The Wage Fund Theory
The wage fund theory was clearly stated and consistently adhered to, after Ricardo’s death, by influential economists such as McCulloch, J.S. Mill and Nassau Senior, though propositions reflecting wage fund notions can be found in only a few earlier writers, Malthus in particular.
In 1869 Mill recanted the theory that ceased to be widely accepted. There were, however, some attempts to revive it, and some of its contents were passed on to the marginal theory.The wage fund doctrine determines the general or average wage rate as equal in any period to the ratio between a given “wage fund” and the entire labour supply, usually identified with the labouring population (Mill 1848: 343-4; McCulloch 1864 [1965]: 316-17; Senior 1836 [1965]: 153). It is therefore the first instance, in the history of economic thought, of the notion of a necessarily inverse relationship between the real wage level and employment, which rests on the fixity of the “fund” destined to employ labour. Given such a relationship, competition among the workers and among the employers ensures that: “If the supply [of labour] is in excess of what capital can at present employ, wages must fall. If the labourers are all employed, and there is a surplus of capital still unused, wages will rise” (Mill 1869 [1965-82]: 643, also 1848 [1987]: 362). Equilibrium wage cannot be affected by anything but the ratio of the wage fund to the working-class population, and any attempt to increase the wage, which does not previously increase that ratio, is bound to fail (Mill 1848 [1987]: 344, 350, 360-62; McCulloch 1864 [1965]: 317, 320). The leading exponents of the theory were indeed favourable to the repeal of the “combination law” prohibiting workers’ organizations, but this was precisely on the grounds that these organizations would be unable to persistently affect the equilibrium wage: combinations cannot keep wages above the full employment rate, as unemployment will cause competition among the workers; while if wages happen to be below that rate, combinations operate in the same direction as, and support, the workings of competition (see Mill 1848 [1987]: 934, 937).
Contrary to the view that wage fund theory is a short-run theory based on the fact that at the beginning of each production period there is a given amount of subsistence goods (food produced in the agricultural sector) available to be advanced in order to support the workers during the next “year” of production, the wage fund was conceived of as capital, or savings, destined to the support of the workers by the decisions of the capitalists:
The distinction...
between Capital and Not-capital does not lie in the kind of commodities, but in the mind of the capitalist... all property, however ill adapted in itself for the use of labourers, is a part of capital so soon as it, or the value received from it, is set apart for productive reinvestment. (Mill 1869 [1965-82]: 56; similar statements in McCulloch 1864 [1965]: 316, 318; Senior 1836 [1965]: 189-93)As a consequence, it was a theory meant to explain the normal, long period equilibrium wage and employment (Stirati 1998).
The wage fund theory came under attack towards the end of the 1860s in the writings of Longe (1866 [1904) and Thornton (1870 [1971]). In his recantation Mill (1869 [1965-82]) accepted and developed some of the arguments that had been advanced against the theory. He admitted that there is no such thing as a given “wage fund” set aside by the capitalists, which will be paid for labour whatever its price and is a pre-determined portion of their entire income and wealth. The quantity of labour a capitalist employs depends on his expected sales, and these are not affected by changes in wages. Hence, argues Mill in his recantation, if workers accept to work for low wages, and the employers can have all the labour they need cheaply, they can and probably will choose to consume more of their income or wealth, rather than attempt to hire more workers. On the other hand, if wages are high (for example, because of a successful combination) employers will have to reduce their consumption to be able to obtain the labour they need.