employing more labour, 
 without employing more land, capital, or organising 
 power. But though the community may be able 
 to absorb a larger proportion than they previously 
 did of such in consideration of their being cheaper, 
 they will not wish to receive all that is saved by the 
 cheapening of this class of commodities in a quanti- 
 tative increase thereof. The proportion of the various 
 necessities and pleasures of life wUl only partially 
 remodel itself in consideration of the new conditions, 
 and other classes of commodities also will be in more 
 demand than before, though possibly the increase of 
 demand for them will not be so great as for the class 
 of what we called in § 38 "Labour-commodities." 
 Nevertheless an actual increase of organisation and 
 supervision will be demanded from the entrepreneur ; 
 this will mean that men formerly on or below the 
 border-land of no profits will be pressed into the 
 service, and that those who were formerly making 
 some profits, will now make more. More capital 
 will be required, and to bring it into industrial 
 
INCREASE OF POPULATION 
 
 95 
 
 service, a higher rate of interest must be paid. More 
 land may have to be taken into cultivation, and 
 culture generally be rendered more intense; the 
 margin of cultivation will be extended, and conse- 
 quently rents will be increased. 
 
 Our problem may then not improbably assume 
 some such form as this : — 
 
 Case No. 1. 
 Standard Year. 
 
 x=1000 
 
 10 Units of Land at Kent of 
 
 8 Units. 
 10 Units of Capital at rate 
 
 of Interest of 1 6 Units. 
 1 Units of Organising Power. 
 
 Profit at rate of 16 
 
 Units. 
 K = 10x 8= 80 
 I = 10x 16 = 160 
 P=10xl6 = 160 
 W =600 = 10x60 
 
 1000 
 
 The average wages re- 
 ceived by a numerical Unit 
 of Labourers will be 60. 
 
 Case No. 3. 
 Population doubled by 
 sudden influx of low-grade 
 unintelligent Labour. 
 
 Product increased by 800 
 Units. 
 
 a;=1800 
 Increased rates of Rent, 
 Interest, and Profits. 
 15 Units of Land at Rent of 
 
 9 Units. 
 15 Units of Capital at rate 
 of Interest of 18 Units. 
 1 5 Units of Organising Power. 
 Profit at rate of 18 
 Units. 
 R=15x 9= 135 
 1=15x18= 270 
 P=15x 18= 270 
 W =1125=20x56^ 
 
 1800 
 
 The average wages re- 
 ceived by a numerical Unit 
 of Labourers will be 56|. 
 
96 THE THEORY APPLIED chap. 
 
 In the case supposed, we see the reward of the 
 average labourer decreased in the ratio of 60 to 56|. 
 
 It will be observed that this suppositious.case does 
 not satisfy Professor Walker's contention that all the 
 additional product resulting from increased effort on 
 the part of the labourer, necessarily accrues to him ; 
 we see reasonable grounds for supposing that some 
 of it will be apportioned to E, I, and P. 
 
 On the other hand the case supposed is equally 
 far from satisfying the Wage-Fund theory, according 
 to which wages per numerical unit of labourers (on 
 the supposition that 50 per cent more capital was 
 drawn into industrial use), would have sunk 25 per 
 cent from what they were in the standard year, that 
 is to say they would have been reduced to 45 units 
 of products. 
 
 We have been able to show a suppositious case in 
 which the wage per capita, although diminished, is 
 not diminished to anything like this extent, and 
 though it is true that the figures are taken arbitrarily 
 that does not show that the case is impossible or ne- 
 cessarily false; but as it is inconsistent with the wage- 
 fund theory, it is necessary from their point of view 
 that the supporters of that theory should demonstrate 
 that it is logically impossible. 
 
 I 52. In the above case an increase in population 
 
V INCREASE OF POPULATION 97 
 
 leads to a decrease in the wages received per capita. 
 But supposing the increase of population to be accom- 
 panied by a greatly improved system of education, 
 or by increased efficiency of work consequent on the 
 division of labour being more perfectly carried out 
 (as is sometimes the case in new countries), these 
 conditions may be reversed, and an increase in popu- 
 lation may lead to an increased proportionate product. 
 In such a case a smaller proportionate contribution 
 may perhaps be paid to the other agents of produc- 
 tion in the aggregate, and the increased population 
 will under such circumstances actually result in in- 
 creased wages per capita : — 
 
 Gase No. 1. Case No. 4. 
 
 Standard Year. Doublingof the Population 
 
 accompanied by improved 
 system of education and better 
 division of labour. 
 
 Product increased by 1200 
 Units 
 x=1000 «; = 2200 
 
 Increased rates of Rent 
 and Interest, but the same 
 rate of Profit. 
 
 [Under the state of things 
 supposed, there will be many 
 more able and willing to join 
 the ranks of the entrepre- 
 neurs than before. On the 
 
THE THEORY APPLIED 
 
 R=10x 8= 80 
 1=10x16=160 
 P=10xl6=160 
 W =600=10x60 
 
 other hand, there will be 
 such a large increase in the 
 amount of organising power 
 required that it will not be 
 safe to predict that there will 
 be either diminution or in- 
 crease in the rate of Profit] 
 
 R=15x 9= 135 
 1=15x18= 270 
 P=25xl6= 400 
 W =1395=20x69| 
 
 1000 
 
 2200 
 
 The average wages re- The average wages re- 
 
 ceived by a numerical Unit ceived by a numerical Unit 
 of Labourers will be 60. of Labourers will be 69|. 
 
 § 53. If we next take the inverse case, that of a 
 population diminished hy pestilence to one half its 
 former numbers, the probable effect in an old country 
 will be converse to that shown in Case No. 3 ; there 
 will be a very large increase of the wages paid per 
 capita to labour. 
 
 This is illustrated by the historical case of the 
 enormous rise in wages of labour which suc- 
 ceeded the depopulation of England by the Black 
 Death : — 
 
DECREASE OF POPULATION 
 
 99 
 
 No. 1. 
 
 Standard Year. 
 
 X = 1000 
 
 R=10x 8= 80 
 1=10x16 = 160 
 P=10xl6 = 160 
 W =600 = 10x60 
 
 1000 
 
 The average wages re- 
 ceived by a numerical Unit 
 of Labourers will be 60. 
 
 Case No. 5. 
 
 Population halved by pesti- 
 lence. 
 
 The community will be 
 supplied with land, with some 
 forms of capita], and probably 
 with entrepreneur power in a 
 proportion larger to popula- 
 tion than before. The total 
 product will not then be dim- 
 inished by half with the halv- 
 ing of the population : — 
 
 x= 700 
 Land will fall out of cultiva- 
 tion to some extent, and rents 
 will fall ; it will be difficult 
 to withdraw fixed capital 
 immediately, interest there- 
 fore will seriously diminish. 
 The entrepreneur class will 
 not be affected by pestilence 
 so much as the labourers, 
 there will be more than half 
 of them left, and there will 
 be some diminution of pro- 
 fit :— 
 
 E=7x 6= 42 
 
 I =9x 8= 72 
 
 P = 6xl5= 90 
 W =496 = 5x99^ 
 
 700 
 
 The average wages re- 
 ceived by a numerical Unit 
 of Labourers will be 99i. 
 
100 THE THEORY APPLIED chap. 
 
 Wages per capita will therefore have risen in the 
 ratio of 60 to 99-|-. 
 
 § 54. Another historical instance (noticed above 
 chap. ii. § 18 in connection with Caimes's argu- 
 ment) is the change in the conditions of cultivation 
 in Ireland after the famine, resulting in the reduction 
 of the population from 8 to 5 J millions. 
 
 Now here the new state of things, since it is 
 brought about by the landlords themselves, may be 
 assumed to be better for them than the old ; their 
 rent-roll will be increased ; and the rates of interest 
 and of profits will not sink, or the capitalists and 
 entrepreneurs would not continue to supply the re- 
 quired capital and organising power. How is it that 
 it is so much worse for the labourer ? 
 
 Is it because the landlord secures a much larger 
 number of units of the product of industry than 
 formerly accrued to him? This is an extremely 
 improbable suggestion ; if there was an enormous 
 advantage to be reaped by the landlords from an 
 economic change which they themselves could initiate 
 by " clearances " and like action, would they not have 
 made it long before ? The much more probable solu- 
 tion is that though the landlord secures a slightly 
 better position, the main injury to the position of 
 labour results not from this, but from a serious 
 diminution in the total product of industry. 
 
" CLEARANCES " IN IRELAND 
 
 101 
 
 The landlord finds that he can get a somewhat 
 better rent for his land as pasture land, than if let 
 under tillage ; but the employment of capital, organ- 
 ising power, and labour, is much curtailed by the 
 change, and as might be expected, the total product 
 is much diminished in consequence. The surplusage 
 of these other three agents of production goes to other 
 countries ; in the case of labour the emigration takes 
 place chiefly to America. 
 
 Case No. 1. 
 
 Let us suppose our Stand- 
 ard Year to represent Ireland 
 under tillage. 
 10 Units of Land 
 
 R=10x8 = 80 
 10 Units of Capital 
 
 1=10x16 = 160 
 1 Units of Organ- 
 ising Power 
 P=10xl6 = 160 
 10 Units of Labour 
 
 W=10x60 = 600 
 
 1000 
 
 Case No. 6. 
 Ireland as a pasture country. 
 
 10 Units of Land 
 
 E=10x9= 90 
 7 Units of Capital 
 
 I=7x 16 = 112 
 7 Units of Organ- 
 ising Power 
 P = 7xl6=112 
 7 Units of Labour 
 
 W = 7 X 60 = 420 
 
 734 
 
 Total Product— («) = 1000 Total Product— (a;) = 734 
 
 The average wage received by a numerical unit of 
 
 labourers remains 60 ; the surplusage who are unable to get 
 
 tbis old rate of remuneration in Ireland emigrate to America, 
 
 tm only the requisite numbers for the new conditions are left. 
 
 [In reality of course there would be a certain amount of 
 
 unwiUingness to emigrate, and consequent inertia, and 
 
102 THE THEORY APPLIED chap. 
 
 wages in Ireland would therefore sink somewhat "below 
 their old level ; but on the whole labour will tend to 
 emigrate till the wage per capita under the new state of 
 things nearly equals that under the old.] 
 
 § 55. But what would have happened in Ireland 
 if there had been no possibility of emigration for the 
 labourers ? Well then they would have been com- 
 pelled to accept such wages as would make it more 
 profitable to the landlords to continue industry under 
 the old system, than to initiate the new one. 
 
 In order to secure that the landlords shall not intro- 
 duce the new system of agriculture they must be given 
 a larger rent for their land than they receive in Case 
 No. 6. Let us suppose E to equal 95, and I and P to be 
 the same as in Case No. 1. Then comparing once more 
 with our Standard Year we get the following result : — 
 
 Case No. 1. Gase No. 7. 
 
 Standard Year. Ireland compelled to ad- 
 
 here to the old state of culti- 
 vation because emigration is 
 impossible, 
 a =1000 a; = 1000 
 
 10 Units of Land lo Units of Land 
 
 11=10x8= 80 E=10x9i= 95 
 
 1 = 160 I =160 
 
 P = 160 P =160 
 
 W = 600 W =585 
 
 1000 1000 
 
 The average wage re- The average wage re- 
 ceived by a numerical Unit ceived by a numerical Unit 
 of Labourers will be 60. of Labourers will be 58|. 
 
V AN EIGHT HOURS' DAY 103 
 
 We are now in a position to examine some con- 
 temporary labour problems : — 
 
 I 56. Let us suppose that the average hours of labour 
 are at present 10. Taking our Standard Case No. 1 to 
 represent the present state of things, what would be 
 the effect of an alteration to an 8 hours' labour day ? 
 
 First of all it is claimed that there will result a 
 larger proportion of ef&cient labour so that we are 
 not justified in supposing the units of labour power 
 to be reduced from 10 to 8, but only say from 10 to 
 8J. We are however now faced by a new element 
 in our problem. Hitherto we have had to deal with 
 muscular power proportionate to the numbers to be 
 fed ; an increase of population, in our previous cases, 
 brought more stomachs to be fed, but it also brought 
 into action more sets of muscles. True, the newly 
 added sets of muscles did not ordinarily work to so 
 great advantage as the old ones, and hence the returns 
 resultant from their efforts decreased ; still there 
 were returns. But now we are faced with an increase 
 of stomachs in relation to labour power in the ratio 
 of 10 to 8 J without any additional returns coming in 
 at all. In the difficulty that before presented itself 
 to us, where was our refuge ? We found that the 
 increasing disabilities, under which labour power 
 operated, were in the long run compensated, if not 
 
104 THE THEORY APPLIED chap. 
 
 more than compensated, by the increasing advantages 
 secured by additional brain activity. Consec[uently 
 ■we have, as regards the general progress of the world, 
 been able to assume variation of total product pro- 
 portionate to variations of labour power, consequent 
 on variations of population. But if it is demanded 
 of brain power that it shall make up the deficiencies 
 of decreased labour power consequent on the curtail- 
 ment of the hours of labour, the case is different, for 
 there is immensely more leeway to make up, and 
 activity of brain on a much more highly increased 
 scale will be required. Is it likely that this wiU be 
 forthcoming ? The extant number of brains is not 
 (as before) increased, but there comes with more 
 leisure a possibility of better education, more thought, 
 and a better rested brain ; whether however less fully 
 engaged time will be actually accompanied by in- 
 creased brain power depends entirely on how the 
 former is used. It is conceivable that if the best 
 possible use were made of the increase of leisure 
 such marvellous improvement in industrial methods 
 might take place, that we should be justified in 
 assuming actual proportionate variation, which in 
 the present instance would mean that there was no 
 reduction of product, that it, like population, remained 
 constant. But the more probable result is that 
 
V AN EIGHT HOURS' DAY 105 
 
 though increased brain power -will be stimulated, it 
 will not be able to meet in its entirety the demand 
 made upon it, and that we shall have the total pro- 
 duct neither maintained at 1000, nor reduced to 850 
 but lying somewhere between the two, say for 
 example's sake at 910 units. 
 
 Our case is now somewhat similar to Case No. 5. 
 Labour becomes scarce and it is likely that in the 
 dividing up of the total product of industry the 
 shares E, I, and P will sink proportionately to W. 
 If however we consider the case of a single country, 
 capital, which has great mobility, will be proportion- 
 ately, though gradually, withdrawn (fixed capital it is 
 true is not easily withdrawn, but itwillnot berenewed); 
 what remains will be paid at the same rate of interest 
 as before. Entrepreneurs will also to some extent 
 withdraw themselves. But land which has little 
 mobility will only to a certain extent fall out of 
 cultivation, though rents will fall. We shall then 
 probably see some such results as the following : — 
 
 Case No. 1. Case No. 8. 
 
 Standard Year Eight Hours of Labour in- 
 
 (Ten Hours ■worked) troduced. 
 
 10 Numerical Units of 10 Numerical Units of 
 
 Labour supply 10 Units of Labour supply 8|- Units of 
 Labour Power. Labour Power. 
 
 a=1000 a; = 910 
 
106 
 
 THE THEORY APPLIED 
 
 10 [Tnits of Land 
 
 10 Units of Capital 
 
 10 Units of Organising Power 
 
 R = 10x 8= 80 
 I = 10x 16 = 160 
 P=10x 16 = 160 
 W =600 = 10x60 
 
 1000 
 
 9 Units of Land at a much 
 diminished rent. 
 
 8 Units of Capital at same 
 rate of interest. 
 
 9 Units of Organising 
 Power at somewhat dimin- 
 ished rate of Profits. 
 
 R = 9x 6= 54 
 
 1 = 8 X 16 = 128 
 
 P = 9xl5 = 135 
 W =593 = 8ix69if 
 
 910 
 
 The average wages re- The average wages re- 
 ceived by a numerical Unit ceived by a numerical Unit 
 of Labourers will be 60. of Labourers will be 
 
 59 j„. 
 
 The per capita wage is therefore diminished in 
 the ratio of 60 to 59^, that is to say the labourer 
 receives less wages for less work, but per hour, he 
 is paid better than he was before (otherwise the per 
 capita wage would have been reduced not to 59^^, 
 but to 48). Per unit of labour power exerted he is 
 also paid better than he was before (otherwise the 
 per capita wage would have been reduced not to 
 59^ but to 51). 
 
 The actual improvements in wage secured are per 
 hour in the ratio of 60 to 74^ 
 
 600 593' 
 U 
 
 /, 600 593\ 
 
AK EIGHT HOURS' DAY 107 
 
 per unit of labour power exerted they are in the ratio 
 of 60 to 69J-f- 
 
 r. 600 593N 
 ( %.e. : ). 
 
 Something like the above is a very possible result 
 of an effective eight hours' movement. The labourers 
 would not receive per head as much wage as before, 
 or, in other words, they would be spending some of 
 their former wage in the luxury of leisure. If the 
 leisure is well spent it is difficult to imagine any 
 luxury the enjoyment of which is likely to be fraught 
 with more benefit ; indeed without it, it is difficult to 
 see how the working classes can participate in any 
 large degree in the intellectual enjoyments of life, or 
 even fit themselves for the exercise of the political 
 power with which they are entrusted. The writer 
 of Ecclesiasticus says : — 
 
 "The wisdom of a learned man cometh by 
 
 opportunity of leisure ; and he that hath little 
 
 business shall become wise." 
 
 " How can he get wisdom that holdeth the 
 
 plough, and that glorieth in the goad; that 
 
 driveth oxen ; and is occupied in their labours ; 
 
 and whose talk is of bullocks ? " 
 
108 THE THEORY APPLIED chap. 
 
 " They " (that is the unleisured labourers) 
 " shall not be sought for in public counsel, nor 
 sit high in the congregation : they shall not sit 
 on the judges' seat, nor understand the sentence 
 of judgment : they cannot declare justice and 
 judgment, and they shall not be found where 
 parables are spoken " (chap, xxxviii., verses 24, 
 25, and 33). 
 It is observable that the author of this apocry- 
 phon seeks to point out that whilst the smith, the 
 carpenter, the potter, the maker of seals, the agricul- 
 tural labourer etc. " maintain the state of the world," 
 they are quite unfit to take part in its political guid- 
 ance. When the verses were quoted by Burke a cen- 
 tury ago (" Reflections on the Revolution in France "), 
 it does not seem even then to have occurred to him 
 that any other gloss could be put on them. It is 
 remarkable evidence of the progress of democratic 
 sentiment during this century that to nine minds out 
 of ten reading these texts to-day, the suggestion will 
 be made not of the necessity of excluding the 
 democracy from political life, but of the exigency of 
 the demand made by mechanics and labourers for 
 leisure. 
 
 The desirability of more leisure for the working 
 classes has almost ceased to be a controverted ques- 
 
AN EIGHT HOURS DAY 
 
 109 
 
 tion, but what they must now ask themselves is, 
 " Can we afford it ? " 
 
 I 57. Now although Case No. 8 may be a probable 
 result of an effective eight hours' movement, there 
 are others that are also possible. 
 
 In Case No. 8, greater brain power increased the 
 proportion of the total product to the supply of 
 labour power. It is conceivable that that increase 
 would have been greater than there supposed. Again 
 by the restriction of the hours, and therefore of the 
 supply of labour, the proportions of E, I, and P to 
 W were altered and it is possible that they might 
 be altered still more in the same direction. 
 
 ' No. 8. 
 Eight Hours of Labour in- 
 troduced resulting in a higher 
 wage paid per hour, and also 
 in a higher wage per unit of 
 Labour Power exerted, but in 
 a lower wage per capita. 
 
 a; = 910. 
 
 U = 9x 6= 54 
 1 = 8x16 = 128 
 P = 94.15 = 135 
 W =593 = 8|x69if 
 
 910 
 
 Case No. 9. 
 Eight Hours of Labour in- 
 troduced resulting in a higher 
 wage per capita, as well as per 
 hour and per unit of Labour 
 Power exerted. 
 
 a; = 920 
 
 R = 8x 5= 40 
 
 I = 7x 16 = 112 
 
 P = 8xl4 = 112 
 
 W =656 = 8ix77i\ 
 
 920 
 
no THE THEORY APPLIED chap. 
 
 The average wage received The average wage received 
 by a numerical unit of labour- by a numerical unit of labour- 
 ers will have decreased in ers will have increased in 
 the ratio of 60 : 59j?^. the ratio of 60 : 65^V 
 
 In such a case not only would the labourer be 
 paid better wage per hour, and better wage per unit 
 of labour power exerted, than before, but he would 
 actually receive a better per capita wage in the pro- 
 portion of 65^ to 60. So far from having to con- 
 sider whether he could afford leisure, he would im- 
 prove his position by the very act of working fewer 
 hours. 
 
 § 58. On the other hand a diametrically opposite 
 result might ensue if the total product were less than 
 we supposed in Case N'o. 8 and if the proportions of 
 E, I, and P to W were also diminished to a less 
 extent. It might indeed happen that one or more 
 of the agents of production was affected in the oppo- 
 site direction. Supposing for example that the 
 restriction of the supply of labour led to a larger 
 employment of machinery and a consequent greater 
 use of fixed capital, we might get a case of this 
 description : — 
 
 Case No. 8. Case No. 10. 
 
 Eight Hours of Labour in- Eight Hours of Labour in- 
 
 troduced resulting in a higher troduced resulting in a lower 
 wage paid per hour, and also wage per capita and also in 
 
AN EIGHT HOURS' DAY 
 
 111 
 
 in a higher wage per unit of a lower wage paid per hour, 
 
 Labour Power exerted but in and per unit of Labour Power 
 
 a lower wage per capita. exerted. 
 
 a; = 910 a; = 900 
 
 R = 9x 6= 54 
 
 I = 8x 16 = 128 
 
 P=9x 15 = 135 
 
 W 
 
 =593=8|x69if 
 910 
 
 E= 9x 7= 63 
 I = 15x 16 = 240 
 P = 9ix 16 = 152 
 
 W =445 = 8|x52^V 
 
 900 
 
 The average wage re- The average wage re- 
 
 ceived by a numerical Unit of ceived by a numerical Unit of 
 Labourers will have decreased Labourers will have decreased 
 
 in the ratio of 60 to 59^^. 
 
 in the ratio of 60 to 44i. 
 
 Here the per capita wage is diininished to such 
 an extent (i.e. in the ratio of 60 to 44|) that the 
 labourer actually gets less payment per hour of 
 work done (in the ratio of 48 to 44J) even though 
 he gives more labour power per hour than before. 
 In such a case the labourer would be paying for 
 leisure at a greatly enhanced price. 
 
 [If it happened that W was reduced to 450 he 
 would be receiving a slightly better wage per hour 
 {i.e. in the ratio of 48 : 50) but a slightly worse wage 
 per amount of labour power exerted (i.e. in the ratio 
 of 51 to 50).] 
 
 § 59. The effects of an eight hours' movement on 
 wages cannot be arrived at on a priori grounds ; nor 
 
112 THE THEORY APPLIED chap. 
 
 is it safe to argue too positively from precedent in 
 such a matter; it is for instance quite conceivable 
 that in a movement for a reduction of the hours of 
 labour from 10 to 9, circumstances might exist, and 
 results ensue, similar to those in Case No. 8, or Case 
 No. 9, but that if a successful issue were followed by 
 a movement for a further reduction of hours from 9 
 to 8, circumstances analogous to those in Case No. 10 
 might come into force. 
 
 To estimate with any chance of success the effect 
 on wages of a reduction of the hours of labour, we 
 must be furnished with the following data : — 
 
 (1) The amount of increase or diminution of the total 
 
 product of industry. 
 
 (2) The amount of increase or diminution of the total 
 
 number of units of land used in obtaining the 
 product. 
 
 (3) The amount of increase or diminution of the 
 
 average rent of such land. 
 
 (4) The amount of increase or diminution of the total 
 
 amount of capital used in obtaining the pro- 
 duct. 
 
 (5) The amount of increase or diminution of the 
 
 average rate of interest on such capital. 
 
 (6) The amount of increase or diminution in the 
 
V AN EIGHT HOURS' DAY 113 
 
 work of initiation and organisation of in- 
 dustry. 
 (7) The amount of increase or diminution in the 
 average proiits of entrepreneurs. 
 
 On (1) depends a: 
 On (2) and (3) depends E. 
 On (4) and (5) depends I. 
 On (6) and (7) depends P. 
 
 Since a; = E + I + P + W 
 
 it is plain that to arrive at W, we must inform our- 
 selves as to (1), (2), (3), (4), (5), (6), and (7). 
 
 It may he douhted whether even the leaders of the 
 great May demonstrations in Hyde Park have quite 
 realised the complexity of the question with which 
 they are dealing. On 4th May 1890 a quarter of a 
 million of men voted apparently without a qualm of 
 doubt, a resolution on the subject of the reduction of 
 hours of labour prefaced by these words, " That this 
 vast meeting of workers of London, knowing that 
 the excessively long hours of labour being worked in 
 many industries causes irregularity of employment," 
 etc. At the still more imposing demonstration of 1892 
 the resolution submitted from most of the platforms 
 did not expressly enunciate this point but in the 
 speeches reference was continually made to the fact 
 
 I 
 
114 THE THEORY APPLIED chap. 
 
 that one of the reasons of their demands was that 
 men who were now out of work and in want of the 
 necessaries of life, might secure employment. This 
 is a point to which we will shortly return. 
 
 § 60, Let us now consider the effect of the action 
 of trades unions and combinations of labour in endea- 
 vouring to force wages up. Now those who have 
 followed me thus far will have seen that we can 
 only agree with Fawcett in thinking that under the 
 competitive system the manufacturer is always as 
 powerless to get labourers to work for him at less 
 than tlae normal wages, as he would be to buy cotton 
 at less than the economic price, if we suppose in the 
 labourer perfect mobility and perfect intelligence as 
 to his own interest. How very far we are from being 
 able to do this, a consideration of the immense gap 
 which divides the knowledge and intelligence of an 
 ordinary labourer from that of the " economic man " 
 is enough to show. In the very common case there- 
 fore of a rise of money wages economically justified 
 (for example by a depreciation of the value of gold), 
 the labouring class will in the natural course of 
 things be very much slower to move than the 
 entrepreneurs (the "economic men") will be in a 
 converse state of affairs. By banding their resources 
 and their knowledge together the working classes 
 
TRADES UNIONS 115 
 
 are vastly assisted in coping with economic situations. 
 
 I am disposed to think that this is the principal 
 
 utility in trades unions, but the utility is certainly 
 
 one oi foremost importance. 
 
 § 61. Professor Walker says {Political Econoviy, 
 
 part vi. chap, v., " Trades Unions and Strikes," 
 
 §§ 394, 395):— 
 
 " These associations, though in form opposed 
 to competition, and though subject to many 
 abuses, do yet, in certain states of industrial 
 society, at least assist the labourers as a 
 class to assert their interest in the distribu- 
 tion of the product of industry." ..." Eespect- 
 ing trades unions, the question is not whether 
 joint action is superior to the individual action 
 of persons enlightened as to their industrial 
 interests, but whether joint action may not be 
 better than the tumultuous action of a mass, 
 each pursuing his individual interest with more 
 or less of ignorance, fear, and passion." 
 
 "Now with a body of employers, few, rich, 
 and powerful, having a friendly understanding 
 among themselves, and acting aggressively for 
 the reduction of wages, or the extension of the 
 hours of work, and on the other side, a body of 
 
116 THE THEORY APPLIED chap. 
 
 labourers, numerous, ignorant, poor, mutually 
 distrustful, while each feels under a terrible 
 necessity to secure employment, else wife and 
 child will starve, who shall say that such a 
 body of labourers might not be better able to 
 resist the destructive pressure from the employ- 
 ing body, if organised and disciplined, with a 
 common purse -^ and with mutual obligations 
 enforced by the public opinion of their class, 
 than if each for himself were to measure 
 strength with his employer ? " . . . 
 
 "Perfect competition which affords the only 
 absolute security possible for the equitable 
 and beneficial distribution of the products of 
 industry, requires that each and every man for 
 himself should unremittingly seek, and unfail- 
 ingly find, his best market. If for any reason, 
 whether from physical obstruction or legal 
 inhibition, or from his own poverty or weakness 
 of will or ignorance, or through distrust of 
 his fellows, or a habit of submission to his 
 employer, or his social superiors, any man fails 
 in fact to reject the lower price and to seize the 
 higher price, the rule of competition is, so far 
 as that individual is concerned, violated; the 
 immunity against deep and permanent and 
 
TRADES UNIONS 117 
 
 economic injury which is afforded by competi- 
 tion is lost; the man may be crushed in his 
 spirit, in his health, in his habits of life, and 
 may thus sink finally and hopelessly to a lower 
 industrial grade. The industrial history of 
 mankind is full of examples of large popula- 
 tions thus broken down by the force of com- 
 petition to which they were unequal, until 
 they have become pauperised, brutahsed, and 
 diseased beyond the power of any purely 
 economical causes to raise them upwards and 
 restore them to industrial manhood." 
 § 62. Professor Walker puts thus forcibly the main 
 part of the case for trades unions, and what he says 
 is accentuated by the fact that many of the leaders 
 of these unions are amongst the most intelligent 
 and earnest of their members. Bearing in mind the 
 aspect of the case he here presents, one is surprised 
 at the unsparing denunciation of other features of 
 the trades-union system which we find in his book 
 on Wages (see his remarks whilst discussing the 
 subject of trades-union rules in the last chapter of 
 The Wages Question). His condemnation is as 
 severe as that of Cairnes (see Cairnes's Leading 
 Principles of Political Economy, part ii. chap. iv. § 4. 
 The writer enforces his case by a quotation from 
 
118 THE THEORY APPLIED chap. 
 
 Thornton). It is true that in both instances con- 
 demnation is called forth by a consideration of the 
 wretched regulations by which many of the unions 
 have from time to time sought to " make work " (or 
 as we should put it in our formulae, to diminish 
 the product — x), and when their sins in this respect 
 are summarised in a catalogue of error, the total is 
 disheartening enough. 
 
 § 63. But is it not true that this evil, and the 
 still more serious ones of lawlessness and intimida- 
 tion, some amount of which seem almost inseparable 
 from the union methods of industrial warfare (can 
 we say that they were entirely absent even in 
 the London Dockers' Strike of 1889 ?), sink into 
 insignificance when compared with the immense 
 advantages that have accrued by the exercise of the 
 important functions set forth in the passages quoted 
 above from Professor Walker ? 
 
 Or putting the same question in other words : 
 Do not the evils which trades unionism has wrought 
 by hampering the action of competition, sink into 
 insignificance by the side of the immense benefits 
 it has brought about by increasing in other ways 
 effective competition ? 
 
 In the common enough case where x is divided 
 amongst E, I, P, and W in a proportion more favour- 
 
V HIGHER WAGES DEMANDED 119 
 
 able to the first three than the economic conditions 
 justify, because the labourer is not intelligent 
 enough, or well informed enough, to insist on his 
 due proportion, trades unions are continually being 
 of the greatest service in placing him in this respect 
 on an equal footing with the entrepreneur. 
 
 § 64. But the question now arises, when the 
 economic equilibrium is once attained, is it in the 
 power of labour by combination still further to force 
 wages up ? 
 
 Suppose our Standard Case No. 1 to represent a 
 state of economic equilibrium, W = 600 : can labour 
 by combining together, and agreeing not to work for 
 less than a 10 per cent advance on its former wage, 
 bring it about that W shall equal 660 ? 
 
 As there is no change in conditions that will 
 increase x, such an augmentation of W can only be 
 brought about by a decrease in the sum of E, I, and 
 P. This aggregate which before amounted to 400 
 must now be reduced to 340. As labour refuses to 
 engage itself at the former rate of remuneration, a 
 scarcity of this agent of production in relation to 
 land, capital, and organising power, is produced. 
 These would very likely be content (as they might 
 be in the case of an introduction of the eight hours' 
 day) with remuneration in smaller proportion 
 
120 THE THEORY APPLIED chap. 
 
 than previously enjoyed, but as in Case No. 8, so 
 now, it does not follow that they will be content 
 with reward lessened to the extent proposed. It is 
 probable that some land, some organising power, and 
 a good deal of capital will be withdrawn from 
 industrial uses in the area affected. No doubt 
 things may adjust themselves to an industrial equi- 
 librium consistent with these diminished amounts of 
 the other agents of production; but it is probable 
 that this will come about only by an employment of 
 a diminished amount of labour. That all the avail- 
 able labour should be employed, was before secured 
 by the process of what is called the " higgling of the 
 market." But labour has expressly excluded itself 
 from this process, and accordingly a certain propor- 
 tion of it will be stranded high and dry above the 
 highwater mark of the extreme of what will be ac- 
 corded by the other agents of production. Some of 
 the labourers will be thrown out of employment, and 
 the product of industry will be lessened. 
 
 The case may then probably work out thus : — 
 
 Gase No. 1. Case No. 11. 
 
 Standard Year. Labour agrees to com- 
 
 bine, and to demand a 10 
 per cent advance on former 
 wage. 
 
HIGHER "WAGES DEMANDED 
 
 121 
 
 10 nviraerical Units of 
 Labour supply 10 Units of 
 Labour Power. 
 
 a=1000. 
 Units of 
 
 10 
 Power 
 
 W=10x 60 = 600 
 B + I + P =400 
 
 Labour 
 
 10 numerical Units of 
 Labour, 1 unit of whicb is 
 thrown out of employment, 
 supply 9 Units of Labour 
 Power. 
 
 Assuming variation of 
 Product proportionate to the 
 numerical Units of Popula- 
 tion actually in employment,^ 
 a! = 900. 
 9 Units of Labour 
 Power 
 
 W = 9x 66 = 594 
 R + I + P =3061 
 
 1000 
 
 900 
 
 1 N.B.—li R + I + P do not 
 equal 306, the assumption of 
 variation of product propor- 
 tionate to the Units of Labour 
 Power mil not be justiiied, and 
 X will equal either more or 
 less than 900. For example if 
 Land, Capital, and Organising 
 Power were affected as in Case 
 No. 8 then R + I + P would equal 
 317 and x would equal 911. 
 
 To arrive at the average wage received by the 
 labourer in the new circumstances we must not 
 simply take into account the wage - receiving 
 labourers. Of them there are 9 units ; 594 -^ 9 = 66, 
 giving an increase of wage from 60 to 66 or 10 per 
 cent (by the supposed conditions of the case they 
 
122 THE THEORY APPLIED chap. 
 
 would not work for less). But there are the un- 
 employed labourers to be reckoned with. They 
 will not rest content to remain idle, and to abstain 
 from underbidding the others for employment, unless 
 they are united with them in a combination the 
 funds of which will give them their share of W. 
 To find the average wages received by a numerical 
 unit of labourers then, we must divide 594 not by 
 9 but by 10, giving us 59| or a diminution- of wage 
 in the proportion of 60 to 59|- 
 
 To sum up the results then, the capitalists have 
 had to reinvest part of their capital, the landlords 
 and the entrepreneurs have suffered monetarily 
 severely ; the labourers have suffered monetarily 
 slightly, but morally they are likely to suffer severely 
 from a proportion of their number being thrown into 
 compulsory idleness. Practically it is hardly con- 
 ceivable that a combination of men would hold 
 together for any length of time under such con- 
 ditions. 
 
 § 65. But just as we found that under the eight 
 hours' regime variations of Case No. 8 were conceiv- 
 able, the first of which (Case No. 9) made the acc[uisi- 
 tion of leisure a positive monetary benefit to the 
 labourers, and the second of which (Case No. 10) 
 made the acquisition of leisure, dearer proportion- 
 
V HIGHER WAGES DEMANDED 123 
 
 ately, than before, — so it is conceivable that the 
 average remuneration of labour would be positively 
 increased by a combination such as we have sup- 
 posed, to force up wages ; or again we may imagine 
 circumstances under which the average remuneration 
 of labour would be affected more unfavourably than 
 has been depicted in Case No. 11. 
 
 It is unlikely that the first result would be 
 attained unless the new forms that industry took 
 were such as employed more fixed capital, etc. And 
 it is on the face of it improbable that a lower rate 
 of remuneration to E, I, and P should bring into 
 industrial use a larger amount of land, capital, or 
 organising power. It is not however an impossible 
 case. Dear labour might result in the adoption of 
 expensive machinery, so that some of that labour 
 might be dispensed with ; and it is conceivable that 
 by the employment of much more fixed capital, and 
 more organising power, x would not be diminished, 
 but increased ; it is even possible that a greater 
 development of the industry would take place, and 
 that all the labourers might again be employed at 
 the 10 per cent increase of wage, and all would be 
 well that ended well just as in Case No. 9. 
 
 But in the very improbable case of a diminished 
 employment of labour, combined with an increased 
 
124 THE THEORY APPLIED chap. 
 
 wage per numerical unit of labour (whether the pro- 
 duct of industry be diminished or not), although the 
 result appears somewhat like that of Case No. 9, it is 
 not one for like congratulation. In Case No. 9 the 
 men had improved their monetary position, and they 
 enjoyed increased leisure all round. In the case now 
 supposed they would improve their monetary posi- 
 tion, but most of them would have as much work as 
 before, whilst a section of them would remain entirely 
 idle. 
 
 § 66. This then leads us to the proposed diminu- 
 tion of the hours of labour as a remedy for irregu- 
 larity of employment. In the above case it very 
 naturally occurs to the mind that by making a 
 further agreement to average the hours of work 
 amongst the total number of the labour combination, 
 the case is made exactly analogous with Case No. 9. 
 First you must force up wages, by a combination, 
 tiU the average per capita (taking into account un- 
 employed as well as employed) is higher than before. 
 Then you must equalise work by the nine, the eight, 
 the seven hours' regulations. This is the remedy for 
 the labour problem believed in by the half million 
 of people in Hyde Park. We have been able to 
 conceive circumstances in which it would actually 
 become operative, but the circumstances depend 
 
V HIGHER WAGES AND SHORTER DAY 125 
 
 upon data whicli are positively essential to the case, 
 and far indeed from being as certain of realisation 
 as the Hyde Park demonstrators assume. What are 
 these data ? 
 
 (1) That with tlie increased cost of labour there will 
 
 either be an increase of x of more than the 
 like amount, or a diminution of E + I + P by 
 more than the lilce amount, or that it shall be 
 more than made good by a combination of the 
 two. 
 
 (2) That labour will remain so self-organised, con- 
 
 stant, and faithful, as in the first place to 
 maintain the higher rate of wage (during 
 which time the unemployed must abstain 
 from underbidding the employed), and in the 
 second place to adhere to the prescribed hours 
 of labour (during this time the employed must 
 refuse to work longer than certain hours). 
 
 (3) That if the economic conditions have so far proved 
 
 favourable, they will not be rendered unfavour- 
 able by the waste entailed in the conversion 
 of labour of a certain standard of length per 
 day to a shorter standard. This waste will 
 principally consist in teaching the necessary 
 technical knowledge to a larger number, and in 
 the fact that the increase in the number will 
 
126 THE THEORY APPLIED chap. 
 
 probably be drawn from those who have least 
 natural and acquired ability for work, so that 
 the average efficiency of labour for a certain 
 number of hours will probably be higher if it 
 is done by 100 men than by 120. It is likely 
 that this will prove to be a more important 
 consideration than that which has to be put 
 against it, viz., that the same individuals will do 
 more efficient work per hour during eight 
 hours, than they will during ten. Putting it 
 in another way when there is a residuum of 
 unemployed, that residuum consists of the 
 least able workmen, and if by an eight hours' 
 movement they are taken into employment, 
 the average efficiency of labour is reduced, and 
 may be reduced to an extent that will prevent 
 hopes from fructifying that might otherwise be 
 realised. 
 § 67. So much for, action initiated by a combina- 
 tion amongst the labourers ; now let us examine the 
 effect of action initiated by the entrepreneur. 
 
 Suppose Case No, 1 to represent a state of 
 economic equilibrium in a large concern. The en- 
 trepreneur determines to introduce a system of profit- 
 sharing. He says to his men : " Now I will pay you 
 in addition to your former wage xtr of the product 
 
PKOFIT-SHAEING 127 
 
 of industry. Numerous cases are quoted (see Mr. 
 Sedley Taylor's and Mr. Gilman's books on profit- 
 sharing), where such an arrangement has led to 
 monetary benefit not only to the workman, but also 
 to the entrepreneur. As we may presume that K 
 and I do not diminish, such a result can only be 
 explained by an increase in x greater than the 
 promised increase in W. This is accounted for by 
 the increased efficiency of the workman consequent 
 on the enthusiasm generated by a prospect of higher 
 reward, directly dependent on his own efforts. 
 
 Gobse No. 1. 
 
 Case No. 1 2. 
 
 Standard Year. 
 
 Profit-sharing introduced, 
 
 a; =1000 
 
 a;=1120 
 
 W= 600 
 
 W= 712 
 
 R= 80 
 
 R= 80 
 
 1= 160 
 
 1= 160 
 
 P= 160 
 
 P= 168 
 
 1000 
 
 1120 
 
 We observe here that whilst E and I remain 
 constant the monetary position of the labourer is 
 improved in the ratio of 600 to 712, and that of the 
 entrepreneur in the less ratio of 160 to 168. 
 
 It so happens in the example that we have taken, 
 that whilst the ratio of W to the whole product 
 
128 THE THEORY APPLIED chap. 
 
 has, been increased that of P has been diminished. 
 Now it is conceivable that a prospect of XD^^ of 
 the product of industry will serve to induce entre- 
 preneurs to initiate industry, but that a reward of 
 tA% which equals only xtnfrT of the total product, 
 will not ; but it is conceivable only if they consider 
 that the increased product will entail on their parts 
 an increased expenditure of their powers, energies, 
 and diligence. If it can be shown that the increased 
 product accrues without any further tax being placed 
 upon them (and indeed the tendency would be the 
 other way, for less supervision would be required, 
 and there would be less mental care involved), they 
 would gladly accept any absolute increase of their 
 share of the- product, even though relatively to the 
 whole product it might have decreased. 
 
 If entrepreneurs generally became convinced that 
 like measures initiated by themselves would bring 
 about like results, there would be a general change 
 in the economic equilibrium, and the new state of 
 things would be better both for workmen and entre- 
 preneurs, than the old. 
 
 § 68. The exact point where equilibrium would 
 be regained would be that where the increase of pro- 
 duct exceeded to the greatest extent the promised 
 increase of reward to labour. Thus in Case No. 12 
 
PROFIT-SHARING 129 
 
 the increase of product equals xmj^ of *• The 
 increased reward to labour equals xoVxr o^ ^- The 
 former exceeds the latter hy xxnjTT °f '^^ If ^^ '^'^^ 
 found that with a promised share of ^^ of ^> t^® 
 increase of a; exceeded by 6 units the increased re- 
 ward of labour, whereas with a promised share of \ 
 of X, the increase of x exceeded by 10 units the 
 increased reward of labour, the tendency to econo- 
 mic equilibrium would dictate a larger share of the 
 product being assigned to labour; and vice versd 
 if the fact of assigning an increased proportion of 
 the product to labour resulted in the increase of the 
 product itself exceeding to a less extent the increase 
 in the reward of labour. 
 
 So much for profit-sharing that " pays " (ie. pays 
 the entrepreneur to whose initiative it is due). Now 
 let us suppose a case of profit-sharing which does 
 not pay in this sense. 
 
 § 69. As before, an increase of wage equal to ^V 
 of X is promised, but the resulting efficiency in 
 labour is not quite so good as supposed in Case 
 No. 12 :— 
 
 Case No. 1. Case No. 13. 
 
 Standard Year. Profit-sharing wMch. does 
 
 not pay so far as the Entre- 
 preneur is concerned. 
 K 
 
130 THE THEORY APPLIED 
 
 x = 
 
 1000 
 
 W = 
 
 600 
 
 R = 
 
 80 
 
 1 = 
 
 : 160 
 
 P = 
 
 160 
 
 
 1000 
 
 x = 
 
 1100 
 
 W = 
 
 710 
 
 R = 
 
 80 
 
 1 = 
 
 160 
 
 P = 
 
 150 
 
 1100 
 
 The monetary position of the labourer is im- 
 proved in almost the same ratio as in Case No. 12, 
 but that of the entrepreneur is injured. He how- 
 ever has the satisfaction of seeing an increased 
 amount of prosperity amongst his workpeople, which 
 is greater than the decrease of prosperity to him- 
 self (in the case supposed, elevenfold greater). In 
 Case No. 12 the example set by the entrepreneur who 
 initiates profit-sharing is one that will be followed 
 alike by those under the sway of purely economic, 
 and those influenced by ethical motives. In Case 
 No. 13 those only whose economic instincts are 
 tempered by ethical considerations will be likely to 
 follow the lead. But for these it is a strong case. 
 It is like an appeal to a man to give £100 to a 
 hospital, on the grounds that by so doing he will 
 make available for the same purpose a further sum 
 of £1000. It is very distinctly a way of helping 
 towards the more equal distribution of wealth, and 
 it is an educative process ; it helps those who are 
 
PROFIT-SHARING 131 
 
 low dowu on the economic ladder to rise by their 
 own endeavours. 
 
 The objections to profit-sharing are summarised in 
 an interesting article by Professor W. J. Ashley in 
 the Economic Review for July 1892 (" Methods of 
 Industrial Peace "). They are however to my mind 
 inconclusive. He objects firstly that it does not 
 meet the difficulty of determining the ordinary wage 
 (to which the profit-share is to be added). This is 
 quite true, but are we to object to a system that does 
 one good thing, because it does not do another 
 separate and distinct good thing? If a system of 
 profit-sharing is entered upon in order to defeat the 
 trades unions it is likely to be, and deserves to be, 
 a failure ; but as a supplement to the action of the 
 unions it seems to me capable of being very useful. 
 The main wage -bargain will be struck with the 
 union ; profit-sharing will provide for the creation 
 of an additional wage. The other objection that 
 profits are often " made in the counting - house, 
 rather than in the workshop," is doubtless cogent in 
 a great many businesses ; where, and to the extent 
 to which, it is valid, it is of course a reason for not 
 adopting the profit-sharing scheme. This has been 
 fully recognised by, for instance, such a strong advo- 
 cate of the scheme as Mr. GUman ; but there remain 
 
132 THE THEORY APPLIED chap. 
 
 a large number of businesses in which the deter- 
 mination of profits does not rest mainly with the 
 counting - house, in which increased industry, in- 
 genuity, and conscientiousness on the part of the 
 workmen will leave a mark on profits which will be 
 perceptible. 
 
 § 70. Now contrast Case No. 13 with a case 
 in which a philanthropic employer determines to 
 place his workmen in a similar position, but in order 
 to do so, instead of instigating them to better work 
 by a system of " payments by results," he at the end 
 of the year simply presents them with a bonus out 
 of the profits : — 
 
 Case No. 13. Case No. 14. 
 
 Profit-sharing which does The philanthropic em- 
 not pay so far as the Entre- ployer distributes a bonus 
 preneur is concerned. amongst his employes equal 
 
 to their increase of wage in 
 Case No. 13. 
 
 x = 
 
 1100 
 
 W = 
 
 710 
 
 E = 
 
 80 
 
 1 = 
 
 160 
 
 P = 
 
 150 
 
 1100 
 
 x = 
 
 1000 
 
 W = 
 
 710 
 
 R = 
 
 80 
 
 1 = 
 
 160 
 
 P = 
 
 50 
 
 
 1000 
 
 The monetary position of the labourer is the 
 
V PRESENTING BONUSES 133 
 
 same as in Case No. 13, but the profits of the entre- 
 preneur are diminished by two-thirds. Evidently 
 the example is not likely to be nearly so widely 
 followed as that of the employer in Case 'No. 13, 
 nor is it as likely to be perpetuated by the successors 
 to the headship in the particular industrial affair 
 concerned. For in the first place, the entrepreneur 
 does not in proportion to his sacrifice secure nearly 
 as important gain for his workpeople, and in the 
 second place many entrepreneurs who could afford 
 the sacrifice supposed in Case No. 13 could not 
 afford that supposed in Case No. 14. I am inclined 
 to think that even on ethical grounds it would not 
 be a good thing if the example set in No. 14 were 
 extensively followed, tending as it would do, to 
 reward work out of proportion to the benefit it 
 conferred on the community. This objection would 
 not hold, or would hold only to a very slight extent, 
 with Case No. 13, if we suppose that the bulk of the 
 increased wage arises not from a sacrifice on the part 
 of the entrepreneur, but that it is consequent on 
 greater efSciency of labour. 
 
 Eeward of labour greatly out of proportion to 
 its efficiency is a demoralising influence because it 
 is opposed to the mobility of labour, and tends to 
 attach people to work for which they are less fitted 
 
134 THE THEORY APPLIED chap. 
 
 than what they might be doing. But an increased 
 reward of labour which causes it to become much 
 more efficient is an eminently educative and moral- 
 ising influence, tending to increase the intelligence, 
 skill, industry, and honour of the workman, and also 
 his mobility. 
 
 In connection with Cases Nos. 12, 13, and 
 14, we have observed the importance of the 
 question of how far such systems initiated by 
 individual entrepreneurs are likely to be generally 
 imitated. 
 
 § 71. The further question arises how far the 
 employed class would be able to com;pel unwilling 
 employers to adopt such methods. In Case No. 12 
 they would merely be demanding a state of economic 
 equilibrium, and they could attain their object by 
 a strike without any after results arising which 
 would counteract the direct benefit attained. The 
 granting of their demand would not result in a state 
 of things which would tend to the withdrawal of 
 any part of the land, of the capital, or of the 
 • organising power required for the industrial pro- 
 cesses. 
 
 In Case No. 13 any attempt to compel entre- 
 preneurs generally to surrender such a portion 
 of their profits as the particular entrepreneur 
 
V PROFIT-SHARING FORCED ON EMPLOYERS 135 
 
 in the case supposed has voluntarily given up, 
 might result in the withdrawal of some of the 
 necessary organising power, and we should have 
 a case analogous to Case N"o. 11, where some of 
 the lahourers are thrown out of employment. 
 
 The same considerations apply, but with consider- 
 ably more force, to Case No. 14. 
 
 It is however fair to remark that such conduct 
 as is supposed on the part of the entrepreneurs in 
 Cases Nos. 13 and 14, would tend to put labour very 
 much on the gm vive, and that it would be less 
 likely than would otherwise be the case to allow 
 itself to be depressed in any way more than the 
 economic situation justified. The danger indeed 
 would be that it would demand moi-e than was 
 justified by the economic situation; this it might 
 temporarily even attain, because of the immobility 
 of fixed capital etc., but in the long run we should 
 have results similar to those in Case No. 11, and 
 labour would be thrown out of employment. 
 
 § 72. It will be observed that the theory set forth 
 in the foregoing pages sets at nought the so-called 
 "Iron Law of Wages.'' Wage has been treated as 
 something dependent on a service rendered to the 
 community, entirely irrespective of the position of 
 the wage-receiver. 
 
136 THE THEORY APPLIED chap. 
 
 But the " Iron Law of Wages " cannot be altogether 
 ignored ; it is not alone in the pages of Lassalle that 
 we are confronted with it ; reference to it, or some- 
 thing very like it, is for example made in the 
 publications of so orthodox a body (orthodox that 
 is to say in respect to its economic theories) as 
 the Charity Organisation Society. Thus in one of 
 the pamphlets issued by that body, entitled "Outdoor 
 Eelief " (1890), I read as follows :— 
 
 "It cannot be denied that the low wages 
 of women are caused to some extent by the 
 out-relief system. Thus, for instance, if out- 
 relief is given to a woman who gains her living 
 by charing or taking charge of chambers, her 
 employer is able to take into account what she 
 receives from the rates, and to fix her wages 
 accordingly." 
 Now I have no desire to deny that this may be 
 so. The theory of wages I have attempted to set 
 forth, is applicable only to "economic" men and 
 women. I submit indeed that the fact that a 
 woman receives help from the rates (except under 
 particular circumstances such as those commented 
 upon in § 73) makes no difference at all to her 
 economic position as a wage -earner; that is to 
 say, that if she, and those in like position to herself, 
 
V THE " IRON LAW OF "WAGES " 137 
 
 chose, they could enforce a rate of wages as high 
 as if they had no such help ; and the same is true 
 of those whose wages are eked out by subsidiary 
 industries, such as straw -plaiting and the like. 
 It is however extremely probable, that without 
 combination they would not be sufficiently in- 
 formed, nor would they act sufficiently in concert 
 to enforce the rights with which the economic 
 position endows them. Hence as I insisted above 
 (§ 60) the extreme importance of trades unions. 
 Very large classes of men now enjoy the full rights 
 that the economic position of the moment affords 
 them ; very large classes of women do not ; and 
 no doubt till a system of trades unions becomes as 
 complete amongst women as it is amongst men, 
 and amongst men engaged in unskilled labour as 
 it is amongst men engaged in skilled labour, the 
 influence of something like an Iron Law of "Wages 
 will be felt amongst the labour of women and of 
 unskilled men-labourers. In these departments of 
 labour the contention that the " standard of living " 
 of the wage-earners influences the scale of wages 
 paid, will find some substantiation. 
 
 In order that the advantages of an economic 
 position may be seized, some sort of uniformity of 
 conduct is required amongst those who are entitled 
 
138 THE THEORY APPLIED chap. 
 
 to reap them. Shopkeepers in the same town are able 
 to sell approximately at the same prices from their 
 knowledge of the economic position ; but if a bank- 
 rupt stock is sold in their midst at prices below those 
 justified by that position, they are for the moment 
 deprived of their share of trade, in consequence of 
 the breach in uniformity of action. Mechanics 
 have considerably less individual knowledge of the 
 advantages to be secured from the economic position 
 than shopkeepers, but in combination they share 
 with each other what knowledge they possess, so 
 that in their unions they are as well informed as 
 the tradesmen. 
 
 But the unorganised "uneconomic " man or woman, 
 has neither the first-hand knowledge of the employer 
 or shopkeeper, nor the second-hand knowledge of 
 the member of the trades union. How is uniformity 
 of action to be established here ? The readiest way 
 is by hunger to which all men are susceptible, or 
 at all events by a reduction to the minimum which 
 the " standard of comfort " of the period, and of the 
 class involved, allows. 
 
 Thus then we see that though the Iron Law of 
 Wages has no place in a theory of wages applicable 
 to " economic " men and women, for those who 
 are unable to grasp the full privileges which the 
 
QUASI-WAGE 139 
 
 economic position justifies, it has a very real 
 meaning, though one much more limited in its 
 application, than Lassalle assumes. 
 
 § 73. I stated above that, ordinarily speaking, help 
 from the rates made no difference in the real economic 
 position of the wage-earner. But any contribution 
 to the wage -earner's pocket constantly incidental 
 to a particular employment will of course affect 
 the wages of that employment, for from the wage- 
 earner's point of view such contributions are in- 
 distinguishable from wage ; in his estimate of the 
 advantages of a given position they will be taken 
 into account as certainly as the nominal wages, so 
 that such contributions practically make a part of 
 wages. The waiter who in a certain restaurant 
 receives 3s. a day in " tips," will be willing to accept 
 the post for 18s. or 21s. a week less wages than he 
 otherwise would do. 
 
 It is on record that in certain agricultural dis- 
 tricts poor law relief has been known to be 
 administered by a compact body of gentlemen 
 identified with the farming interest, who have 
 systematically given aid out of the rates during 
 several months of the year to able-bodied agricultural 
 labourers. These same gentlemen, acting not in 
 their capacity of Guardians of the Poor (and pre- 
 
140 THE THEORY APPLIED chap, v 
 
 sumably of the public purse) but in that of em- 
 ployers, have found that they have been able to 
 employ farm labourers at a lower rate of wages, 
 taking the year all round, than have farmers living 
 in a less favoured union. 
 
 But it will readily be seen that these are not in 
 reality instances of the operation of the " Iron Law 
 of Wages." 
 
 THE END 
 
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