The Wage Fund.

The Development of the Doctrine: the Critique of the Doctrine by Longe

and Thornton: Mill’s Recantation.
Mill wrote a treatise on logic, and he was therefore fully aware of what at the
time constituted good grounds for accepting and rejecting theories

The actual grounds Thornton gives for rejecting ‘supply and demand’ need to be
considered with care. Most of the literature claims that Thornton’s arguments
are so logically weak that Mill could not possibly have accepted them, and this
leads to the suspicion that Mill rejected the doctrine on other grounds.

The Wage Fund Doctrine.

Definitions: The obvious one is the very concept itself of a ‘fund’ dedicated to
the payment of wages. This ‘fund’ became associated with the concept of
‘circulating capital’ as opposed to ‘fixed capital’.

“That part of the capital of the farmer which is employed in the

instruments of agriculture is a fixed, that which is employed in the wages
and maintenance of his labouring servants is a circulating capital”. Smith
p 457

“The demand for those who live by wages, it is evident, cannot increase
but in proportion to the increase of the funds which are destined for the
payment of wages.” Smith chapter 8 p 117

When we get to James Mill (1824):

“Universally, then, we may affirm, other things remaining the same, that
if the ratio which capital and population bear to one another remains the
same, wages will remain the same; if the ratio which capital bears to
population increases, wages will rise; if the ratio which population bears

J.S. Mill and the Wage Fund 1

 to capital increases, wages will fall.” Elements of Political Economy. Ch
2

This is clearly very loose terminology: if by the ratio of capital to labour Mill
means the whole of the national capital stock, then obviously, as
industrialisation occurs, this ratio is likely to rise permanently.

M’Culloch
“No other fund [than capital] is in existence from which the labourers, as such,
can draw a single shilling.” Wealth of Nations, M’Culloch’s edition p 470 as
quoted by Taussig (1896),Wages and capital: an examination of the wage fund
doctrine, Appleton, p 192

“the rate of wages in all countries and at all periods depends on the ratio
between the portion of their capital allotted to paying wages, and the number of
their labourers.” Taussig p 192

Fawcett
Fawcett claims that it is not the case that wages are controlled soley by
employers “………… wages are regulated by fixed and well-ascertained
laws, and that these laws are as certain in their operations as those which
control physical nature...” Fawcett “Economic position of the British
labourer, p 119-121 as quoted by Longe, F.D., (1886) p 13-14

Fawcett “Economic position of the British labourer, p 119-121 as quoted by

Longe, F.D., (1886) p 13-14

The wage fund and elasticity.

If we simply takes the statement that wages are the ‘fund’ of capital divided by
the labourers, with F as the fund, L as the labourers, and w as the wage, then

W = F/L

J.S. Mill and the Wage Fund 2

This is clearly a rectangular hyperbola, since the total wage bill is always the
same, namely F=WL

By rearranging this equation, it can be imagined that there is a ‘demand for

labour’ function, where the quantity of labour demanded is a function of the
wage rate.

So we can say,

L = F/W

Since the elasticity of demand for labour is

dL w
dw L
with L = F/W ,

dL F
=− 2
dw w

dL w F w F
then =− 2 = = −1
dw L w L LW

at all points on the demand curve.

This is unit elastic, and thus changes in the wage rate will not affect the total
wage bill.

Mill on the wage fund

In his Principles of Political Economy (1848) John Stuart Mill helps to clarify
the terminology:

“Wages, then, depend upon the demand and supply of labour; or, as it is often
expressed, on the proportion between population and capital. By population is
here meant the number only of the labouring class, or rather of those who work

J.S. Mill and the Wage Fund 3

for hire; and by capital only circulating capital, and not even the whole of that,
but the part which is expended in the direct purchase of labour. Principles of
Political Economy, 1848 .ch 2

In other words, wages are determined by the amount of capital and the level of
the working population, and nothing else.

The result of the ‘law’, claims Mill, is that it is impossible for labourers to
combine in a trade union and successfully increase wages.

In Volume three he says:

“If it were possible for the working classes, by combining among

themselves, to raise or keep up the general rate of wages, it needs hardly
be said that that this would be a thing not to be punished, but to be
welcomed and rejoiced at. Unfortunately the effect is quite beyond
attainment by such means…..the increase in wages would simply reduce
the level of employment. …..” Mill, J. S. Principles of Political
Economy: With Some of Their Applications to Social Philosophy, part 11,
p 348

Apparently, prior to the Thornton critique the wage fund theorem was thought
to be an irresistible law.

“It is laid down that wages, by an irresistible law, depend on the demand
and supply of labour, and can in no circumstances be either more or less
than what will distribute the existing wages-fund among the existing
competitors for employment.” John Stuart Mill, The Collected Works of
John Stuart Mill, Volume V - Essays on Economics and Society Part II
(Chapters of Socialism) “ Thornton On Labour And Its Claims” 1869, pp
634

J.S. Mill and the Wage Fund 4

 The sum available to pay wages being fixed, the wages depend entirely
upon the population. See John Stuart Mill, The Collected Works of John
Stuart Mill, Volume V - Essays on Economics and Society Part II
(Chapters of Socialism) “ Thornton On Labour And Its Claims” 1869, p
634

Thornton.
We come now to the actual review by Mill of Thornton’s book On Labour.
Though there are s different interpretations of this work, the essence would
appear to be an attack on ‘Supply and Demand’.

Mill’s response seems unclear. At times he seems to defend the ‘law’ of supply
and demand. At times he seems to accept that Thornton has a point. He also
seems to take the position that the ‘general’ law of supply and demand cannot
be subverted, but that it might be inadequate in individual cases.

In order to examine the justice of Mill’s critique, it is first necessary to attempt

to ascertain just precisely what Thornton was arguing. (See Book II, Chap1, Of
Supply and Demand.)

Thornton’s Approach.

Throughout, Thornton appears to adopt two methods. The first is a generalised

attack on supply and demand. The second method is a set of examples he gives.

Putting the second method - the ‘examples’- aside for the moment, just what is
Thornton’s generalised rejection of supply and demand?

“….Labourers can be rendered connubially discreet only by having their

standard of living raised. But their standard of living cannot be raised
without a permanent rise in the price of their labour, and the price of
labour cannot be permanently raised, unless the multiplication of

J.S. Mill and the Wage Fund 5

 labourers be checked, and that multiplication cannot be checked except at
the bidding of connubial discretion.” 1870 2nd ed, p44

The argument essentially being that population growth condemns the

population to a low income.

“For those who do not choose to be confined within this millhorse circle
there is no alternative but to cut the supply and demand theory adrift.”
1870 2nd ed, P44

“the theory [of supply and demand] is not simply imperfect, but radically and
intrinsically unsound. I assert positively that the price, whether of labour or of
anything else, in no case whatsoever depends on the proportion between supply
and demand…” 1870 2nd ed, P44

The General argument.

It must be admitted that the argument is not entirely clear, but Thornton seems
to be interested in just how prices, if they are not equilibrium prices, get
adjusted to equilibrium, that is, the process of price adjustment.

Though not entirely explicit about this, he is concerned with knowledge,

information and time. If sellers set a price, how do buyers know whether there
is excess demand or excess supply at that price? If some buyers felt there was
‘excess demand’, (the ‘possibility’ of a price-rise?) they would want to buy now
before the price rose; would some sellers sell at the price they originally set?

If they did, this would remove a certain quantity of the good from supply (and a
quantity of buyers from demand) and hence change the character of any new
‘equilibrium’ price. (This can be referred to as ‘transactions at non-equilibrium
prices’.)

J.S. Mill and the Wage Fund 6

If there was ‘excess supply’, nevertheless there would be some buyers willing to
pay the original price set. Once again, would some sellers sell at the original
price (Non-equilibrium transactions again.)? Just what is meant by ‘supply’;
does a ‘smooth’ (upward sloping?) supply curve imply that quantity supplied
can be changed instantaneously, to any point on the curve? New production has
to take time.

Moreover, how many buyers and sellers are there? Just how does one
‘aggregate’ to get the ‘market’ demand function or the ‘market’ supply
function? Moreover, does the ‘supply function’ mean that sellers are willing to
accept any price to get rid of their wares? (To leap ahead, exactly this problem
will recur in the study of Leon Walras, who introduced the concept of
‘Tattonement’ in order to deal with the process of getting from non-equilibrium
to market-clearing or equilibrium prices.)

Thornton is arguing that the assumptions necessary for price to adjust to equate
supply and demand at an ‘equilibrium’ price are simply unrealistic – no
transactions at non-equilibrium prices, instantaneous quantity adjustments.

“…the theory I am impugning requires and assumes as its basis a condition

which in practice is almost always absent”. Book II ch 1 p 51

He points out that the assumptions necessary are that there needs to be a
perfectly free and open market, with competing dealers and customers, and that
the goods supplied or offered for sale are offered unreservedly, Book II ch 1 p
51

He later says: “Obviously, this condition is an absolute sine qua non1. ….

without it, supply and demand must be impotent for the duty ascribed to them.

1
Without which there would be nothing.

J.S. Mill and the Wage Fund 7

Obviously, as long as a price is reserved at which a dealer is prepared to sell,
but below which he will not consent to sell, excess of supply or deficiency of
demand will not bring down price…. this absolutely indispensable condition,
without which there is obviously no room for the popular theory, far from being
always or generally, is almost never present.” p 55

In Thornton’s own words, he gets rid of the problem of the ‘supply curve’
implying instantaneous quantity adjustment simply by assuming that supply is a
fixed quantity.

Not only that, but Thornton claims that sellers will not offer for sale below a
given or reserved price. This is crucial to Thornton’s analysis since he claims
that the unrealistic, assumed ‘condition’ of supply and demand theory is that
sellers offer their whole quantity for sale unreservedly, that is, for any price it
will bring. There is thus a seller-determined minimum price: but sellers would
be willing to sell for a higher price, determined by the most ardent buyers.

Various quantities of the goods will therefore be sold at any price between the
buyer determined maximum and the seller determined minimum i.e., at
‘intermediate’ prices.

In order to try to illustrate this general argument, Thornton gives some

‘examples’. Sadly, problems arise therefrom.

Thorntons Examples.

Thornton’s second method is to give imaginary ‘examples’ which he claims are

‘exceptions’ to the theory, on the grounds that ‘exceptions’ to a ‘scientific law’
deprive it of universal validity.

J.S. Mill and the Wage Fund 8

“for a scientific law admits of no exception whatever, one single exception
sufficing as completely as a thousand to deprive it of all legal character.” Book
II ch 1 p 67 This seems to be a falsifications argument.

The Examples given by Thornton.

Thornton discusses five cases, but in fact only the first three are ‘exceptional
cases’, the other two ( lumped together below) are an attempt to restate his
‘general’ argument:

(i) Dutch2 and English Auctions (Multiple ‘equilibrium’ prices can arise)

(ii) Excess Demand: Horses. (No price rise)

(iii) Excess Demand: Gloves. (ditto)

(iv) ‘Discriminatory’ Sales: (Non-equilibrium trading) and (v) the use of ‘time’
to increase prices. See book II ch 1

We should say at the outset that these examples have been defined as ‘absurd’,
‘bizarre’, ‘confusing and weak’, ‘fatuous’, ‘flimsy’, ‘blatant naivety’,
‘unsophisticated’.

They did give his opponents some apparently easy grounds for rejection. Any
defence of Thornton seems to rest on the claim that his major argument rests on
the ‘general’ critique of supply and demand requiring unrealistic assumptions:
the examples are weak, and can be rejected on the grounds that they all rely
upon supply and demand ‘functions’ that are reduced to mere dots or points, or
functions that are either vertical, horizontal, or contain jump discontinuities.
That is, they can be rejected on the grounds that they are all ‘anomalous cases’.

The details of these ‘cases’ can be found either in Thornton’s chapter on Supply
& Demand, or in Mill’s review.

2
In Dutch auctions prices start high and then are moved down until someone is prepared to buy.

J.S. Mill and the Wage Fund 9

In case 1 Thornton argues that, with ‘identical circumstances in all respects’, the
same lot might be sold for one price in a Dutch auction, and another in an
English auction.

In the next two cases Thornton simply assumes there are sellers with a fixed
quantity to sell at a given price. In each market there are more people willing to
buy at the fixed price, but not at a penny more, than the number for sale; excess
demand does not change price.

The last two cases again express Thornton’s general worry about the price-
adjustment process, and behaviour at ‘non-equilibrium’ prices. He takes a case
where ‘ultimately’ the whole of the available supply will be sold, so in that
sense ‘supply equals demand’, but since some buyers are willing to pay higher
prices than others, they will be charged a higher price, the price being only
reduced later “to get rid of the remainder”. (Just which price is ‘equilibrium’ if
different prices are charged?)

(Thornton does not discuss what implications transactions at ‘non-equilibrium

prices’ have for the very notion of equilibrium itself.)

The final case is Thornton’s rebuff of the assumption of unreserved selling. He

claims that the supply & demand theory has to assume “…….the goods
supplied or offered for sale are so offered unreservedly, the owner or owners
being content to let them go for what they will fetch.” p 52

He then gives the example of “a corn dealer who in the course of a season sells
thousands of quarters of wheat at fifty shillings per quarter.” Such a dealer,
claims Thornton, “would not get twenty shillings a quarter if, as soon as his
corn ships arrived, he was obliged to turn the cargoes into money.” p 53. How
does he get the higher price asks Thornton? Thornton argues this is by not
selling unreservedly: “simply by declining the price which would have resulted

J.S. Mill and the Wage Fund 10

from the relations between the actual supply and actual demand, and by setting
up his goods at some higher price, below which he refuses to sell”. p 53

“the theory [of supply and demand] is not simply imperfect, but radically and
intrinsically unsound. I assert positively that the price, whether of labour or of
anything else, in no case whatsoever depends on the proportion between supply
and demand…” 1870 2nd ed p44

Thornton and the labour market.

There is one final point that must be made. Thornton attacks ‘supply and
demand’ per se in general, yet he does then go on to argue that the ‘labour
market’ is different from other markets.

Mill accepts the critique of supply & demand?

Mill at first seems to accept this by reverting to the fundamental position of
Ricardo. Remember the famous Chapter xxx of Ricardo’s Principles: “It is the
cost of production which must ultimately regulate the price of commodities, and
not, as has been often said, the proportion between the supply and demand”.
Ricardo 1871 Chapter xxx

Mill seems to confirm this, but with ‘modifications’, arguing that no economist
would consider supply and demand to be the “ultimate regulator of value”, but
that the cost of production is (exempting the possibility of a monopoly).

However, he does then say: “… Subject to these conditions, all

commodities, in the long run and on the average, tend to exchange for
one another (and, though this point is a little more intricate, tend also to
exchange for money) in the ratio of what it costs, in labour and
abstinence, to produce the articles and to bring them to the place of sale.”
Vol V ,“Thornton on labour and its Claims”1869. p 634

J.S. Mill and the Wage Fund 11

This simply repeats the analysis of ‘supply and demand’ given by Mill in his
Principles

“The law, therefore, of values, as affected by demand and supply, is that they
adjust themselves so as always to bring about an equation between demand and
supply, by the increase of the one or the diminution of the other; the movement
of price being only arrested when the quantity asked for at the current price, and
the quantity offered at the current price, are equal. This point of exact
equilibrium may be as momentary, but it is nevertheless as real, as the level of
the sea.” Thornton on labour and its claims, 1869.

“It is, therefore, strictly correct to say, that the value of things which can be
increased in quantity at pleasure, does not depend (except accidentally, and
during the time necessary for production to adjust itself) upon demand and
supply; on the contrary, demand and supply depend upon it……Demand and
supply govern the value of all things which cannot be indefinitely increased
except that, even for them, when produced by industry, there is a minimum
value determined by the cost of production. But in all things which admit of
indefinite multiplication, demand and supply only determine the perturbations
of value, during a period which cannot exceed the length of time necessary for
altering the supply. While thus ruling the oscillations of value, they themselves
obey a superior force, which makes value gravitate towards cost of production,
and which would settle it and keep it there, if fresh disturbing influences were
not continually arising to make it again deviate.” Mill 1869 Book III ch3p 635

But when it comes to considering Thornton’s arguments in detail Mill gives an

‘equilibrium’ statement of the ‘law of supply and demand’ which he seems to
accept without reservation.

J.S. Mill and the Wage Fund 12

Did Mill Reject The Critique Of Supply & Demand?
“ If, on the contrary, the supply, being in excess of the demand, cannot
be all disposed of at the existing price, …… a sale will be forced by
offering it at such a reduction of price as will bring forward new buyers,
or tempt the old ones to increase their purchases. The law, therefore, of
values, as affected by demand and supply, is that they adjust themselves
so as always.” Mill 1869 Vol V ,“Thornton on labour and its Claims. p
636

“He has proved that the law of the equalisation of supply and demand is
not the whole theory of the particular case…..The demand and supply are
equal at twenty shillings, and equal also at eighteen shillings. The
conclusion ought to be, not that the law is false, for Mr. Thornton does
not deny that in the case in question it is fulfilled; but only, that it is not
the entire law of the phenomenon.…nor has he now, shown it to be in the
smallest degree incorrect.” Mill 1869 Vol V ,“Thornton on labour and its
Claims”

Mill’s conclusion is clear: Thornton’s strictures on ‘supply & demand’ are not,
in general valid. Mill calls them ‘minute’ and ‘unimportant’. Moreover:

“I confess I cannot perceive that these considerations are subversive of the law
of supply and demand.” Volume V 1869 ,“Thornton on labour and its Claims”

Given these statements, what comes next, therefore, has caused much debate.
Mill would appear to accept that ‘the labour market’ is an exceptional case.

Mill’s Recantation.
Whilst he describes Thornton’s improvement of the theory of price as
“minute” and “unimportant” he acknowledges them as of great practical
importance in the case of labour.

J.S. Mill and the Wage Fund 13

 The key difference with the labour market being where does the market
power lie?

“… there is this difference between the labour market and the market for
tangible commodities, that in commodities it is the seller, but in labour it
is the buyer, who has the initiative in fixing he price. It is the employer,
the purchaser of labour, who makes the offer of wages; the dealer, who is
in this case the labourer, accepts or refuses. Whatever advantage can be
derived from the initiative is, therefore, on the side of the employer.”
Volume V 1869 ,“Thornton on labour and its Claims” P 643

Here he appears to acknowledge some degree of market power being exercised

by the hirer of labour.

“The demand for labour consists of the whole circulating capital of the
country, including what is paid in wages for unproductive labour. The
supply is the whole labouring population…. If the supply is in excess of
what the capital can at present employ, wages must fall…. The only way
the power of the employers can be overcome is by a “close combination”
of labour.” Volume V 1869 ,“Thornton on labour and its Claims” P 643

He then goes on to say:

That the wage fund doctrine is “deprived of its scientific foundation,”

“The right and wrong of the proceedings of Trades' Unions becomes a
common question of prudence and social duty.” Volume V
1869 ,“Thornton on labour and its Claims”. Thus, Mill does appear to be
rejecting the doctrine, and indeed support trades unions.

Mill returns to an Adam Smith type of wage bargaining?

“What is true is, that wages might be so high as to leave no profit to the
capitalist, or not enough to compensate him for the anxieties and risks of

J.S. Mill and the Wage Fund 14

 trade; and in that case labourers would be killing the goose to get at the
eggs. And, again, wages might be so low as to diminish the numbers or
impair the working powers of the labourers, and in that case the capitalist
also would generally be a loser” Volume V 1869 ,“Thornton on labour
and its Claims”” p 657

Mill points out that, between the highest wages possible and the lowest
ones there is an intermediate region “ within which wages will range
higher or lower according to what Adam Smith calls "the higgling of the
market."

This higgling however, would be unlikely to have an outcome favourable

to individual employees, and employees are likely to have their wages
kept closer to the lower limit. If organised into unions, labourers might
obtain a wage closer to the higher limit, but might harm the industry they
work in. see Volume V 1869 ,“Thornton on labour and its Claims”” p
658

Long, FD 1886
Long describes Mill’s law of wages as “so certain is the natural law by which
wages are controlled, that employers cannot be held responsible for the amount
of wages they pay” p 14

He points out that whether the wage fund would be able to pay more and keep
the same number of employees is a matter of fact, p21, but clarifies that Mill
does not mean “existing capital” of a given set of employers or a given number
of employees but those of the whole nation. P 22

Long later argues that the “law” is merely application of demand and supply –
demand the capital, supply the population. P26, and that the demand and supply
of labour is “directly the reverse” of that of normal goods, p. 38 A supplier of

J.S. Mill and the Wage Fund 15

goods would not normally supply so much that they could not recover at least
the cost.

“ The true theory of the production of wealth is embodied in these words: both
capital and labour are the servants of the consumer” Longe (1886) p43-44
He also points out, again, that the amount of capital available may not be fixed,
we may use some of our wealth for other things – consumption, saving, etc.

J.S. Mill and the Wage Fund 16

A Numerical example of the wage fund.
One possible way of looking at this controversy in the history of economic
thought is to use standard input-output economics. Let us assume an economy
producing 3 goods; goods 1 and 2 are 'fixed capital' goods, that is, they can only
be used directly as technological inputs; they cannot be 'consumed'.

Good 3 is 'circulating capital', that is, it is the 'wage good' of the economy
(food). Using arbitrary numbers:

Table 1 Physical units

Good 1 Good 2 Labour Totals of

Useage Useage output

Good 1 120 30 180 360

Good 2 60 45 120 135

Good 3 60 15 120 42

Totals 240 90 420

Note: only 42 units of food are produced, despite 420 units of labour being
used. Though the remainder of the analysis can be completed using only this
example in 'physical' units, it is also possible to solve for classical 'values', and
conduct the analysis in labour time. Both will be done here:

The above system solves in terms of labour usage as follows:

J.S. Mill and the Wage Fund 17

120v1 + 30v2 + 180 = 360v1........a
60v1 + 45v2 + 120 = 135v2 ........b
60v1 + 15v2 + 120 = 42v3 ...........c

these equations can be solved for:

v1 = 1,v2 = 2,v3 = 5

The system in labour time, therefore, is

Table 2: Labour units

Good 1 Good 2 Labour Labour used

to make

output

Good 1 120 (120*1) 60 (30*2) 180 360 (=360*1)

Good 2 60 90 120 270 (=135*2)

Good 3 60 30 120 210 (=42*5)

Total usage 240 180 420

/depreciation

From now on, physical units will be used in the top table, labour units in the
bottom.

Let us now assume that the whole of the output of the 'circulating capital' good
(good 3) is distributed to workers as wages.

J.S. Mill and the Wage Fund 18

Table 3: Physical Units

Good 1 Good 2 Labour Output Surplus

Good 1 120 30 18 360 120 (360-240)

Good 2 60 45 12 135 45 (135-90)

Good 3 60 15 12 42 0

Totals 240 used 90 used 42 used

(depreciation)

On the top, the output of good 1 is 360, depreciation 240, so surplus 120; of
good 2, output is 135, depreciation 90, surplus 45. There is no excess output of
good 3

In table 3, it is clear that the whole of the 'wage fund' is distributed as wages.
That is the 42 units of food (good 3) are paid out as wages. Therefore, as the
total labour force is 420,

Output 42 1
w= = . In units So labour is given 1 unit of food per each
total labour hours 420 10
unit of labour.

In table 3, the output of good 1 is 120 units (360, depreciation 240) ; net output
of good 2 is 45 (output is 135, depreciation 90). There is no excess ( or net)
output of good 3 ( the food).

J.S. Mill and the Wage Fund 19

Table 4: Labour units

Good Good Labour “Surplus Output in

1 2 labour” labour terms

Good 1 120 60 90(18*5) 90 360 years

(=360*1)

Good 2 60 90 60(12*5) 60 270

years(=135*2)

Good 3 60 30 60(12*5) 60 210 years

(=42*5)

Totals 240 180 210 210

In table 4, total labour input has been divided into Marx's variable capital and
surplus labour: 210 labour years worth of output are distributed to 420
210 1
labourers, therefore w = = . In labour years.
420 2

F
These are equivalent to w = , where the 'Fund' is the total output of
L
circulating capital. It is also clear that it is impossible to pay workers any more,
for wages to be higher, since there are no more wage goods to distribute.

Identifying the net national product, however, helps to interpret what is going
on.

J.S. Mill and the Wage Fund 20

In table 4, net output of good 1 is 120 labour years (360 output – 240
depreciation) + 90 labour years.

Good 2 (270 output – 180 depreciation)

Good 3 0 labour years of food (210 output – 210 usage)

In both cases, the net national product consists entirely of 'fixed capital' goods,
120 units of good 1 (120 labour years) and 45 units of good 2 (90 labour years).

As fixed capital goods can only be accumulated (added to the capital stock), this
economy can grow.

Suppose it grows by 50% in the next period, we can examine the effects by
scaling up the previous period’s output.

If the two above systems are scaled up by the factor 50%, one gets next period’s
output:

Tale 5: Physical units 2 ( simply physical units 1 *1.5)

Good 1 Good 2 Labour Output

Good 1 180 45 27 540

Good 2 90 67.5 18 202.5

Good 3 90 22.5 18 63

Usage / 360 135 63

depreciation

J.S. Mill and the Wage Fund 21

Table 6: Labour units 2

Good 1 Good 2 Good “surplus Labour output

3(labour) labour”

Good 1 180 90 135 (27*5) 135 540 (540*1)

(45*2)

Good 2 90 135 90 90 405 (202.5*2)

Good 3 90 45 90 90 315 (63*5)

Totals 360 270 315

with labour used being

L1 270

L2 180

L3 180

Total 630

It should be clear here that the deprecation of fixed capital goods in this 'period'
is exactly the quantity of gross output of these goods from the previous 'period',
360 good 1 (360 labour years) and 135 good 2 (270 labour years).

Once again, in the new circumstance, total circulating capital goes as wages,
and it is impossible to pay workers any more. That is, as before:

63 1 315 1
w= = units or w = = hours
630 10 630 2

J.S. Mill and the Wage Fund 22

Also as before, the whole of net national product takes the form of fixed capital
goods

But there is no 'unbending necessity of political economy' (Mill) that dictates

that the whole of the net national product shall take the form of accumulable
fixed capital goods.

All one needs to do is rearrange the relative sizes of the three sectors of the
economy so that the whole of the net national product is in fact composed of the
circulating capital good. In other words we now have an economy that no
longer accumulates capital.

Return to the original economy but suppose the data had been as below.

Table 7 Physical units

Good 1 Good 2 Labour

Good 1 140 35 21 420

Good 2 60 45 12 135

Good 3 220 55 44 154

Totals 420 135 77

J.S. Mill and the Wage Fund 23

Table 8 Labour units

Good 1 Good 2 Labour “Surplus Labour

labour” output

Good 1 140 70 (35*2) 105 (21*5) 105 420

Good 2 60 90 60 60 270

Good 3 220 110 220 220 770

Totals 420 270 385 385

with labour being

L1 210

L2 120

L3 440

Total 770

It is clear here that the output of fixed capital goods exactly equals the
depreciation (420-420) + (270-270), which means that the national product is
154 units of circulating capital (which takes 770 labour years to produce).

1 1
In this case, the old wage rate of w = (w = in labour time)
10 2

need not now apply, for if the whole of the circulating capital is now paid as
wages,

J.S. Mill and the Wage Fund 24

 154 1
w= =
770 5

770
or, in labour time. w = =1
770
This would appear to suggest that the 'Fund' for the payment of wages can be
anything from some minimum, to the whole of the net national product.

Of course, if, in order to accumulate 'fixed capital', the production of 'circulating

capital' is pushed down, to be a small proportion of the net national product,
then wages will be low, since it is a truism to say that no more can be
distributed as wages than the total quantity of 'wage goods'. But there is no
'irresistible law' which determines the mix of 'fixed' and 'circulating' capital in
the net national product.

There would appear to be no truth in Fawcett's claim that "wages are regulated
by fixed and well-ascertained laws, and that these laws are as certain in their
operation as those which control physical nature." Fawcett Economic Position
of the British Labourer, pp. 119-121. As quoted by Longe, F.D., p 14

Mill's final position appears to be that the total wage bill, and therefore the
average wage, can be "between two limits…the highest wages consistent with
keeping up the capital of the country…and the lowest that will enable labourers
to keep up their numbers".

J.S. Mill and the Wage Fund 25