J. S. Mill's Wages - Fund Theory

John Stuart Mill's Wages-Fund Theory

The credit for formulating another theory of wages, comple­mentary to, rather than a substitute for, the subsistence theory, goes to John Stuart Mill. The theory known as the wages-fund or wage-fund theory was first suggested by Adam Smith when he intimated that a store of funds was available out of which wages could be paid. J. R. McCulloch, James Mill, Nassau Senior, Malthus, and Ricardo all found the concept of a wages-fund acceptable as an explanation for the level of wages. Wages; according to this theory described by John Stuart Mill, depended upon the relationship which existed between the supply of pop­ulation and the capital available to employ workers. Mill was forced to add qualifications to the concepts of population and capital. By the former he meant those members of the laboring population who offered their services for hire; and by the latter, the amount of capital to be used for the payment of wages and any amounts incidental to the hire of laborers. Thus the funds available for wages were fixed at any given time, and the only way to increase wages was to reduce the number of wages to be paid or increase the capital funds available. The theory had im­portant bearing upon the relation of trade unions and legislation to wages. At best the effect of either of these would be merely the shifting of a share of wages from one group of wage earners to another, since no absolute increase in the total wages paid was possible. That there was no fundamental contradiction between the subsistence and the wages-fund theories is clearly demon­strated by the fact that the strongest advocates of the subsistence theory also accepted the wages-fund theory without criticism.

Mill had influential supporters for his theory in Henry Fawcett and John Elliot Cairnes. To their credit it must be admitted that a modicum of truth appears in the general idea that wages are paid in part out of capital. This does not validate the general theory, as a glance at some of the fundamental criticisms will show; but it does relieve it of some of the stigma of being a dis­tinct capitalist class doctrine.
Criticism of the wages-fund theory came from a variety of sources. Several decades before the final statement of the wages-fund theory, F. B. von Hermann in Germany had raised ob­jections to it. Later Francis Walker, Francis Longe, and W. T. Thornton pointed out such errors and impracticalities that the theory failed to survive. These writers pointed out that it was the consumers who set the demand for labor, and workers might be provided for out of current income as well as from capital. Also there was no specific fund for wages which was separable from other funds to be used in production. The "fund" then was really a matter of the employer's discretion as to how much he would provide for wages. Mill was aware of the telling effect of these criticisms upon his theory, but he was not prepared to submit another; so his original statements continued to stand though the general acceptance of the theory lost ground.