.,JL-^ 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 HISTORY OF THEIR DEVELOPMENT BY JAMES W. CROOK, Ph.D. Sometime University Fellow in Economics Assistant Professorjof Political Economy, Amherst College COLUMBIA UNIVERSITY Beta) ^nxk 1898 COLUMBIA UNIVERSITY Faculty of Political Science. Seth Low, LL. D., President. J, "W. Burgess, LL. D., Professor of Political Science and Constitutional Law. Richmond Mayo-Smith, Ph.D., Professor of Political Economy. Munroe Smith, J.U.D., Professor of Comparative Juris- prudence. F. J. GoodnOW, LL.D., Professor of Administrative Law. E. R. A. Seligman, Ph.D., Professor of Political Economy and Finance. H. Li. Osgood, Ph.D., Professor of History. "Wm. A. Dunning, Ph.D., Professorof History. J. B. Moore, A. M., Professor of international Law. P. H. GiddingS, A.M., Professor of Sociology. J. B. 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For further information address Registrar. :U) 6 7i"" II GERMAN WAGE THEORIES A HISTORY OF THEIR DEVELOPMENT STUD/ES 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 HISTORY OF THEIR DEVELOPMENT JAMES W. CROOK, Ph.D. Sometime University Fellow in Economics Assistant Professor of Political Economy, Amherst College COLUMBIA UNIVERSITY JSctD porfe 1898 o \ iriLJ t Vd TABLE OF CONTENTS PAGB 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 IO7 (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 \lOA^ 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-Gaevernitzs has described the methods ^ List, National System, p. 53. * Hobson, Modern Capitalism, p. 73 ff. „ Grossbetrieb, p. 34, 305] 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 fi'aternity 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 ^ Quoted by Hobson, Modern Capitalism, p. 78. * Quoted from Social Peace, p. 113, by Hobson, p. 78. IQ 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 1 1 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 some 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. "^ StaatswirthschaftsleJire in Brief en, 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).4 V. Thiinen 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.s 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, * Grundsdtze der Volkswirshschaftslehre, 4lh ed., 1841, p. 201. * Ibid., p. 252. ' Grundsdtze der Oekonontisch-politischen oder Kameralwissenschaflen, 1820, 2d Ed., § 186. ^ Staatswirthschaftliche Uniersttchttngeti, 2d ed., 1 870, p. 460. *Der Isolirte Slaat, Part ii, p. 78. 309] INTRODUCTION 1 2 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 treated 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 J. 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, I776-1832 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- velopment 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 Konigsberg, 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 1 8 10, 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"] 15 1 5 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, Gesc/iic/Ue, p. 498-9). For his treatment of systematic Economics see Haiuibuch der Staatswirtschaft, Berlin, 1808, and Staatswirtschaftslehre in Brie/en, Berlin, 1818. For his characterization by Roscher, see the latter's Geschichte der National. Oeiottofiii/c in Deutschland, p. 498. 313] PREDECESSORS OF HERMANN 1 7 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 Avith a discussion of the influence of scarcity and plenty upon 1 Friedrich Carl von Fulda, born 1774, died 1847, student at Gottingen 1794- 97, and received in 1798 a call to Tiibingen as Professor of Kameralwissenschaft, a position which he occupied nearly forty years. His views on Economics are found in his Grundsdtse der ceconovtisch-politischen oder Kameralwissenschaften, 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. ,8 GERMAN 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,3 who first stated the conditions of maximum wages. This is the begin- ning of a new and more fertile treatment of the subject. Lotz pointed out that competition could operate only within certain limits, the lowest limit being subsistence wages and the upper 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 1826. The doctrine of wages formulated in the first edition received scarcely any modification in the successive nine re- visions, of which the last appeared in 1870. Rau was the first great German economist to recast the science on the principles laid down by Adam Smith. He may, therefore, be considered 1 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- tionalindustrie tind Staatsioirlhschaft. ' Christian Jakob Kraus, born 1753, died 1807. He studied at Konigsberg and Gottingen, and in 1780 became Professor of Practical Philosophy in Konigsberg, a place which he kept till his death. ' Johann Friedrich Eusebius Lotz, born 177 1, died 1838. He studied in Jena. He held many government appointments and was for a lime Professor of Law and Economics at Bonn. He published, in 1821, Handbuch der Staatswirthschafts- lehre. * Karl Heinrich Rau, born 1792, died 1870. 315] PREDECESSORS OF HERMANN ig the founder in Germany of that individuahstic school which Adam Smith founded in England. While previous writers, 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 appHed. 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 a whole, as well as that of the peculiar class to which the laborer may happen to belong; (2) the price of the 20 GERMAN WAGE THEORIES V^^^ 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- iing 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 com^s. 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 limit, 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 ^ays almost nothing further about market wages. He seems 217] PREDECESSORS OF HERMANN 21 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 problern 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 work 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 century 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 1 Freidrich Benedikt Wilhelm v. Hermann, born 1795, died 1868. 319] ^3 24 GERMAN WAGE THEORIES [^20 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." ' Staats-wirthschaftliche Untersuchungen, 1870, p. 390-459. ' Staatswirthschaftlichc Untersuchungen, p. 460-487. 22 1] HERMANN 2$ 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; i. 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 26 GERMAN WAGE THEORIES [322 stages in the productive process, the idea is clearly suggested by Hermann. Only a small fraction of the number 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 miners and agriculturalists 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 to 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 as possible. This means that a constant pressure is ^23] HERMANN 2/ •brought to bear on all those in the previous labor steps to limit the wage outlay. " Upon all the production stages there rules the economic motive to furnish to the final purchaser as cheaply as possible the labor contained in the product." The producer of the final product is not so pushed, since his com- ; Staatsw. Unters., p. 483. ' Ibid., p. 483. ' Ibid., p. 483. 227] HERMANN 3 1 II Hermann's treatment of indirect competition, at first sight, seems to lend support to the chief contention of the protec- tionist in respect to wages. The free trade doctrine has en- joyed no sHght advantage, in that it could quote in its support the teachings of nearly all the respectable economists for a cen- tury or more. It would be no slight gain if the authority of Hermann could truthfully be used in support of protection. While some support might be gained from him, it will appear from the statement given above that he was free from somie of the commonest errors observed in the modern discussions of the tariff. It would be hard to find in his discussion support for the " pauper argument," unconnected, as it commonly is, with rigid investigations as to conditions of production other than labor conditions. It is too often assumed that " cheap " labor will inevitably displace more highly paid labor. Accord- ing to Hermann's view, pauper labor, far from being a danger- ous competitor of better paid labor, might easily be displaced by the latter. The real importance of indirect competition, then, lay in the fact that such competition was made possible by various favorable conditions of production. By this means capital might be the laborer's most relentless competitor, thus rendering useless his efforts to better his condition by limiting his numbers. The treatment of direct competition is open, of course, to the charge of inadequacy, but this is true of all beginnings. It is less to Hermann's discredit that he did not complete the theory, than it is to his followers, that they ignored the theory altogether. The objections which have been urged against Cairnes' idea of the limits of competition in group arrangement may be urged against Hermann's idea. They may both have truly described conditions at the time, but the extension of machinery and modern methods of production makes modifi- cation necessary. Both writers appear to have had in mind principally a sort of contingent, not an actual, competition. It 22 GERMAN WAGE THEORIES [228 depended upon the transference of the young from the occu- pation of parents to other kinds of work. The theory was in- tended to answer the question, What is the force of a man's competition if he tries to change his occupation? It did not determine actual competition should a man remain in his occu- pation.' On Hermann's part the doctrine was negative. This is due to the fact that he did not complete the study as we may suppose he had planned. His idea that wages are high or low according as the labor is near to, or remote from, the final stage of production, is new and interesting, but does not seem to have large support from facts. By comparing wages paid in the earlier stages of pro- duction with those in the later, facts could be found which would seem to support a directly opposite conclusion. He points out no limited special talent as necessary to perform the labor near the final stage. He notices no obstacles to com- petition in the final group which do not apply to other groups. He provides for competition in all the groups from the new populations, and it does not appear clear why in a few generations migrations from other groups would not reduce wages to a general level for like skill. If there were reasons in general economic conditions why the highest wages could be paid for work on the final stage, and it were actually offered, there would be a tendency to overcrowd those occupa- tions, a tendency which would result in reducing wages to the level of pay in other occupations. The most interesting point, and certainly the most import- ant for later developments of wage theories in Germany, is Hermann's treatment of the wages-fund theory. But this point is so intimately connected with the teachings of Hermann's successors that a discussion of it will be deferred till the group to which Hermann belongs is brought under review. •J. B. Clark, Limits of Competition. See Clark and Giddings, Modern Distributive Process. CHAPTER III HERMANN S SUCCESSORS There are a number of economists who are the followers of Hermann in the sense that they are influenced by his teach-) ings, but Brentano is one in the sense that he made additions to Hermann's theory. Although Brentano has made several contributions to the subject in recent years, nothing more fundamental has appeared on his theory of wages since he published the essay in Hildebrand's Jahrbiicher, in 1871, on " Die Lehre von den Lohnsteigerungen mit besonderer Ruck- sicht auf die englischen Wirthschaftslehrer,"^ This is a criti- cism of the English views on wages, in the course of which his own ideas are made apparent. The central point of his criticism is his opposition to the fixity of the fund involved in the doctrine of the wages- fund, as taught by the leading economic writers up to that time. He exonerates Adam Smith from the imputation of having conceived the fund as a fixed quantity; for, although he was the first to use the word, fund, and to speak of it as a source of wages, when capital and land are introduced as claimants of a share in the production, wages no longer correspond with total production, and from this point on, are not conceived as fixed by the amount of a fund. Having placed Adam Smith to one side as not open to criticism on this point, Brentano proceeds briefly to show that when other economists thought they were basing their doc- trine on a fixed fund, they were mistaken. Ricardo's doctrine of the relation between wages and profit assumes a fixed amount. At the same time his theory of the standard of life ^ See Jahrbucher fur Nationaloekonomie, i Folge, vol. xvi, pp. 251-281. 329] 33 ^ . GERMAN WAGE THEORIES [330 as determining wages makes fixity impossible, depending as a standard does upon the laborers' subjective measure of life- needs. This charge, however, of a lack of consistency be- tween two parts of a theory does not seem to be well founded, from the fact that so far as Ricardo considered the standard of life as determining wages, it was a minimum standard which he had in mind, and this he conceived as constant for long periods. Brentano also denies Senior's claim to have estab- lished the fixity of the fund upon a scientific basis. According to Senior, the wages-fund depends upon the relation in which !■ the entire product is distributed between laborers and capital- ij ists on the margin of cultivation. This relation depends upon: the rate of profit, which in turn depends upon the surplus above the cost of labor. In short, the fund which determines wages is itself determined by wages. John Stuart Mill is as little successful as the others in establishing the fixity of the fund. Having placed certain limitations upon the terms em- ployed. Mill holds that wages depend upon the relation of population and capital. He further states that they cannot be affected by anything else. "Wages cannot rise, but by an increase of the aggregate funds employed in hiring laborers, or by a diminution in the number of competitors for hire; nor fall, except either by a diminution of the funds devoted to paying labor, or by an increase in the number of laborers to be paid."^ He here assumes a certain degree of fixity, but Brentano points out that Mill's idea of capital allows very little definiteness to the fund, since he made the distinction between capital and not-capital to centre wholly in the intention of the owner. Human intention as to the particular employment of wealth is too changeable to allow fixity to be predicated of its object. For instance, the ordinary exigencies of life may re- quire that what to-day was intended to be devoted to the em- ployment of labor may to-morrow be spent on a journey. An ^ P/incipUs of Political Economy, Book ii, ch. xi, § I. 23 1 ] HERMANN'S SUCCESSORS 35 increased demand for goods might easily change the wages- fund by a change in the mind of the capitalist as to the destin- ation of wealth in his possession. Thornton discussed at considerable length the possibility of an increase of wages, either at the cost of consumers by com- pelling them to pay higher prices for commodities, or at the cost of employers through a diminution of profits. He argued that it could be at the cost of consumers only if there arose a relative increase of demand for consumable goods, or a relative decrease of product by monopoly. Accordmg to Thornton's view, in whatever way consumers are forced to bear the bur- den of the higher wage in one branch, it will be found that their power of demand for other commodities has been propor- tionately weakened, and thus laborers in other branches suffer a corresponding loss. It is evident that, if we entertain Thorn- ton's view, although we may not hold to a fixed wages-fund, we really substitute for the latter a fixed income-fund, and must admit the truth of the opinion held by the wages-fund theorists that one class of laborers can increase their wages only at the expense of another class. Brentano holds that Thornton has here made a mistake, which consists in not suf- ficiently analyzing the changed economic conditions of laborers as consumers, brought about by a rise in their wages. By as- suming a fixed income, it is true that by so much as income is allowed to expand in one direction it must contract in an- other. But Brentano continues to argue that by the very con- ditions of the supposition, the laborers' mcome is not fixed, but increased. Therefor, in their case no contraction is necessary. Furthermore, the extra demand upon the incomes of others by increase of price is exactly counterbalanced by an increased wage or purchasing power on the part of laborers. Hence an increase of wages, by the method supposed, is not a detriment to otber laborers, nor is it inimical to national accumulation, if secured at the expense of employers, for by as much as capi- talists have less inducement, laborers have greater power to save. ^6 GERMAN WAGE THEORIES [332 So far the work of Brentano seems to be purely negative, but taken in connection with his position in regard to the source of wages, both ultimate and proximate, it is enough to show the trend of his thinking. His ideas as to the source of wages is made clear in the article in the Jahrbiicher, and in some of his later works. ^ The capitalist secures control of laborers' products by supporting laborers out of his capital. In what- ever form it may come, there is the purpose and expectation that the value will all return to the capitalist out of the income of the consumers of his product. Since what consumers offer is no settled amount, the wages-fund theory overlooked the "possibility of rolling off upon consumers the higher wages, demanded by coalitions; it overlooks the fact that an employer will always be ready to expend more capital in the payment of wages as soon as the consumers replace for him the sum expended thereon, and that in such a case it will always be possible for him, if he himself has no more than a certain capi- tal, to procure capital by borrowing abroad."'' We see how closely he follows Hermann in admitting the entrepreneur's possessions as the immediate source of wages, but denying that they perform the important function assigned by the wages-fund theorists. The capital of the employer is the source of wages in the first instance, but the employer himself is only a link in the chain, and that a very dependent one ; for consumers control the situation. If the latter show willingness to consume at remunerative prices, capital can ex- pand to an unlimited amount by anticipation under our credit system. This view necessitates the surrender of the idea of a fixed wage fund. The effective criticism of that postulate of English political economy is the important contribution of Brentano to this subject, based as the criticism is upon Her- mann's positive contributions. Hermann's criticism consists largely in an interpretation of economic organization, as related ^ See Relatio7i of Labor to Law, p. 214. ^See below, p. 37. 333] HERMANN'S SUCCESSORS 37 to the laboring man, which made necessary a different view of the nature of the " fund " from that of the English school. Brentano was not content with this, but pursued the enemy into his own camp. He showed that, as judged by the very writings of those who championed the doctrine most strongly, it must suffer discredit. From his criticism of Ricardo and Mill, as of others, it is clear that Brentano does not believe in the fixity of the wages- fund. But his account of the manner in which the capital in employers' hands, which he regards as the immediate source of wages, can be changed in amount, shows that there are definite limits to the fluctuation of capital. One common method was shown by Brentano in his criticism of Mill. An employer might change his mind. But while this might affect to some extent the fixity of the funds of an individual capitalist, it becomes of less importance when applied to capitalists as a class, for an average change of intentions by a large number of employers might result in something approaching a con- stant. The same remark holds for the other cause — the use of credit. If an individual capitalist is in mind, there may be some truth in the possibility of increasing wage-paying power by credit, but when applied to all capitalists the use of credit for such purposes has definite limits. In general, we may say that Brentano's criticism of the English economists makes clear his view that the source of wages is elastic, and that his treatment of Thornton's opinions shows that Brentano regarded as possible an advance of wages to workers in one branch of industry, without necessity of loss to workers in other branches. Yet the whole treatment fails clearly to distinguish between the operations of individual capitalists and the operations of capitalists as a body. Roscher's contribution is rather insignificant. As usual with the Germans, he opens the discussion by assigning to supply and demand the highest importance. Each element is considered by itself in the discussion. The supply of labor is 28 GERMAN WAGE THEORIES VlZA^ determined by the prevailing standard of life. And since the standard is determined by laborers, therefore the supply of labor is determined by laborers. Thus one important factor of those which determine wages is under the control of wage- receivers. Roscher seems to have understood the real signifi- cance of this fact without assigning too much importance to it. It is not true, of course, that present laborers have control of present supply. To say that laborers have control of labor- supply can only mean that present laborers can control future supply. How important this may be as a basis for shifting upon laborers the responsibility for their own condition, de- pends upon how thoroughly we hold to the solidarity of labor as a sort of corporate responsibility by which the present gen- eration is held responsible for the doings of the past genera- tion. Responsibility is of two kinds, natural and moral. Natural responsibility for past errors, either of themselves or of their ancestors, laborers cannot escape. The sins of the fathers are visited upon the children. But the moral respon- sibility for the errors of a former time cannot be ascribed to the present. But the case may be different in respect to the accountability of the present for the future. It is certain that, physically speaking, the supply of the laboring population twenty years hence will depend upon the action of population for the next ten years. But there is nothing in the nature of things that could indicate what laboring population is neces- sary twenty years hence. So that present increase is based upon present conditions, and the future must take care of itself; just as past conditions determined past increase, and the present must deal as best it can with numbers such as they are. Although Roscher does not enter at all upon this line of reasoning, he sees enough to admit that labor's control over its own supply has this limitation : that the laboring class as a body can benefit by it only after long periods of time, and that for the moment the control is of slight advantage, because the whole present supply must be carried to market for support. 235] HERMANN'S SUCCESSORS ^p Demand, according to Roscher, depends upon the value in use of labor and purchasers' capacity to pay. While the standard of life fixes minimum wages, value in use determines maximum wages. Under value in use he merely approves v. Thiinen's point that additional product in any branch of in- dustry, due to the labor of the last workman employed, has a controlling influence on the rate of wages. He connects capacity to pay in a vague way with national income. In this it is easy to trace the influence of Hermann. But the points, when not fragmentary, are confused. Hermann is also fol- lowed in the opinion that the capital of the employer is not the source of wages, but acts as a sort of reservoir for the payment of wages. Demand for labor does not depend upon the size of the national capital. This view is supported by calling attention to the effect of the different uses of capital upon the demand for labor. " Every transformation of circulating into fixed capital diminishes the demand for other labor." " Only that part of circulating capital can aflect "wages which is intended, directly or indirectly, for the purchase of labor." ^ He likewise follows Hermann in the view that the highest wages are paid to those who are employed on the last stages of the productive processes. This is enough to show how little of originality is to be found in this part of Roscher's work. At the same time it is enough to indicate his proper historical place on the question of wages. The method is that of Rau and Hermann, while the ideas are m,ostly those of the latter. While the treatment is much weaker than that of the one from whom he chiefly draws his material, the inclusion of von Thiinen's undeveloped doctrine of the influence of marginal laborers on M'ages, having no organic connection with other parts of Roscher's work, implies, in addition, a careless attitude of mind on the whole question. Mithoff"'' seems to have adopted Roscher's treatment as an ^ Roscher, Fol. Econ., v, 2, p. 55. ' See Schonberg's Handbuch der Politischen Oekonomie. 40 GERMAN WAGE THEORIES \lZ'^ outline for his own discussion. The standard of life, the ele- ments of which he states in detail, here also determines mini- mum wages and is treated under supply, while the usefulness of labor and money demand (Zahlungsfahigkeit) determine maximum wages. The larger part of his treatment comes under ability to pay, and is hence an attempt to give a more precise determination to the wages-fund. It must be confessed that the exposition is somewhat hackneyed. The capital of the employer and that of others over which he has control by means of credit is a reservoir for the payment of wages. What flows out of the reservoir in the form of wages is restored by consumers of the goods produced by labor's help. Hence consumers are the buyers of labor, and their income, or that portion which is paid to labor, is the true source of wages. This is, however, not a fixed amount in the sense that it re- mains fixed during a productive period as it was at the begin- ning. At any moment it is a fixed, but not a foreordained amount. If at any moment we divide this amount by the number of laborers, the quotient is the average wage. How- ever, Mithoff shows his practical turn of mind and his agree- ment with Brentano by asking what purpose such a procedure would answer. The amount of capital, however, applied to the purchase of labor is unknown. If it is a certain sum to-day, by a change of rate it is a different sum to-morrow. A change of rate is possible by a transference of part of the profits to wages, or by drawing more heavily upon consumers. " If neither of these assumptions can be made, then the under- takers will not apply a greater amount of capital to the pur- chase of labor. In this case, certainly, the average rate of wages remains dependent upon the capital which the under- takers determine shall be applied to the purchase of labor." However, the amount is not made unchangeable during the production period. How much of the national income is ap- plied to payment of wages depends upon two factors : the first is direction of consumption; the second is the character of produc- 337] HERMANN'S SUCCESSORS ^j tive industries. " If consumption seeks preponderatingly for such goods as require for their production much human labor,. a greater part of the national income is required for the pur- chase of labor than would be required if such goods were con- sumed which required less labor and more capital and a larger draught upon nature's powers." If we suppose an in- crease of total capital the evolution of technical branches of production will promote a more universal application of capital and a diminished use of human labor. We perceive that Mithoff' s views are for the most part such as we find in the works of his predecessors. We have supply and demand as the great law, supply as connected with cost of labor, demand for labor as connected with its utility, and lastly consumers' income as the true source of wages, which is but a repetition of Hermann's view. How much consumers contribute to wages depends, he says, upon the direction of consumption and the character of productive industries. If consumption takes the direction of demanding goods chiefly made by labor, wages tend upward ; or, if the state of the arts is such that what is demanded is made largely by machinery^ human labor is displaced and wages tend downward. The comments of Professor Taussig^ on this point are so admirable that I shall be pardoned for quoting him. After pointing out that this reasoning as to the direction of consumption is derived apparently from Roscher, who states that the demand for unskilled labor is much affected by the direction which con- sumption takes, being greater if the luxury oi the rich takes the form of hiring many dependents, and less if expenditure takes modern form, he continues: * * * " The whole consid- eration of the direction of consumption as affecting wages, the discussion of demand for hand-made goods or machine-made goods * * all goes back to consumers' demand or income as the source of wages. It can really bear, therefore, only on the ^ Quarterly Journal of Economics, v. 9, p. 19. 42 GERMAiV WAGE THEORIES [^38 demand for one sort of labor as compared with another. * * * The form which it takes with Mithoff, and apparently with Roscher, overlooks the simple fact that machines are made by labor, and that a demand for machine-made goods affects, not the total demand for labor, but the direction of demand (say) towards laborers who make and tend shoe machinery rather than towards old-fashioned cobblers." There is a good deal in Mangoldt to remind one of Senior, both in spirit and in treatment of the subject. Senior, how- ever, did not employ such terminology as to obscure rather than illuminate his text, nor did he cumber the treatment with such barren analysis. Mangoldt's teachings agree for the most part with contemporary English political economy. This is seen most clearly, perhaps, in his treatment of the wages-fund. The supply of the means of support of labor is said to constitute the demand for labor. This supply makes up the greater part of circulating capital. For theoretical purposes, says Mangoldt, we may treat circulating capital and means of support of labor as identical, and say that wages are determined by the relation of circulating capital to labor supply. But this comes dangerously near saying that wages are determined by the relation of labor supply to wages. This declaration so lacks in scientific precision that it may not be improper for Professor Taussig to say that Mangoldt " gives the subject a wide berth." His fragmentary treatment may be exemplified by the fact that, like Roscher, he merely ap- proves one of von Thunen's most important points, but makes no use of it in further discussion. He says the demand for labor proceeds from employers, and can continue only so long as the service of labor surpasses in value that which the em- ployer pays in the form of wages. Since employers apply labor to the most productive parts of their business, and only have recourse to less productive parts as more labor is employed, it is possible to say that the wages which secures equilibrium between supply and demand is of like im- 3^9] HERMANN'S SUCCESSORS 43 portance with the anticipated pure return of the labor last applied.' The treatment of our subject by Philippovich^ is of interest '•■because he endeavors to give a systematic account of Political Economy as it now stands. He does not represent any economic school, but tries to retain the best from all writers, and thus exhibit a progressive science. His method is thor- oughly German, following as he does Rau and Hermann in treating wages as only a part subject, under price of commodi- ties. If faithfully followed, this method insures the inclusion rin the discussion of all the important commercial influences upon wages. To avoid error, however, it is necessary to notice in what respects labor differs from commodities. Philippovich •escapes this error only in part. He merely mentions the laborer's relations to the thing which the laborer sells. Since the laborer cannot separate himself from his labor-power, and the fulfilling of the labor contract involves the use of the man, "the wage- question involves more or less the physical, moral, ^spiritual and social welfare of wage-earners. These non- material elements of the problem affect the practical working out of the forces of supply and demand. In critical periods of the relation of employers and employed, the local bonds of -workmen preventing movement, as well as lack of accumulated means of support, operate against them. The ease with which ^employers organize, and their command of the supplies of life, give them the advantage in the struggle, and as a conse- ■er Grossbetrieb, 1892. '^ Der Grossbetrieb, p. 224. 403] 107 I08 GERMAN WAGE THEORIES {A'^A It is held that in the earlier period of the modern industrial evolution the laboring classes still belonged psychologically to an earlier date. Their wages were more or less near to the so-called life minimum.^ The great pioneers of industry, with disposable capital in their hands, had a double advantage. First, the new order of things with its high demand for capital gave its possessors a high bargaining power. Hence, interest was extrordinarily high. Secondly, the talent brought to bear in the new fields, being of a rare and special quality, deserved, and was able to obtain, great rewards. Both these forces, when united in the same individuals, as they usually were, in reference to the ownership and management of a given body of capital, gave them such advantage in the industrial order that the additional values created by the new organization fell easily into their hands. They may be said to have re- ceived the remainder after the usual costs were paid. Since that initial period of capitalistic production to the present time a great change has occurred. Now capital has increased enormously and interest has been gradually falling for many years. And talents which were once so rare no longer enjoy the monopoly of old.^ The characteristics of the early period were: high costs due to high interest and high prices, together with high profits due to the element of monopoly.^ Our author justifies this regime on the grounds that in no other way could the great masses of capital, which were necessary for the successful conduct of business in the new order, be brought together, that the habits and tradi- tions of an earlier time favored a comparatively inferior order of men in the industrial field, and therefore the large accumu- lations with high profits were necessary to win capable heads for industrial callings, and, furthermore, that these capable heads came to have political influence, and social development was pushed forward through the exercise of political power by ^ Schulze-Gaevernitz, Der Grossbetrieb, p. 215. •^lbid.,^.2\Z. ^Jbid.,^.2iT. 405] SCHULZE-GAEVERNITZ IO9 the industrial element. In contrast with the characteristics of the opening period of modern industry, the present shows low costs due to low interest, and the substitution of more produc- tive capital for labor; low prices with an advantage to the poor consumer, the laborer, whose real wages are thereby in- creased.^ The struggle to lower costs is a leading motive and agency in centralized industrial development. A similar amount of capital, because of technical advance, produces more than it did fifty years ago. Interest and profit have not advanced, hence the increasing surplus must be going to labor." Edward Atkinson, whom Schulze-Gaevernitz so often quotes, puts the case as follows : Wages are a remainder from the sale of the product. To ascertain the share of labor the following deductions must be made : 1. Replacement of capital used. 2. A sum equal to the average rate of profit on capital in- vested in the very safest securities, and enough in addition to cover risks. 3. Cost of materials. 4. Cost of the very best administration. 5. Taxation. The remainder constitutes the wages of labor, whatever that remainder may be. Wages constitute all there is left, and under the inexorable law of competition of capital, the profits of capital are constantly tending to a minimum, while the rate and purchasing power of wages are constantly tending to a maximum.' Let us now consider first the implication of these views, and then show their bases in theory. That laborers are abso- lutely better off now than they were in the early part of the century, there can be little doubt. But that the growing advantages of civilization are being secured more fully by the laboring classes relatively than by the other classes in society ^Schulze-Gaevernitz, Der Grossbetrteb, p. 219. "^ Ibid. 'Atkinson, The Distribution of Products ^ 1885, p. 70. no GERMAN WAGE THEORIES \A'^ is by no means free from dispute. The question cannot be discussed properly apart from a consideration of the relative numbers in the social classes — those who live directly on the proceeds of capital, and those who depend upon the proceeds of manual labor. Marx' contention that there always exists a reserve army, although he may not have correctly traced a causal connection between the growth of such a reserve and accumulation, has enough truth in it to make the problem of the unemployed one of grave concern. Concentration of indus- try is certainly eliminating the small producer and small dealer and converting them into laborers. If the class laborers is constantly growing relatively larger, and the class capitalists is growing relatively smaller, the returns to capital, though relatively less per unit, could secure to the capitalist relatively more as a whole than the laborer progressively receives. The question of concentration of property is of great importance, because we desire to know not so much the progressive return to capital, as the progressive return to the capitalist. Moreover, the annual wealth of a country is by no means measured by the products of manufacture, agriculture and trade — using these terms even in a wide sense ; but must in- clude the increase of the value of what from one standpoint may be called idle property. Such are city lots and other property that increase in value annually by mere situation and growth of population. These increased values accrue to persons as owners. Laborers have small share in these increments. Further, it is not certain what these authors mean by capi- tal. What is often called capital, and upon which the usual rate of interest is computed, is so often mere " water," and rep- resents no real investment, but results from capitalization. It is not, however, with the alleged fact of the relative gain of capital and labor in growing industry that we have in this essay primarily to do ; but rather with the law of wages according to which the result is said to issue, viz., that wages are the residual share of the total national income to be distributed. 40/] SCHULZE-GAEVERNITZ HI So far as known to the present writer, no German author has formulated in detail the grounds of this theory. But since the residual wage theory is the basis of Schulze-Gaevernitz' work, it is desirable to make some examination of it. According to this theory, rent, interest, and profits are each governed in amount by independent laws, while wages remain as a residual share. The owners of land receive rent, the own- ers of capital receive interest, and the owners of undertakers' ability receive profits. Rent is fixed in amount by the Ricar- dian law. Interest is fixed hy the law of supply and demand. Profit, the share of the undertaker as such, which hitherto had been confounded with the capitalist's share, has been of recent years differentiated as the peculiar reward for initiating and "captaining" industry, and has been assimilated to the law of rent for the use of land. Francis A. Walker, who called profits the rent of ability, has the credit of being the first clearly to expound in detail this theory of profits as well as the residual theory of wages. According to this view, profits may be stated in terms of the law of rent; profits are determined by the dif- erences existing in the productiveness of different abilities or opportunities of employers engaged at the same time in sup- plying the same market.^ Profits range from the return to the poorest undertaker, who receives ordinary wages and who is called the no-profit undertaker, to the return which is limited only by business ability. All three shares are so determined that they can in no way interfere with the laborer's share. Thus runs the theory: "un- less by their own neglect of their own interests, or through inequitable laws or social custom having the force of law, no other party can enter to make any claim on the product of in- dustry, nor can any of the three parties already indicated carry away anything in excess of its normal share." ^ This state- 1 Walker, Political Economy, 3d ed., 1888, p. 236; Marshall, Principles of Economics, 2d ed., 1891, Book vii., ch. v,, § 7. =* Walker, Political Economy, 1888, p. 251. IJ2 GERMAN WAGE THEORIES [408 merit of the theory has been interpreted to mean that the laborer's share is wholly dependent upon the laborer's contri- bution to the total product.' This conclusion is not unnatural from an exclusive attention to particular parts of Walker's work,^ and an endeavor to connect wages and laborer's contri- bution from the statement that " wages equal the whole pro- duct minus rent, interest and profits."^ But attention to all that Walker has written on the question of distribution makes it reasonably clear that he did not intend to teach a strictly productivity theory. That is, he did not attempt to establish any identity between the sum of values received as wages, and the sum of values produced by labor in the productive co- operation. He attempted to show that, when all the factors are working under normal conditions, there is a process of carving out shares from the total product by all the productive factors except labor; that whatever may remain after the slic- ing process is complete goes to labor as its share. If, now, the total product is increased by the energy, economy or care of labor, assuming no change in the other factors, and assuming the absence of friction, that increase goes to labor. In other words, if laborers make the total larger, and no change occurs in the efficiency of the other factors, the enlargement of labor- ers' remainder equals the enlargement of the total. This is an identity between an increment of product attributable to labor and an increment accruing to wages. At most, by this theory, the productivity theory applies to an increment and does not extend to total wages. " So far as by their energy in work, their economy in the use of materials, or their care in dealing with the finished product, the value of that product is increased, that increase goes to them by the force of natural laws, provided only competition be full and free." * 1 Journal of Political Economy, v. 2, pp. 77-87, especially pp. 81-2. 'See especially Wages Question, pp. 129, 130. 8 Walker, Political Economy, 3d ed,, 1 888, p. 284. * Walker, Political Economy, p. 251. 409] SCHULZE-GAEVERNITZ II3 The Germans under consideration do not attempt to modify in any important particular the main feature of Walker's theory. Hence a consideration of this part of German theory calls for no extended criticism. Such would be a criticism, not of the German work, but of that of President Walker. It may be re- marked, however, that an appreciation of the strength of this theory requires a careful consideration of wage conditions for short and for long periods of time. Attention to that differ- ence might have saved some criticisms. Walker admits that for short periods his theory does not hold true. When we have made all allowances, the theory fails to satisfy the mind completely. An efficient competition of capi- tal is assumed, while the equally at times efficient competition of labor is minimized. 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