The Theory of Capital
Part 1, Essay 1
Review of F. W. Taussig, Wages and Capital: An Examination of the Wages Fund Doctrine
Reprinted from Political Science Quarterly 12 (March 1897). The book under review is Frank W. Taussig's restatement of the classical theory of the wage fund, Wages and Capital: An Examination of the Wages Fund Doctrine (New York: D. Appleton, 1896).
This book consists of two main parts—a historical resume of the wages-fund controversy, and a presentation of the author's own conclusions on the subject. The historical portion is by no means unimportant: in fact, it cannot fail to receive commendation from all quarters for impartiality of treatment, acuteness of criticism, fullness of knowledge and clearness of style. This review, however, must be confined to the author's "positive theory" as contained in the first 125 pages of the volume.
Among the limitations which Professor Taussig places on the problem he is investigating is one that deserves a special word of comment. He limits the problem to the determination of "the total that goes to laborers as a whole." "It is only with the total," he says, "that the wages fund, or the discussion of wages and capital, has to do" (p. 109). "The causes which determine the share which a particular set of laborers shall have are different," and present a different set of questions. This distinction, to be sure, is made with practical unanimity by the adherents of the wages-fund doctrine in any of its forms: it may almost be considered their shibboleth. The author accepts it without question. May we venture to suggest that it is the fundamental source of what seems to be the error in the view he presents? "Total wages" is an abstraction—and, moreover, a useless and misleading abstraction. To suppose that one set of forces determines the total going to laborers and that another set of forces then distributes this among the different classes and individuals, is to reverse the true order of fact and of thought. Total wages are merely the arithmetical sum of individual wages. The latter are in a sense the dynamic element; the total is a passive result. To view the matter otherwise is to go astray at the earliest stage, and to set one's self seeking for a shadowy and uncertain explanation of a vague and shadowy thing.
Professor Taussig's first chapter, entitled "Present Work and Present Wages," is devoted to a very lucid description of the leading features of the modern industrial process. In the case of the great multitude of products, as he shows, a long series of acts extending over a considerable period is necessary before the finishing touches are put upon them. The conclusion is clearly drawn that "present labor produces chiefly unfinished things, but the reward of present labor is finished things." In the sense that "the current yield of industry" (p. 22) is always having put to it the finishing touches, wages may, indeed, be said to be paid from current product; but in a truer sense "real wages are virtually to their full extent the product of past labor" (p. 17).
The main conclusion of chapter two, entitled "Capital and Wages," is as follows: Taking wages to "mean all the income of all laborers" (p. 43), and capital to mean "that supply of inchoate goods, in all stages toward completion, from which the steady flow of real income is derived" (p. 44), "we may lay it down broadly," says Professor Taussig, "that wages are derived from capital" (p. 43). This proposition "has nothing to do with money or money wages" (p. 45). "The relation of wages to capital," here expressed, "would be the same under any social organization" (p. 45). Real capital, under any rational conception, consists of "things tangible and usable"; real wages, of "the enjoyable commodities which the laborer gets" (p. 46).
The author perceives, however, that this proposition is entirely too general to be used to support a doctrine of a wages fund. He admits that
this reasoning, while directed to wages, applies equally to every other form of income....[What] is true of wages is true of interest and rent and business profits. All are derived from capital in the same sense.... If any law of wages has been reached...it is but a statement of the fact that all the enjoyment of to-day comes from commodities which are the product of past labor [p. 48].
The result thus reached would appear very neatly and conclusively to dispose of the concept and phrase "wages fund," except as a literary curio. In the same sense and with equal scientific significance can it be said that there is a profit fund, an interest fund, a rent fund—a possibility which earlier in the book (p. 16) does not escape the author's notice. Yet he would not have the reader draw a conclusion which his own conservatism hesitates to accept. The reader's judgment is therefore suspended by various expressions: "if any law of wages has been reached" (p. 48); "and yet there is something more to be said of wages and capital than this general proposition;" "the unmistakable differences in the mode in which the various members of the social body get their share of the general income bring some important consequences, both as to distribution at large and as to wages and the wages fund." These expressions indicate that the author intends to retain the expression "wages fund," and to show that there are good reasons for looking upon such a fund as differing in some points worth the noting from the part of the social income going for rent, for profits and for interest.
In carrying out this purpose the author may fairly be expected to conform to certain minimum requirements. First, we are justified in expecting that real wages, and not mere money wages, shall be the subject of his discussion. Professor Taussig keenly appreciates the proneness of other writers to err at this point. "The obvious distinction between real wages and money wages," says he, "makes its appearance in every book on the elements of economics, but it is too often forgotten when the causes determining wages come to be examined" (p. 15). As he elsewhere expresses it (p. 231), this is a convenient short cut which breeds confusion in the mind of the reader while veiling the real question. (See also pp. 17, 19, 45, 46, 47, 231, 245, 247, 297 et passim.)
Secondly, we may expect that he will avoid the error, to which he so frequently refers, of considering that the "capital"—the "fund," whatever it be called, that constitutes real wages—is "necessarily owned by the individual who pays wages." "Such reasoning," as he says, "does not touch real capital or real wages" (p. 46).
The capitalists who directly employ laborers have usually no ownership of the commodities which make real wages. If these real wages come from capital, the capital is certainly not in the hands of the employers [p. 20. See also p. 258 among others].
Thirdly, we may justly require of the author a comprehensible explanation of the way in which the "wages fund" is marked off from, or carved out of, the total income of the community; and we may expect that in some important respects this shall be shown to differ from the process which apportions the shares of the other factors in distribution. This "total income," elucidated by the author in the first two chapters, is essentially the "subsistence fund" of Böhm-Bawerk. Yet the author says: "There is an obvious difficulty in the fact that the general subsistence contains the income not only of laborers, but of the whole community" (p. 316). Indeed, he thinks the Austrian writer has gone "but a very little way toward explaining just how the total subsistence fund and its ripening installments are diverted to one and another class in the community" (p. 317). When Professor Taussig further adds that "an investigation of the machinery of distribution...is the essential part of the wages-fund problem" (p. 317), he seems to imply a promise to make an examination of these "essential" questions before quitting the subject. Moreover, the promise is made distinctly (p. 16) where the author says that the question "whether there can be any possibility of separation of this net income into parts destined for any one set of persons, or appropriated to them," will engage his attention "at a later stage."
Every one of these minimum requirements the author fails to meet. First, instead of striking straight at the fundamentals and refusing to consider the mere "machinery by which laborers are enabled to get their real wages" (p. 15), he makes this machinery, that is, money wages, a central object of his attention. Having devoted some discussion to "real income and real wages," he begins a fresh chapter with the announcement: "In the present chapter money and money income play a vital part" (p. 51). The suddenness of this change of face comes as a surprise and a disappointment to the reader. Moreover, throughout the chapter the discussion blooms with that perennial error, emphasis of the superficial monetary aspects of the problem. Money income and money payments, flowing first into the hands of the immediate employers, absorb all the author's attention. Further, repeated use is made of "funds" in the sense of money funds in the hands of the employers. Among numerous instances one of the most noteworthy is the following:
The hired laborer gets his wages from capital in a sense in which the independent workman does not. His money income...is turned over to him by capitalists. It comes from funds in the possession of a body of which his immediate employer is a member.... In this sense his earnings depend on a wages fund—on the sums which the employers judge it expedient to turn to the hire of labor [p. 75]....[With the same connotation he says:] In an important sense hired laborers are primarily dependent for their wages on the funds which the whole body of active capitalists can and will turn over to them [p. 78].
It is unnecessary and, indeed, impossible here to follow out all the details of the reasoning on these points. The author himself in his criticism of others has most satisfactorily shown that such a treatment but skims over the surface of the question. It ends in what seems little more than a mere verbal quibble.
The second requirement is met no more satisfactorily. The capital or funds that are discussed are throughout looked upon as in the hands of the employing class, except where the conception is widened to included the great body of money-lenders "whose business it is to make advances to the more immediate directors of business affairs" (p. 63). Throughout the chapter the concept of capital, or funds, fails to include all the sources of the real income that the laborers enjoy—for example, stores of goods in the hands of independent producers, and even a portion of labor itself, so far as personal services make up that real income. There is no hint that such elements may play a part in determining the remuneration of labor.
Nor is the third requirement fulfilled in the author's discussion. He practically brushes aside, when he reaches it, the problem of the fixing of the shares in distribution. Nowhere does he show that there is anything peculiar about the part going to labor that can entitle it, in distinction from the other parts, to be called a fund. He summarizes his own results in these words:
In fact the wages-fund doctrine, or what there is of truth in it,...can tell us little...as to the fundamental causes which...determine the share of that real income which in the long run shall go to wages or interest or rent (p. 322).
Moreover, Professor Taussig does not show what the fundamental causes are which determine the different shares at any given time. Once he confesses that his examination of "the immediate source of the money wages of hired laborers is at best incomplete; the inquiry as to the source of real wages remains the important one in the background" (p. 64). But with the remark that "the questions as to the machinery of immediate money wages are important enough" (p. 65), he returns to their consideration. The reader looks in vain for any further light upon this question in the remaining chapters.
The "main conclusions" reached by the author appear to be that there is more than one tenable sense in which a wages fund may be spoken of—that, indeed, there are two wages-fund doctrines. Neither is quite like the doctrine as held by the older economists. The one is broader than theirs—so broad, in fact, that it seems to the reviewer nothing more than a statement that what the laborers enjoy is a part of the total income of society. In this it is hard to recognize more than a bald truism. The second doctrine which the author presents is the one wherein the superficial monetary aspects alone are kept in view. This is impressed upon the reader with much emphasis; yet, as my italics show, the author's faith fails him when he comes to state it for the last time:
Hired laborers are dependent on a wages fund (if one chooses so to call it), which is in the hands of the capitalist class. Their money income is derived from what the capitalists find it profitable to turn over to them [p. 321].
No further citation is needed to indicate that the author has, without intending it, given the coup de grâce to what was left of the old wages-fund doctrine. He intends to be conservative, and he shrinks from the logical conclusions of his own reasoning; yet no one, so effectively as he, has shown that the wages-fund doctrine, in any tenable form, is nominis magni umbra.