The wage–fund doctrine is an expression that comes from early economic theory that seeks to show that the amount of money a worker earns in wages, paid to them from a fixed amount of funds available to employers each year (capital), is determined by the relationship of wages and capital to any changes in population. In the words of J. R. McCulloch,
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The economists who first stated this relationship assumed that the amount of capital available in a given year to pay wages was an unchanging amount. So they thought that as the population changed so too would the wages of workers. If the population increased, but the amount of money available to pay as wages stayed the same, the results might be all workers would make less, or if one worker made more, another would have to make less to make up for it and workers would struggle to earn enough money to provide for basic living requirements.
Later economists determined that the relationship of capital and wages was more complex than originally thought. This is because capital in a given year is not necessarily a fixed amount. The Wage–fund doctrine model would be seen as less important in economic theory than later ones.
Model
In essence, wage–fund doctrine states that workers’ wages are determined by a ratio of capital to the population of available workers.
In this model, there is a fixed amount of capital available to pay for the costs of production and the wages necessary to sustain workers in the time between the start of production and the sale of production output. Capital may change from year to year, but only as a result of reinvesting the prior year’s savings. “The wage-fund, therefore, may be greater or less at another time, but at the time taken it is definite.” (Walker)
Population is the endogenous variable affecting wages. As the working population changes, the available wage moves in the opposite direction. Additionally, because capital is fixed, “the whole of [wage fund] is distributed without loss; and the average amount received by each laborer is, therefore, precisely determined by the ratio existing between the wage-fund and the number of laborers.” (Walker)
If one worker earns more, another worker must earn less to compensate.
Origins
The doctrine has its roots in the Physiocrats’ Tableau économique (Spiegel, pg. 389) in which the landowners provide capital to farmers in the form of land leases. The amount of land and the rents from it are fixed, and the capital needed for farming supplies and food for laborers in any one year is directly derived from the profits of the previous year’s production. Population is also the variable factor, but for the Physiocrats, it was constrained by the amount of land available for growing food, not by the amount of capital available to pay wages.
From the early 1800s until after the Napoleonic wars were over in 1815, Great Britain had almost full employment to the point that “an increase in the number of laborers had the effect to throw some out of employment or to reduce the rate of wages for all.” (Walker)
Capital was still believed to come only from savings in prior years, and no additional amount of money could be added to the production process to support more workers. Additionally, the capital used in the equation above was the macroeconomic concept of a country’s total accumulated wealth, not the wealth of individuals.
At the macroeconomic level, though, enough capital had been generated in prior years that “employers found no (financial) difficulty in paying their laborers by the month, the week, or the day, instead of requiring them to await the fruition of their labor in the harvested or marketed product.” (Walker)
Unlike the Physiocrats’ tableau, the money to maintain the subsistence of employees during production did not have to come from previous year’s savings. The wages were so low, however, that workers still lived at barely subsistence level.
Principles of Political Economy
John Stuart Mill’s Principles of Political Economy, published in 1848, provides the definitive treatment of Wage-Fund Doctrine. Mill’s solution to increasing the wage rate above subsistence level is to control the growth of the population. If population grew faster than the growth of capital, wages would fall. If wages fell below subsistence levels, population would decrease from disease and starvation.
In 1869, Mill recants his support of the Wage-Fund Doctrine due to recognition that capital is not necessarily fixed in that it can be supplemented through “income of the employer which might otherwise go into savings or be spent on consumption.” (Spiegel, pg. 390) Walker also states in “The Wages Question” that the limits on capital and the growth in population “were accidental, not essential” to the formation of the doctrine. The limitation on the growth of industrial capacity placed a limit on the number of workers who could be accommodated more than the limit on capital. Furthermore, English agriculture “had reached the condition of diminishing returns." (Walker); therefore, each additional worker was not providing more output than he needed for himself for survival. Given the improvements in technology and productivity that followed 1848, the original reasons that gave rise to the doctrine were seen to be unusual and not the basis for a universal law.