expense either of other people's wages or of profits. An increase in wages in one industry would attract new labour from other industries, and thus, by the greater competition for employment, would force the wages down again. Or a fall in wages would be caused when the alleged increase in population, following the better standard of living, increased the number of competitors for employment. An increase in all wages would be entirely at the expense of profits. Consequently it used to be argued that if by trade union or other action wages were increased, other workers would suffer, or, if the increase came out of profits, capital would be driven out of the industry, the demand for labour would fall in consequence, and wages would be reduced to the original level. The wages fund theory therefore was as pessimistic as the subsistence theory to which it shows a certain resemblance. This theory, which Mill himself renounced in later years, is now generally abandoned, though one frequently comes across echoes of the belief that an increase in the wages of one class of workers must necessarily be at the expense of other workers. That this is true in particular circumstances is not denied. The main criticism of the theory is that it ignores the possibility of increased wages leading to greater efficiency, either in the worker himself or in the organisation of the business, and therefore to a greater output. It confuses the expenses of labour with the real cost of labour. Extra remuneration may come, not from other people's wages or from profits, but from greater productivity. Experience of the Trade Board system has shown that the better wages have in some cases improved the physique and efficiency, and therefore the output of the worker; in other cases they have impelled the employer to re-organise the methods of production and cut down waste to a minimum. Even where the increase in wages comes out of profits, the assumption that capital will be driven out of the industry is not always true. Firstly, capital is not so mobile as the theory assumes, some forms being almost impossible to divert to other uses. In the long run, however, if the rate of profits fell below normal the absence of fresh investment would bring about a shortage of capital in the particular industry. But, secondly, where the profits have been above normal, wages might be increased at their expense, yet leave sufficient inducement for new capital to be invested, provided that the encroachment on profits does not bring the rate below that prevailng in other industries of a similar character. Thirdly, the addition to the wages bill may be made up by raising the price of the product. The extent to which the ultimate burden falls on the worker himself depends on the character of the article. Obviously a rise in the price of wheat consequent on higher wages would rebound more on the workers as a class than an increase for the same reason in the price of motor cars. Through increased prices the non-wage-earning classes can bear, and have already borne, part of the incidence of higher wages. The theory is fallacious in assuming that increased wages inevitably cause an increase in population; this is contrary to general experience. It also assumes falsely that better wages in one trade cause a flow of labour from another; labour is not so mobile and adaptable as is here implied. Further, the wages fund theory as a complete explanation is disproved by actual experience. Wages may be higher in "new" countries, where the amount of capital is relatively small, than in "old" countries, where capital is plentiful. The average rate of wages is higher in the United States than in Great Britain, not because there is a greater capital fund there than here, but for several other reasons, prominent among which is the superior organisation and productivity of industry. Experience further shows that profits and wages have frequently risen together, and not one at the expense of the other as this theory would suggest. Where goods are being continuously produced under steady conditions, it may be argued that the capital available for the payment of wages in the present is the money received for identical goods produced in the past and now being sold. To this extent the wages fund theory is true. But many new goods are daily produced in anticipation of a market without a corresponding inflow from the sale of other goods, and the wages are an advance payment based on the estimates of future sales. Of course the money used for paying the wages is regarded as capital, but the essential fact is that the amount of capital is not necessarily pre-determined by past production. Bank credits play an increasing part in financing industry, and the fund of capital becomes extremely elastic. A wages fund which can be expanded according to the prospects of future sales ceases to be the fixed fund laid down in this theory. The amount of capital available is of great importance in the initiating and conducting of production, and therefore in affecting the wages of labour. But the statement that the amount of wages to be paid is determined in advance by the stock of capital representing past production cannot be accepted. The Residual Some writers have attempted to explain the nature of wages on the ground that labour was the residual claimant on the national dividend, i.e. it received what remained after rent, interest, profit, and other charges had been paid. Jevons, for instance, stated that "the wages of a working man are ultimately coincident with what he produces after the deductions of rent, taxes and the interest on capital." But rent, interest and profit are not fixed quantities, as the theory would imply. Indeed, profit and rent are more akin to residual elements than wages. Obviously a residual theory that can be applied to more than one of the factors of distribution is unsatisfactory. The theory is significant, however, in that it recognises the importance of productivity. It is not so pessimistic as the earlier theories, since it allows for a positive improvement in the share going to labour, provided that the efficiency of the workers and of industry in general is improved. The Marginal The productivity theory breaks away from the conception of a fixed fund, and regards the several types of income (wages, rent, interest and profits) as flowing from a continuous stream, the volume of which varies with efficiency and output. The employer is supposed, under perfect conditions, to make use of the different factors of production in those proportions which will render the maximum net gain. Free competition and mobility being assumed, each factor of production tends to be rewarded according to its specific contribution to the total product. The marginal theory of value* is applied to the reward of labour. It is submitted that the value of a man's services is determined in a similar manner to that governing the value of material goods. According to this theory, the wages of a given grade of labour tend to equal the net product of the marginal labourer, i.e. the specific output, after deducting all interest and similar charges, of the labourer whom it is just found profitable to employ. The reasoning may be briefly indicated. An employer is * No attempt can be made in these pages to enter into the marginal theory of value. For a full exposition of this important doctrine, see Marshall, Principles of Economics, Book V. endeavouring to secure the maximum net profit. For simplicity, let it be assumed that the price of the article he is selling is fixed not by, but for, him through the play of competition; similarly, that competition determines for him the price that he has to pay for the labour, capital and land. The profits of the employer are represented by the difference between the price he pays for these factors of production and the price he receives for the product. He finds that different combinations of the three factors give him varying net returns. Using a little more capital (e.g. machinery) and a little less labour may give him a higher-or a lower -net return than using less capital and more labour. Obviously the most efficient employer will be the one who secures the most perfect combination of the factors. The employer regards labour, land and capital merely from the standpoint of what they are respectively worth to him, and their prices are determined by their specific productivities. If the worker is paid less than the value of his product, competition among the employers is supposed to bring the wage up to the level; if he is paid more, competition among the labourers is depended upon to bring the wage down to that level. The employer, in his desire to obtain the most economical combination, pays regard not only to the specific product derived from all the labour, all the capital, and all the land that he uses, but (according to this theory) to the differences in the net product that are attributable to the addition or subtraction of small units of each of the factors. Thus is introduced the conception of " the little more or less " that is characteristic of the marginal theory. Suppose the employer finds that by engaging relatively more labour he secures a net increase in output over and above his extra outlay. He continues to take on workers but finds that at a certain point the net product |