SCIOD 10: The Fund-a-mental Thing's Supply as Time Goes 'Bye'

The eclipse of the wages-fund doctrine in political economy was the occasion for a peculiar twist in the rhetoric of anti-union polemicists. In 1867, on the eve of Thornton's critique of the doctrine and Mill's recantation, an anonymous article in the Quarterly Review condemned unions for their failure to understand the dynamic nature of the wages-fund:

The question for those who wish to raise the wages of labour is, not how to divide the existing wages-fund in a manner more favourable to the working man, but how to increase competition for his labour among employers.

According to the article, the price of labor depends on the demand for labor which depends on the rate of profit. "The real cause, therefore, of a high rate of wages is a high rate of profit."

Four years later, yet another Quarterly Review article discussed the refutations of the wages-fund and criticized unions for basing their strategies "on the same assumption of a permanent wage-fund" as the orthodox political economists. According to the author, John Wilson, trade unionists believed they could "cause the lion's share of that fund to come into their own hands, to the exclusion, as far as possible, of outsiders—that is to say, of the whole body of workpeople outside the Unions."

Later that same year, the engineers' strike in Newcastle, England for the nine hour day was occasion for several letters to the Times of London and a correspondent's report in the New York Times attributing the demand for the shorter day to a belief by the union "that the amount of work to be done is a fixed quantity, and that in the interest of the operatives, it is necessary to spread it thin in order to make it go far." This is a remarkably close paraphrase of the "false principle," denounced by Dorning Rasbotham, that "there is, say they, a certain quantity of labour to be performed."

Alfred Marshall – whose sympathy toward the working classes was tempered by a growing ambivalence, marked by occasional hostility, toward trade unions – annexed the "fixed amount of work" idea to a modified, purportedly union version of the discredited wages fund that he dubbed the "fixed Work-fund fallacy":

It is known that the immediate effect of a reduction of the hours of labour would be to cause those employers who had contracts on hand, and some others to take on extra men. And it is argued that therefore a reduction of the hours of labour would diminish the number of the unemployed, and raise wages.  

But there is not, as this argument assumes, a fixed Work-Fund, a certain amount of work which has to be done, whatever the price of labour. On the contrary the demand for work comes from the National Dividend; that is, it comes from work: the less work there is of one kind, the less demand there is for work of other kinds [Say's Law!]; and if labour were scarce, fewer enterprises would be undertaken.

Marshall's argument oscillates between self-evident truism and non-sequitur. Part of the problem is that Marshall had buried in the preceding paragraph the important qualification that the reduction in hours be independent of any effect on efficiency. The other part of the problem with the fallacy argument is that unions virtually always in the 19th century cited overwork and the efficiency gains that would results from shorter hours.

A few decades later, Marshall's star pupil and successor in his chair at Cambridge, Arthur Cecil Pigou rather delicately teased out some of the exceptions and qualifications to the alleged fallacy of the fixed work-fund. First, he conceded "an element of undoubted truth" to the idea that under many circumstances protectionism can be fruitful for workers in a particular industry and that those benefits may be long lasting. However, he contrasts that localized gain with the idea that there would be an overall benefit to all industries from, for example, limitation of imports. Having made that concession to the fallacy claim, Pigou then addressed a more fundamental issue about the relationship between ideas – however fallacious – and economic facts -- it is:

...unwarrantable to conclude that, because the reasons which popular thought offers in defence of any thesis are invalid, therefore, that thesis is untrue…. conclusions are often right when the reasons adduced by their supporters are ridiculously wrong.

Pigou then proposed the one and only condition under which this alleged popular thought could be vindicated: "that these devices succeed in rendering the labour and capital of the rest of the community more effective in production." Again, it needs to be reiterated that the "popular thought" that there is "only a fixed amount of work to be done" has always been – from Rasbotham to McCulloch to Wilson to Marshall – an idea attributed to some vague collectivity by the writer and never an argument uttered by an identifiable person or group. Those who do the attribution are no doubt quite certain that they have correctly characterized the unspoken "idea behind" one policy proposal or another. But they view as incomprehensible any suggestion that they need to back up such claims with evidence.

In 1926, Maurice Dobb added another wrinkle to the question of the Work-fund and its supposed fallacy – workers were not necessarily as concerned with maximizing aggregate earnings per capita, as the economists assumed, but in increasing "wages in proportion to the worker's expenditure of energy and his 'wear and tear,' and… wages as a proportion of the total social income":

What was implied in the economists' retort to the advocates of the so-called Work-Fund leads to the apparent paradox that the more the workers allow themselves to be exploited, the more their aggregate earnings will increase (at least in the long run), even if the result is for the earnings of the propertied class to increase still faster. And on this base is erected a doctrine of social harmony between the classes.

Even as economic theorists such as Dobb and Pigou were carefully dissecting and refuting the implicit assumptions of the Work-fund fallacy claim, economic textbook authors were diligently parroting the discredited claim. In economics, what is taught trumps what is thought. 

Raymond Bye's Principles of Economics, first published in 1924 became one of the most widely adopted college introductory economics textbooks in the United States during the interwar period. In it, Bye presented an atypically clear exposition of the "'lump-of-labor' or 'make work" fallacy," which he defines as "very similar to the general overproduction fallacy..." "The reader," Bye assures, "will see the error in this sort of thinking if he understands the true nature of exchange." So what is the "true nature" of exchange?

Every laborer creates a product which is offered in exchange for the products of other laborers. The demand for labor thereby grows as fast as its supply; the one cannot be greater or less than the other, for they are the same thing. Every addition to the labor force of a community gives other laborers work to do providing for the needs of the newcomers, while the latter can find occupation catering to the ungratified desires of those who were already employed.

The demand for labor grows as fast as its supply! They are the same thing! Bye's explanation surpasses "supply creates its own demand." Supply IS it's own demand.