I decided to open up today’s diary with a modern discussion on the question of the notion of equality that was held at the Fabian Society (for some history on the society, see http://en.wikipedia.org/...). Think First has been critical in that I am spending so much time on historical discussions. So, I decided to open the diary with an examination of the speech by John Denham (the UK Secretary of State for Communities) on the notion of equality and its role in the electability of the Labour Party at this current stage. In many senses, it sets the stage for the discussion of wages articulated in the Wages-Fund theory which is the topic of today’s diary.
Next week, I am planning to do an examination of the debate on the causes of poverty in economic discussions of the time and a discussion on policy to combat it by examining the old (1795-7) and new poor law (1834) reforms.
I. The Debate on Notion of Equality and Labour’s Electability Issues:
In a speech yesterday at the Fabian Society, the Communities Secretary the Rt. Hon. John Denham, MP fired a salvo across the bow at the notion of equality and the manner in which it is approached by liberals and the left. Since they approach the question of equality rather differently (the former preferring the notion of equality of opportunity, the latter favouring measures towards economic, political and social equality), it was an inauspicious start which literally reached an even uglier crescendo. The full text of the speech can be found here, as I am only planning to highlight certain points: http://www.fabians.org.uk/... .
Perhaps, given the history of the Fabian Society, its stated belief in socialism, its members struggle for social justice and its role as the ideological centre of the old Labour party, made it a fitting place for New Labour to state its abandonment of the shining ideological crown of the Fabians inequality. Just as a quick introduction to Fabian Socialism, here is a short discussion of their history from Wikipedia http://en.wikipedia.org/...:
Immediately upon its inception, the Fabian Society began attracting many prominent contemporary figures drawn to its socialist cause, including George Bernard Shaw, H. G. Wells, Annie Besant, Graham Wallas, Hubert Bland, Edith Nesbit, Sydney Olivier, Oliver Lodge, Leonard Woolf and Virginia Woolf, Ramsay MacDonald and Emmeline Pankhurst. [...] At the core of the Fabian Society were Sidney and Beatrice Webb. Together, they wrote numerous studies of industrial Britain, including alternative co-operative economics that applied to ownership of capital as well as land.
The first Fabian Society pamphlets advocating tenets of Social justice coincided with the zeitgeist of Liberal reforms during the early 1900s. The Fabian proposals however were considerably more progressive than those that were enacted in the Liberal reform legislation. The Fabians lobbied for the introduction of a minimum wage in 1906, for the creation of a Socialised healthcare system in 1911, and for the abolition of hereditary peerages in 1917. [...] They favoured a national minimum wage in order to stop British industries compensating for their inefficiency by lowering wages instead of investing in capital equipment; slum clearances and a health service in order for "the breeding of even a moderately Imperial race" which would be more productive and better militarily than the "stunted, anaemic, demoralised denizens...of our great cities"; and a national education system because "it is in the class-rooms that the future battles of the Empire for commercial prosperity are already being lost".
The Fabians also favored the nationalization of land, believing that rents collected by landowners were unearned, an idea which drew heavily from the work of American economist Henry George.
Many Fabians participated in the formation of the Labour Party in 1900, and the group's constitution, written by Sidney Webb, borrowed heavily from the founding documents of the Fabian Society. At the Labour Party Foundation Conference in 1900, the Fabian Society claimed 861 members and sent one delegate.
So the choice of venue was cynical to say the least, what was certainly even more cynical were the words of the man whose brief was that of Communities secretary. The speech is based on research completed by the Joseph Rowntree Foundation and The Fabian Society. Starting off with a discussion of the current state of the fight against inequality in Britain, Denham says the following:
- But there are important challenges that remain. Income inequality and family background still have too strong an influence on a child’s life chances. Anti-social behaviour still damages too many communities. And with globalisation rapidly shaping our industrial base, we face new challenges on employment, demanding ever greater personal adaptability. 4. The research focuses on income equality. But many of the underlying attitudes expressed reflect a wider debate about fairness, a key consideration in many of the challenges we now face as a country. What is that that makes a society fair? What is it that makes people feel that they get a fair reward for what they put in?
Both are legitimate points and legitimate questions. The research considers exactly those points and came up with the following answers and these answers are what we can expect in this day and age after all the hard-work done by both the Labour and Conservative Parties to undetermined people’s solidarity with each other:
- What the research shows is that popular sentiment supports a tough, hard headed, but at the end of the day, compassionate version of fairness. One that does not turn its back on those in great need, but one that also insists that effort should be rewarded, and that society should be fair to those who play by the rules. 6. This sense of fairness is based on the idea that there is a set of obligations and opportunities that should underpin British society. When people say ‘it’s not fair’ it is usually because they believe that the balance of duties and rewards, of right and responsibilities, has been upset." [...] 9. It is clear from the research that people do not make judgements about how fair things are by only looking at outcomes. They also care about how we get there. 10. They differentiate between those who are disadvantaged despite the effort that they have made, and those who have not made that effort. And they will do the same for those who win out – there is much greater acceptance of disparities of wealth where they think that wealth is the outcome of talent or effort rather than luck.
Rather than arguing that we really need to rebuild the consensus in support of such as worthy thing as equality and fairness, given the far greater level of inequality of wealth and income existent in Britain after years of Thatcherite and New Labour policies, what is Denham’s conclusion?
- But it means we must accept that this research sounds the death knell for the purely needs based approach to fairness and inequality which has dominated much left-liberal thinking since the 1960s. 14. We must confront the difficult truth, that this form of egalitarianism, the one that defines fairness solely in terms of society’s response to those in greatest need, is badly out of step with popular sentiment.
Even more so, maintaining this deeply out of step argument in equality and fairness represents a threat to Labour’s electability in the future, wonderful, Labour’s non-electability has nothing to do with its domestic and foreign policies while in power, its neoliberalism, its lack of internal democracy and abandonment of the ideals that it stood for, it has nothing to do with the fact that it has cynically jettisoned its base due to those policies while chasing electability, rather the danger is its "support" for the principles of fairness and equality (certainy not obvious if you look at New Labour policies while in power):
The left needs to stop holding up egalitarianism as the ideal. A rejection of inequality - both absolute, relative and of opportunity - is absolutely core to who we are. But we will be more successful - not just electorally but in challenging unacceptable inequality - if we adopt and own a different, more nuanced view of fairness and equality. If we continue to believe that the egalitarian approach is really the right one, and that our main task, somehow, is to find more cunning ways of getting there, we will fail.
Perhaps, New Labour should instead stop calling itself left, as it is nought but a centrist party and stop telling the left to abandon its most cherished message. I leave it to you to read the rest of the speech outlining the "brave new world" ... the really strange thing is that if this message had been delivered by Tony Blair when he took over the Labour party, I would not be surprised; in fact, I am surprised he did not do so (I guess these words are sacred cows to most liberals and leftists) ... no, it is in the middle of the worst economic crisis since the Great Depression (and there are no indications as of yet that Britain is moving out of this crisis) that they launch their attack on ideas that could be used to justify Keynesian economic principles: equality and fairness.
Now, we can go look at an earlier attack on workers and the poor found in the wages-fund theory.
II. The Wages-fund Theory
a) the theory
In the earlier diaries that I did on the discussion of wages in classical economic theory and in my description of the structure of classical economics, I had argued that in the classical theory, the real wages were taken as a given, along with the social product and the technical conditions of production in the determination of the rate of profits and the prices of commodities.
What does that mean? Remember in our discussions of Smith and Ricardo, I said that they both held that the natural wage was given by historical and social conditions. Thus, natural wages (or the commodities composing the wage bundle) were specific to a given time and place and could change over the long period due to changes in the pace of the accumulation of capital or in the size of the population -- thus, the conditions of the supply of labour and its demand (the capital available for its employment) could affect the determination of the natural wage.
I also said that the employment of labour depended upon the social product and the technical conditions of production (the known techniques to produce the output) -- thus, changes in the pace of accumulation would affect the demand for labour and hence the employment of labour. Furthermore, I argued that necessary consumption (that part of the product going to maintain the size of the economy at the same level as it was that part guaranteed to workers in Smith and Ricardo) was determined endogenously to the theory, thus the amount of the social product that goes to labour depends on the size of the employed population and the natural wage (wL). Thus, whatever part of the social produce which goes to labour depends on the size of the employed labouring population and it will change in terms of the share of wages out of social product depending on the amount of employed labourers and the commodity composition of necessary consumption and the social product will alter if the natural wage itself alters. Is that clear?
The wage-fund argument put forward by James and John Stuart Mill and J.R. McCulloch derives in part from the work of Malthus.
The first part of the argument of these authors was that instead of a given real wage, what was actually given was necessary consumption, or what was termed the wages-fund.
They argued that there was a given amount of capital which was available to employ workers at the beginning of each production period (sometimes, identified with the physical commodities consumed by workers (James Mill, McCulloch), sometimes a unspecified quantity of capital (McCulloch) and in J.S. Mill, the wages-fund was an amount of saving destined for the employment of labour).
But it is unnecessary in an inquiry of this sort, to refer to capital in general; for we have only to deal with that portion of it which embraces the various articles intended for "the use and accommodation of the labouring class." This portion forms the fund out of which their wages are wholly paid (McCulloch, 1854, p. 4).
This amount of capital, of course could change with the pace of accumulation of capital -- thus the quicker the pace of accumulation, the larger the available fund with which to employ workers or the larger the available wage fund.
In this sense, like Malthus, they argued that the part of the product which composed the share of wages out of output was fixed or hard to change. Malthus had argued that the amount of food that could be produced could only be increased arithmetically, and that as time went on it became more and more difficult to procure this food as less and less fertile land had to be brought into production. Mill and McCulloch argued that the necessary consumption of the workers was given exogenously, that is there was a given fund of capital which was available to employ labour. This wages-fund is predetermined independently of the real wage rate.
They then argued that given the available wages-fund and the active working population, that the real wage for the working class was determined by the relation between the amount of capital available for the employment of labour and the size of the labouring population.
K/L = w
As we have seen, however, that the regulation of the shares between the capitalist and labourer, depends upon the relative abundance of population and capital, and that population, as compared with capital, has a tendency to superabound, the active principle of change is on the side of population, and constitutes a reason for considering population, and consequently wages, as the regulator. (Mill, 1826, p. 71)
What this means is that they argued that the real wage was flexible, and was equal to the available wage fund divided by the active working population. Thus, any decrease in the real wage rate meant that there would be a proportional increase in the number of workers employed. This combined with the flexibility of the real wage rate ensured a tendency towards the full employment of the available labouring population.
The flexibility of the wage in relation to the unemployment or increasing demand for scarce labour means that if there is unemployment the real wage would fall until there was full employment and if labour was scarce, the real wage would rise.
[...] But there are limits, however difficult it may be to specify them, to the extent to which a reduction of wages can be carried. The cost of producing labour, like that of producing other articles, must be paid by the purchaser. Work-people must, at all events, obtain a sufficient quantity of food, and of the other articles required for their support, and that of their families. This is the lowest amount to which the rate of wages can be permanently reduced; and it is for this reason that it has been called their natural or necessary rate. The market rate of wages may sink to the level of this necessary rate, but it is impossible it should continue below it. The labourer's ability to maintain himself, and to rear fresh labourers, does not, as already shown, depend on the money he receives as wages, but on the food and other articles required for his support for which that money will exchange. The natural or necessary rate of wages must, therefore, be determined by the cost of the food, clothes, &c., which form the maintenance of labourers (McCulloch, 1854, p. 27).
They argued that there was an inverse relation between the real wage and the employment of labour in the economy. In the wages-fund theory, contrary to that of Smith and Ricardo, the real wage is determined exclusively by supply and demand for labour.
Universally, then, we may affirm, that, other things remaining the same, if the ratio which capital and population bear to one another remains the same, wages will remain the same; if the ratio which capital bears to population increases, wages will rise; if the ratio which population bears to capital increases, wages will fall. (Mill, 1826, p. 44)
Some clarifications would be helpful:
- The relation between the natural wage and the market wage in the wages fund theory is different than what was in earlier arguments. In the work of Smith and Ricardo, the market wage was simply the actual observed wage in the real world and the natural wage, was determined by historical and social conditions, but would be affected by systematic and persistent forces operating in the labour market (increases in the pace of accumulation and the growth of population).
- In the wage-fund argument put forward by James Mill, the natural wage is now determined endogenously to the model, and it will in general be equal to the subsistence wage. In the wage-fund argument put forward by McCulloch, the market wage becomes a normal theoretical variable, the natural wage becomes a minimum threshold.
- This can be seen in James Mill's absurd argument (1826, pp. 51-57) that population growth outstripped the growth of capital. Again, this argument derives from the work of Malthus. In this situation, the growth of the labour supply will always be greater than the increase in the demand for labour and will keep the full employment real wage at the level of subsistence (natural wage).
- On the other hand, the only manner to raise the market wage would be to have the growth of capital accumulation outstrip the growth of the labouring population -- this would constitute an increase in the wages-fund relative to the employable labouring population and then the market wage would rise. Thus, the market wage becomes a theoretical variable determined in the theory, which tends to be equal, through the population mechanism to the natural subsistence wage. This is why Marx said McCulloch was so vulgar that he even vulgarised James Mill.
b) differences from Smith and Ricardo
Let's note the differences of this theory from Ricardo's theory (and Smith where relevant and appropriate).
In Ricardo's theory, the natural wage is determined at the level of subsistence by historical and social conditions and the systematic and persistent forces of the accumulation of capital (labour demand) and population growth (labour supply).
The necessary consumption or the wage share of output is determined endogenously dependent upon the real wage, technical conditions of production and social product. There is no notion in Ricardo's analysis of an exogenously given wages-fund to employ the whole working class.
Ricardo's theory does not predict full-employment of labour except in the possible situation of a scarcity of labour relative to the growth of capital which is to employ that labour. In fact, persistent unemployment is to be expected, given his argument on machinery.
Furthermore, the real wage is clearly not flexible and there does not exist an inverse relation between the real wage and the employment of labour. You may recognise this argument, it is the precursor to the later neo-classical argument from the 1870s, but without the notion of substitution of factors of production underlying the theory of marginal productivity to bolster it.
According to Stirati, (1994, pp 177-184) the wages-fund theory can be characterised by the following argument:
- an exogenously given fund of capital which is to employ the available working population;
- a flexible real wage determined in relation to the supply and demand for labour;
and 3) an inverse relation between wages and the employment of labour which ensures the full employment of the available working population.
Can you see the differences between these theories? Is it clear that the wages-fund theory changes the core or the structure of the determination of exchange value and distribution of classical political economy? The data of the theory have changed, instead of a historically determined natural wage (which although is still given is of no relevance, merely serving as a minimum threshold or floor), the necessary consumption of the working class is now taken as a given, and the real wage is determined endogenously or within the model given the wages-fund divided by the labour force.
Moreover, the distinction between the natural wage and the market wage has been blurred substantially, as the market wage has now become a theoretical variable, which is determined in the system as the real wage. The market wage is no longer just the actual wage in the real world; there is now a theory to determine its actual level. Is this distinction clear?
The Malthusian population mechanism ensures the tendency of the market or real wage towards the historically determined subsistence level, which will correspond with the full employment of labour. Moreover, if you read James Mill, he argues that the natural wage is determined by the wages-fund, which will then ensure that everyone receives the subsistence minimum. On the other hand, McCulloch argues that the natural wage is determined by historical conditions, but the market wage is determined by the wages-fund in relation to the quantity of employable labourers. The two of them, the main proponents of the wages-fund notion, are not entirely clear as to what they are actually determining -- the distinction between the natural wage and the market wage has become very confused in this argument.
Political Apologetics and the Wages Fund:
I have said that this theory was politically apologetic in nature, why is this the case? This theoretical position carries with it political consequences.
First of all it is a full-employment theory of wages; people who are unemployed are unemployed by choice; there is no involuntary unemployment in this theory (unless of course it was caused by trade unions demanding higher wages than the one determined in the theory, see below).
Second, if at any given time, there exists a natural rate of wages, and that the market rate is determined by the relation between the existent wages fund and the labouring population, then there is no manner in which the market wage can be affected except by varying that which impacts upon either of these two variables. Besides that which increases the growth rate of the wages fund or decreases the growth rate of population, there is nothing which can cause rising market wages.
According to McCulloch, government legislation to raise the level or to protect the wage will remove responsibility from the worker's control for the maintenance of their own level of existence, and will have an impact upon the role of free competition in regulating wages.
On the other hand, both Mill and McCulloch opposed the usage of the Combination Acts to prevent workers from organizing trade unions and any government interference which prevented free competition from regulating wages.
They maintained that competition between capitalists and workers in the market would result in increases in market wages that had been depressed below the natural wage.
Although they did recognize that trade union organization was legitimate in and of itself, they believed that it could only be effective when the market wage was forced below the natural wage.
Thus they argued that it was completely futile and illegitimate for trade unions to attempt to raise market wages above the natural wage. It is futile because all that would happen if there is an increase in the market wage brought about by unionisation is that given the size of the wages-fund, a higher wage for workers means that some workers would be unemployed, as there has not been an increase in the size of the fund, merely the level of the wage and hence that would mean that some workers would be made redundant. Moreover, the unemployment would cause workers to compete against each other and the wage would actually fall. It was the fact that the theory rendered trade union struggles futile for actually increasing the wage that led to its abandonment by JS Mill (that along with the fact that the argument does not hold water which he realised in his discussions with William Thorton).
This revision of Ricardo's theory of wages literally undercut the possibility of political struggle whereby workers could gain a larger share of the surplus product at the expense of the capitalists, which was explicit, for example, in the writings of Smith. The only control that the workers could have over their wage rate, given the assumptions of the theory, was to limit their birth rates in order to keep population growth commensurate with the growth of the wage fund.
On the plus side, it should be noted that this argument did leave intact the inverse relation between wages and the rate of profits, as once wages are determined in the system, then the rate of profits could be easily determined. I say easily because both Mill and McCulloch maintained a simple labour theory of value, rejecting the modifications that were introduced by Ricardo. However, that linkage was soon to be shed by the abstinence theory of profits.
Marx, K Theories of Surplus Value, Volumes I-III, International Publishers, 1971.
McCulloch, J. R. (1825) Principles of Political Economy, Ward, Lock and Co.
McCulloch, J.R. (1854) A Treatise on the Circumstances which Determine The Rate of Wages and the Conditions of the Labouring Classes, AM Kelley, 1967.
Mill, James, (1821) Elements of Political Economy, Elibron, 2003.
Mill, James (1824) Elements of Political Economy, Baldwin, Craddock and Joy.
Mill, James (1826) Elements of Political Economy, George Olms, Verlag, 1971.
Ricardo, D. (1821) Principle of Political Economy and Taxation, Vol. I of the Collected Works and Correspondence of David Ricardo, Cambridge University Press.
Stirati, A. The Theory of Wages in Classical Economics, Edward Elgar, 1994.
Earlier diaries which will clarify this discussion are the following: