per man begins to decrease in value. The explanation of this decrease is afforded by the increased supplies of the product in the market, or by an actual decrease in the amount produced per head, or by the operation of both. (A reduction in output per head does not in this case mean that the men vary in efficiency, for they are all of the same grade and capable of doing the same work. The reason might be simply that the point of maximum returns of the firm has been reached, after which diminishing returns* begin to operate.) The employer will go on engaging men until he reaches the "point of indifference," where the addition of another man adds nothing to the gain. If he employed labour beyond this point, he would be paying more than it is worth to him. If he stopped employing before reaching this point, he would not be reaping the maximum advantage. If there is perfect competition on both sides, the employer will pay a wage to all the workers in the grade equal to the net productivity of the worker whom it just pays to employ. The workers in the grade are by hypothesis "identical and interchangeable," they are all of equal efficiency, and an increase or decrease in the marginal product is not attributable to variations in the application and energy of the individual workers in the grade. The marginal worker is as efficient as all the others; indeed, any one of the workers in the grade might be termed the marginal labourer.† The wages of the grade, therefore, * Cf. above, p. 32. †This may be illustrated by analogy with the voters at an election. Suppose the successful candidate was returned by a majority of only one vote. Possibly an individual who voted for him just as a polling booth was closing would claim that it was his vote that returned the candidate. But if the latter polled 15,000 votes altogether, any one of this number could equally be termed the decisive vote for they are all identical and interchangeable." tend to be measured by the value of the product of the marginal labourer. Considerations on the supply side of labour must also be taken into account. The "cost of production" of labour, i.e. the cost of rearing and training labour of different kinds, is an important factor in influencing wages, though care must be taken not to magnify the influence of this cost. Though a larger sum of money is spent in the training of an engineer than in the case of an unskilled artisan, the relative remunerations are out of all proportion to the respective initial outlays. The cost of training a teacher is higher than that spent on a mechanic, yet the latter may earn a bigger income than the former. Productivity to the employer, rather than the cost of producing the labour, is the principal consideration, though limitation in the supply of labour due to high cost of training will serve to force up the marginal product and therefore the wages. The wages paid in a trade influence the amount of labour forthcoming, especially over a long period. If the wages in a particular occupation are relatively high, the supply of labour entering that occupation will tend to increase, and eventually bring about a reduction in the value of the marginal product, and therefore a decline in the rate of payment for labour. If the wages are low, the supply of labour will over a period fall off, thus tending to raise the value of the marginal product and consequently the wages. Again, in a new country where labour is scarce in relation to land, men will be employed only where their productivity is comparatively high. Capital goods will assist in the performance of those tasks on which it would not be profitable to engage labour working alone. In a country where the supply of labour is plentiful in relation to land and capital, it is found possible to employ labour on less productive work than would be economical in the first country described. This, coupled with differences in the efficiency of industrial organisation, helps to explain why wages are higher in some countries than in others. The marginal productivity theory, of which the above is a very incomplete exposition, may be equally applied in principle to other forms of distribution. The different grades of labour are theoretically regarded according to their respective marginal productivities. And in theory, interest, rent and profits as well as wages are determined in a similar manner, each factor of production tending to be rewarded according to its marginal contribution to the total product. Some writers* slightly modify the marginal productivity theory of wages by introducing the idea of a discount. The period between the commencement of production and the receipt of the money for the finished article is usually much longer than the worker can afford to wait for his wages. The employer advances the "present worth" of the worker's specific product. Thus wages tend to equal the marginal product, minus the discount claimed by the employer for paying out the wages in advance of the sale of the product. The marginal productivity theory approaches nearer to a complete explanation of wages than do the previous theories, but on account of the peculiarities attaching to the demand for and supply of labour it cannot be regarded as a final statement. Specific productivity" would require that the respective outputs of labour and capital are separable and measurable to a degree greater than is actually possible. An employer by adjusting the proportions of capital and labour may find that the addition of a given amount of one or the other may result in a certain amount of extra product. But as labour and capital are acting in conjunc * E.g. Hadley and Taussig tion, capital being useless without labour, and labour increasing its productivity by the use of capital, it is hardly correct to speak of a specific product accruing to either. Further, the theory assumes a condition of perfect competition, the absence of which in real life renders some qualification necessary. An employer may be able to give a higher wage than he is actually paying. But unless he is compelled by the competition of other employers, or by trade union action, to pay the maximum possible, he may continue to give much below the value of the "specific product." To say that an employer can pay more does not necessarily mean that he will pay more. The theory takes no note of differences in bargaining strength, and assumes a perfect knowledge and mobility on the part of labour. But here again the conditions are not borne out in practice, economic friction" being particularly marked. The worker may be too weak in bargaining power to secure his due. Or he may be producing value considerably in excess of his wage, yet be in ignorance of the fact. Or he may, for sentimental or other non-economic reasons, prefer to carry on with his old employment though he is offered a better wage elsewhere. 66 The marginal productivity theory overcomes many of the difficulties that confronted the subsistence and the wages fund theories. It is more optimistic in that it permits of a permanent addition to the wages of labour. It does not fear an automatic increase in population, with its greater competition for employment and the resultant fall in wages. Indeed, it recognises that an increase in population may facilitate a further division of labour and thus improve the net output per individual. Nor does it fear the restriction of a capital fund; it shows that wages are paid on an estimate of future sales, and are not pre-determined by a fund consisting of goods produced in the past. Though its assumption of perfect mobility cannot be allowed, it explains better than the other theories why wages in one trade are higher than in another. The problem of relative wages is settled in so far as differences in remuneration are due to differences in the marginal productivity of the respective workers. Wages in one district or country may be higher than elsewhere for a similar reason. General This very brief review shows that no theory has yet been submitted which satisfactorily explains the nature and principles of wages. And, as previously suggested, it is doubtful, having regard to the character of the problem, whether any final theory can ever be universally accepted. The critics of the wages system repudiate altogether the possibility of a "law" of wages; they claim that the whole system is artificial and morally indefensible, and that a reasoned scientific law of wages cannot therefore ever be formulated. From the examination of the several influences on wages however, it is possible to infer some general tendencies, even if these cannot be crystallised into an exact scientific law. The subsistence theory emphasised the fact that wages cannot fall for long below the sum necessary to maintain bare physical efficiency. While recognising that subsistence" is a somewhat elastic term, one may regard it as providing the minimum. The marginal productivity theory showed that, under free competition, wages tended to equal the productivity of the marginal worker. In practice the employer may pay less than this amount, but he will not, in a competitive system, pay more. Thus marginal productivity sets the maximum. As the efficiency of the worker and the organisation of industry improve, the level of productivity rises. Although there is a constant advancement in what the worker regards |