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.

The Political Consequence of the Wages Fund Theory Is, At Least Concerning the Lot of Workers, To Leave Things To Themselves -- Laissez Faire

That is to say, from the wages fund theory follows the idea of harmony between the two “classes” capital and labour. It follows, in the words of McCulloch, “that at bottom they [the work-people] have no exclusive interests, and that their prosperity is intimately connected with, and is indeed inseparable from, the prosperity of the other classes.” If the capitalists thrive, so will workers. This leads Adam Smith to an optimistic interpretation of the development of society. He thinks it best to leave everybody free to achieve his selfish goals. The increase of capital that would result would be of advantage also to the working class. Thus, the political consequence of the wages fund theory is, at least concerning the lot of workers, to leave things to themselves -- laissez faire.

--Eduard Braun, "Financial Markets and Economic Growth" (PhD diss., Université d'Angers, 2011), 114-115.

The Abandonment of the Wages-Fund Doctrine Made Possible the Acceptance of Keynesianism

According to this famous critic, the wages fund theory is a cornerstone of the classical system, not merely a part of it that could be erased or replaced at will. Also modern economists will see from this quote that, if George is correct, the wages fund theory is central to economic questions that are still of importance today. In the words of Reisman, “the abandonment of the wages-fund doctrine […] made possible the acceptance of Keynesianism and the policy of inflation, deficits, and ever expanding government spending.” Whether one shares Reisman’s opinion concerning Keynesianism or not, the wages or subsistence fund theory seems to be pivotal to economics.

--Eduard Braun, "Financial Markets and Economic Growth" (PhD diss., Université d'Angers, 2011), 113.