This section is from the "Economics In Two Volumes: Volume I. Economic Principles" book, by Frank A. Fetter. Also available from Amazon: Economic
§ 4. Optimistic theories of wages. Some recent theories of value have assigned to labor a more hopeful position. Most optimistic was "the residual claimant theory," of wages presented by the American economist, Francis A. Walker. His view was that the various shares of production, such as land-rent, the income from machinery, etc., and the enterpriser's profits, were fixed by forces independent of wages, and any increase in the output must therefore fall to the laborer as the residual claimant. This appears to explain somehow the rise in wages in the past century, but the fallacy of its method is evident. It involves the circular reasoning that land-rent (a surplus over cost of production) is fixed regardless of wages, whereas the cost of production itself is made up chiefly of wages.
Another American economist, John B. Clark, was led by his theory of profits to a most hopeful view as to the future of wages. Profits he considers to be essentially the reward for introducing new methods into the productive processes, which gradually accrue to the general benefit. As profits thus disappear, the average wage-earner is correspondingly uplifted. In reaching this conclusion Clark omits from consideration the growing scarcity of natural resources and narrows his conception of profits to the point where industry is self-organizing and self-directing. Some facts lend support to every one of these theories of social progress, radical and conservative, gloomy and hopeful, but other facts refuse to be harmonized.
§ 5. An organic theory of value. Let us turn from negative criticism to a summary of the positive ideas as to value that are contained in the foregoing chapters. We have not been content with an easy but superficial explanation of value. We have come to see that the value of the simplest commodities (a dozen eggs, a pound of butter, a bushel of wheat), is a part of a great complex problem. We have not explained it fully, we have only begun to understand it, when we take the desires of a group of traders in a market as a starting point, and have even drawn a diagram showing the meeting point of price. For these desires in turn have been conditioned by manifold influences, stretching on to other men, other goods, other lands, and other times. Nor can we rightly conceive of a theory of value as being a thing apart from a theory of usance, of labor-incomes, of time-preference, etc. These are all but special aspects of a general theory of value, and each must be thought of as a part, or aspect, of what might be called an organic whole, or perhaps better, a general economic situation. From the first and repeatedly this thought was brought to the reader's attention, in treating the static theories ; 2 and the thought has pervaded our whole discussion of the dynamic aspects of economics. In respect to value, as in other ways, it may be said: "We are all members, one of another." With this thought now clearly in mind we may take a final view of the subject.
The productive process is a unity and the values of the different agents and incomes in our actual economic organization bear a mutual relation to each other. Yet the unit itself (the total to be divided in an industry) rises or falls as a result of many forces cooperating or conflicting; any share, therefore (as that of the laborer), depends both on the size of the total product and on the proportion he gets out of it. The factors and agents of production mutually employ each other and thus prices are fixed by reciprocal demand. (See Chapter 34.) The value of any one in terms of the other rises as its relative quantity and efficiency fall and falls as its quantity and efficiency rise. But the absolute amount of goods obtained, the income obtained by any one, may and does rise with its quantity and efficiency and vice versa. Labor and natural materials are complementary agents, and the more abundant and accessible the natural stores of materials, the larger the whole product of industry and the larger also the share of the price that is attributed to the labor. Real wages must vary (other things equal) with available supplies of elementary materials, rising when they become relatively more abundant, and falling with their exhaustion or relative diminution. This is illustrated broadly by the high real incomes of the common laborer in new countries, despite some other adverse conditions, and by the lower incomes in countries poor in natural resources. As those natural resources that are exhaustible, as lumber, coal, and metal ores, grow less, their money price rises. That makes the purchasing power of a day's labor less in exchange not only for those raw materials, but for everything which those materials are indirectly helping to create. It is possible to counteract this effect in part or wholly, temporarily or permanently, by substitutions and by other improvements, and by the discovery of new resources beneath the surface of the earth.
Even when population is stationary or decreasing, an absolute decrease of the supplies of many of the principal natural materials is certain to take place and, in so far, real wages may be reduced. A decreasing food supply, on the contrary, can hardly occur with a stationary or slowly increasing population such as results from effective volitional control.
Change in the artificial agents for shaping and moving things is the second great objective cause of changes in wages. It has been shown (Chapters 12 and 36) how the utilization of wealth is affected by scarcity and abundance of agents, and how saving increases the bounty of agents, improves the methods of production, and benefits the community as a whole, including those who have had no part in the saving (Chapters 24 and 38). Thus from several sides it has been seen how the necessary influence of a decaying equipment of tools must force laborers to lower, less effective, margins in the existing stocks of tools, and on the other hand how the relative increases of those agents, and the growth of science and invention, tend toward the raising of production and of the proportion going as wages. Other things being equal, real wages vary with the agencies for shaping and moving things, rising when they become relatively more abundant and effective, and falling if they decline. Except as affected by the increasing scarcity of some elemental materials, the reasonable prospect is that tools and machinery will steadily be multiplied in number and improved in efficiency. This is a basis for optimistic prophecy.3