The Wages Fund: Mill's Recantation

The wages fund doctrine was used by some economists and a number of popular writers as an argument against the formation of labor unions. According to the wages fund theory, the wage rate was determined by the size of the labor force and the size of the wages fund, and any attempt by labor to raise wages, by whatever means, would be fruitless. This is an example of how orthodox economic theory was used to prove that attempts to improve the welfare of the working class by providing a more equal distribution of income could not be successful. We have already seen that Mill believed that his unique contribution to economic thinking was a distinction between the fixed laws of production and the institutionally and culturally determined laws of distribution, and that his reason for drawing this separation was to allow his humanism to moderate the conservative conclusions of the Ricardians.

Even though Mill accepted the wages fund doctrine, he supported the formation of labor unions. In this he followed the reasoning of Adam Smith, who had pointed out that a single unorganized laborer was at a competitive disadvan­tage in bargaining over wage rates with an employer. Unions and strikes seemed to Mill to be appropriate tools for labor to use in its attempt to counterbalance the power of the employing firm. It is possible that Mill's adherence to the wages fund theory can be explained by his strong concern over the consequences of unregulated population growth. After the publication of the sixth edition of Mill's Principles, but before the publication of the seventh, Mill reviewed a book by William Thornton that was critical of the application of supply-and-demand analysis to labor markets and that rejected the wages fund doctrine. In his review, Mill accepted nearly all of Thornton's arguments, concluding that the argument that unions cannot raise wages is invalid.

The wages fund doctrine asserted that the demand for labor was fixed absolutely by the size of the wages fund. Mill now retreated from this position to argue that although the maximum amount of funds that could be used to pay wages was fixed, a given labor force and wage rate might not exhaust this fixed amount. Under this reasoning, the wage rate is not conclusively determined; there is a range of possible wages. Labor unions can therefore raise wages through the bargaining process.

Although Mill rejected the wages fund doctrine in his 1869 review of Thornton's book, the seventh edition of his Principles, published in 1871, made no changes on this score, because Mill maintained that these new developments "are not yet ripe for incorporation in a general treatise on Political Economy." This is quite puzzling, for in 18 62, in the fifth edition of his Principles, Mill had already concluded that wage rates depended on the bargaining power of the employer and employee and that one important way for labor to increase its power was through unionization.30 This inconsistency is simply another example of Mill's attempts to stay within the general framework of classical economics, which he learned at a young age from his father, while giving vent to his humanistic feelings, which called for social reform centering around a more equal distribution of income.