The wage fund concept is a doctrine or expression which was developed by Stuart John Mill and other contributors of economic theory and political economist in the 1800s. This theory seek to show that any amount that an individual earns as a salary/ wage and which is paid to him/her from a certain amount of funds that is fixed and available to him every year is usually determined by the association of capital and wages to any population change(Spiegel 300). Therefore, the wage fund model developed by mill is as follows;
Wage= Capital/ population
This model states that workers wage is determined by the ratio of a fixed capital to the available population. In this case, there exists fixed capital that is available in paying for production cost as well as wages that are necessary to maintain workers in between the beginning of production period and the period of production output sales.
However, this theory was first suggested by Adam Smith. Smith proposed that demand in labor was not possible to increase and except only in proportion to an increase in funds that have been destined for paying wages. The political economist as well as Mill therefore held that the amount of wages at any particular time/year in a country was dependent on the relationship of wages fund and the number of workers. Some of the wage fund contributors who were influential Mill’s supporters included Fawcett Henry as well as Cairness John Elliot. To the credit of these contributors it must be admitted therefore that some degree of certainty appear in the wage fund general idea which state that wages are salaried in part from capital.
This concept was developed in the 1800s and has its roots on how it came about from the Physiocrats Tableu economics where land-owners gave farmers capital in form of leases of the land (Spiegel 389). At that time, the size of the land as well as the amount paid as rent was fixed. However, the capital that was required for supplies used for farming as well as food for the workers in a period of one year was directly obtained from the previous year’s production. In this period, after the Napoleonic wars (1815), there was full employment in Great Britain and an increase in laborers therefore led to a reduction in wage rate or led to some being thrown out of employment.
Also, at that time, it was believed that capital came only from the previous years’ savings and hence no extra amount of fund was added to the process of production in order to encourage more laborers. This therefore led Mill into the wage fund theory suggesting that demand in labor was not possible to increase and except only in proportion to an increase in funds that have been destined for paying wages.
Smith and some of the economist who contributed to this wage fund based this theory on assumptions that the capital amount which was available in a certain year for paying wages was not changing (unchanging amount). They therefore thought that, if the population changed in any way, so would the amount of wages. In this case, if the population increased without any change in the amount for wages to workers, workers would produce less or if one worker produce more, others would be forced to make less in order to make up for the additional made by the other. They therefore assumed that workers would struggle to work and earn enough funds for providing basic requirements (Breit).
Other assumptions made into the wage fund included the annual harvest assumption that the existence of a given aggregate time interval between an input point and its output. They also assumed an identical production period and the time between succeeding inputs and succeeding outputs (Negishi 60). Another assumption made included that the output of a product was composed of only fixed capital (machinery), capitalist consumables and the wage goods in a perfect market. Also the productivity and population was assumed to be constant over a period of years (Sidgwic 411).
However, due to the discovery of various others conditions that affect wages, this wage fund theory have been subject to modification/ change by various other economists. This modifications arose to the reasons that various assumption made by the wage theory were not relevant. These economists therefore suggested that the relationship between wages and capital was much more complex that what the wage fund theory suggested (Sidgwic 409). This was due to the reason that, capital can never be fixed and keeps changing each year. For instance, Ricardo upheld that capital increase would lead to an increase in labor demand.
Other criticism arose from von Hermann, Walker Francis, Longe, francis as well as Thornton, W.T. who intended to change the wage fund theory. They pointed out that the theory had errors and that it was impracticable since consumers were the ones responsible for setting the demand for labor and therefore laborers would be provided for their wages from the capital as well as from the current income. Also, they opposed that as wage fund suggested; there were no specific wage fund that was set aside and separable from any other funds that were used in production. They therefore changed the wage fund as an issue of the employer's discretion as on how much he/she intended to provide for his/her workers wages (Sidgwic 413)
In my opinion, the method of reasoning used in wage fund theory is not valid since the amount of capital keep changing and hence we cannot determine workers wage by the ratio of a fixed capital to the available population. Therefore, in my opinion, the wage fund will therefore differ and can be less or more at different times (Scarlett). As the population increases, the prior year’s saving will also change with a result of reinvesting the saved funds. Hence, since capital is flexible, if one worker earns an additional wage, no other worker will be required to earn lesser wage to compensate.
In conclusion, although the concept faces its criticism, the wage fund concept is still used today although merely and especially in decision making concerning wages and a firm’s production. However, this concept is not in much use as different economist critiqued the theory making it look less more important in the current economic theory. Due to retraction from the theory by Mill himself as well as recently emerging ideas on unions and wages, it has become of less usage today.
The persistent economical stagnation in various countries has however led to the wage fund being used in economical, social, and moral dilemma and especially those created by trade unionism growth and increase in political economists who have particular different sets of problems. The wage fund theory has therefore influenced decision making today in determining factors of production as well as the level of production to be reached. The wage fund also affect decision making on the fixing wages for the workers as well as fixing a certain production target in a given year.
Work cited
Breit, wiliiam. "The Wages Fund Controversy Revisited." Journal of Economic Issues 33.4 (1967): Web. 27 Apr 2011.<http://www.jstor.org/pss/140020>.
Negishi, Takashi. Historical Theory on Modern Economy. 1985. Web. 27th April. 2011
< http://www.jstor.org/pss/140020>
Scarlett. J.S. Mill’s Wages- Fund Theory. 2010. Web. 27th April. 2011
< http://www.economictheories.org/2008/11/j-s-mills-wages-fund-theory.html >
Sidgwic, Henry. "The Wages Fund Theory." Fortnightly Review 25. (1879): pp. 401-413. Web. 27 Apr 2011.<http://www.efm.bris.ac.uk/het/sidgewick/Wf.html>.
Spiegel, Henry. The Growth of Economic Thought. Duke University Press, 1983. Print.
