Subsistence Theory of Wages

The Subsistence Theory: Smith, Ricardo, and the Socialists

Adam Smith appears to have accepted the subsistence theory of wages, but his discussion was more suggestive of alternate theories and possible modifications of the "iron law" (as Lassalle later called it) than it was a definite statement of it. The low standard of living, he declared, was not a cause but an effect of low wages. Fundamentally the subsistence of the workman and his family set the bottom limits to wages. A rise in wages, there­fore, did not so much improve the lot of the wage earner as allow him to bring more children to adulthood. Hence high wages in­creased the number of workers, and low wages reduced the sup­ply. Wages were never absolute in amount at a given time; there was room for bargaining to take place. The discrepancies in the bargaining power of the wage earners and the employers were clearly described. On the one hand, employers were few, no re­strictions were set upon their organization, and tacit agreements existed among them as to wage policies. On the other hand, the opposite conditions applied to the wage earners.

Variations in the statement of the subsistence theory of wages continued to arise, even from those who have been regarded as its staunchest advocates. Malthus, basing his theory of wages on his theory of population, followed a supply and demand thesis, advocating the restraint of marriages as a means of decreasing the supply of wage earners and thus raising the standard of wages. The subsistence level does set the level of wages, but it is a subsistence level governed by custom. Malthus denned it as "that amount of those necessaries and conveniences, without which they would not consent to keep up their numbers." There­fore wages could not fall below this level for the various classes of people without a fall in the labor supply and a consequent in­crease in the rate of wages.

Ricardo's contribution to this doctrine was the theory of the natural wage and the market wage, the natural wage being the wage which enabled the laborers to subsist and perpetuate their race without change. But, he added, the subsistence level was determined by custom for the various strata of society. Ricardo, of course, merely transferred his general theory of value to a theory of wages. Since value is the labor cost of production, wages are the cost of reproducing the same quantity of labor. Variations in the supply of laborers or changes in the demand for the prod­uct may change market wages, but in the long run they will tend to conform to the natural wage. There is also the admission that market wages might continue for an indefinite period above natural wages. One must draw the logical inference that an in­crease in market wages raises the customary standard of living. Does the new wage become the natural wage? Ricardo, without being aware of it, anticipated aspects of the wage problem which are still plaguing economists. In an expanding economy, Ricardo was well aware, things may act quite differently than they do in a static period of history.

Still in line with the classical tradition, this theory has had something of a revival in recent years after losing ground in the last half of the 19th century. Alfred Marshall advanced the opinion that wages (Ricardo's natural wage) in the long run would tend to equal maintenance and reproduction costs.
The Socialists have fastened upon Ricardian theories and used them as a justification for the overthrow of the capitalist system. According to Ricardo, labor is the only source of value. He also said that wages tended to be just sufficient to provide for sub­sistence and reproduction on a given customary standard of life. It takes no imagination to foresee the socialist line of reasoning from this point on. Labor has created ample value for a decent existence; in return labor has received a subsistence wage. Obvi­ously, value has been taken from labor by someone who had no right to it since it was the creation of labor.

In the hands of Marx these ideas were worked out as the theory of surplus value and the doctrine of increasing misery of the working class. The last is an embellishment of a process of change first explained by J. K. Rodbertus (1805-1875) but given currency by Marx in the Communist Manifesto. Briefly, Marx said that as the produc­tivity of labor increased through division of labor and the use of machines, the variation in wage levels tended to disappear since skilled workers were reduced to unskilled, all wages falling to­ward the barest minimum of subsistence. Consequently an in­creasing disproportion appeared between wages paid to the la­borer and the value he created.