The Decline Of Classical Economics

The Decline Of Classical Economics

Classical economics was, of course, never without its critics. The Malthusian population doctrine and the differential-rent theory, for example, underwent frequent attacks by radicals, socialists, and reformers throughout the nine­teenth century. But in an 1869 issue of the Fortnightly Review a curious event took place within the classical orthodoxy of Great Britain that shook the foun­dations of the classical theoretical system. John Stuart Mill recanted the wages-fund doctrine.

The Wages-Fund Revisited

The wages-fund doctrine held that at the end of a production period, a given stock of circulating capital is advanced to laborers to tide them over the next production period. This stock of capital is determined by many variables, in­cluding the productivity of labor and capital in previous periods, the amount of investment in previous periods, and so forth. In crude terms, the doctrine in­dicated that at a macroeconomic level, the average wage rate over a produc­tive period would be given by dividing the stock of capital by the number of laborers. Thus, in real terms, a maximum real wage (that is, all the goods con­sumed by laborers) is determined at the beginning of the production period. Properly stated, and given the assumption of a discrete time period of produc­tion in the economy, the wages-fund doctrine forms an integral, and indeed an inextricable, part of the dynamics of the classical system.

Confusions Surrounding the Doctrine

Numerous confusions always sur­rounded the wages-fund doctrine. One of them concerns the introduction of money wage payments, which customarily stand as the proxy for real wages. If the fund is understood as a money amount, then the amount going to labor could indeed be elastic and variable. The stock of real wage goods on hand is nonaugmentable (at a given time), irrespective of the amount or variability of money wages paid. Money wages, then, are not the "capital" of the wages-fund theory. Even Adam Smith, who provided early and otherwise clear state­ments of the wages-fund theory, was not immune to the problem. As Frank Taussig has pointed out with reference to Smith's statements of the doctrine:

Sometimes, indeed most commonly, this "stock" is conceived in terms of money or as consisting of funds in the hands of the immediate employer. Sometimes the money payments are described as of no essential importance, as only steps toward the distribution of real wages. The uncertainty and confusion which thus showed itself in Adam Smith continued to appear in almost all the discussions of wages for fully a century after his time (Wages and Capital, p. 145).

Micro Theory

versus Macro Theory Another difficult problem concerned the attempt, by both defenders and critics of the wages-fund, to read a microeconomic theory of wage determination into statements of the doctrine. For example, Francis A. Walker, an American critic of the concept, was led to argue that the wages-fund doctrine ignored the varying productivity of workers and therefore did not explain varying wage returns between different types of laborers or between laborers of different countries (e.g., East Indians and Englishmen). Walker had much company in this criticism. Unfortunately, and in spite of misuse on the part of its proponents, the wages-fund doctrine was designed only as a rough-and-ready macroeconomic argument. It was not until the development of the marginal-productivity theory decades later that a sat­isfactory explanation of individual wage determination was approached.