CHAPTER 9

THE LAW OF WAGES

We have by inference already obtained the law of wages. But to verify the deduction and to strip the subject of all ambiguities, let us seek the law from an independent starting point.

Wages, which include all returns received from labour, vary not only with the differing powers of individuals but, as the organization of society becomes elaborate, they vary also largely as between occupations. Nevertheless, there is a certain general relation between all wages, so that we express a clear and well-understood idea when we say that wages are higher or lower in one time or place than in another. In their degrees, wages rise and fall in obedience to a common law. What is this law?

The fundamental principle of human action - the law that is to Political Economy what the law of gravitation is to physics - is that men seek to gratify their desires with the least exertion. Evidently this principle must bring to an equality, through the competition it induces, the reward gained by equal exertions under similar circumstances. When men work for themselves, this equalization will be largely effected by the equation of prices; and between those who work for themselves and those who work for others, the same tendency to equalization will operate.

Under this principle, what, in conditions of freedom, will be the terms on which one man can hire others to work for him? Evidently, they will be fixed by what those others could make if labouring for themselves. The principle which will prevent him from having to give anything above that, except what is necessary to induce the change, will also prevent them from taking less. Did they demand more, the competition of others would prevent them from getting employment. Did he offer less, none would accept the terms, as they could obtain greater results by working for themselves. Thus although the employer wishes to pay as little as possible, and the employee to receive as much as possible, wages will be fixed by the value of such labour to the labourers themselves. If wages are temporarily carried either above or below this line, a tendency to carry them back at once arises.

But the results, or the earnings of labour, do not depend merely upon the intensity or quality of the labour itself. What a given amount of labour will yield will vary with the powers of the natural opportunities to which it is applied. This being the case, the principle that men seek to gratify their desires with the least exertion will fix wages at the produce of such labour at the point of highest natural productiveness open to it.

The Determinant of Wages

By virtue of the same principle, the highest point of natural productiveness open to labour under existing conditions will be the lowest point at which production continues, for men will not expend labour at a lower point of productiveness while a higher is open to them. Thus the wages which an employer must pay will be measured by the lowest point of natural productiveness to which production extends, and wages will rise or fall as this point rises or falls.

To illustrate: In a simple state of society, each man, as is the primitive mode, works for himself - some in hunting, let us say, some in fishing, some in cultivating the ground. Cultivation we will suppose has just begun, and the land in use is all of the same quality, yielding a similar return to similar exertions. Wages therefore - for, though there is neither employer nor employed, there are yet wages - will be the full produce of labour; and, making allowance for the difference of agreeableness, risk, etc., in the three pursuits, they win on the average be equal in each that is to say, equal exertions will yield equal results. Now, if one of their number wishes to employ some of his fellows to work for him instead of for themselves, he must pay wages fixed by this full average produce of labour.

The Margin of Production

Let a period of time elapse. Cultivation has extended and embraces, instead of land of the same quality, lands of different qualities. Wages now will not be the average produce of labour as they were before. They will be the average produce of labour at the margin of cultivation, or point of lowest return. For, as men seek to satisfy their desires with the least possible exertion, the point of lowest return in cultivation must yield to labour a return equivalent to the average return in hunting and fishing. (This equalization will be effected by the equation of prices.) Labour will no longer yield equal returns to equal exertions, but those who expend their labour on the superior land will obtain a greater produce for the same exertion than those who cultivate the inferior land. Wages, however, will still be equal, for this excess which the cultivators of the superior land receive is in reality rent; and if land has been subjected to individual ownership, the result will be to give it a value.

If under these changed circumstances, one member of this community wishes to hire others to work for him, he will have to pay only what the labour yields at the lowest point of cultivation.

If thereafter the margin of cultivation sinks to points of lower productiveness, so must wages sink; if on the contrary the margin rises, so also must wages rise.

Here then we have the law of wages as a deduction from a principle most obvious and most universal. That wages depend upon the margin of cultivation, that they will be greater or less according as the produce which labour can obtain from the highest natural opportunities open to it is greater or less, flows from the principle that men will seek to satisfy their wants with the least exertion.

Wages in Various Occupations

If we turn from simple social states to the complex phenomena of highly civilized societies, we shall find upon examination that they also fall under this law.

In such societies wages differ widely but they still bear a more or less definite and obvious relation to each other. This relation is not invariable. As at one time a philosopher of repute may earn by his lectures many-fold the wages of the best mechanic, and at another time can hardly hope for the pay of a footman; so there are occupations which in a great city may yield relatively high wages but which in a new settlement would yield relatively low wages. Yet these variations between wages may, under all conditions and in spite of arbitrary divergences caused by custom, law, etc., be traced to certain circumstances.

In one of his most interesting chapters (Wealth of Nations, book I, chapter 10, part 1), Adam Smith enumerates the principal circumstances which, as he puts it, make lip for small pecuniary gain in some employments and counterbalance a great one in others: First, the agreeableness or disagreeableness of the employments themselves; secondly, the easiness and cheapness, or the difficulty and expense of learning them; thirdly, the constancy or inconstancy of employment in them; fourthly, the small or great trust which must be reposed in those who exercise them; and fifthly, the probability or improbability of success in them. It is not necessary to dwell in detail on these causes of variation in wages between different employments. They have been admirably explained and illustrated by Adam Smith and the economists who have followed him, who have well worked out the details, even if they have failed to apprehend the main law.

(1) This last, which is analogous to the clement of risk in profits, accounts for the high wages of successful lawyers, physicians, contractors, actors, etc.

Demand for and Supply of Labour

It is perfectly correct to say that the wages in different occupations will vary relatively according to differences in the supply and demand of labour - meaning by demand the call that the community as a whole makes for services of the particular kind, and by supply the relative amount of labour that can, under the existing conditions, be determined to the performance of those particular services.

But though this is true as to the relative differences of wages, the words are meaningless when it is said that the general rate of wages is determined by supply and demand. For supply and demand are but relative terms. The supply of labour can only mean labour offered in exchange for labour or the produce of labour, and the demand for labour can only mean labour or the produce of labour offered in exchange for labour. Supply is thus demand, and demand supply, and, in the whole community, one must be coextensive with the other. What conceals the absurdity of speaking generally of supply and demand in reference to labour is the habit of considering the demand for labour as springing from capital and as something distinct from labour; but the analysis to which this idea has heretofore been subjected has sufficiently shown its fallacy.

Wage Variations are Interdependent

It is indeed evident from observation, as it must be from theory, that whatever be the circumstances which produce the difference of wages in different occupations, and although they frequently vary in relation to each other (producing, as between time and time, and place and place, greater or less relative differences) yet the rate of wages in one occupation is always dependent on the rate in another; and so on, down, until the lowest and widest stratum of wages is reached, in occupations where the demand is more nearly uniform and in which there is the greatest freedom to engage. For although barriers of greater or less difficulty may exist, the amount of labour that can be determined to any particular pursuit is nowhere absolutely fixed. All mechanics could act as labourers, and many labourers could readily become mechanics; all storekeepers could act as shopmen, and many shopmen could easily become storekeepers; many farmers would, upon inducement, become hunters or miners, fishermen or sailors; and many hunters, miners, fishermen and sailors could on demand turn their hands to farming.

On the verge of each occupation stand those to whom the inducements between one occupation and another are so nicely balanced that the slightest change is sufficient to determine their labour in one direction or another. Thus, any increase or decrease in the demand for labour of a certain kind cannot, except temporarily, raise wages in that occupation above, nor depress them below, the relative level of wages in other occupations, which is determined by the circumstances previously adverted to, such as relative agreeableness or continuity of employment, etc. Even where artificial barriers, such as limiting laws, guild regulations, the establishment of caste, etc., are imposed on this interaction, experience shows that they may interfere with, but cannot prevent, the maintenance of this equilibrium. They operate like dams that pile up the water of a stream above its natural level but cannot prevent its overflow.

The General Law of Wages

Thus, although wages may from time to time alter in relation to each other, as the circumstances change that determine relative levels, yet it is evident that wages in all strata must ultimately depend upon wages in the lowest and widest stratum - the general rate of wages rising or failing as the latter rise or fall. The primary and fundamental occupations upon which, so to speak, all others are built up, are evidently those which procure wealth directly from nature; hence the law of wages in them must be the general law of wages. And, as wages in such occupations clearly depend upon what labour can produce at the lowest point of natural productiveness to which it is habitually applied, therefore wages generally depend upon the margin of cultivation or, to put it more exactly, upon the highest point of natural productiveness to which labour is free to apply itself without the payment of rent.

The law of wages we have thus obtained is that which we previously obtained as the corollary of the law of rent.

It is, that:

Wages depend upon the margin of production, or upon the produce that labour can obtain at the highest point of natural productiveness open to it without the payment of rent.

Like Ricardo's law of rent, of which it is the corollary, this law of wages carries with it its own proof and becomes self-evident by mere statement. For it is but an application of the central truth, which is the foundation of economic reasoning, that men will seek to satisfy their desires with the least exertion. The average man will not work for an employer for less, all things considered, than he can earn by working for himself; nor yet will he work for himself for less than he can earn by working for an employer. Hence the return that can be secured by labour from such natural opportunities as are free to it must fix the wages that labour everywhere gets. That is to say, the line of rent is the necessary measure of the line of wages. In fact, the accepted law of rent depends for its recognition upon a previous, though in many cases it seems to be an unconscious, acceptance of this law of wages. What makes it evident that land of a particular quality will yield as rent the surplus of its produce over that of the least productive land in use, is the apprehension of the fact that the owner of the higher quality of land can procure the labour to work his land by the payment of what that labour could produce if exerted upon land of the poorer quality.

Wages a Proportion of the Product

Perhaps it may be well to remind the reader that I am using the word wages not in the sense of a quantity, but in the sense of a proportion. When I say that wages fall as rent rises, I do not mean that the quantity of wealth obtained by labourers as wages is normally less, but that the proportion which it bears to the whole produce is necessarily less. The proportion may diminish while the quantity remains the same or even increases. If the margin of cultivation descends from the productive point which we will call 25 to the productive point we will call 20, the rent of all lands that before paid rent will increase by this difference, and the proportion of the whole produce that goes to labourers as wages will to the same extent diminish. But if, in the meantime, the advance of the arts or the economies that become possible with greater population have so increased the productive power of labour that at 20 the same exertion will produce as much wealth as before at 25, labourers will get as wages as great a quantity as before. The relative fall of wages will not be noticeable in any diminution of the necessaries or comforts of the labourer, but only in the increased value of land and the greater incomes and more lavish expenditure of the rent-receiving class.

In its simpler manifestations, the law of wages is recognized by people who do not trouble themselves about Political Economy, just as the fact that a heavy body would fall to the earth was long recognized by those who never thought of the law of gravitation. It does not require a philosopher to see that, if in any country natural opportunities were thrown open which would enable labourers to make for themselves wages higher than the lowest now paid, the general rate of wages would rise.

Adam Smith himself saw the cause of high wages where land was yet open to settlement, though he failed to appreciate the importance and connection of the fact. In treating of the Causes of the Prosperity of New Colonies (Wealth of Nations, book 4, chapter 7), he says: "Every colonist gets more land than he can possibly cultivate. He has no rent, and scarce any taxes to pay.... He is eager, therefore, to collect labourers from all quarters, and to reward them with most liberal wages. But those liberal wages, joined to the plenty and cheapness of land, soon make those labourers leave him in order to become landlords themselves, and to reward, with equal liberality, other labourers, who soon leave them for the same reason that they left their first master."

It is impossible to read the works of the economists who since the time of Smith have endeavoured to build up and elucidate the science of Political Economy without seeing how, over and over again, they stumble over the law of wages and never once recognize it. Yet "if it were a dog it would bite them!" Indeed, it is difficult to resist the impression that some of them really saw this law of wages but, fearful of the practical conclusions to which it would lead, preferred to ignore and cover it up, rather than use it as the key to problems that without it are so perplexing. A great truth, to an age which has rejected and trampled on it, is not a word of peace but a sword!

CHAPTER 10

INTEREST ON CAPITAL

Capital is not a fixed quantity, but can always be increased or decreased, (1) by the greater or less application of labour to the production of capital, and (2) by the conversion of wealth into capital, or capital into wealth.

It is manifest that under conditions of freedom the maximum that can be given for the use of capital will be the increase it will bring, and the minimum or zero will be the replacement of capital; for above the one point the borrowing of capital would involve a loss, and below the other, capital could not be maintained.

The power of applying itself in advantageous forms is a power of labour, which capital as capital cannot claim nor share. A bow and arrows will enable an Indian to kill, let us say, a buffalo every day, while with sticks and stones he could hardly kill one in a week; but the weapon maker of the tribe could not claim from the hunter six out of every seven buffaloes killed as a return for the use of a bow and arrows. Nor will capital invested in a woollen factory yield to the capitalist the difference between the produce of the factory and what the same amount of labour could have obtained with the spinning-wheel and handloom.

Capital is produced by labour; it is, in fact, but labour impressed upon matter - labour stored up in matter, to be released again as needed, as the heat of the sun stored up in coal is released in the furnace. The use of capital in production is, therefore, but a mode of labour. As capital can be used only by being consumed, its use is the expenditure of labour; and, for the maintenance of capital, its production by labour must be commensurate with its consumption in aid of labour.

The normal point of interest, which lies between the necessary, maximum and the necessary minimum of the return to capital must, wherever it rests, be such that all things considered the reward of labour and the return to capital will give an equally attractive result for the exertion on the one hand or the sacrifice on the other hand that is involved. It is perhaps not possible to formulate this point as wages are habitually estimated in quantity and interest in a ratio. But there must be such a point at, or rather about which the rate of interest must tend to settle; since, unless such an equilibrium were effected, labour would not accept the use of capital, or capital would not be placed at the disposal of labour.

This natural relation between interest and wages may be stated in a form which suggests a relation of opposition; but this opposition is apparent only. In a partnership between Dick and Harry, the statement that Dick receives a certain share of the income implies that the share of Harry is less or greater as Dick's is greater or less; but where, as in this case, each gets only what he adds to the common fund, the increase of the portion of the one does not decrease what the other receives.

We are, of course, not speaking of particular wages and particular interest, but of the general rate of wages and the general rate of interest, meaning always by interest the return which capital can secure, less insurance and wages of superintendence.

In a particular branch of production the line may be clearly drawn between those who furnish labour and those who furnish capital, yet even in communities where there is the sharpest distinction between the general class labourers and the general class capitalists, these two classes shade off into each other by imperceptible gradations, and in the extremes where the two classes meet in the same persons, the interaction which restores equilibrium can go on without obstruction.

Relative Positions of Capitalist and Landowner

Even in communities where there is the sharpest
distinction between the general class of laborers and
the general class of capitalists, these two classes shade
off into each other by imperceptible gradations.
If we could imagine a place where the production of wealth went on without the aid of labour and solely by the reproductive force of capital and that certain capitalists were transported with their capital in appropriate forms to such a place, manifestly they would get, as the return for their capital, the whole amount of wealth it produced, only so long as none of its produce was demanded as rent. When rent arose, it would come out of the produce of capital, and as it increased, the return to the owners of capital must necessarily diminish.

If we imagine the place where capital possessed this power of producing wealth without the aid of labour to be of limited extent, say an island, we shall see that as soon as capital had increased to the limit of the island to support it, the return to capital must fall to a trifle above its minimum of mere replacement, and the landowners would receive nearly the whole produce as rent, for the only alternative capitalists would have would be to throw their capital into the sea. Or, if we imagine such an island to be in communication with the rest of the world, the return to capital would settle at the rate of return in other places. Interest there would be neither higher nor lower than anywhere else. Rent would obtain the whole of the superior advantage, and the land of such an island would have a great value.

Capital as a Form of Labour

In truth, the primary division of wealth in distribution is dual, not tripartite. Capital is but a form of labour, and its distinction from labour is in reality but a subdivision, just as the division of labour into skilled and unskilled would be. We have reached the same point as would have been attained had we simply treated capital as a form of labour and sought the law which divides the produce between rent and wages; that is to say, between the possessors of the two factors, natural substances and powers, and human exertion - which two factors by their union produce all wealth.

Profits Often Mistaken for Interest

Everyone knows the tyranny and rapacity with which
capital when concentrated in large amounts is
frequently wielded to corrupt, to rob, and to destroy.
Profits thus derived are not to be confounded
with the legitimate returns of capital.

Attention has already been called to the fact that land values, which constitute such an enormous part of what is commonly called capital, are not capital at all; and that rent, which is as commonly included in the receipts of capital and which takes an ever-increasing portion of the produce of an advancing community, is not the earnings of capital, and must be carefully separated from interest.

Nothing can be capital, let it always be remembered, that is not wealth - that is to say, nothing can be capital that does not consist of actual, tangible things, not the spontaneous offerings of nature, which have in themselves, and not by proxy, the power of directly or indirectly ministering to human desire.

Thus, a Government bond is not capital, nor yet is it the representative of capital. The capital that was once received for it by the Government has been consumed unproductively - blown away from the mouths of cannon, used up in warships, expended in keeping men marching and drilling, killing and destroying. The bond cannot represent capital that has been destroyed. It does not represent capital at all. It is simply a solemn declaration that the Government will, some time or other, take by taxation from the then existing stock of the people so much wealth, which it will turn over to the holder of the bond; and that, in the meanwhile, it will from time to time take in the same way enough to make up to the holder the increase which so much capital, as it some day promises to give him, would yield him were it actually in his possession. The immense sums that are thus taken from the produce of every modern country to pay interest on public debts are not the earnings or increase of capital; they are not really interest in the strict sense of the term, but are taxes levied on the produce of labour and capital, leaving so much less for wages and so much less for real interest.

But suppose the bonds have been issued for the deepening of a river bed, the construction of lighthouses, or the erection of a public market; or suppose, to embody the same idea while changing the illustration, they have been issued by a railway company. Here they do represent capital, existing and applied to productive uses, and like stock in a dividend-paying company may be considered as evidences of the ownership of capital. But they can be so considered only in so far as they actually represent capital, and not in so far as they have been issued in excess of the capital used.

There are economic writers who decompose profits into interest, insurance, and wages of superintendence. But while wages of superintendence clearly enough include the income derived from such personal qualities as skill, tact, enterprise, organizing ability, inventive power, character, etc., there is another contributing element to the profits we are speaking of, which can only arbitrarily be classed with those qualities - the element of monopoly.

When James I granted to his minion the exclusive privilege of making gold and silver thread, and under severe penalties prohibited everyone else from making such thread, the income that Buckingham enjoyed in consequence did not arise from the interest upon the capital invested in the manufacture, nor from the skill, etc., of those who really conducted the operations, but from what he got from the King - namely, the exclusive privilege - in reality the power to levy a tax for his own purposes upon all the users of such thread. From a similar source comes a large part of the profits which are commonly confounded with the earnings of capital.

Receipts from the patents granted for a limited term of years for the purpose of encouraging invention are clearly attributable to this source, as are the returns derived from monopolies created by protective tariffs under the pretence of encouraging home industry.

Profits properly due to the elements of risk are also frequently confounded with interest. Some people acquire wealth by taking chances which to the majority of people must necessarily bring loss. Such are many forms of speculation and especially that mode of gambling known as stock dealing; just as at a gaming table, whatever one gains someone else must lose.

How necessary it is to note the distinctions to which I have been calling attention is shown in current discussions, where the shield seems alternately black or white as the standpoint is shifted from one side to the other. On the one hand we are called upon to see, in the existence of deep poverty side by side with vast accumulations of wealth, the aggressions of capital on labour. On the other hand, it is pointed out that capital aids labour, and hence we are asked to conclude that there is nothing unjust or unnatural in the wide gulf between rich and poor; that wealth is but the reward of industry, intelligence and thrift; and poverty but the punishment of indolence, ignorance and imprudence.


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