A Fund of Consumers’ Goods Ready to Support Workers Is the Prerequisite for Every Form of Production

The root of the wages fund theory can be traced back to authors writing before Adam Smith. But only with the latter this theory starts to receive a more systematic treatment. We are not concerned with the detailed historical development of the theory. In essence, it is “nearly self-evident,” a “truism” as Jevons calls it; yet, an important truism apparently – even Jevons himself employs it.

To begin with, Adam Smith and his epigones are very well aware of the correct order of things. Before production can be started, there has to be something else in existence that maintains the workers until they have finished the product. This is, though trivial, a basic insight. A fund for the payment of wages, however defined, has to be there before work can be done. The idea is clearly taken from the conditions prevailing in agriculture. Harvest is reaped only once a year. But until this point in time, people working in the farm production have to be supported. And this cannot be done with the help of their own product because it doesn’t exist in consumable form, yet. The consumers’ goods, or the means to obtain consumers' goods, have to be “advanced” to the workers out of the product of past labour. The store out of which these consumers’ goods are paid the classics call “funds destined for the maintenance of productive labour,” “the fund out of which their [labourers’] wages are wholly paid,” or simply the “wages fund.” As the wages fund is meant to serve for the payment of workers, it “embraces the various articles intended for ‘the use and accommodation of the labouring class.’”

As far as only periodic production is concerned, like in agriculture, even important critics of the wages fund theory admit that “a special store is obviously needed.” However, the classical economists are of the opinion that a fund of consumers’ goods ready to support workers is the prerequisite not only of agriculture, but of every form of production. Before soil can be cultivated, something “must be provided for the support of the labourers employed upon it, in like manner as it must be provided for the support of those engaged in manufactures, or other branches of industry.” Now, as the wages are paid out of a special fund, it naturally follows that wages depend on this fund on the one hand, and the number of labourers that share this fund on the other. General wages depend, in this view, “on the Extent of the Fund for the maintenance of Labourers, compared with the number of Labourers to be maintained.” These are the two variables that the classical wages fund theory is composed of: the wages fund and (working) population. From here the theory can easily be extended in a way to allow for a demand and supply analysis. Wages are paid out of the wages fund, which is the demand for labour. The number of the workers constitutes the supply of labour. If the former grows, wages will rise, if the latter grows, wages will decrease.

—Eduard Braun, “Financial Markets and Economic Growth” (Dr. rer. pol. diss., Université d'Angers, 2011), 93-94.