Cornell University Library HD4911.C94 German v^age theories; a history of their 3 1924 000 655 245 STUDIES IN HISTORY, ECONOMICS AND PUBLIC LAW EDITED BY THE FACULTY OF POLITICAL SCIENCE ;0F COLUMBIA UNIVERSITY IN THE CITY OF NEW YORK Volume IX] [Number 2 GERMAN WAGE THEORIES A HISTORY OF THEIR DEVELOPMENT JAMES W. CROOK, PI1.D. Sometime University Fellow in Ecorwmics AstiBtant Professor of Political Economy, Amherst Oollegt COLUMBIA UNIVERSITY Beta porti 1898 THE LIBRARY OF THE NEW YORK STATE SCHOOL OF INDUSTRIAL AND LABOR RELATIONS AT CORNELL UNIVERSITY II GERMAN WAGE THEORIES A HISTORY OF THEIR DEVELOPMENT '^\^^'^/ Cornell University Jbrary The original of tiiis book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924000655245 STUDIES IN HISTORY, ECONOMICS AND PUBLIC LAW EDITED BY THE FACULTY OF POLITICAL SCIENCE OF COLUMBIA UNIVERSITY IN THE CITY OF NEW YORK Volume IX] [Number 2 GERMAN WAGE THEORIES A HISTOET OF. THEIR DEVELOPMENT JAMES W. CROOK, Ph.D. Sometime, University Fellow in Economies Assistant Professor of Political Economy, Amherst College COLUMBIA UNIVERSITY 1898 TABLE OF CONTENTS PAGS Introduction 7 CHAPTER I Predecessors of Hermann 15 CHAPTER II Hermann 23 CHAPTER III Hermann's Successors . 33 CHAPTER IV Criticism 55 CHAPTER V Von Thunen 68 CHAPTER VI The Socialists 94 CHAPTER VII SCHULZE-GXVERNITZ I07 (V) INTRODUCTION Ever since political economy received its modern form at the hands of Adam Smith, the theory of wages has been in controversy. What is true of many economic questions is true of this one: the germs of later and more complete develop- ments are found in the Wealth of Nations. Problems peculiar to the periods of historical evolution since the time of Adam Smith have brought into prominence one or more of the truths which he perceived. The system of natural liberty which he so tenaciously advocated brought the demand for its com- plement and condition — equality. But if the history of this century records a growing recognition of freedom for all classes, it has also disclosed an obstacle to the realization of freedom, viz., economic weakness. The demand for equality comes from the economically weak, the wage receivers. Hence, the investigation of the economic forces which deter- mine the incomes of those classes becomes an important in- quiry. Thus from a practical point of view the work done in this field by scientists of more than one nation is amply justified. If science is not international, it ought to be so, to such an extent that the important work of one country be not unknown to another. A survey of the somewhat voluminous German literature upon the subject of wages shows that, for half a cen- tury after the publication of the Wealth of Nations, almost no original work is to be found. That there was no lack of acad- emic activity is clear from the number of university text-books issued. These, however, for the most part repeat, summarize or but slightly modify the reasoning and conclusions of Adam 303] 7 8 GERMAN WAGE THEORIES [304 Smith. The conditions of economic life in the two countries at this period were very different. There was wanting on Ger- man soil the stimulating influence of unsolved practical prob- lems of economics. The "industrial revolution" developed more slowly on the continent. There were lacking those conditions so favorable to the growth of industry. England's insular position allowed a degree of political unity and com- parative certainty of political destiny such as was hardly pos- sible to a continental state closely surrounded by jealous neighbors or agitated by the contending forces inherent in a loose federation.' The political solution must precede the economic. The English people have also possessed, to a re- markable degree, those moral capacities which underlie any considerable industrial progress, the capacity to labor and to co-operate. If we add to these facts the favorable climate, easy communication by land and sea, and abundant supplies of coal and iron, we may reasonably account for England's industrial leadership.^ The series of remarkable inventions, beginning with that of Hargreaves, established the factory system, stimulated the growth of industrial towns, and brought into contrast the in- terests of laborers and employers. While this contrast was not exactly a new one, yet it was never sufficiently intense till then to force the legal barriers to labor combination. The place which the labor problem has occupied in the British mind may be roughly measured by that legislative accumula- tion known as the Factory Acts, which have been a model for similar legislation by other nations. All this is in contrast with the German condition. There the old industrial order with its restrictions and conservative methods prevailed long after England had replaced the old with the new. Schulze-Gaevernitz^ has described the methods ' List, National System, p. 53. ' Hobson, Modern Capitalism, p. 73 ff. „ Grossbetrieb, p. 34. 30S] INTRODUCTION g which prevailed in the i8th century throughout Germany. " Everything was done by rule. Spinning came under public inspection and the yarn was collected by officials. The privi- lege of weaving was confined to the fraternity of the guild. Methods of production were strictly prescribed; public in- spectors exercised control. Defects in weaving were visited with punishment. Moreover, the right of dealing in cotton goods was confined to the confraternity of the merchant guild ; to be a master weaver had almost the significance of a public office. Besides other qualifications, there was the condition of a formal examination. The sale also was under strict supervision ; for a long time a fixed price prevailed, and a maximum sale was officially prescribed for each dealer. The dealer had to dispose of his wares to the weaver, because the latter had guaranteed to him a monopoly of export trade." ' How comparatively little progress Germany had made with machine industry under these conditions is indicated by the following facts. In 1882, 42 per cent, of the German textile industry was still conducted in the home or domestic work- shop, while only 38 per cent, was carried on in factories em- ploying more than 50 persons. More weavers were still en- gaged with hand looms than with power-looms, and the latter was so little developed that the hand loom could still hold its own in many articles. Knitting, lace making and other minor textile industries are still in the main home industries.'' List, in 1844, laments the comparative infancy of German manufac- tures and continually seeks to impress upon his readers the industrial superiority of England. Marx finds England the paradise of capitalistic production, and although familiar with German conditions draws no important illustrations from his native country. Writing as late as 1873 he declared that polit- ical economy was in Germany a foreign science, there having 1 Quoted by Hobson, Modern Capitalism, p. 78. 2 Quoted from Social Peace, p. 113, by Hobson, p. 78. lO GERMAN WAGE THEORIES [306 existed there no soil for its growth.' Lassalle found German laborers unorganized and so inured to custom as to be almost deaf to his passionate appeals. These differences between the two countries may adequately account for the great disparity in theoretic development. The existence of problems calls for solution ; solution requires con- structive theoretic foundations. That this is the natural order is abundantly shown in finance. Financial difficulties or prob- lems have necessarily preceded any considerable determination of the science of finance in modern nations. The new condi- tions and new relations involved in machine production, or the great industry (Grossbetrieb) bring into relief the interests of classes and make necessary a scientific determination of both productive and distributive forces. Experience has demonstrated that it is usually in connection with industries other than agricultural that the problems pe- culiar to the relation of employer and employed come to the front. The classes subordinated come to feel their position, they startle society by proclaiming some unusual doctrine or by per- forming some destructive act. Then the scientist sets about understanding the phenomena. This is the usual sequence, but the work of von Thiinen would seem to furnish an excep- tion to this order. As an agriculturalist he became impressed with the dangers involved in the existence of the economic gulf separating classes, in advance of the feelings of those classes, themselves. As early as 1826 he began a series of original investigations in connection with agricultural production, which in the course of twenty-five years yielded results that for orig- inality and value may be compared with some of the best work of Ricardo. Moreover, as proof of his practical interest, and to give his theories of distribution a practical test, he used his agricultural estate for purposes of social experiment. When Rau published the first edition of his political economy {1826) 1 Preface to 2d ed. of Capital. 307] INTRODUCTION n Germany had made some start in national activity which gave rise to industrial problems. Seven years later Hermann broke the parallel course of English and German economic writing, and started Germans on a path of their own, which they have not wholly ceased to follow to this day. Before studying theories themselves, it will be useful to take 5ome notice. of terminology. The term wages as used by the different authors does not always include the same kinds of income. It is not unnatural that men, writing under different economic conditions, and at periods so separated by time as the writers brought under review in this essay, should differ in the use of a word like wages, or a phrase like wage-class. There is great lack of unanimity even now, as will be seen by a compar- ison of the advocacy of different or competing views held by Walker, George or Sidgwick. As to definition, the Germans did not always follow Adam Smith. The latter said that the wages ■of labor were everywhere understood to be what they usually were, when the laborer was one person and the owner of the stock which employs him another.' This would confine wages to the income of laborers employed by owners of capital in the -course of operations undertaken for a profit. It will not be necessary to point out here how Adam Smith departed from this definition in his treatment of wages. Schmalz defines wages as the income which men receive from •others for important or unimportant, honorable or despicable services. Accordingly, he classes generals, state ministers and even pensioners as wage-earners. There is nothing in his subsequent treatment to reveal the gain of such a classifi- cation.'' Rau broadens the meaning to include what the undertaker saves out of his business to pay for his own activ- ity — the equivalent of what he would otherwise have to pay as ■wages. This is the modern conception of wages of superin- 1 Wealth of Nations, Rogers' ed., 1869, v. I, p. 69. 2 Staatswirthschaftslehre in Briefen, v. I, p. 23. 12 GERMAN WAGE THEORIES [308 tendence.' However, in the 8th ed. he considers that the most important case arises when over against the worker there is a wage-giver with whom he contracts for definite wages." Fulda does a similar thing when he makes a part of the in- come of the capitalist his wages. But he has a different meas- ure for the amount. He says the business man, during the time he is in business, must satisfy his needs for food and shelter according to the degree of his culture. He must also hold his capital in that condition which is required to prose- cute his business. The part which his necessary support re- quires is his necessary wages; the part which his capital requires is his necessary profit.^ Hermann restricts wages to a payment by one person to another for common services ren- dered. He distinguishes services as common, talented, fixed and official. For the reward of common labor he would use wages (Lohn). For the reward of labor requiring talent and education, honorar. The payments made by university stu- dents to professors for their lectures are at the present time called by that name. For fixed employment he uses salary (Gehalt), and for official services fee (Gage).'' V. Thunen would also restrict wages to payment for hired labor, but he is most anxious to distinguish between the reward for labor as such, and that which is due to the tools the laborer may em- ploy, including the simplest implements. The reward for the use of tools is interest, that for labor proper is wages.5 Many writers do not consider it important to state what they mean by wages, leaving the reader to infer from the general treatment the sense in which the word is used. We are, • Grundsatze der Volkswirshschaftslehre, 4lh ed., 1841, p. 201. ' Ibid., p. 252. ' GrundsStze der Oekonomisch-politischen oder KameralwisstnschafUn, 1820, 2d Ed., § 186. * Staatswirthschaftlicht Untersuchungen, zd ed., 1870, p. 460. ' Der Isolirte Staat, Part ii, p. 78. 309] INTRODUCTION 1 3 therefore, warned against apparent differences due to differ- ences of terminology merely. The plan to be pursued in this essay has occasioned some thought, and the arrangement finally adopted is not without objection. But since the chief object in making the study is to discover, if possible, progress of thought on this subject, chro- nology had to be sacrificed, in some instances, to a logical order. Hence while von Thiinen appears after Hermann in obedience to the time order of their work, yet von Thiinen appears after Brentano and Philippovich, because he is not so clearly a follower of Hermann as they are. It has often been remarked by students of the theoretical Economics of the Germans that there exists but a slender thread of logical con- nection between the great German writers of the last one hun- dred years. Indeed it has been said that the attitude toward the wages-fund theory is the only point common to most of them. But a study of the treatment by the Germans of the wages-fund, will not include the work of von Thiinen, as is shown by Professor Taussig's admirable " Wages and Capital." Wishing to exhibit, if possible, the treatment of the entire wages question by the Germans, passing over rather lightly the part in each author which treats of the wages-fund, because Professor Taussig has made that familiar to English readers, and trying at the same time to give unity to my work, I have, so far as possible, grouped writers who appear to show the largest number of points of contact, and at the same time in- cluded writers of eminence who, though not connected closely with German predecessors or successors, have made important contributions to the subject. Hence all the German writers treate4 here are placed in two groups. One contains Schmalz, Fulda, Sartorius, Lueder, Kraus, Rau, Hermann, Brentano, Roscher, Mithoff, Mangoldt and Philippovich. Hermann is the centre of this group, and the others are important only as they lead up to him, depend upon him, deviate from him, or throw light upon him. Apart from those who come first, the 14 GERMAN WAGE THEORIES [310 common element in nearly all is the method of treatment. Other points of contact will appear as we proceed, but this is the most conspicuous. In this group there is a real unity of method and interest. The other group contains von Thiinen, Karl Marx and Schulze-Gaevernitz. These authors do not belong together in the sense that the others do. They have so little in common that it is not even necessary to speak of them as a group except for convenience. They are included in this discussion because of their importance. Von Thiinen was a genius, about whom it is desirable that American students should know more. A fair-minded and exhaustive study of Marx's theory of distribution, the full materials for which have but recently come into our hands, has yet to be made in Eng- lish. Any earnest study of his theory of wages is welcome if it adds anything to our real understanding of Marx. Schulze- Gaevernitz is noticed here because he is the chief representa- tive in Germany of those writers who regard wages as a residual share, and because the theory which he represents, is exciting the interest of German students. One who goes to Germany to hear lectures on the principles of Economics, or who undertakes a study of the literature of the same, must not expect to find a body of doctrines devel- oped independently on German soil, and uninfluenced by the work of other nations. The German professor has ever on his lips the names of Adam Smith, Ricardo and John Stuart Mill. Each economist is followed, criticized or expounded according to the knowledge and idiosyncrasies of the instructor. The present German thinking has its roots in the work of the English school; and, if the German work is to be understood, the English work must be mastered first. The same thing is true of the literature. The foundations have been laid across the Channel. Hence in exposition, the theories of Adam Smith and Ricardo are often employed in this study as standards, and in this way the English and German ideas are brought into comparison. CHAPTER I PREDECESSORS OF HERMANN, I776-I832 While this period is the least important of all in positive results, yet a consideration of the work of a few men who wrote during this time will repay the student who desires to know the beginnings of things, and who loves to trace the de- velopmen,t of method and theoretic spirit. When Adam Smith published the " Wealth of Nations," the physiocratic doctrines of distribution were dominant. The struggle be- tween the views entertained by the Physiocrats and those introduced by Adam Smith was not so bitter as such struggles are apt to be. There appears to have been in Germany com- paratively little objection to Adam Smith's statement. On the contrary, adherents sprang up wherever the new doc- trines became known. Within a few years German students were listening to lectures delivered by University Professors who declared themselves followers of Adam Smith. How- ever, there were some who, for various reasons, could not or would not change views already formed and expressed, and who, though partaking of the early advantages of this century, took little notice of the new movement. Among these is Schmalz,' whom Roscher calls the last of the Physiocrats. 'Theodor Anton Heinrich Schmalz was born 1760, died 1831. He studied Theology and Philosophy at the University of Gottingen, 1777-1780. He became a Professor of Law at Rinteln in 1788, but the following year was called to K5nigsberg, becoming Director of the University in 1801. In 1803 he was trans- ferred to Halle as a judicial counselor and Professor, where he remained till 1808. When the new University at Berlin was established he became its first Director in 1810, and as Professor of Law continued in the service of the Prussian king. As a writer his life was full of activity, his efforts centering principally upon 3"] IS 1 6 GERMAN WAGE THEORIES [312 According to Schmalz, society is composed of classes or groups, differing in standard of life. Yet there is an average standard to which all groups are tending. The poor are spurred by ambition to approach the average, while shame restrains the rich from maintaining a standard far above the average. Notwithstanding the spur of ambition, wages are governed by a law. That which one is accustomed to con- sume in his class during the time that the work is being done determines the wages he will receive. Two reasons are assigned for this rate : i . The laborer demands it for a life of respectability among his class. 2. It is the laborer's right. The question of right enters, because wages are obtained from men and not from nature. When a man sacrifices his time to work for me, it is right that I give him as much for it as he consumes in that time. He has also a right to receive as much for his labor as the companions of his class consume during the time in which the labor is being performed. There is no reason why he should consume more at my cost. If I give him less, I do him an injustice. If I give him more, I make him a present. Wages correspond to the amount here indi- cated, and that which men habitually pay by contract must have back of it the force of natural right. It is not necessary to point out how far short of scientific precision this reasoning of Schmalz falls. Adam Smith's reas- oning may leave something to be desired, but it is better than that of Schmalz. This consuming rate of Schmalz is not the same as the "lowest rate consistent with common humanity" Politics, Law and Economics. In Politics he favored absolutism. In Law he represented the standpoint of natural right. In Economics the Physiocratics' views seemed to him the soundest. He compared the doctrines of Colbert and his followers to the Ptolemaic system of Astronomy, and those of the Physiocrats to the Copernican system, and regarded Adam Smith as a fad (see Roscher, Geschichte, p. 498-9). For his treatment of systematic Economics see Handbuch der Staatswirtschaft, Berlin, 1808, and StaatswirtschaftsUhre in Brief en, Berlin, 1818. For his characterization by Roscher, see the latter's Geschichte der National.Oekonomik in Deutschland, p. 498. 313] PREDECESSORS OF HERMANN ij of Adam Smith; the latter was a consumption rate sufficient for both the workman and his family during the entire year; the former was a rate for the workman during the time of work. Adam Smith had in mind a corrective in a decrease of the supply of labor, if the rate fell below the standard. Schmalz was appealing to conceptions of natural right. Fulda" is important only as a transition from the old to the new point of view. While holding with Adam Smith that the state of wages is at once a sign and an effect of the different states of society, he attempts to show that wages may be af- fected by different applications of capital. To his mind ma- chinery is inimical to the interests of labor. Wages are more favorably influenced if capital is applied to agriculture rather than to trade, since in manufacture labor is displaced by the preponderance of capital in the form of machinery. From this point of view the national interests of labor may be promoted by change of national industry and without any increase of capital. Sartorius," Lueder and Kraus were prominently instru- mental in introducing the teachings of Adam Smith into Ger- many. In the extent to which they appeal to his views for an explanation of wages, they differ widely. Sartorius seems to have paid attention to the last page only of Adam Smith's chapter on wages, when he points out that the price of labor is regulated by (i) the demand for labor, and (2) the price of the necessaries and conveniences of life, and then follows this with a discussion of the influence of scarcity and plenty upon 1 Friedrich Carl von Fulda, born 1774, died 1847, student at Gottingen 1794- 57, and received in 1798 a call to T. bingen as Professor of Kameralwissenschaft, a position which he occupied nearly forty years. His views on Economics are found in his GrundsStse der ceconomiscJi-poliHschen oder Kameralviissenschaften, Tubingen, 1816, 2d ed., 1820. ' George Friedrich Sartorius was born 1766 and died 1828. After studying At Gottingen he was, in 1802, appointed by that University Professor of Philoso- phy, and remained in that position, although called to both Berlin and Leipsig as Professor of Kameralwissenschaft. l8 GERMAtf WAGE THEORIES [314 these two factors. Lueder ' likewise uses only a part of Adam Smith, holding that wages will be above the minimum only when the funds from which wages are drawn increase. Kraus,* however, constituted himself the special interpreter of Adam Smith to the Germans; accordingly, his book read in connection with the table of contents is found to be not a word for word repetition of the " Wealth of Nations," but a good analysis of it. Thus his treatment of wages is made to include all the main points of Adam Smith. Up to this point the German economists stated a necessary minimum wage ; a new idea was originated by Lotz,' who first stated the conditions of maximum wages. This is the begin- ning of a new and more fertile treatment of the subject. Loti pointed out that competition could operate only within certain limits, the lowest limit being subsistence wages and the uppef limit that point at which wages swallow up the profits of capi- tal. All economists since Lotz have observed some such limits. Rau was the first to elaborate the point. Rau * published the first edition of his Political Economy in 182'6. The doctrine of wages formulated in the first editi-ott reCeive'd scarcely any modification in the successive nine re- visions, of which the last appeared in 1 870. Rau was the first great German economist to recast the science on the principles laid down by Adam Smith. He may, therefore, be considered ' August Ferdinand Lueder, born 1760, died 1819. He was Professor of History in Braunschweig, 1797, and in 1810 Professor of Philosophy in Gottingen, where he remained till two years before his death. He published in 1800-1804, Na- tionalindnstrie und Staatswirthschaft. ' Christian Jakob Kraus, born 1753, died 1807. He studied at Konigsberg and GSltingen, and in 1780 became Professor of Practical Philosophy in Konigs'berg, a place which he kept till his death. ' Johann Friedrich Eusebius Lotz, born 1771, died 1838. He studied in Jena. He held many government appointments and was for a lime Pro'fessdr of Law and Economics at Bonn. He published, in 1821, Handiuch der Staatsiiiirthschaft^ lehre. * Karl Heinrich Rau, born 1792, died 1870. 3i5] PHEDECESSOHS OF HERMANN ig the founder in Germany of that individualistic school which Adam Smith founded in England. While previous writersr who may be called followers, were for the most part mere copyists, Rau makes departures in statement and analysis. He also attempts to adapt the matter to the conditions of hiS' own country. Rau was the first to enunciate the doctrine that wages are only a special form of price. In this he is truly a predecessor of Hermann. To understand Rau's discussion,, we must recur to his doctrine of price. Price results from the combined action of three forces: (i) the value of the exchang- ing good, (2) the cost of the exchanging good, (3) competition. Price cannot go higher than the value of the good to the buyer; it cannot go below the cost to the producer; it is de- termined somewhere between these limits by the relation of supply and demand. Turning now to his discussion of wages, the value of labor is regulated by the purposes for which it is applied. In most cases it is applied to secure a profit. When so employed, the undertaker is in a position to give high or low wages according to the amount of net product left over after other expenses are paid. It might go so high as to swallow up the pure profit of the undertaker, and even so high as to decrease interest and rent, but it cannot destroy them, because in that case undertaking must cease. But from the fact that even pure profit usually exists, it is evident that we need other determining principles. We take a further step in advance by applying the principle of costs to labor, which, in skilled occupations, includes sub- sistence and previous outlay for training; while in simple occupations, subsistence, broadly interpreted to include family Support during the intervals of idleness, is the principal Consideration. Costs are determined by (i) the usual manner of life of the laborer and his family in given conditions of climate, customs, and the degree of culture of the people as & whole, as well as that of the peculiar class ta which the laborer may happen to belong; (2) the price of the 20 GERMAN WAGE THEORIES [316 commodities which enter into the laborer's consumption list. In this way is determined the cost of production of labor. Wages cannot remain permanently below this cost, for in that case the supply of labor would fail. Here we have the limit to the fall of wages. The limit to the rise of wages has already been given. Between the limits there is a wide margin. The force that determines whether wages shall tend to the maxi- mum or to the minimum, or remain intermediate, is competi- tion : the competition of labor for capital and the competition of capital for labor. The supply of labor consists in the num- ber of men who are resolved to work for wages and are seek- ing work. The demand for labor consists in the amount of capital which is destined to be applied to the employment of laborers in profitable undertaking. If the population is very large in comparison with the amount of capital, then wages may sink to the minimum or below it before correction comes. In the opposite case, it may rise till reduced profits correct the tendency. In these views Rau differed but slightly from the English school as known in his time. Adam Smith and Ricardo both conceived a hypothetical price which they called natural, above and below which actual market price might fluctuate. Rau designated an upper and lower limit between which actual price might fluctuate. Rau's lower limit is really iden- tical with Ricardo's central point. The fluctuations in both cases are caused by the same influence, i. e., relation of supply and demand. In designating the upper hmit, as the value of the good to the buyer, the first step was taken toward regard- ing the influence of the consumer on price, which in the hands of Hermann developed into a theory designed to refute the wages-fund doctrine. There is one other respect in which Rau and the English school differ : as to the part of the theory upon which special emphasis shall be laid. After Ricardo makes the distinction between natural and market wages, he says almost nothing further about market wages. He seems 317] PREDECESSORS OF HERMANN 2 1 to have developed his system of distribution from the point of view of his conception of natural wages. If so, he would nat- urally lay greater emphasis upon it, as his readers would thereby the better understand him. In the passages in which he re- pudiates supply and demand as determinants of prices, he is to be understood not as denying their influence on market price, but as denying their power to determine natural price, in which he is chiefly interested. It was not so with Rau Ricardo's determinant of natural wages became for him one of the limits of fluctuation and the determinants of the fluctua- tions assumed the central place. We might therefore expect from Rau a more careful study and statement of the principles of supply and demand in their application to the problem of wages. To say that wages depend upon the relation of supply and demand is to say almost nothing at all. We want some- thing more than a definition of the terms employed in one short sentence. Such expressions as that, when capital is large in comparison with population wages rise, and when population is large in comparison with capital wages fall, are too indefinite, and bring in direct comparison things which strictly are incapable of comparison. The foregoing discussion shows that Rau is far superior to his German predecessors. But, in justice to them, it must not be forgotten that he wrote under the influence not only of Adam Smith, but of Malthus, McCulloch, Torrens, Ricardo, and James Mill. This is proved by the fact that in the first edition of his work on political economy, he makes frequent reference to these authors whose works had been translated into German or French. It is also proved by the fact that many of his general propositions are found in the English works. For instance, his remarks on the proportions between capital and labor as determining wages are found in substan- tially the same form in James Mill. Any lack of economic analysis tending to mar the work of the early German economists is fully atoned for by the publi- :22 GERMAN WAGE THEORIES [318 cation in 1832 of Hermann's "Economic Investigations," This woik marks a great advance on previous theoretical economic studies, and even to-day exercises considerable in- fluence on economic thought. CHAPTER II HERMANN ' ' Historically considered, the "Economic Investigations" of Hermann possesses a unique interest. Unlike Adam Smith, whose " Wealth of Nations " appeared at the end of a long career, Hermann began his extended activity in economic literature with the publication of the work by which he is chiefly known, and which won from Roscher the judgment that it placed its author " among the most eminent economists of the nineteenth century." To the reviewer of the progress of economic theory in Ger- many, the work marks an important advance. Finance and Administration were ably and independently treated previous to 1832. But of the many names which appear among con- tributors on pure Economics during the half centuiy following the publication of the " Wealth of Nations," Rau is really the only one of note, and in power of analysis and independent thought he is much inferior to Hermann. That the work of the former was always more familiar to ordinary students must be admitted; but that is due to the fact that Hermann's style is more difficult, while Rau's book has decided pedagogical advantages. It is to Hermann's credit that, living in a country which was then far behind England in commercial and industrial develop- ment, and hence behind her in the development of capitalistic production, and the advanced relations of laborer and em- ployer, he should have been the first to assail, with some ' Freidrich Bmedikt Wilh«Iro v. Henii^nn, boxn 1795, dwd i868. 319] 23 24 GERMAN WAGE THEORIES [320 measure of success, the wages-fund theory of the English economists, and substitute for it a theory which appears in nearly every systematic treatise on political economy in Ger- many since his day. I. In the early German wage literature there appears little to which Hermann is indebted. The numerous writers previous to Rau are either avowedly expositors of Adam Smith or mere copyists. He, however, owes something to Rau. Rau was the first German economist to treat wages as only a special form of price and to apply the general principles already evolved under his treatment of price to a solution of the prob- lem of wages. It is from this point of view that Hermann opens his dis- cussion of wages. According to both men, the general prin- ciple is supply and demand, but to Hermann this, so stated, means but little. We need to trace back the causal connection one step further. Taking the demand side first, there are three factors which determine price.' First, the individual value of the good to the buyer. Secondly, the buyer's ability to pay for the good. Thirdly, the disposition to buy as cheaply as possible; the buyer will therefore pay no more than the price reduced by the competition of the sellers. Turning now to the supply side of the problem. There are here, too, three factors. First, the seller must receive as much as the good has cost. Secondly, the disposition to get as much as possible; the seller will therefore get as much above cost as the buyers raise the price. Thirdly, much depends upon the exchange value of the means of exchange. If in the above principles we will substitute for seller, buyer and good, the words laborer, employer and labor, we shall have in outline the principles according to which wages are determined." ' Staatswirtksckaftlichi Untersuchungen, 1 870, p. 390-459. ' Staatswirthschaftliche Untersuchungen, p. 460-487. 32 1] HERMANN 25 Unfortunately, Hermann never finished the discussion, hav- ing treated the subject from the standpoint of demand only. How he would have considered the problem of population! under the cost of production of laborers we have no means of knowing. Although the treatment as we have it is defective, yet we may adopt a point of view according to which the ap- parently one-sided treatment may yield results. If we note that population does not readily respond to fluctuations in de- mand for laborers, we may assume the supply side of the problem as a fixed quantity. Then a correct statement of the principles of demand may yield the determinant of wages for short periods; /. e., assuming Hermann's method to be a correct one. Hermann's views may be conveniently considered under five heads. I. The first important question is, to whom, or to what class is labor valuable? who are the real buyers of labor? To these questions Adam Smith, Ricardo and James Mill had given the unequivocal answer, the employer of labor — the capitalist. But Hermann answered that the real consumer of labor power, and hence the class to which it has value, is the class which consumes the laborers' products. The nature of the case is not changed by the fact that the producer hires and rewards the labor directly, while the consumer is uncon- scious of the labor involved in the product. The consumer is nevertheless a buyer of labor. The undertaker is considered by Hermann a mere labor purveyor, a sort of consumers' agent, who for his outlay in wages seeks a recompense in the price of the goods made by labor. This doctrine, not elaborated, but rather treated as self- evident, is the foundation-stone of Hermann's theoretic struc- ture, and upon its truth or falsity will depend the .soundness or weakness of his alleged contribution to this subject. n. While Menger properly has the credit of working out in detail, and tracing to some important result the conception of 36 GERMAN WAGE THEORIES [332 stages in the productive process, the idea is clearly suggested by Hermann. Only a small fraction of the numher of laborers engaged in productive activities are employed in putting on the finishing touches to commodities. Many are getting out the raw materials, and between mioers and agricuUuralistSi at one end of the line, and labourers ministering directly to con- sumers' needs at the other, there are whole groups of laborers pushing along the commodities from a lower to a higher stage in the transformations from crude products of nature tq the manifold refined forms suited to serve man's wants. Hermann makes use of the theory to establish a point which seems not to have attracted the attention of subsequent writers. Most theorists since Adam Smith have felt the necessity of distinguishing between particular and general wages. They considered that when they had determined a general law of wages they had not accounted for differences of wages in dif- ferent employments. Hence we have repeated so often both in English and German treatises Adam Smith's familiar points: wages in particular employments are determined by differences in agreeableness of employment, expense of learn- ing, trust reposed, etc. Hermann offers a different view when he proclaims a difference in wages according as the employ- ment is remote from, or adjacent to, the final stage. Bakers and butchers always receive higher wages than weavers, and those are in the most unfavorable position who are laboring in the initial stages of production, as in mining and agriculture. The explanation of these alleged facts is that the final prod- ucts are subject to constant daily demand, and the dealer in such commodities can and must offer his laborers higher wages than he who produces what can remain for a consider- able time in one stage. The dealer in the intermediate prod- ucts must make good his wage outlay in the price of the product, and in order to insure this he keeps wages at as mod- erate a figure as possible. All who purchase from him buy as cheaply ag possible. This means that a constant pressure is .333] HEMMANN 2/ 2hrought to bear on all those in the previous labor steps to dimit the wage outlay. " Upon all the production stages there ■rules the economic motive to furnish to the final purchaser as •icheaply as possible the labor contained in the product." The producer of the final product is not so pushed, since his com- modity is subject to pressing daily demand. In connection with this there is a subordinate point which is worth mentioning. What are the general principles accord- ing to which a change of price of goods in the final stage will ^affect wages in the earlier stages ? Hermann answers that this depends upon the time during which the product delays at a given stage. The shorter the time, the more sensitively will the rate of wages respond to changes in the stages above. Jt will also depend upon the readiness with which undertakers and laborers can betake themselves to other employments. Something depends also upon whether the raw material or the partly-manufactured product is limited to a definite use, or is capable of several applications. III. Mere demand or desire is powerless to affect wages unless there exists also the ability to pay. To know this, one must know the source of payment. Adam Smith and his immediate followers considered income and capital as the true sources of all payments for wages. Ricardo laid emphasis xipon capital alone. Against Ricardo's view Hermann took a decided stand. A mere statement of his argument reveals strong feeling. Whoever would get the labor he needs or wants must have the means to pay. In the case of household servants it is plain that they are paid from income. With the fluctuation of incomes, fluctuates the effective demand for servants. It is evident that to pay them out of the stock of accumulated wealth would be wastefulness. There is no labor which does not pertain to a last consumer. This is as true of labor, for labor contractors or undertakers,, as of labor in direct personal service. However numerous the technical steps in the production may be, the finished product 28 GERMAN WAGE THEORIES [324- at last becomes an object of use, either temporary or lasting... All the intervening steps from the beginning to the end have been taken for the sake of this ultimate use. And the final recompense for all previous outlays must find its source in the- payments for the use of these final objects. " Not merely all the labor applied to every labor step in producing the imme- diate product, but also the labor contained in the replacing: and use of all kinds of fixed capital, is at last to be made good- by the payments which the ultimate consumer of the product makes."' The wage outlay of the last, as well as of ali previous steps of manufacture, is contained in the price of the final product. Capital cannot be the source of wage payment^, for if restitution out of the product fails, production and hence wage-payment must cease. If production were continued without reference to the final demand, the depreciation in value- of the raw products would be a severe experimental demon- stration to the producer that his capital was not the source or wage payment. Hence we get the following result. The true and continuous source of the compensation of production is the income of the buyer of products for his own use. Capital is only the help-means to production, not the source of reward.. "It is unthinkable that wages depend upon the greatness of the disposable capital in relation to the number of laborers."'' It depends in the long run always upon the price which the active buyers can and are willing to pay for the product. " To. hold that the source of wages is capital is not merely a theoret- ical error, but also in practical affairs is a doctrine of the most, serious importance ; because it fortifies the laborer in the super- ficial view that the undertaker is his wage-giver, and that upoa him depends the scale of his wages. If the laborer holds to such an appearance of the truth and becomes hostile to the undertaker, participating in acts of violence against him, there is no cause for surprise. That the doctrine of science should! ' Staats. Unttrs. , p. 473. ' liitf., p. 477. 325] HERMANN. 29 strengthen the selfish procedure of ignorant laborers in strikes, Ijy its doctrine that the source of wages is the capital of the "* entrepreneur,' shows the need for caution." ' IV. The two considerations, need of labor service and abil- ity to pay, are operative from the side of the " entrepreneur." But "these are conditions which relate to but one of the contractors. It is obvious that in general under the regime of free competi- tion, whoever employs labor will not grant higher pay than the lowest at which he can obtain the appropriate service in -sufficient quantity. How low wages may go is influenced somewhat by the competition of laborers. Unfortunately Hermann did not profess to have treated the wage question -from the side of supply in any thorough manner. We do not ^nd that he took account of numbers and the forces which -ranches and laborers are divided into groups, separated more or less completely by differences in skill, special aptitude and training. However, there are in all branches of industry oc- -cupations which require only ordinary skill or intelligence and hence can be filled by the common laborers of all branches. Here exists almost complete competition and the lowest wages ^prevail. As we ascend in the scale of skilled and special em- ployments up to the liberal professions, we find more and more important the group formations. Even in groups there are forces at work which tend to break down the barriers to competition. One such force is the existence in modern times of ■extended enforced idleness. Such idleness, not accidental but 46 GERMAN WAGE THEORIES [342~ largely the result of the unsteadiness of industrial evolution, im- pels men to seek new employments, thus breaking down former- group arrangements. There is always a readjustment of employ- ment after an extended period of enforced idleness. Under cer- tain exceptional conditions there are natural limitations to com- petition. When unoccupied land is plentiful competition will cease at the point where wages sink to the level of what labor can make on such land. But this is not the law under ordi- nary circumstances. The openings to labor without capital are small in number. As a rule labor power without capital has no value to its owner. VI. By the amount of labor offering service our author does- not mean the number of persons seeking work. That is measured by the labor power and skill of laborers and the number of hours during which daily its labor power can be active. The only point made under this head beyond the fore- going definition is that relating to the correspondence between time and service. Up to a certain point as the hours of the working day are shortened the quality of the service per hour increases. No attempt is made to determine this point, but it is brought out that if this point of maximum service is passed in the direction of shorter hours, the effect is the same as if the number of workers were decreased. VII. The laborer's valuation of his labor power may be affected by two circumstances. Under the exceptional con- ditions of the existence of large quantities of fertile unoccupied land accessible to laborers, wages cannot sink below the in- come obtainable by the laborer in independent undertaking. But under ordinary conditions the opportunities for independ- ent undertaking without large capital are insignificant, so that from this standpoint labor power has no value to the owner.. A basis for its valuation is found by recognizing the personality of the laborer. This appears by reason of the cost value of labor and the standard of life. The cost of labor is not sa simple as might at first appear. Even a narrow view must 343] HERMANN'S SUCCESSORS 47 include in addition to support during the time of work, costs of bringing up and development of the laborer, support during the period of old age, and a reserve as a provision against sickness and other causes of loss of employment. But the laborer as a human personality is more than an individual. He is also the father of a family ; and no fair judgment of the value of labor can ignore that fact. That it is so often ignored is accounted for by our author by a reference to the strong competition of labor, and the admittance of women to men's employments. The question of costs is much influenced, whether as an individual or the head of a family, by the standard of life, which is defined as the expense which one is induced on the average to incur for the satisfaction of wants, in accordance with the habit and custom of the group to which one is attached by his calling ; or shortly, support conformable to one's rank. This differs so much according to peoples, times, and places, that it is impossible to reduce the standard of life to any law. In general it may be said that much depends upon the position accorded to the laboring class in society and political life. The different amount of contact with other social strata and the means of culture become of prime importance. Of course, the standard of life is a powerful force among all classes of society ; but that of the laboring class has a special interest to students of society, because the integrity of the standard has a more or less precarious support in their case, and a failure to maintain it may mean a real degradation. It is because laborers are affected in their social position and their respectability that such fierce opposition is made to wage reductions. It is only by raising the standard of life that we can have a permanent rise of wages. VIII. Wages may be said to be affected by money in that wages fall if money Increases in value, and vice versa. The cause is a double one. If money becomes dearer, other things, including labor, become cheaper ; but in the face of a falling market, production tends to diminish, and thus the demand for 48 GERMAN WAGE THEORIES [344 labor is lessened. It will be noticed that this argument for the most part applies to money wages only, and, indeed, the treat- ment thus far contemplates no determination of commodity wages. The entire treatment by Philippovich may be summarized as follows : Wages are determined by the combined action of the following forces : i. The competition for labor is greater, the larger the number of employers. 2. The demand for labor depends partly upon the amount of land and capital which the owners employ in productive industry. This employment is favored by small owners. 3. Labor is largely valued accord- ing to the efficiency and skill of workmen. 4. The power to employ labor is affected by the degree in which undertakers can restore capital either from consumers' incomes or by the use of credit. 5. Laborers are limited in their competition against each other by social and industrial group arrange- ments. 6. The labor supply is influenced by the length of the working day. 7. Wages, in many instances, are largely de- termined by what laborers can make in independent undertak- ings, although ordinarily there are no lucrative independent undertakings open to them. 8. The standard of life is an ever active powerful force affecting the supply of labor. These will be recognized as important elements, but the analysis would be much more complete if some attempt were made to measure the relative importance of the factors. Under given circumstances, some factors are peculiarly active, while others are quiescent. If we are not to be confused by a mass of meaningless details, we must know these facts. There are still two points under dispute which Philippovich discusses briefly. They pertain to the effects of a supposed rise of wages. I. May wages rise at the cost of the undertakers? To answer this question intelligently we must analyze the under- taker's income. It is in the aggregate composed of (i) wages of superintendence, (2) interest, (3) profit. A rise of wages at 345] HERMANN'S SUCCESSORS 49 his cost would affect him, therefore, either as leader, capitalist, or speculator. We may assume that his first two functions cannot be affected by this cause except through the last. If a rise should occur at the cost of profits, the undertaker would be in a more unfavorable position than the ordinary capitalist, for the latter includes in the rate of interest insurance against risk. Such a position he would not endure permanently, and the only reason he might temporarily would be the inability to withdraw his capital. Moreover, no one would embark in industries in which such conditions prevailed, so that in course of time production would decline, and with a rise in price profits would become normal. There are certain kinds of industries in which wages might rise with no unfavorable effect upon profits. Such are certain forms of monopoly, or industries for whose products there is a rising market, or those in which the costs of production de- crease more rapidly than wages increase. In such cases the advantages could be appropriated by labor only through com- bination. Labor unions, as instruments to keep wages from falling, are beneficial under certain circumstances, both in competitive and monopolized undertakings. In the first, to prevent undertakers from lowering wages under the stress of competitive pressure among themselves ; in the second, where there is no pressure of competition, to force those to allow better conditions who can but will not voluntarily do so. II. It has sometimes been said that if wages should rise at ■the cost of consumers, laborers would be sufferers in the end. The argument is that by so much as prices rise, consumers, having fixed incomes, must curtail their consumption. This means a weakened purchasing power in certain directions, resulting in a decrease of production and a falling off in the •demand for labor power. But this is a point to which Brentano paid special attention, and Philippovich, without mentioning his authority, employs Brentano's argument. It is simply that any loss of former consumers' purchasing power is fully made 50 GERMAN WAGE THEORIES [346 up by the new additional purchasing power of laborers whose wages have been increased. Philippovich, however, did not fail to notice that, if prices were increased by a rise of wages, laborers would lose a part of their wage advance by having to pay higher prices for consumption goods. He at the same time pointed out that they would not lose all their advance, since a part of the burden of higher prices would be borne by capitalists, land-owners and professional men. The discussion of these two questions becomes clearer by noticing the views of Thornton, whom both Brentano and Philippovich are either following or criticising. Brentano would naturally consider Thornton, for his article in Hilde- brand's Jahrbiicher was devoted to a study of the doctrine of wage increase. Philippovich took up the discussion doubtless because he felt that no systematic work on Political Economy would be complete without it, although he had nothing espe- cially new upon the subject. Thornton' desired to determine whether trades unions could be instrumental in securing for laborers a permanent advance in wages above what would be secured without union action. He was met at the beginning of the discussion by the objection that whatever the unions might succeed in extorting would either have been granted eventually without union action or could not be lasting, according to circumstances. The first objection was supported by the contention that if labor organizations should force a wage advance in some par- ticular trade, at a time when business was improving and profits abnormally advancing in that same trade, it would be but to an- ticipate what must occur later by forces purely economic when capital should be attracted to that trade by reason of the extra- ordinary profits prevailing. The advent of new capital would cause an increase of demand for labor, and wages must rise in consequence. Thornton admitted the force of this argument, • On Labour, p. 279-321. 347] HERMANN'S SUCCESSORS 5 1 but claimed that unless the unions intervened at the beginning of the process the employers would pocket the whole advant- age during the time preceding the advent of competition. Furthermore, if laborers waited for competition to raise their wages they would suffer loss, for increased production follow- ing competition in production would lower prices, and thus the source of higher wages would be partially cut off. This point Philippovich also notes. So much for the efficiency of union action in case profits are above the general level. The second objection that higher wages, extorted at a time when profits were at an equilibrium or were below the general level, could not be permanent, Thornton denied for the greater number of cases to which the rule was applicable. Unionism can raise wages permanently in the following cases: (i) Those in which there exists monopoly, for prices can be raised against consumers to meet the increased cost. (2) Those in which, whether monopolized or not, the demand of customers is increasing. Prices may be raised. (3) Those in which economizing machinery and processes are being introduced. By these means laborers are more efficient and a greater num- ber of products at old prices is as beneficial to employers as the same number at higher prices. (4) A rise of wages is also possible if all trades were united in a combination so that an equal and simultaneous rise of wages would produce a uni- versal fall of profits. In this case, capital having no place to which to flee for relief, must submit. There are other cases mentioned, but these are the more important. In all the cases mentioned above, except the third, higher wages are obtained only at the expense of undertakers or consumers. Indeed, Thornton lays it down as a general proposition that wages cannot rise except as prices rise or profits fall. Hence it be- comes important to enquire : in all. cases in which unionists are the gainers, who are the losers? This is, of course, a difficult problem, since all are consumers. We shall indicate briefly Thornton's answer, as it is to his 52 GERMAN WAGE THEORIES [348 answer that the German economists take exception. He says that this will depend upon many circumstances, the important ones being, whether the gain has taken place in a competitive or in a monopolized trade, or whether it has taken place during a stationary or a progressive period. We will simply notice here the case of monopolized industries. If the rise occurs in such an industry in a prosperous period, employers are not injured, for they can raise the price. Consumers are the only positive losers ; for, although they may be compelled to pay more for one class of commodities than formerly, they may still be able to spend as much as before on the produce of other trades. In that case laborers in general would not be deprived of anything they were accustomed to ; " they would merely be excluded from participating in unaccustomed gains of which otherwise they would have had their share." If a rise in wages is forced in monopolized industries during a period of stagnation, consumers are not the only losers. The main body of laborers, excluding those laborers the rise of whose wages is contemplated, are injured by the fact that the unionists have intercepted an amount of money which would otherwise have been expended in the purchase of com- modities which the main body of laborers produces. In a stagnant period, incomes are regarded by Thornton as fixed ; therefore, if the producers of one class of goods succeed in absorbing more than the former usual share of consumers' income, less remains for expenditure in other departments of trade. The curtailment of expenditure in these other direc- tions diminishes demand for goods in these trades, and thus laborers employed in these trades are injured. Thus Thornton regarded the gain to a particular group of laborers under the circumstances noted above as offset by a double detriment ; first to consumers, whose consumption was thereby curtailed, and secondly to the general body of laborers, the demand for whose products was thereby diminished. This is the point to which both Brentano and Philippovich 349] HERMANN'S SUCCESSORS 53 object. As already noticed, they call attention to the increased purchasing power of the group of laborers whose wages by supposition have been increased. They would admit that con- sumers of the products whose price has been raised are suf- ferers, but they deny that the general body of laborers are necessarily affected. The aggregate demand for goods has not decreased because one class of consumers has benefited at the expense of another class. Laborers whose wages have been increased are more extensive consumers than formerly. They now possess an augmented purchasing power just equal to the diminished purchasing power of consumers affected by higher prices. The conclusion then is that when wages have been increased at the expense of consumers, the consumers are the chief sufferers, and that the general body of laborers are not affected by a diminution of demand for commodities. This view would doubtless have been admitted by Thornton if his attention had been called to it, for on its face there does not appear any reason why the general labor market need suffer because purchasing power has been transferred from one class of laborers to another. If Philippovich corrected one of Thornton's errors, he did not avoid falling into another one of the same author. They both teach that in case of monopoly a rise of wages may occur at the expense of consumers. Both assume that monopolies have such control of the market that they can raise prices to meet extra expenses; thus there can be shifted upon con- sumers the burden of a higher wage cost. But if monopolists can increase prices to their advantage after a rise of wages, the question forces itself upon us as to why they could not do it before the event. Since precise studies have been made of the relation between the price of monopolised goods and monopoly profits, it seems clear that monopolists possess no power to shift upon consumers the burden of a higher wage rate. Monopolists always charge the highest price consumers are willing to pay. The principle of charge from the monopolist 54 GERMAN WAGE THEORIES [350 standpoint is the establishment of such a balance between costs and gross income as shall yield the highest net return. In general, the number of consumers of a particular good varies inversely as the price. An increase of wages constitutes an expense chargeable to an undertaking as an undivided whole, and is not one which varies with the amount of the commodity produced. Such a charge must be borne by the monopolist, for if he attempted to escape it by raising prices, consumption would be diminished so that the monopolist's net income would be decreased. CHAPTER IV CRITICISM It is proposed now to discuss briefly two points pertaining to the work of this entire group, the centre of which is Her- mann. The first point concerns the method of approaching the wages question by all the German economists from Rau to Philippovich. The characteristic method is to state that wages depend upon the law of supply and demand. In the same manner that that law determines the price of commodities, so with a few corrections it determines the price of labor. The reader of the German work on wages is referred to the analysis of supply and demand as applied to commodities, and then finds the author employing the same terminology, with here and there a word changed designed to suit the special case in hand. The criticism of this method as applied by the group under consideration is that not sufficient emphasis is laid upon the very peculiar nature of labor as a commodity. This peculiar characteristic is illustrated by the application of the law of supply and demand to different kinds of exchangeable values, and by the analogy that may be drawn between labor power and certain kinds of goods. If we undertake to rely upon the operation of demand and supply as a practical rule to regulate prices in all industries and for all services, we shall find that the rule does not apply with equal facility. The law of supply and demand as a regu- lator of price can be applied with the least advantage with regard to goods or utilities which are produced by a body of capital that can be easily, and with small loss by the change, 35'] SS 56 GERMAN WAGE THEORIES [352 increased or diminished. Such would be the case with capital invested in the stock exchange or in banking. Supply and demand have somewhat less application in a merchant's busi- ness, still less in manufacturing, and least of all in transporta- tion, especially railroad transportation.' Banking, trading, manufacturing, and railroad transportation constitute a series of undertakings, at one end of which, banking, the principles of supply and demand in regulating price from the standpoint of costs, apply with the most satisfactory results; and at the other end these principles have less validity. In the bank- ing business, nearly all the capital is circulating capital, but in the railroad business a larger proportion is fixed, and these opposed conditions make a great difference in the practical working out of prices. In the banking business, under free competition, if the price goes much above the costs of produc- tion, the unusual profits attract capital into the business till an equilibrium is established. If prices fall below costs of pro- duction, further production ceases till the equilibrium is again restored, and thus prices hover close to costs. Of the whole capital invested, the greater the proportion that is fixed, the more difficult it is to adjust investment to change of price. When it comes to a business like the railroad business, the costs of pro- duction or the cost of service have but slight influence upon charges. If competition forces prices below costs, there is no economic force to restore it, except such as work through long periods. In a merchant's business, sales below cost cause a greater loss the greater the amount of sales. But in the railroad traffic, any business that pays more than immedi- ate expenses is worth more than no business. When a mer- chant becomes bankrupt he ceases to compete. But a bankrupt railroad is a more dangerous competitor than a sound road. In a merchant's business the law of supply and demand may be relied upon to adjust prices for the best good of the com- ' Hadley, Railroad Transportation, p. 40. 353] CRITICISM 5; munity. But in the railroad business combination and agree- ment seem the only means to avoid industrial warfare. Now the question occurs, is labor power, as a commodity, analogous to bank service or merchants' goods, or is it more analogous to factory products and railroad service? This is important, because upon the answer will depend the extent to which we can wisely and without great modification employ the same analysis of supply and demand that might be em- ployed in reference to competitive goods. The laborer, for the purpose contemplated, now occupies the same position in rela- tion to his labor power that the business man or capitalist does to the commodity or utility he produces. The laborer's capital is himself. As the business man maintains his capital only by producing and selling the utility his capital is fitted to pro- duce, so the laborer is maintained by exercising and selling his labor power. The kinds of business referred to above as a series difTer in two respects. First, in the ability to cease producing without serious detriment to the investment. Secondly, in the freedom and ease of transferring the value of the investment. In these two particulars banking is at one extreme of the series and the railroad business at the other. A banker may cease discounting without serious injury to the plant, and may easily close up business entirely, transferring the value of the capital to another business. A railroad cannot cease transporting without serious losses in fixed charges and in deterioration. It is comparatively useless as a body of mere property. Nearly all the value is in the business, so that it is next to impossible to decrease the supply of transportation according to the demand for it at old prices. The supply is kept up at such prices as will secure business. With reference to these last points labor is more analogous to the railroad business than to banking.' A laborer cannot cease selling his product without serious, and it may be permanent, detriment to ^Hadley, Railroad Transportation, p. 78. 58 GERMAN WAGE THEORIES [354 his investment, that is himself. And here the laborer's position is peculiar, in that he carries upon his shoulders, so to speak, the future supply of labor. If his labor should cease, not only is his own investment damaged, but that of others who are de- pendent upon him. It is as if a business were being conducted not alone for the sake of the owner, but also as a support for the business of others, so that if the one ceases the others of necessity fall also. Neither is the laborer free to withdraw his capital and pro- duce something else. The laborer never has anything to sell except labor power. If capital does not wish to buy what he offers for sale, there is no hope for it. Capital buys at some price or the laborer goes to the poor-house. These two con- siderations make it as impossible for labor to cease selling its product, as for a railroad to cease running its trains. This analysis discloses the peculiar nature of labor-power as a commodity. Its immobility is a serious obstacle to the reduction of wages to a common level. Its comparatively permanent supply, together with its necessary productive activity, retards the correcting power of supply and demand. We may say that the operation of the law of supply and de- mand in its application to labor is greatly impeded by friction. And in any practical treatment of the wages question such as is found in the German literature, the friction-element ought to dominate the discussion more than it does. None of the authors of this group take pains to point out these characteristic differences between labor and competitive commodities except Philippovich. But the differences dis- cussed by him have slight effect upon his subsequent treat- ment. Rau designated an upper and lower limit of price, and appealed to supply and demand as forces operating to deter- mine wages at some definite figure between those limits. But the result is vague and indefinite. Hermann employed the familiar procedure, but omitted a discussion of that part of the question which, according to his method, would have given 355] CRITICISM 59 him an opportunity to point out the comparatively permanent character of the supply of labor. Having, however, placed wages in the same category as the prices of commodities, he practically sets aside all factors as having no force except con- sumers' income. Although his followers, for the most part, enter upon the discussion of wages by an elaboration of factors identical with those applied to determine the prices of commo- dities, they ultimately appeal to some one as really final. When this is not done, as in the case of Philippovich, the whole treatment is confused. All recent writers practically adopt Hermann's view. It is desirable, therefore, to enter upon some discussion of consumers' income as the source and determinant of general wages, and this is the second point in the criticism. It will be recalled that Adam Smith pointed out that there was necessarily a minimum rate, below which it seemed im- possible that even the lowest grade of labor could subsist for any considerable period of time. This lowest rate for any family must be more than sufficient to support the man and wife. When it went below this, it failed to be consistent with the needs of common humanity, and had the effect of produc- ing a dearth of workmen. However, the possibility of raising wages above the minimum depended upon the increase of the " funds " which are " destined for the payment of wages." These funds were of two kinds: first, the revenue which is over and above what is necessary for the maintenance of the employer, and secondly, capital which is over and above what is necessary in order that the employer may conduct his business on any given scale. In the first part of the section on wages, he showed that wages were the result of a contract entered into by laborers and employers. In settling the terms of the con- tract, the employers have the advantage. In the long run, laborers may be as necessary to employers as employers are to laborers, but, practically speaking, it cannot be a question of " long run " with workmen. Employers could subsist for a 6o GERMAN WAGE THEORIES [356 long time on present accumulations. " Many workmen could not subsist a week, few could subsist a month, and scarce any a year, without employment." ' Notwithstanding the fact, however, that employers have the advantage, wages for the most part are above the minimum, and this fact is not to be regretted; for good wages, by increasing the efificiency of work- men, redound to the distinct advantage of society. Some modification of this last proposition is necessary, since there are two kinds of laborers corresponding to the two kinds of funds for the payment of wages : (i) Laborers who are paid from stock are such as by their exertions add to the wealth of society. They are " productive." (2) Laborers who are paid from revenue and render services simply. They minister to personal enjoyment, but their product perishes with the first use, and there is added nothing to social wealth. Such labor is " unproductive." Adam Smith makes it clear that produc- tive processes extend over periods of time, and that wages are advanced to laborers by the owners of wealth as the result of a bargain. But the exact nature of the funds held by employ- ers is not made lucid." Thus there are two theories of wages in the Wealth of Nations. One is the minimum wage theory» the other is the theory of demand and supply, the latter con- nected with the idea of funds for the payment of wages. Ricardo's treatment differed somewhat from Adam Smith's. The minimum wage is with Ricardo the natural price of labor, a reward which is " necessary to enable the laborers, one with another, to subsist, and to perpetuate their race, without either increase or diminution." Any deviation from this rate, by the operation of supply and demand is called a " market " rate. The laborers are in a flourishing and happy condition if the market rate is above the natural rate, and in a " most wretched " condition if it is below the natural rate. This statement is 1 Rogers' 2d ed., v. i, p. 70. ' Taussig, Wages and Capital, p. 150. 357] CRITICISM 6 1 much qualified by Ricardo later, either in statement or in emphasis, as follows : 1. The " natural " rate is not to be understood as absolutely fixed. The habits and customs of the people make a difference between different nations, and between different periods of the same nation. 2. Notwithstanding the statement of the importance of the standard of life, it is practically ignored in the subsequent dis- cussions on taxation, and the general problems of distribution. 3. Market wages seem to have small interest to Ricardo, probably because natural wages furnished the key to distribu- tion. Revenue nowhere appears as playing a part in the demand for labor. He took into consideration only those laborers who are hired by capitalists with a view to realize on the invest- ment, and so far as market wages are considered, he regards them as determined by the relation of capital and population. In his essay " On the Influence of the Low Price of Corn on the Profits of Stock," Ricardo says that the rise or fall of wages in the stationary state is regulated wholly by the increase or de- crease of the population. In the advancing state it depends on whether the capital or population advance at the more rapid course. In the retrograde state it depends upon whether population or capital decrease with the greater rapidity.' As the income mentioned by Adam Smith was that of the employer, and in his view would exercise influence on wages only so far as it was used to employ domestic servants, the in- come side of Adam Smith's wages-fund would be naturally neglected so soon as writers come to regard the most im- portant case of wages as arising when men were employed for a profit. Neglected it certainly was and, if for the reason stated above, the negligence is justified. But viewing Eco- nomics from the side of production, and production from the 1 Works, p. 379. 62 GERMAN WAGE THEORIES r^cg side of capital, English writers were led away from consump- tion and the demand of consumers as leaders in economic activity. It is at this point that Hermann made a departure from the traditions of the science, and intercepted the paralleJ course of thinking on wages in England and Germany. Cap- ital is repudiated as the source and determinant of wages. The key to the situation is no longer held by the employers but by the consumers. Employers are mere agents, middlemen, who do the consumers' bidding. for a commission. The consumer is the real buyer of labor. All the steps leading to the final product are taken for the final consumer. The true and con- tinuous source of compensation for production is the income of the buyer of the product for his own use. This doctrine has been followed generally by the German economists ; but in England it has not received very strong support. In the first place, Mill attacked its main position in his famous proposition that a demand for commodities is not a demand for labor. Mill thought it important to support this proposition because its contrary was so widely assumed by common apprehension; and because, with the exception of Say and Ricardo, most economists fell into the error in some part of their thinking. Up to Mill's time, however, it formed no integral part of their theories of wages. Although of late some of Mill's reasoning on this point is not accepted, the whole of it passed practically unchallenged for twenty years. In the second place, when Longe and Thornton adopted Hermann's point of view, and tried to persuade their countrymen of its soundness, with some success, if judged by Mill's action, Cairnes submitted the doctrine to a careful analysis and published the results in the form of an elaborate attack in his " Some Leading Principles in Political Economy Newly Expounded." There is something very plausible in the idea that demand for commodities determines the aggregate amount of wealth spent in wages. It is of a kind with the popular conviction 359] CRITICISM 63 that the " extravagance of the rich is the gain of the poor," or that " profusion is for the good of trade.'" The source of the error, as to wages, seems to be the failure to distinguish between general and particular wages, wages of all laborers and those of groups of laborers. The discussions on wages are for the most part grouped about three questions : (i)What is the true source of the quantity of real goods which laborers as a body receive ? (2) What determines the quan- tity ? (3) What determines the share of any particular group ? Let us consider briefly these questions in the order stated. I. It is evident that it is from the total productions of society that ultimately all wages must come. It is also evident that, under our present system, wages cannot absorb the whole of that product. The first difference of opinion appears when the attempt is made to designate the particular part of this total product which furnishes wages, or the habitual form which it assumes as a source of wages. All goods have a career. For some, the career is short, for others long ; some are destined to give direct enjoyment to society, others to help in the process of production. The trac- ing of the career of goods is a comparatively simple process. Under our wage system they are first in the hands of the en- trepreneur class, then in those of the trading classes, and finally in those of the consumers or users. To be sure, some goods suffer destruction by fire and some by accident, while some may revert to the trading classes as second-hand goods ; but if they fulfill their proper destiny, they finally disappear in the users' hands. There is a continual inflow at the one end of the line, and a continual outflow at the other. The complication comes when we attempt to note the causes which determine the posi- tions which classes hold with reference to the flow and ebb of goods, and the relations of the classes to each other as an out- come of the various positions. Could we cause the economic 1 Cairnes, Political Economy, p. 163. 64 GERMAN WAGE THEORIES [360 flux and the social flux to cease for a time while we noted the various positions of goods and classes, we would find some goods just issuing forth, others passing away, still others in all stages of intermediate progress. We should also find all classes of men concerned with the dissipation of goods in the process of what we cJill consumption. There is great diversity in the value of goods thus consumed, as also in the economy and profuseness of consumption. Of these some take no part whatever in the inflow of goods. Of those who do, we distinguish (i) the so-called small pro- ducer who combines his labor with some accumulation in the production of goods ; (2) those who have large accumulations of their own, or that which belongs to others ; (3) those who have little or no accumulation, and are employed by the second class. The problem of distribution is a study of the causes which determine, for final consumption, the propor- tionate assignment of the total productions of society to social classes. And the wage problem, as a part of the question of distribution, so far as the source of wages is concerned, is a double one. ist, To what stage must products arrive before they become the source of wages ? 2d, Into the possession of what class must they come to be such a source ? Some hold that the source of wages is a portion of wealth held by em- ployers in its form of food (capital) ; others that part which the laborers have immediately helped to produce (product) ; still others that part held by dealers of commodities in the form of laborers' consumption goods held for sale, i. e., capital in the hands, not of employers, but of merchants ; and, finally, some regard it as that part of wealth which is, or is about to be, in the hands of the consumers of laborers' product as a money income. Hermann and his followers, of course, are identified "with the last view. II. The second question pertains to the determination of the quantity of real goods going to labor. As men differ in regard to the source of wages, so they differ as to the cause of 361J CRITICISM 65 the amount. Those who look to the employers' capital as the source, think that the state of the arts principally determines what portion of total capital shall be used to employ labor. This determines the sum total that can be divided among laborers. Those who look to labor's product as the source, lay stress upon labor's efficiency or productivity as chiefly fixing the quantity. Here the element of time is important, for in short periods contract may prevent an adjustment to efficiency. A perfect competition on the part of capitalists is also postulated in order that interest may be kept at a mini- mum rate and prevented from absorbing the share of laborers. Those who look to merchants' capital as the source of real wages make the volume of the flow of consumable goods to laborers dependent upon the volume of money wages. Such wages are in general dependent upon employers' means. Hence a rise in wages, other things being equal, can occur only if the directors of industry are able to add to their money resources and enlarge their undertakings. Finally, those who appeal to the income of consumers rest their case upon the assumption of a more or less definite proportion between wages and consumers' income. This is also the point of view of Hermann and his followers. For completeness there ought to be some attempt to distinguish between the power of con- sumption of laborers and that of other classes, and the extent to which laborers are the consumers of their own products. On the most superficial view, it must appear that laborers and their families, constituting as they do a considerable propor- tion of the population, are large consumers of their own pro- ducts. Just in so far as this is true, wages appears as a determinant of itself, and thus we reason in a circle. Her- mann did not escape this kind of reasoning, though Brentano did. ni. Writers on wages have not always distinguished be- tween general wages and group wages. Some have evolved a theory explanatory of the wages of laborers as one body 66 GERMAN WAGE THEORIES [362 opposed to all other classes. They have determined certain principles applicable to the larger problem, and then have pro- ceeded to draw certain conclusions about the wages of groups based upon those principles, without perceiving the change of problem. Others have pursued^the opposite policy. Having perhaps correctly observed the relation of cause and effect in the case of wages of groups, the principles so evolved are likewise used as a solution of the other problem, which is so different. Hermann and his followers seem to be guilty of this last error. They observed that individual employers enter upon industry with a view to gain profit, that they regulate their production by their customers' demands. If demand increases, more is invested; if demand falls, less is invested. This increase or decrease of investment carries with it corre- sponding changes in the amount paid in wages. As individual employers do, all do ; therefore wages depend ultimately upon consumers' demand. If we have regard to a single industry, it seems clear that the investment of capital and the total amount paid in wages follow closely the lead of consumers' demand. There can be little question but that it is effective in distributing the relative amounts of capital over the whole field of pro- duction. Production is for no other purpose than to meet the varying demands of men, and capital is ever on the alert to anticipate, if possible, the growing and changing wants of humanity. There is thus a re-shifting of industry and employ- ment, and wages are sensibly affected, at least for short periods.. However, even here it can scarcely be said that demand determines the amount of investment. What it does is to influence it more or less. These matters are important as throwing light on the determination of group wages. But the problem of general wages is a different one. Here we view income as a whole, and industry as a total. The effectual demand of society is the offer of total income. We are unable to conceive of an increase or decrease of demand without at 363] CRITICISM 67 the same time conceiving an increase or decrease of produc- tion. In the view of Hermann, an increased demand is viewed as a cause of which increased investment and increased pro- duction is the effect. While viewing total demand and total production, increased production must ever be the cause of increased demand. We see, therefore, how unfitted this theory is as an explanation of general wages, although it may throw light on particular wages.' ' See Cairnes, Political Economy, and Taussig, Wages and Capital, CHAPTER IV VON THUNEN JoHANN Heinrich VON Thunen, bom 1783, died 1850, was a Mecklenburg aristocrat who, as a scientific land cultivator, endeavored to put to a test, on his own property, the theoretical conclusions of his economic studies. He is re- garded by the Germans as their most original theoretical economist. As a close student of English political economy he professed to have little confidence in its conclusions; yet he did not succeed in emancipating himself from either the char- acteristic method, or some of the more important results of his English preceptors. There runs through his thinking on the subject of wages the fundamental assumption that neither wages nor interest can rise except at the expense of the other. They are supplied from a fixed amount, and whatever causes a rise in one must produce a corresponding fall in the other. He proceeds, as Smith and Ricardo, did by assuming simple primitive conditions or hypothetical cases. His method is wholly deductive and highly abstract. Thiinen's confidence in future economic peace is disturbed by his belief that the laborer is separated from the results of his productive power.' It was his opinion that, so long as such a state of things lasts, hostility between labor and capi- tal is inevitable and not without justification. Under present arrangements labor does not get all it produces, but there is no reason in justice why it should not. It is not enough to ask what wages are. We must enquire what wages ought to be. ^ Der Isolirte Staat, ii, p. 210. 68 [364 365] VON THUNEN 69 Wages are, roughly speaking, determined by the relation of supply and demand, and under this influence they tend to the standard of life minimum. This point is treated in a most original manner, if we remember that it was written in the early part of this century. Business men will employ addi- tional laborers up to the point at which the last laborer employed produces his own wages ; beyond that they can- not go without loss ; to that point self-interest prompts them to go. Under the operation of competition all laborers of like grade receive the same wages as the last one em- ployed. If at this point all are miserable, what remedy is there ? The undertaker cannot be blamed, for, while he may make a surplus from the earlier laborers employed, to suppose that he will bestow it as a free gift to his laborers is to fail to distinguish between moral obligations and busi- ness principles. A rise in wages without a decrease in the number of laborers employed is not possible, for then the last employed laborer produces less than his wages. Employers must discharge men until wages equal production. On the other hand, rather than remain breadless, discharged men are willing to work at a figure which makes their employment possible. If we suppose an increase in the number of laborers without a corresponding increase of capital and land, wages must fall, for the undertaker can employ additional labor only on less productive objects. If laborers increase, in spite of sinking wages, the only limit to population is the means of sub- sistence. How productive the object is upon which the last laborer is employed depends upon the supply of labor. The greater the supply of labor, the less productive will the capital be upon which the last laborer employed works. To what limit wages may sink depends upon the sum of the means of subsistence. Between the real worth of labor, the supply of labor, and the means of subsistence of labor there is an inti- mate connection. The economists have considered the last two factors only, and have thereby drawn the conclusion that •JO GERMAN WAGE THEORIES [366 Providence has designed for laborers nothing except necessary support during the period of their life/ Such a conclusion can not be admitted, and will be found to be scientifically unten- able when we have investigated the real worth of labor. Von Thiinen complained that Adam Smith's law of the rela- tion of supply and demand as determining wages was dependent upon changes in the national wealth. He desired to discover a law of wages for a persistent condition of society. In such a condition, demand and supply are in equilibrium ; each cancels the other. Since they appear to be inactive, there must be some other law. To the question, what is the natural share of the laborer in products brought forth by him, Adam Smith answers, that which he usually gets. But that which he usually gets through competition is subject to continual change. We must ask which one of all those actually received is the right one, the natural one. Adam Smith did not investi- gate this question.' If we compare von Thunen's conception of natural wages with that of Ricardo's, we find them quite different. Ricardo was the analyst of actual economic facts. In the realm of distribution he sought to establish no reform. Hence he of- fered no criticisms of the social method of awarding shares. To his mind the essential task at that time was to establish, if possible, beyond all question, what the social method actually was. He found it convenient to adopt Adam Smith's distinc- tion between wages which fluctuate in short periods accord- ing to the varying strength of demand for labor, and wages which prevail in the long run and are connected with the de- crease or increase of population. Ricardo called wages nat- ural which enabled laborers under the influence of climate and habit to perpetuate their kind without increase or diminution. Von Thunen's interest in economic questions was different. ' Der Isolirte Staai,\\, p. 86-90. ' Der Isolirte Staat, ii, p. 64. 367] ^ON THUNEN 7I He was not less keenly alive than Ricardo to the importance of a theoretical statement of actual distribution, and in this field he achieved probably as notable success. But he brooded over the miseries of the poor, and sought for the causes in the national economic system. To him a wage which was divorced from correspondence with production was unjust and unnat- ural. In a word, he called wages natural when they were in agreement with justice ; and justice required that a man should be rewarded according to his production. But in seeking the law of wages the interests of both capitalists and laborers must be taken into account. To eliminate the complicating effect of rent, von Thiinen seized upon the idea of the isolated community. He supposes a large city situated in the centre of a fruitful plain. To eliminate unnecessary causes of unequal opportunity, he sup- poses the plain not crossed by river or canal. At a consider- able distance from the city the plain ends in a wilderness which wholly separates the supposed state from the rest of the world. All laborers are equally strong, wise and skillful. The num- ber of laborers remains the same, i. e., there are just enough children brought to maturity to fill the ranks depleted by age and death. The population is also so limited that plenty of land awaits occupation. Hence there is a border where no rent is paid, for rather than pay rent the Bauer would take new land. Conditions on the border determine for the entire com- munity what wages shall be paid, for there wages are not determined by the will of the employer, the competition of laborers, or the means of subsistence, but by what the laborer can himself produce. Such wages are paid throughout the entire community by the force of competition. Conditions on the border also determine interest, since there capital has its highest uses, and being highly volatile, it finds the place of highest reward. Von Thunen was careful to credit as much to interest as belonged to it. Not all that falls into laborers' hands, ostensibly as wages, is properly to be considered as 72 GERMAN WAGE THEORIES [368 such. Nearly all workmen are furnished with equipment of one sort and another, such as implements or tools to assist them in labor, and a part of what they receive is to be ac- credited to interest for their use. In order that labor may not be at the mercy of competition, he supposes conditions under which labor may freely apply itself to unoccupied land. An investigation as to how high wages may be under these conditions will teach us what natural wages are, for here the laborer will get what belongs to him. The total product is divided between two claimants : laborers and capitalists. It will be found that the interests of both are best subserved when the so-called natural wages are paid. The problem, then, is to determine the relation of the rate of wages to the rate of interest. This Von Thiinen at- tempts to do by reducing the efficiency of capital to labor- terms. It involves the most difficult problem of determining the shares attributable to labor and capital out of a product which is the result of the two in co-operation. Before enter- ing upon this discussion, it will be perhaps best to give some explanation of the mathematical terms employed. A represents the wages for the year of a family, including the wife and young children under fourteen years old. These wages are expressed in bushels of rye. To determine how much such a family would consume would manifestly depend upon the number of children. In this investigation it is von Thiinen's aim to find a law for the regulation of wages and rate of interest for the stationary state of society; hence the working population is supposed to be constant. Each family will therefore on the average succeed in raising a suffi- cient number of children to replace the losses by age and death. The necessaries of life, which are required to keep such an average family in labor power for a year, are assumed to be such value as is equal to the value of a bushel of rye. If from the total wages A the necessaries be subtracted, there will be a surplus which is designated by the letter y. Then 369] yON THUNEN 73 A — a +y. That part of the gross product which is left after deducting repairs of all sorts, costs of raw material, and admin- istration, as well as profits to the undertaker as such, is called by Thijnen the " product of labor." This is a technical ex- pression, as evidently the product is the joint result of the co- operation of labor and capital. If we divide the product of labor by the number of laborers employed, we get the amount of the labor-product of one man, which is designated by "p." We now turn to the reduction of the efficiency of capital to labor-terms, and it is necessary to follow our author somewhat closely. If we suppose a capital Q and a wage a+f expressed in bushels of rye, dollars, or any other measure of value, and that Q be divided by a +y, we have as a result an expression for capital in terms of the year's labor of a family, or we have discovered how many years' labor of a family a capitalist with Q capital can employ.' If this labor quantity be represented by nq, then — ^— = nq, and Q = nq {a -t- J'). If a +y be re- garded as equivalent to a unit of capital, then Q = nq units of capital. In case the capitalist lends his capital to an under- taker who employs n laborers, then each laborer is assisted by — = q capital. The product of a laborer employed with a capital q for a year is designated by "/;" p, then, is a joint product, and the problem is to find an equitable division be- tween the laborer and capitalist. If n laborers are employed, the product of all laborers is «/ ; their wages are « (a t-j/); the capitalist has the difference : np — n{a+y')—n{p—{a-\-y'\). The capital employed is nq {a -\-y). If the rate of interest be designated by ., then. = ^(^=I^>=^=:(^. The ^ ng{a+y) q{a+y) laborer's share can now be expressed in terms of labor-product, rate of interest, and capital. ^Der Isolirte Staat, ii, p. 124. 74 GERMAN WAGE THEORIES [370 ^^omz = ^~\^^^y^ is obtained qz{a^y)= p-ia-^y)-, from this is obtained the following: (\. ■\- qz) (a -{■ y) = p ; whence a+y = — - — = laborer's share. The capitalist's share is found by subtracting the laborer's share from the product of labor : / ^ =l±M-L = IM. = capitalist's share. I + gz l+qz I + qz From the above it appears that the relation of the laborer's share to that of the capitalist is as i : qz. This relation may be variously expressed : The reward of q units of capital equals the wages of qz laborers, and the reward of one unjt of capital is equal to the wages of z laborers, or as is subsequently required in the discussion : The wages of one year's labor are to the earn- ings of q units of capital as i is to qz, or the wages of one year's labor are to the earnings of one unit of capital as i is to z. Von Thunen has now succeeded in finding a mathematical expression for the relation of the reward of capital and labor. He must proceed one step further to express the relation of their efficiencies. Since in the production of one and the same product/, a part of the capital may be replaced by labor and vice versa, it appears that each is a competitor of the other. It is therefore in the power of the undertaker who with Q capital hires, say n laborers, to give any desirable value to q by increase or decrease of the number of laborers. The undertaker who knows and follows his interest will raise q to the point where capital-cost and labor-cost are in direct relation to the efficiency of both. Hence the reward of both capital and labor is measured by the efficiency of each.' If the reward of labor is to the reward of capital as i is to z, and the efficiency of labor is to the efficiency of capital as the reward of labor is to '^Der Isolirte Staat, ii, p. 126. 37 1] yON THUNEN 75 the reward of capital, then the efficiency of labor is to the effi- ciency of capital as i is to z. We arrive, then, at the following very important conclusion : When capital and human labor are measured by the same rule, viz., the year's labor of an individ- ual man, the rate of interest, "s," is the factor by which the relation of the efficiency of capital and that of labor is ex- pressed. By this we can reduce to labor terms the co-operation of capital in the production of goods. Furthermore, in so far as land rent does not enter, it is possible by this to express in terms of labor the cost of production of a commodity, and thereby labor becomes a true measure of the value of goods.' The place which the " reduction of the efficiency of capital to labor-terms " has in the general discussion will be more clearly seen later on. Von Thiinen has to exercise constant care that at every step in the process no unknown term shall be allowed to do duty for known ones. He started out to obtain an ex- pression for natural wages. He has obtained an expression for wages under existing conditions with which he cannot rest, for it contains too many unknown quantities. In the expression a +y = \_ the value of a -\-y is dependent upon the value of z, so that to get the value of a +jy we must know the value of z. Now / is not constant, but increases and diminishes with the value of g and is therefore dependent upon it. Upon the value of p depends again the value of y and z. There- fore p, y and z are functions of q. The problem therefore is to find the value of p,y and z for a given value of g.' He then turns to his favorite hypothetical society in paragraph 14, in which he says that it is on the margin of cultivation of the isolated state that we are to find the conditions for the development of the relation between wages and the rate of interest." Here it is possible to be free from the confusion 1 JDer Isolirte Staat, ii, p. 127. '^ Ibid., p. 139. ' Ibid., p. 140. 76 GERMAN WAGE THEORIES [^y2 due to the presence of land rent. Here laborers are free to choose whether they will continue as wage laborers or move to unoccupied land and lay out a property of their own. If laborers are to be kept as farm hands, their total income, made up of wages and interest upon capital required to lay out a farm, must equal the product of labor procurable from a marginal farm which they might themselves have laid out.' Von Thiinen expresses this mathematically. If wages = a +y, product of labor ==/ and the capital required to lay out a small farm = g {a +y) — all expressed in bushels of rye — and the rate of in- terest = s per cent., then that laborers may be retained the following equation must hold: a+y + q{a+y)z=p. From this results :« + r = ^^— ; and z= . , v - I" this ex- 1+ qz' q{a +y) pression under the conditions assumed a, p and q are constant quantities, only y and z being variable. It is of the first im- portance to find the exact relation between y and z, for upon that solution depends a knowledge of the relation between wages and interest.' He then undertakes to find an expression for^ which does not contain the quantity for z. He supposes that a number of laborers form a combination on the margin of cultivation of the isolated state to put into cultivation a new farm. That there may be no disadvantage attached to this farm on account of its size, it is supposed to be as large as the average in the state. The laborers united for this purpose divide themselves into two groups. Group I is busied preparing the land for cultivation, erecting buildings, etc. Group II is composed of men who for the time being remain as laborers for hire, and by means of the surplus which they have above that required for their own support, offer the means of support of Group I. Under these conditions, says von Thiinen, in the preparation of the farm, none of the existing national capital is consumed. The sum of those ^Der liolirte Staat, ii, p. 141. *Ibid., p. 142. 373] VON THUNEN y-j objects of value after completing the farm is as great as be- fore its completion. The new farm has cost labor, and noth- ing but labor/ These two groups of laborers have really devoted their surplus to the production of this farm, and the farm may be spoken of as their invested capital, the interest of which must come from the future products of the farm. Groups I and II are called throughout von Thunen's discussion " capital producing laborers." Now the question occurs, how shall the wages of farm hands be de- termined? Von Thiinen answers that it must be sufficiently high so that the surplus of a laborer put out at interest will equal the interest of a " capital producing laborer ;" for if this were not the case the laborers would immediately go to capi- tal producing. It is the interest of each, both laborers and capitalists, to get as high a return as possible, but there is no opposition between the two classes. In economic life, as we know it, if efficiency is not afifected by changes in wages, capi- talists' interests are promoted by lowering wages; but, under the simple conditions which von Thiinen supposes, this does not follow. A^ will be more clearly seen later on, the follow- ing question is to the point: what rate of wages can capitalists pay and draw the highest rate of interest, supposing the effi- ciency is not considered, and that capitalists were to have the same rate of wages when they were producing capital ? To show what he means by this question, and also as an aid in the solution of the same, it will be necessary to recur once more to his use of mathematical symbols, n represents the number of labor families whose continuous labor is required to culti- vate the farm after its preparation, nq represents the number of laborers in Group I. In this expression is included the co- operation of capital.'' A laborer employed with q capital pro- duces /, and the product of n laborers equals np. Group I has in the course of the year consumed anq bushels of rye. 1 Der holirte Staat, ii, p. 151. ' Jbid., ii, p. 152. 78 GERMAN WAGE THEORIES [374 Since Group II devotes its surplus to the support of Group I there are as many laborers in Group .II as the number of times that y, the surplus of each man, is contained in anq, the amount consumed, hence the expression — - . The whole number of " capital producing laborers " then is nq + — = nq —. The entire wage expense for farm cultivation is n{a-\- y). If we subtract this outlay from the total product np we have np — n{a-\-y') = n{^p—\a + j/]). It is the yearly pro- duct of the farm, which belongs to nq — and is their profit, or interest on the capital invested. To find each man's share we only need to divide the farm profit by the number of owners. Therefore -[a+j^])jy -| _ ^ {py\-ay-f ) L ^C^+JJ') J g{a+y) =q [a +y) {p — a—zy)dy — {j>y — ay — r') qdy = o therefore (a +y) (p — a— 2y) =py — ay —f ap — d — zay-\- py — ay— 2y =py — ay—y^ ap — d — 2ay — zf = — y y + 2ay = ap — d? {a-\- yf = ap a+y= V ap Expressed in words this means that it is in the interest of capitalists that wages be equal to the square root of the prod- uct of the necessaries of life and the product result of labor, all expressed in some common measure. Such a wage, not determined by supply and demand, or springing from the necessities of the laborer, but from the free determination of the laborer, von Thunen calls natural wages.' This discussion, so far, aims to show that it is in the interest of the " capital producing laborers " that wages be Vap. If it can be shown that laborers themselves receive the highest amount as interest upon the investment of their surplus when wages are Vap, the claim that it is the natural wage has some reinforcement. He proceeds to show this in the following manner : According to a former expression (see p. 76) (i + qz) (a + j) =p, whence a +y~ — f — , and y — — ^ a. Were \-r qz 1+ qz a workman to loan at interest his surplus _y, or its equivalent p fi — i a, his total return would amount to — f- az. 1+ qz 1+ qz Now what rate of interest will make this amount the largest? ^£>tr IsolirU Staat, ii, p. 157. 377] ^ON THUNEN 8 1 V (Zi) — €L The differential calculus yields for z the value — -- — . If ap P we substitute this value of z in the equation a-\r y= , -l „, > P wehavea+^= — = ap — vap — a= , ,— r — V ap. Hence I -^ — a+vap — a ^ aq it appears that when a laborer receives Vap wages he receives the highest return on his surplus invested, and his interest coincides with that of the " capital producing laborers " when wages are at that figure.' The critics of von Thiinen may be roughly divided into two classes. First, those who deny the validity of the formula because of the unreality of the assumptions upon which it is based. Secondly, those who impeach the consistency of his mathematical reasoning. The second class is more worthy of attention, because a mathematical criticism requires a pro- founder study and clearer understanding of the author. Roscher thinks that we cannot place so high a value upon the law as von Thiinen does, for it could hold only where the severe struggle between capital and labor does not exist. In young agricultural colonies, where fruitful soil exists in super- fluity, where every laborer can save a surplus, where there are no capitalists in the narrow sense, and all the laborers are nearly alike, and, furthermore, colonies where perhaps no in- dustry exists that requires large capital or superior labor, there a wage of •\/ap might be natural." Schafifle takes a similar position when he says that the law is valid only for a hypothetical economy. It presupposes an unchanging tech- nique, a mere replacement of the number of laborers, a constant price for grain, and other fictions which suppose variable amounts for constant. Especially does he regard the hypothe- 1 Der Isolirtt Staat, ii, p. i6o. ^Geschichte der NationaVdkonomik in Deutschland, p. 896. 82 GERMAN WAGE THEORIES [378 sis of a constant number of laborers as in reality no basis for natural wages.' Likewise Lehr objects that in the formula the number of laborers who compete with each other and press down wages plays no part. But (/) the product will be affected by the number of laborers. With a growing popula- tion the amount of land not yet occupied becomes continually smaller and less productive. Under a given condition of technique, the transference to more intensive operations yields to the last laborer less and less. The more / approaches a in amount, the more does the formula lose its significance. If p = a, then the laborer can lay up nothing. Objections as given above are shared by many other writers, as Leymarie, Mangoldt and Mithoff. Dr. Joh. von Komor- zinski ' has more recently and in greater detail pointed out one of von Thiinen's limited assumptions which is worth noting by itself Von Thiinen had argued that it was for the interest of the laborer that his wages should be at such a point that the interest upon the investment of his surplus be as high as possible. This Komorzinski clearly points out would not be true for all laborers. The laborer has two sources of income: wages, and interest on savings. He desires that with a given effort the total income be as large as possible. The relative importance to the laborer of wages and interest on savings de- pends upon the quantitative relation which each has to the whole income. A laborer who is just beginning to save de- sires that his wage be as high as possible. The rate of interest upon his small investment is a relatively unimportant matter to him ; while the laborer who has saved much during a long period may regard the amount of his wage as a matter of com- parative indifference. His chief source of income being interest upon invested surplus, he is led to desire a maximum rate. If ^Das Gesellschaftliche System der Mtnschlichm Wirthschaft, 1873, p. 440. ^Zeitschrift ur Volkswirthsehaft, Socialpolitik und Verwaltung, B. iii, Heft i, p. 27-62. 379] VON THUNEN 83 von Thunen's argument is to be valid, laborers must have saved an equal length of time and an equal amount. These objections are for the most part only repetitions of von Thiinen's stated assumptions, and we cannot suppose that he is taken unawares. Ricardo assumes for the economic world at large conditions which were familiar to him on the stock exchange, and upon these he developed principles of rent that might have been more accurately developed if he had been more familiar with farm economy. Subsequent thinkers have had to make the necessary corrections. Ricardo's assumptions were not so violent as to belie his observations, for he really thought his assumptions, in general, were true. This cannot be said of von Thiinen. He did not attempt to develop princi- ples of banking investment based upon farming experience. Had Ricardo written on the exchange he would have traversed paths familiar to him. When von Thiinen wrote on farming he wrote accurately. He was a practical farmer, as well as a scientific thinker. The world of his assumptions and that of reality are too far removed from each other for us to suppose him ignorant of the radical difference between them. He is con- stantly drawing contrasts between reality and the isolated state. He has a different law of wages and of interest for each. How shall we explain his confidence in a law based upon conditions so far removed from the real world and so lacking in completeness ? Only on the assumption that he regarded present conditions as unnatural, and the wage of the present order as an unnatural wage. He said that the present regime was likely to result in the starvation and misefy of the labor- ing classes. The present system must therefore lack equity. He professed to have investigated the relation of wages and interest from several standpoints, and to have found that, when wages were at "^ ap, they agreed with the nature of man, and of the physical world.' He regarded his formula as a foot- ^ Der Isolirit Staat, ii, p. 206. 84 GERMAN WAGE THEORIES ["380 rule by which to judge whether a wage were at once natural and righteous. It was, therefore, to express a condition that in his opinion ought to exist, a goal which laborers ought to strive for, and one that employers and society should help labor to reach. We cannot but admire the spirit of von Thiinen, who, in mediating between the extremes of the adherents of the " iron law " and those of the socialists, endeavored to lay a scientific foundation for the elevation of mankind. That he does medi- ate is shown by an inspection of the formula. If/ were equal to a, then, according to the equation, wages would equal the necessaries of life, and wages would absorb the entire product. But with von Thiinen, / is always greater than a -\-y. Wages then would be above the necessaries, but below the total pro- duct. Most men regard this as just. Our admiration of his spirit, however, must not blind us to the faults of his work. A man may love his neighbor, and may give him a formula by the realization of which in life, he may be landed in a state of comfort and right economic relations with his fellows. But if that formula can be realized only in a state of society far re- moved in nature from the present, and if that state, in addition, is so primitive and simple as to preclude the social complexi- ties of modern life, the author of the formula may not com- plain if he is rejected as an unsafe and impractical social guide. Such is the position to which von Thiinen is reduced by this method of criticism. The second method of criticism is quite as important in re- sults, assuming the points well taken, because it discredits the mathematical reasoning by which the formula is evolved. The method of procedure is to show that von Thiinen treated as constant or known some quantity which in reality is vari- able or unknown. Among the first to do this was Falck.' ^ Falck, Die Thiinensche Lehrt vom Bildungsgesetz des Zinfussfs und vom naturgemasstn Arbeitilohn. 38 1 ] VON THUNEN 8$ He says " the formula Lc — \ — yjiy ^33 obtained from the q[a+y) n\_p-{a^y)\ formula nq(a-\-y) . The numerator denotes the rent J' from the farm, the denominator the number of those among whom the rent is divided. But is the f of the denominator really equivalent to the j of the numerator ? The jy of the numerator denotes the surplus that is paid to the laborer at this particular time ; but ihef of the denominator denotes the surplus of wages that existed before the laying out of the farm. Only by placing the two j's equal to each other has it been possible for the rent (or interest) to obtain a maximum value at a definite rate of wages.'" This would be a just criticism if it were conceived that von Thiinen was dealing with two widely different economic regimes at the same time. But a sympa- thetic study of von Thiinen makes it fairly clear that he regarded the economic conditions under which both Group I and II worked as identical. He assumed that natural wages already existed in the isolated state ; and as a means of discovering the mathematical expression for such wages, he supposed that a number of laborers, to whom it is a matter of indifference whether they labor for wages or cultivate a marginal farm on their own account, combined to lay out a farm.^ If the social arrangements are the same in both cases ; if the society is sta- tionary, as the isolated state was conceived to be ; if men were equal in skill and the standards of life were the same among them all, then the necessaries or life subtracted from an equal wage would have equal surplus, and the j/'s would be equal. Thus Falck's objection falls to the ground. Komorzynski in the article referred to above also attacks * Quoted by H. L. Moore in his Von Tkiinen's Theory of Natural Wages. See Quarterly Journal of Economics, v. 9, p. 389. » Q. J. of Econ., V. 9, p. 391. 86 GERMAN WAGE THEORIES [382 the formula, but in a somewhat different way. He inquires whether a general relation between the rate of interest z and wage surplus y exists which finds its proper expression in P — (^ "I" y) z = — r— ; — r-- He defines p as the exchange value of the product after the deduction of all outlays except wages and interest on capital, q [a 4-j/) expresses the value of the capital invested. ^ = the number of year's wages which equals the value of the capital. The question now relates to the pro- priety of treating p as constant, and of valuing capital in the manner indicated. That/ should not be treated as a constant must be evident, says Komorzynski, from the fact that / is a dif- ferent quantity in every different process of production. More- over, it is straining matters to suppose / the same when great changes may occur in wages and interest. Likewise the value of the capital, a complex of goods, is treated as constant, al- though the formula for wages, a changeable factor, is used to ex- press its value. It is difficult to regard capital as having a static value when it is itself a dynamic entity. The goods of capital become in turn products, and other goods take their place, yet the value is conceived as the same. Products of one process find application as capital in some other production process, in all of which cases von Thunen conceives the value of capital as dependent upon the rate of wages. Von Thunen does not seem to have applied a consistent theory of price determination. It follows that, if p and q {a -f-j) vary by no known law with every different process of production, ^=^- — ■—-. — v- cannot q(a +y) express a constant relation between interest and surplus in all industries. It is unsuited to express a general relation, how- ever well it may represent the relation between wages and in- terest in specific industries. Komorzynski errs in two particulars : first, in not remember- ing the static conditions of the isolated state ; secondly, in dis- regarding the author's definition of p. Von Thunen nowhere 383] yON THIJNEN 87 has / represent value. If he speaks of mining,/ stands for so many pounds of silver; if of agriculture, then so many bushels of rye. It will be seen that this error vitiates the argument of the example upon which he relies to prove his position. He says, " If the rate of interest is 5 per cent, and the rate of wages 400 florins, then, in three different forms of production, these equations may exist : „ T 5 2500 — 400 , , I. -^^— = -^ — , where * -= 2,500 and g — 105. 100 105 X 400 ' ^ >^ 1 J «TT S 1200 — 400 , ^ J II. -^ — , where * = 1,200 and q = 40. 100 40 X 400 r > " III. — ^ = — — , where fi = 460 and q= %. 100 3 X 400 ' ^ ^ ^ ^ " But if {a + J/) should rise from 400 to 450 florins, then the following unequal rates of interest would result : .'); and by substitut- ing for {a + j) in formula A obtain the value of z. The form- ula which enables him to find the independent expression for nlp-{a^y)-\ (a +_j') is nq {a +y) . In this formula, which we shall call formula B, all the quantities are assumed as known excepting j. But how did von Thiinen obtain the quantity nq ? He (von Thiinen) says : Suppose ' the laying out of the farm required the year's labor of nq men .... Unquestionably in order to provide a new farm is needed not only labor, but also the use of capital; (but) according to § 13, we can reduce the co-operation of cap- ital to terms of labor, and thus express the costs of laying out the farm entirely in terms of labor-' When we refer to § 1 3 to see how the reduction is to be performed, we find that it is done by means of the rate of interest. The fallacy in the argument is evident. Thunen's whole procedure is a mere begging of the question. His problem is to find the values of y and z in the formula A ; and, to solve the problem, he undertakes to find an independent expression for {a + y) by means of formula B, and by substituting for {a +y) in formula A obtain the value of z. But, in order to get the quantity nq in formula B, he assumes that z is known. If, however, z is known, then, according to formula A, y is known. Thiinen undertakes to find the value of the unknown quantities y and z ; and, in attempting to solve the problem, he uses the very quantities that he wants to find 385] VON THUNEN 89. as known quantities.'" This expresses in the clearest possible manner Prof. Moore's position. It is a position which appears unassailable. I can discover no flaw in his argument ; his study of von Thiinen has evidently been thorough and candid. Of von Thiinen's critics and commentators he seems to me to be the best informed on the author's fundamental ideas. He was the first adequately to grasp the true limitations of the isolated state ; to note the true difference between the dynamic and static conditions of von Thunen's problem. A proper emphasis on the last mentioned point has enabled Prof. Moore successfully to defend von Thiinen against those who have not adequately comprehended him. This same insight has enabled Prof. Moore to hit upon the real weakness of von Thunen's work, and to show that, after all the laborious work on the isolated state, the conclusion is worthless. In two particulars, then, we find von Thunen's formula for wages unsatisfactory : First, assuming the conditions of the isolated state as admissible, the formula is not obtained by a proper method. Secondly, if the formula were properly ob- tained, it would be useless on account of the extreme limita- tions of the isolated state upon which the formula is based. If the results based upon the isolated state may not be accepted, and it is found necessary to set aside that part of the discussion which relates to wages as of slight value, it will not be denied that there are some things of real interest in his treat- ment based upon the objective economic world. By many years von Thiinen anticipitated a theory of prevailing wages' that was independently developed and made known to the world by Professor J. B. Clark — a theory which is quietly finding its way into the pages of economic works, and becoming a sort of common property with almost no knowledge or acknowledg- ment of its source. As will be seen, however, von Thunen found slight comfort in the theory for the future of the race. 1 Q. y. of E., V. 9, p. 405. ^Der Isolirte Staat, ii, p. 178-193. go GERMAN WAGE THEORIES [386 He pointed out that an undertaker will not employ additional laborers unless they earn for him at least as much as he pays them. If the point of equivalence between return and wage- payment has been reached, then a rise of wages with a station- ary value of product (i. e., output of laborers) brings about a decrease of laborers employed, and, as a result, a decreased output. Further, an increase of value of product with station- ary wages yields the opposite result, viz., additionally employed labor with an increased output. Since it lies in the interest of the undertaker to increase the number of his laborers so long as by their employment a net advantage accrues to him, the limit of that increase is reached when the output of the last laborer employed is entirely absorbed by his wages. The wages, then, of the last laborer employed must about equal his output. But these wages are normal for all laborers of like skill, because for like service unequal wages cannot be paid. Employing the term " marginal " for " last employed," we reach the following law : wages are determined by the product of marginal laborers. Von Thiinen did not discuss this doctrine in detail. Much was left to the easy acquiescence or imagination of the reader. For instance, one feels the lack of scientific explanation of the true significance of marginal employment. That von Thiinen himself recognized the wide field ofresortforthe unemployed in the marginal uses of capital can scarcely be doubted, other- wise he could not have assigned so important an agency to it. That the theory attracted almost no attention among thinkers, who must be supposed to have read the work, may be attrib- uted to its fragmentary treatment. As it stands in von Thiinen's pages the theory is a digression. Von Thiinen laid comparatively no emphasis upon the matter, because he was not primarily interested in the statement of the law of present wages. He was far more concerned with the discovery of a law of distribu- tion, the realization of which should secure to the laboring class wages adequate to a reasonably high level of life. He 387] VON THUNEN 9 1 was convinced that the present system did not do this. It was not enough for him if the wages received were equal to amount produced. More important was the inquiry: Are laborers secure from misery and want ? After stating the above theory of wages, he proceeds by means of the theory to correct some misapprehensions in re- gard to the labor problem. The socialists deny that one man, whatever his skill may be, should receive as much, or more, for an hour's work as another man receives for twelve hours. But, says von Thiinen, it is idle to complain of an undertaker who pays his superintendent a superior reward. He pays it simply because the overseer's product at least equals his wages. The socialists' scheme of using labor time as a measure of wages is a dream. The misery of the laboring class cannot be laid to the fault of the " entrepreneurs," for they cannot pay more to labor than labor is worth to them. If some one objects that the earlier employed laborers produce more than they receive, and that thus the conductor of industry has a surplus at his disposal for higher payments which, if he withholds, makes him responsible for the laborers' lot, it is to be said that such an objection shows a confusion of moral and business princi- ples. If one undertaker alone did what is here suggested he would be driven out of business by his competitors ; and, if a nation did this, it would suffer by foreign competition. It may be laid down as an absolute principle that no laborers should be employed whose output does not cover the cost of their employment, otherwise the wealth of society, which ought to be increased by the labor force of a nation, would be by it di- minished. No, the misery of the laboring class may not be remedied by an appeal to the sense of duty of the rich, but must be met in some other way. Von Thiinen proceeds to show by means of this law of wages that under the present system the fate of the laboring class may be a melancholy one. There seems to be no escape from the main conclusions of the theory. If we suppose wages to 92 GERMAN WAGE THEORIES [,88 increase, without a decrease in the number of laborers, the last laborers employed do not earn their wages. Employers will then discharge men till the last one retained earns what is paid to him. Thereby many laborers are made idle, and rather than starve they will be willing to work for the old rate. Hence under these circumstances no rise of wages can occur. If, on the other hand, the laboring population should increase, while capital and land remain constant in amount, then the new laborers can find no employment at the present rates. This is plain from the fact that, since this wage already absorbs the entire product of the marginal laborers and every addi- tionally employed laborer produces less than the one previously employed, the hiring of the new laborers at the present rate involves a loss to the undertaker. It follows that the new laborers can find employment only at a lower rate. If addi- tional population makes necessary the employment of labor upon less and less productive objects, wages must continue to fall till the limit of subsistence is reached. The increase of population under these circumstances, bringing its attendant evils, seems, however, to von Thiinen a certainty. But the evil, he thinks, will not fall upon all indiscriminately. He holds to the doctrine of the salvation and survival of the fittest. By constitution men differ in soundness and skill. By reason of life's changes men's industrial fitness differs with age. Hence if there is a surplus of population, only the healthy, the most skillful, the most efificient and those in the prime of life will be retained. The old, the decrepit, the weak, the inefficient will be industrially left behind. We may thus approach conditions in which the only relief from actual suffering is an appeal to charity funds. Reckless increase of population is an evil from which even good harvests may not rescue us. Von Thiinen is haunted by the suggestion that prosperity (economically) gives well-being, well-being overpopulation, and over-population misery; and he asks whether there is no escape from this vicious circle. Has Providence designed that as the earth be- 389] y'O^ THUNEN 93 comes inhabited, the future should become darkened by the vision of increasing misery? He thinks there must be an escape. Providence is not so cruel ; but clearly to define the conditions whose fulfilment will ensure happiness to men, is a problem with which he cannot attempt to deal. CHAPTER V THE SOCIALISTS What is often called the pessimistic side of Ricardo's eco- nomic ideas, viz., the side which rests wages upon some neces- sary demand on the part of laborers, reached its highest de- velopment in the socialistic view of wages. Marx," like Von Thiinen, was dissatisfied with a simple appeal to supply and demand as an explanation of wages. According to him it ex- plains nothing but wage changes. " The price of labor at the moment when supply and demand are in equilibrium is its natural price determined independently of the relation of supply and demand, and how this price is determined is the question at issue.' His treatment of wages is a unit with the treatment of the value of commodities. " That which deter- mines the magnitude of the value of any article is the amount of labor socially necessary for its production.'" The value of a commodity being determined initially by conditions of pro- duction, it is put into the course of trade or circulation in order to realize upon it, during the process of exchange, a surplus value. Commodity is exchanged for money, and money for commodity, so that with each transaction an increase of value or surplus is exacted. If it were otherwise, the exchange would not take place. A similar process, says Marx, occurs with respect to labor. To make this point clear, a distinction is made between labor-power and labor. By labor-power, or capacity for labor, is to be understood the aggregate of those mental and physical capabilities existing in the human being ' The references to Capital are to Sonnenschein's edition. " Capital, p 548. » Ibid., p. 6. 94 [390 39l] THE SOCIALISTS 95 which are exercised whenever there is produced a use value of any description.' Labor is labor-power in use.' A laborer is labor-power in action. The value of the two may be, and usually is, quite different. The value of labor-power is the price of labor on the market, or wages. The value of labor is the value of labor-power when it is embodied in a product ; and that value must be greater than the former, as a rule, or the capitalists would not deal in labor. At one point in the discussion, Marx sees that the price of labor-power will be fixed by the bargaining powers of each party to the contract. He also says that the minimum limit of the price of labor-power is determined by the value of the commodities for consumption, which are required to renew labor energy and to renew the supply of laborers from fresh generations.' But in his further treatment he assumes that wages will not be much above this lowest limit. He does say that if it falls to this minimum it falls below its real value, for then it would exist in a crippled state. " The value of every commodity is determined by the labor time required to turn it out so as to be of normal value."* The method of converting the value of labor-power into the value of labor and thus securing a surplus value, is the kernel of Marx' severe indictment against capitalistic production. Assuming that the product of six hours of labor almost covers the cost of the maintenance of labor, or wages, the capitalist class is guilty of wrongful appropriation of all values created in the remaining hours of the working day. This analysis of the industrial situation has considera- ble enforcement in Marx' historical account of movements to secure a shorter legal working day. Such movements have usually encountered the united opposition of the employing class. The inference is easy on a superficial view ; it is be- cause employers dread a curtailment of a surplus which they 1 Capital, p. 145. ^ Ibid., p. 156. ^ Ibid,, p. 152. ^ Ibid., p. 152. g6 GERMAN WAGE THEORIES [302 have marked as their own. Marx' accumulated mass of evi- dence from the English Blue Books as to the barbarously long hours of labor of men, women and children, exacted in the early history of English manufacture, constitutes some of the most tragic chapters of history. His account is admirably calculated to enlist a lively sympathy for the innocent and almost helpless class of wage earners, and at the same time calls forth deep resentment against the powerful capitalists whom we are led to regard as heartless and rapacious to the last degree. The real point made here by Marx is that, as machin- ery has increased the efficiency of labor to the extent of en- abling a worker to accomplish as much, say, in four hours as could formerly be done in ten, the hours of labor in a day have not been reduced in proportion. It must not be lost sight of, however, that hours of labor have been materially shortened as society has become ad- justed to machine and factory conditions of production. Where the factory system has developed most completely the hours are not so long as to excite pity. The condition of things in this respect under the domestic system, and in the early factory period, as well as those where older forms of production still survive, is far less favorable than in the fully developed factory system. In the second place, physical productivity of capital may not necessarily be value productivity. Under modern conditions laborers cannot, and ordinarily would not, desire to be paid in the commodities of their own making. They prefer payment in a universally ac- ceptable commodity representing some proportionate value of their product. The working man is interested in the value of his total product, not in the number of pieces turned out. The figures commonly employed to show the enormous increase of productive power by the use of capital nearly always fix the attention upon the physical facts of the case, and the result is sufficiently startling. But if comparison were made only be- tween the values of the product with and without machinery, 393] ^^^ SOCIALISTS gj a different impression would result, especially if account were taken of all the labor involved in the production of the capital. Those who read the earlier portions of Capital and not the later are apt to get erroneous notions of the amount of exploitation of laborers which exists according to socialistic conceptions. If six hours of labor are sufficient to support the worker, but the employer forces him to add four or six hours more to each •day's labor for the employer's special benefit, an injustice is apparent. But if from the product of the additional hours, all capital which makes possible this large production for the laborer, must be replaced, and all losses incident to capitalistic risk must be met, the amount remaining over as a true surplus value on a priori grounds may not appear great. Marx does not ignore replacement of capital. " Whatever the form of the process of production in a society, it must be a continuous process, must continue to go periodically through the same phases." " When viewed, therefore, as a connected whole, and as flowing on with incessant renewal, every social process of production is, at the same time, a process of reproduction." ' The very condition of production with the aid of capital, whether the economic organization be the so-called " capital- istic " or socialistic, requires that a large share of the annual income or social dividend be reconverted into means of pro- -duction, or in other words, that it be devoted to the service of replacement of capital whose energies have been transmitted into products of a lower degree, to use Menger's conception. Marx has devoted much space to show the process of the flow of products and the conversion of apart of this flow into capital. And there is much in that part of his work which will repay diligent study. However, Marx regards even the replacement of capital to be as much an exploitation as is the personal consumption •of the capitalist. If we suppose that a capitalist has made an investment of a certain sum, and yearly devotes enough of the 1 Capital, 1887, p. S77-8. gS GERMAN WAGE THEORIES [3^4 product to replace the yearly wear of the capital, and consumes the rest, it will be but a few years when he will have consumed a value equal to his capital. Now, the capitalist thinks that he has consumed the product of unpaid labor, says Marx, and that he has kept his capital intact. But that is not Marx' interpretation. In fact, the capitalist has consumed his own capital, which he may have himself produced, but has appro- priated surplus value without payment to the amount of his original capital. Thus replacement is an exploitation.' Of special interest is Marx' conception of the relation be- tween wages and product, as well as between wages and capi- tal. This relation is first indicated by an illustration.' A peasant, who is liable to do compulsory service for his lord, works three days for himself and three on the lord's domain. Under these circumstances the peasant reproduces his own labor fund. If the lord appropriates to himself the land and other means of production of this peasant, the latter will be obliged thenceforth to sell his labor-power to the lord. Under these circumstances, he continues to work three days for him- self, the time necessary to obtain his necessaries, and three days for his lord. "As before, he will use up the means of production, as means of production, and transfer their value to the product. In the same way, a definite portion of the pro- duct will be devoted to reproduction [replacement]. But from the moment that the forced labor is changed into wage-labor, from that moment the labor-fund, which the peasant himself continues as before to produce and reproduce, takes the form of a capital advanced in the form of wages by the lord." The economists of Marx' day regarded wages as advanced from capital, but Marx regards wages as paid from current pro- duct. He says that it is only here and there on the face of the earth that what laborers receive as wages is not what laborers have already themselves produced.' He complained of classical • Capital, p. 582. '^ Ibid., p. 580-I. ^ Ibid., p. 581. 395] ^-^^ SOCIALISTS gg economy, that it always loved to conceive social capital as a fixed magnitude of a fixed degree of efficiency.' As will be seen in the subsequent treatment, Marx regards the capital of a country as constantly changing in quantity, and in the relative proportions of its elements. Upon these two facts — accumulation of capital and the change in the constitu- ents of capital — rests the fate of the working classes. As a first step in the argument, we must make clear what Marx meant by the terms constant and variable capital. In the pro- cesses of production, he desired to place in clear light the pre- cise part which labor performed, as well as that of capital. It is a common observation that, under ordinary circumstances, values in means of production are perpetuated in their products. Of this there may be more than one explanation. One com- monly entertained is that capital possesses the capacity in itself of erecting new values which take the place of those values dissipated while capital is performing its industrial functions. This view Marx rejects. Another explanation is that capital has no such capacity, but is a dead, inanimate, passive complex of things upon which labor operates. Capital can, therefore, create no values of any sort.^ But human labor possesses the capacity to transfer values from capital, in which values already exist, to products. And this labor does unconsciously and inevitably while it is performing another function as well. It is a common observation of economic life that products possess greater value than is to be found in their means of production. The true explanation is, according to Marx, that while labor is transferring old value, it is also creating new value. Thus labor performs a double function in the same act. In the process of production itself, or that part of the process which is represented in the transferring of value, no quantitative change in value occurs. That part of capital which is repre- sented by means of production, by the raw material, auxiliary ^Capital, p. 622. ^Ibid., p. 383. lOO GERMAN WAGE THEORIES [356 material, and the instruments of labor, is called constant capital. On the other hand, that part of capital represented by labor- power does in the process of production undergo an alteration of value. " It both reproduces the equivalent of its own value, and also reproduces an excess, a surplus-value, which may itself vary; may be more or less according to circumstances. This part of capital is being continually transformed from a constant to' a variable magnitude, and is called variable capital." ' Marx opposes the idea of Adam Smith and Ricardo, that capital in its ultimate analysis may be resolved into advances to labor. All surplus value is divided into means of produc- tion, and the direct support of laborers. It is illogical, he de- clares, to admit, as Adam Smith did, that in the case of the individual capitalist, all capital does take these two directions, and then deny it for the capital of society." Marx does not minimize the importance of capital as a pro- ductive agent. He shrinks from conceiving it as possessing power, preferring to regard capital as loaded with value trans- ferable by labor. Although he is usually an unsparing critic of the capitalist class, at times he is forced to give capitalists credit for the social service of having forced the human race to produce and develop its powers. Without the capitalist, society might not have created the material conditions which alone can form the real basis of a high form of society, and in which the full development of every individual forms the ruling principle.' But in performing this service, the capitalist has exalted the principle of saving. Accumulation has come to be the law and the prophets. In Marx's view, at the bottom of all accumulation is the propensity and power to withhold from labor a part of its just share of social product. But capitalists are charged with having sometimes forced conditions which result in adding to their profits at the expense of laborers' necessary support. Wages are forcibly reduced below the value of labor power. '^Capital, p. 191-2. '^ Ibid., p. 601. ^ Ibid., p. 603. 397] "^^^ SOCIALISTS loi A second factor in accumulation is relief from the necessity of furnishing capital in proportion to labor employed. Any given capital is made sufficient by requiring longer hours in factories, by day and night shifts in extractive industries, and by the reliance upon nature in agriculture as an immediate source of greater accumulation. The general result is that " by incorporation with land and labor, capital acquires a power of expansion that permits it to expand its accumulation be- yond the apparent limits of its own magnitude.' But the most important factor in accumulation is the pro- ductivity of social labor. All nature works in the interest of the capitalist. While machines are wearing out, and having their value transferred to products, science and technology are making their advances, the results of which are incorporated in the new machines without additional burden to the capitalist.' Then, too, labor's capacity to transfer value from capital to product in the very act of creating new value, is nature's gift, since it is done unconsciously and without merit on labor's part. Capital in this case is nature's beneficiary. The same fact becomes evident if we regard capital from another stand- point. As capital increases in quantity, the difference be- tween fixed and circulating capital (to adopt an old classifica- tion, but excluding wages from circulating capital) increases. That is to say, the number and mass of those things which yield up their utilities but slowly, constantly increase in pro- portion to those whose utilities are transferred at once. Now, just so far, says Marx, as those things which lose their value piecemeal, are " wholly employed, but only partially consumed, they perform the same gratuitous service as natural forces, water, steam, air, etc. This gratuitous service of past-labor, when filled with a soul by living labor, increases with the advancing stages of Accumulation." ' This general idea has further enforcement by a course oi ^Capital, -p. bl6. «/«unn, Jr., State Librarian (Ind.); Prof. Elliott (Minn. U.); R. P. Faikoer (Penn. 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