This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 1. The price of labor. § 2. The self-directing laborer's income from sale of products. § 3. Shifting of labor to the point of highest return to the laborer. § 4. Fees for temporary direct services. § 5. The continuous wage-contract for personal service. § 6. Price of labor employed on products to sell. § 7. Various grades of labor and rates of wages. § 8. Doctrine of non-competing classes. § 9. Basis of the personal bargaining power in the wage-contract. § 10. Friction in the adjustment of wages. § 11. Uniqueness of separate services. § 12. Labor-incomes and wealth-incomes. § 13. The wage system. § 14. Wages and the general economic situation. Notes on The labor-theory of value, Various methods of remuneration, Real wages in Europe and America, and Value versus utility of labor.
§ 1. The price of labor. In the last chapter have been considered the circumstances affecting the value of human services. The labor has value in the estimation of some person or persons because the labor yields a psychic income either directly or indirectly. We now turn to consider the price of labor. Just as the value of direct commodities comes to be expressed in a price in sale, and as the value of the uses of durable agents (usance) comes to have a price called rent, so the value of any labor that is capable of being sold, that is performed for another for pay, comes to bear a price called wage, or wages.
Like every price, wage involves a contractual relation more or less temporary, between two persons, the one selling and the other buying labor. The buyer is the employer and the seller is the employee, or the wageworker, or the hired man. All that has been said above of the principles of value in relation to labor, holds of course of wages, whenever the labor is being measured in a market and its value is being expressed in terms of something paid for the labor.1
§ 2. The self-directing laborer's income from sale of products. Before considering the case of contractual wage-payment, where one man is hired by another, let us see what occurs when a number of self-directing laborers come together into trading relations with their products. In this case there is a market for goods and there are prices for goods that have been produced by the aid of labor, but there are only valuations and not prices for labor services. Such was the state of industry in early and medieval times, and in large measure these conditions still are found in modern society. Each trader would originally come to the market with a scale of valuations for all his different goods, reflecting his own unequal fitness for different tasks, and he would meet men having very different scales of valuation due to the variety and disparity of their talents. If one man can make arrows and canoes very well but is too slow to hunt, and the other is a good hunter but a poor worker in wood, there is mutual gain in division of labor and barter. (See Chapter 5, section 7.) If several traders are present so that the higgling element of isolated barter is reduced, a true market-price is found for the goods resulting from each laborer's services. In the presence of this price the individual valuations are adjusted to the whole economic situation, are socialized in the market. (See above, Chapter 7.)
Goods exchanged in this way evidently are not valued according to the amount of labor measured by labor-hours, or by painful exertion. They are valued by the strength of desires as expressed in choice; some goods that are produced easily by little labor may have a high value, and other goods that are produced by much hard and disagreeable labor must have a low value.2
1The wage being a tangible market-fact was first studied when economics began to be a science, and it was seen that the wage was but the reflection of a valuable service. So the term wage was ex-tended to this value of the service which was called the "natural wage" -more often of late the "economic wage." In this book, however, the term wages is confined to the price aspect of labor, while labor-yield (which is labor-income to some person) is the physical product or the valued service given off by an action.
§ 3. Shifting of labor to the point of highest return to the laborer. The fisherman as he follows his vocation (as a self-directing laborer) gets an income in the form of the price of the fish he catches every day (less cost of maintaining his equipment). The value of this income is a complex of the usance attributable to the equipment, a very small amount, and of the value of his own labor. The market conditions for fish determine the value of his labor. If in the long run he earns less than he could get in another equally agreeable occupation requiring no greater equipment, to which he will and can transfer, he will leave fishing. If he does change and gets a larger labor-income this is but the reflection of the higher-priced product in the new occupation. Similarly, the gold-miner, working with simple tools in the days of placer-mining, got an income determined by the value of the gold he washed out. It was for this that he gave up his former occupation and went to the gold fields. In like manner the farmer, the cloth weaver, the furniture maker, etc., would find the occupation in which his labor would produce goods of the greatest value (differences of psychic income being allowed for).3 Thus we must conceive of a state of equilibrium where each kind of labor would be applied to the production of that kind of goods which will yield it the largest possible income, and where there is no one at the moment that can change to an occupation paying better on the whole.
In any labor market, each grade of labor may be looked upon as a potential supply of desirable things and its value is determined as if it were an actual supply. If all the various goods, psychic and material, that labor produces were spread out before men in visible form, some would be in great demand, some would exchange at a very unfavorable ratio with others. The market for goods would come to equilibrium at a point where each buyer had adjusted his supply of services in the most favorable way, had distributed his purchasing power, as represented by his labor, so as to get those kinds and amounts of goods (including services of others) which gratify his desires in the highest possible manner.
2 See note at end of chapter, on The labor-theory of value.
3 See note at end of chapter, on Value versus utility of labor.
Corresponding with this state of equilibrium on the buyers' side, would be at the point of the theoretically correct market-price, an equilibrium on the sellers' side. Wherever and in so far as free competition exists, there is a constant adjustment and striving toward such a state of equilibrium. Each workman is moving into the industry where he earns the highest amount possible to him; that is, the highest price which any of his fellow-men are willing to pay for the service (embodied in goods) which he can and will perform. Each man's income is determined by the desirability of his services as bid for by the other members of his community. His value to others determines his economic place just as the specific gravity of liquids of different densities poured into a glass determines their place. In actual life various disturbing factors prevent the full realization of this condition, but the practical process by which labor is valued is that which we have been describing. Each laborer in a true market should get close to what his services "are worth" in the sense of their economic value to the purchaser.4
4 This in no wise is to be taken to assert the social desirability of low wages, or the justice of actual wages either in any particular case or in general. Some thinkers have assumed and have asserted that the competitive wage is the wage which is "theoretically correct" in an ethical sense. The process of valuation which we are describing, however, leads us to the conclusion that under competitive conditions a man gets what he "is worth" to the purchaser merely in the value sense; he gets the maximum sum possible in view of the nature of his service and of the existing conditions of demand and supply. But these conditions are more or less dependent at any given time upon various antecedent circumstances, such as the distribution of wealth, inheritance, the growth of population in the different classes of society, etc. Our present analysis, therefore, involves no ethical judgment of a competitive wage-scale one way or another. That is a question for separate consideration.