The teaching of the classical economists that poverty and social inequality are the inevitable result of the operation of natural forces has found general acceptance in the notion that unemployment and poverty are only to be overcome by government planning of industry. What is more, the theories by which classical economists explain the operation of natural forces have similarly come to be accepted by the great majority of people, almost without question. These theories are known as the Wage Fund Theory and the Malthusian Doctrine.
The Wage Fund Theory is based upon the view that wages are paid out of a pre-existing stock of wealth and that, consequently, labour is dependent upon this stock for employment and for the reward it obtains in employment. Because this idea is generally accepted, on the one hand the Conservative party teaches that the prosperity of the country depends upon the maintenance of a state of confidence that will lead rich men to invest their wealth in industry; while, on the other hand, Socialists teach that it is just this ownership of capital which enables the few to control the many and that the remedy for social injustice is for the State to take the whole of production and to use the wealth for the benefit of all. Again, when dealing with the problem of unemployment the majority of modern economists recommend, as the best means to keep unemployment within bounds, the maintenance of investment at a high level. Some of these scholars have advocated that the government should establish machinery by which it will be able to swell investments when private investors fail to maintain their investments at a sufficiently high level. In all these policies it is taken for granted that employment and wages depend upon the amount of the pre-existing stock which is made available for the payment of wages.
This conception, that some predetermined fund sets a limit to industry and, therefore, to work and wages, holds sway. It leads governments the world over to legislate first in order to keep out of their territories foreign workers who, as it is believed, take work from their own nationals, and then, in order to encourage foreigners to bring money into the country because it is believed their money will provide work. The same idea lies behind those proposals for monetary reform which, it is claimed, will solve our industrial problems. Many and conflicting as these monetary schemes are, they have this in common, that they propose, by increasing the supply of money and credit, to provide employment and secure an even distribution of wealth.
A belief which is so widely held is entitled to respect. On the other hand, with social conditions in their present chaotic state, even the most popular theories must be closely examined before they are accepted in a scientific study, for it is probable that in these very theories the mistakes will be discovered which have led to the difficulties of today. It is proposed, therefore, to examine the Wage Fund Theory and the basic idea on which it rests to see if it right and, if not, to see where it is wrong.
Teaching that wages were drawn from this pre-existing stock, and calling this stock "capital", the classical economists went further and set down the law governing wages in a simple equation:
|| Capital (a pre-existing stock of wealth)|
Number of labourers
This equation became known as the "Wage Fund Theory" and expressed very clearly the basic idea that wages are drawn from a pre-existing stock of wealth. If the amount of this stock available in a community is relatively low and the number of labourers relatively high then wages will be low. Conversely, if the amount of capital available in a community is relatively large and the number of labourers relatively low then wages will be high.
When this equation is put to the test of facts it appears at once to be contrary to reality. Thus when the American Colonies were being developed large numbers of people migrated from Europe, rapidly increasing the number of labourers. They went there in search of the very high wages which were to be obtained. So substantial were the earnings of the working men in these new areas that the British Government sent out an economist called Wakefield to enquire into the remarkable phenomenon and advise how it could be prevented. Wakefield described in his report how the labourers instead of passing out of the factories into the workhouses, as they did in the old country, passed out of the factories into competition with their former employers. Such was the condition of wages. On the other hand, it was plain that the stock of wealth available in the new country was very low indeed and by no means kept pace with the very rapid increase in population. So great was the demand for capital that interest rates in the new country were between two and three times as much as in England. Equally plain was the fact that in the mother country the amount of wealth available as capital per man employed was far greater than anywhere else in the world. England was then the workshop of the world. The working people, however, were suffering the dreadful poverty and frightful working conditions which accompanied the early days of the industrial revolution.
In modern times both wages and interest are relatively high in times of brisk trade and relatively low in periods of depression. During a boom the demand for wealth to be used as capital is keen and the rate of interest rises, whereas, in times of slump wealth available for investment is superabundant and the interest rate drops sharply. Now, this equation asserts that wages will be high when the amount of capital is high and the number of labourers who may be employed is relatively low. Under such conditions, wealth being abundant, the rate of interest on it would of necessity be low. Conversely the equation asserts that wages will be low when the amount of capital is low and the number of labourers is relatively large. Under these conditions, wealth being scarce and in keen demand, the interest rate would necessarily be very high. In short, if the equation were correct, interest would be high when wages were low and low when wages were high.
The facts of the case establish the opposite relation. It is to be observed that generally when wages are relatively high, interest is relatively high and when wages are relatively low interest is relatively low. Thus in 1931, with the onset of the depression of that year, wages governed by Trade Union agreements were, in England, cut by 10 per cent. Wages in other occupations fell by about the same amount. In addition the number of unemployed in England, increased from under one million to over three and a half million, so that the reduction in wages was far greater than the 10 per cent cut. The interest rate on capital in 1929 stood at something over 5 per cent, but by 1932 it had fallen to a little over 2.5 per cent. In addition, great factories with their machinery, stocked warehouses and growing crops were rotting in idleness so that the fall in interest was even greater than from the figures appears. During the depression large funds were lying idle for want of investment. When in 1935-36 industry began to lift out of the depression, more men came back to work and the cuts in wages were partially restored. At the same time new factories were built, idle funds found new openings for investment and the interest rate rose to something over 3.5 per cent. This depression followed the course of all others. Wages and interest fell and rose together. The number of men in employment and the amount of capital in production fell and rose at the same time.
In the American Colonies interest continued high while wages were high but as wages fell so did the interest rate and, when the industrial cycle began to afflict American economy, wages and interest rose and fell together just as in every other part of the world.
These hard facts threatened at an early stage to destroy the Wage Fund Theory and there is little doubt but that it would have been discarded had it not been for the timely arrival of the Malthusian Doctrine, (to be examined later), which seemed to buttress it at every point. Far from demonstrating that wealth suffers when labour prospers and gathers in interest at the expense of wages, the facts are that as a rule interest is high when wages are high and low when wages are low and point to a harmony between the reward to labour and the reward to capital. The prevalent notion that the employer gains when the labourer loses by obtaining a greater reward for the use of his wealth is not true. If he obtains a greater reward it must be for reasons other than the mere ownership of wealth.
Of recent years some of the leading economists have rejected the equation worked out by the Wage Fund Theorists in the sense that they have introduced new elements into it or modified some of its terms. Thus, Professor Marshall, whose theories are followed by many of the leading universities, teaches that wages are determined by the amount of the stock of wealth used to employ labour and teaches further that the amount of this stock used to pay wages depends upon the expectation of profit. With very few exceptions, however, the leading economists still teach that wages are paid out of this stock, which they call capital, and all their various equations rest on this basis. Clearly, if this basis is wrong, then all the various equations are wrong.
The notion that wages are paid from a pre-existing stock of wealth can only be held upon a very narrow view of wages, for clearly it can only apply where wages are paid by one man to another. Where a man employs himself his wages do not come from any stock. A fisherman's wages are part of the fish he catches. They are as truly the reward for his labour, though no one employs him, as are the food, clothing and cigarettes which the seaman buys with his wage packet. Indeed in some occupations employees are paid a proportion of the product of their work. Until recently the crews of whalers were paid off in blubber. Obviously the blubber did not come from capital but was part of the men's catch, that is part of the product of their labour. Whenever the employees are paid in this manner it is plain on the face of it that they do not receive their wages out of a pre-existing stock. It makes no difference if money is substituted. Nowadays the crews of most whalers are paid off with the equivalent in money of their share of the haul. Where pound notes are given instead of blubber the whalerman's wages still come from the product of his work. Commission agents are in the same class, for they are paid a percentage of the proceeds of their work. Pieceworkers too, are paid fixed prices for work done. In all these cases payment is made against result and there can be no question of wages coming out of an accumulated stock of wealth. They are being paid in money instead of kind, that is all.
The substitution of a weekly wage for payment by results does not alter the principle. In truth the arrangement is usually to the benefit of the employer as by this means he can pay slightly less than under a system of piece rates. A week's work precedes the payment of a weekly wage. Before pay time arrives the work of the labourer's hands has passed to the employer and in paying the worker off the master is only giving him a proportion of the produce. Production is the mother of wages. Unless the men produce more than they receive the industry in which they work must soon fail. In a normal case the wealth produced during the week will exceed in value the money paid to the men for the week.
In truth labour applied to land does much more than produce wages. In working, labourers consume material, machinery is subjected to wear and tear and buildings deteriorate. The product of labour applied to land must pay for all this, or the business will cease. The product must pay rates, taxes and insurance premiums. In short, day by day labour must not only create its own wages from the land, but must pay for the upkeep of the industry in which it is engaged and must meet all the charges upon it. The theory that wages are drawn from a pre-existing stock is in contradiction to all the facts. It ignores the elementary fact that all that man has comes from the application of labour to the natural resources. Wealth owes its existence to labour, not labour to wealth.
All economists agree that in a primitive condition of society wages come from the products of a man's work. Those who hold that wages are drawn from a pre-existing stock of wealth, however, argue that with the development of modern machinery there came over the economic life of the world a change in the very nature of things. These developments made possible the production of wealth which took years to complete. During the interval, between the commencement of work and the completion of the final product, labourers had to live and it was the function of the capitalist to bridge the gap by paying labour until he could recoup himself by realizing on the finished product.
The theory was that men by their thrift or foresight accumulated large stocks of wealth which they or their sons used to feed and clothe their less thrifty or less fortunate brethren, while they were working through the long process of production. When at last the produce of the labourers was sold and the employer had recouped himself for his expenditure, then he received the reward of his abstention. This explanation of modern industry completely overlooks an elementary fact. The men are not maintained out of stocks of wealth which their master, or his father had accumulated. On the contrary they eat meat that was fresh killed by working butchers a few days before, they drink milk delivered by the dairyman in the morning and wear clothes provided by the tailor but a few months earlier. The gas and electricity which heat and light their homes are supplied by the day and night work of the power company employees. In short the men live upon the wealth produced from day to day by their fellow labourers and their master does the same. The Industrial Revolution has no more changed the principles which govern relations between men in society than the invention of the aeroplane has changed the law of gravity. All men are daily dependent upon the continual application of labour to land and the only effect of the growth of modern methods has been to make this dependence more immediate and more continuous. Now work must go on through the night and all men cannot rest on the Sabbath. Our civilization demands never ceasing toil. A man may no more live by the work his father did than he could stomach eggs laid by his father's chickens.
An example will illustrate clearly the true relation between labour and wealth in a long term undertaking. Consider the building of a bridge. The contractor will first bring to the sight the material he needs, the timber, stone, sand, cement, steel and the like. He will also bring machinery, cranes and cement mixers, oil and petrol. These things are his capital, his wealth used to produce more wealth. In addition he may have a credit at the bank. He may have an overdraft, but assume that he has a credit. Work begins: from Monday to Friday the architect, the engineers, the tradesmen and general labourers perform their allotted tasks. By four o'clock on the Friday following the foundations of a pier of the bridge are laid in the bed of the river. All this time labour has been producing wealth for the contractor. Labour has been advancing to the employer wealth which is capital. In doing so timber and steel have been used, concrete has been mixed and set and machinery has been worn. On the one hand the employer has less materials and less machinery than before but in their place the materials have been turned by labour into part of a bridge. Obviously, in their new form, the materials are worth much more than before, a week's productive work having been added to them. So far then the employer has advanced nothing to anybody but has received an appreciable increase in his capital. When paytime arrives the employer's credit at the bank is reduced by the amount of wages he pays, but he has lost nothing. His credit has been turned into capital which will be worth more than the money paid to the men. At no time has the employer advanced anything from his capital. On the contrary, the whole time labour is at work it is increasing his capital. The money he pays to the men is but an exchange whereby he obtains the results of their labour.
The point is clearly illustrated by a common practice amongst contractors. It frequently happens that the contractor has no credit at his bank sufficient to pay wages. That does not deter him from undertaking the work. If the contract is a sound business proposition the bank will readily advance funds against the work done, which funds will normally be sufficient to pay wages and current expenses. It is well known that bankers do not advance funds without sufficient security. The work of the labourers, however, creates a good security. It makes wealth of a considerably greater market value than the funds it draws when paytime arrives. Wages, clearly, are paid on results. The bridge is being bought by the contractor on the instalment system.
A further illustration is the general practice between contractors and the bridge owner. Upon an architect's certificate being given that a portion of the work has been satisfactorily completed, the owner will pay a part of the purchase price which will be due to the contractor when the work is completed. Obviously, the owner would not pay unless he was receiving in return value for his payments. The value he receives is the part of the bridge created by labour.
In the illustration the owner needs funds not to pay wages, because he does not pay them, but because he wants a bridge. The contractor needs funds for the same reason, which is not because he wants to pay wages but because he wants a bridge to sell to the owner. The house wife needs a coin to buy a pound of butter but it has never been suggested that the grocer was maintained by advances out of capital. The transaction is an exchange in which both parties give and receive some valuable thing.
Indeed, it is clear that the workmen are not maintained by the employer at any stage. The money they receive would be quite useless if they were unable to turn it into food and clothing. They live upon all those things they buy with the money they receive. These things are the produce of other labourers. If the shops were not full of supplies the bridge would not be built. Only when civilization advances sufficiently so that some men concentrate on making the daily necessities of life can other men spend their time on making wealth which takes time to complete. As knowledge and skill are increased and in consequence labour's power of producing wealth grows, so it becomes possible for new forms to be developed. The building of bridges, giant reservoirs and other huge works is not limited by any preconceived fund but is limited only by the day to day production of industry.
The means by which in medieval times boroughs would build markets is an illustration of this simple fact. As work proceeded the borough would print special notes and give them to the craftsmen employed. These notes the craftsmen would use to buy the things they desired. When the market was completed and the dues began to be collected, the notes would be recalled until they were all withdrawn. Now, obviously, in these cases there was no pre-existing fund. The notes were simply printed against the work done and the men lived by current production. But this was not inflation. The stock of wealth had been increased by more than the value of the notes and in due course the notes were withdrawn. Exactly the same thing happens when a contractor pays labour with an overdraft. Again, there is no pre-existing fund. The fund is specially created against the security of the work done and in due course it is withdrawn again.
In short, the whole transaction reduces itself to this. Labour adds to the stock of wealth by building part of a bridge and takes from the stock of wealth in return. The extent to which such transactions can be pushed depends upon the general production of wealth. Each day, it is true, new, long-term projects are begun but equally each day long-term projects are completed.
Clearly, capital cannot limit production, that is, limit employment, for production begins on the natural resources - on the land. While labour has access to land, there can be no want of employment. If warfare were utterly to destroy all the capital in the world, it would be a grave disaster indeed, but one which would be rapidly overcome assuming men retained their skill and knowledge. If men still knew how, they would quickly reproduce all that had been destroyed. Capital does not supply the materials which labour works up into wealth, they come from Nature. True, at first, progress would be slow, but as production got under way the speed would increase and there is no doubt but that within a single generation the position could be restored. It is notorious how retreating armies destroy the capital which they would otherwise have to leave behind for their enemy's use, but it is equally well known with what amazing rapidity production is begun by the successful party. The lack of capital does not limit production and does not set a bound to employment. Indeed, it is in countries being newly developed where capital is scarce, that production makes the greatest headway, and where men move in search of higher wages; while in the old countries where capital is abundant are to be found the large numbers of unemployed and the greatest poverty.
The function of capital is not to provide men with work, it is to aid and assist labour in production. As new forms of capital are devised, so the powers of production increase, for labour is rendered far more efficient. Again, new methods of production made possible by the use of capital, diversify the forms which work takes. This is the function of capital - to be the handmaiden of labour.
The Wage Fund Theory and all its counterparts, resting as they all do on the belief that wages are paid from capital, deny the elementary truth which is of universal application, that labour depends upon land, and land alone. It denies also the elementary truth that capital is itself produced by labour applied to land. It is the skill and knowledge of man which creates capital, and not the pre-existence of capital which enables him to work. Capital does not employ labour, labour employs capital. This is the reason why when men fall out of work and in consequence wages drop, capital also falls out of employment and interest drops. This is the reason why when men return to work new employment is found for capital and interest rises. When the steel workers of South Wales were thrown out of employment in the depression of 1931, the steel mills rotted and rusted. When men stopped working, capital decayed. This being the simple truth, it is to be expected that when wages fall, interest will fall, and when wages rise, interest will rise.
All theories based upon the assumption that wages are drawn from capital are advanced to explain why by the very nature of things men are reduced to poverty. It must be clear, however, that these explanations of poverty are false.
The Malthusian Doctrine blamed poverty on the niggardliness of Nature. The teaching was that population tended constantly to outstrip the means of subsistence. When Dr.Malthus, a country parson, wrote his remarkable Essay on Population it had an immediate success. He calculated that on an average population doubled every generation, thus two parents had four children, then those children in turn marry and have four children again. The absurdity of this calculation led followers of Malthus to modify the ratio of growth, and some very interesting theories were expounded as to the probable rate of increase of the human race. But whatever the rate of progress, the theory was that it outstripped the means of subsistence.
At the time the Essay was written the population of England was increasing very fast and poverty was growing more intense. On a superficial view the theory had much to commend it. It was a possible explanation, too, of the prosperity in the Colonies which were then newly being settled. Fresh lands with an abundance of subsistence explained high wages, but population was increasing at an astonishing rate. Subsequent history seemed to reinforce the theory for the population grew greater and gradually poverty made its appearance. The whole Malthusian conception harmonized with the view that wages were determined by a limited fund of capital. It was conceded from the outset that man's powers of production increased the subsistence available but it was thought that population outstripped this. Malthus went further. He said that to counteract this pressure of population Nature caused men to go to war, to suffer famine and pestilence, for by these means population was reduced. The Black Death in England had reduced population violently and it was common learning that following this disaster wages rose very high. Such were the arguments and they gained great hold upon thinking men and an even greater hold upon the body of the people.
Today it is often said that this country is overpopulated. The German claim to "lebensraum" is a demand for more room for the people; Italy, too, has claimed her natural rights in Africa; Japan has demanded an outlet in Asia and the vast territories of the British Empire have been held to be the cause of the higher wages in England. In England, however, this theory of overpopulation has in the face of facts lost its sway. It has now become recognised that the powers of producing wealth are far greater than is necessary merely to maintain life. Indeed, governments the world over, even in the countries which claim to be overcrowded, have taken stern measures to restrict the production of the things which maintain life.
Now a country is only overpopulated if by its production and trade it is unable to maintain its population. When crops are being ploughed back into the land, fish thrown back into the sea and the product of mines and quarries is subjected to restriction because, it is said, disaster is threatened by overproduction, quite obviously pressure of population cannot explain poverty. In those very countries where the unhappy lot of the bulk of the people is attributed to this cause, are to be found very many other explanations for their condition - large fortunes fall into the hands of a few; monopolies and restrictions cramp production, in some countries tyrannical and in others chaotic government reduces people to poverty.
The notion, however, that it was the very nature of things for poverty to exist and that, therefore, it was up to each man in the struggle for existence to secure what he could for himself, was very comfortable for those who profited despite the general suffering.
All these ideas of natural injustice have found support by a false analogy with the animal and vegetable kingdom. The scientific theories of the survival of the fittest and the struggle for existence have been applied to man's life, and it is worth while to notice just how false the extension of these teachings has been.
Observation has shown how, for the most part, the wild creatures are limited in number by two forces only - the food available for them and the depredations of their natural enemies. Thus when rabbits were exported to Australia, where there was food in abundance for them but where the fox and the stoat were unknown, their numbers multiplied until they became a serious pest. In the natural order of things only the limitation of their food and the attacks of other creatures keep numbers within bounds. Man lives by eating animals, vegetables and fish. The powers of reproduction in the lower forms of life are very much greater than amongst men. By creating artificial conditions man has ever multiplied the sources of his food to a far greater extent than he could multiply his own numbers. Indeed, this natural power of increase in the life upon which man feeds is an insurance against hunger which cannot fail. Moreover, whereas amongst these creatures improvement in conditions always leads to an increase in numbers, with man observation shows that as his material condition and his education improve so the size of his families tends to diminish. So it is to be seen that no support whatever is to be obtained from the evolutionary theories for the view that the natural pressure of population against some predetermined limit is the cause of poverty.
Though the Malthusian Doctrine has lost much of its sway in academic circles and writers on economics declare that both the Malthusian Doctrine and the Wage Fund Theory have been exploded, yet the essence of the teachings that poverty, war and pestilence belong to the natural order of things, has held its ground. It is still widely taught that the amount of investment available for industry limits opportunities for employment or that some other ascertainable fund, sometimes called purchasing power, regulates the amount of wages.
Most of the proposals for social reform now currently advanced are based on such assumptions. On examination, however, they fall to the ground. The natural limit upon man's employment is the extent of the natural resources of the universe.
Every year man discovers prodigious forces in Nature available for his benefit and use. The natural universe seems inexhaustible in its power to provide for human wants. When man works, nature gives back in abundance. Indeed, men have become fearful of the amazing productive power of labour and have come to blame overproduction as one of the causes of their troubles. But this very production is the means by which men live and to say in one breath that there is overproduction and want is contradictory folly. It is certainly not the niggardliness of Nature which causes man to want. His poverty does not arise from natural limitations.