A Neglected Classic That Demolishes Classical Production Theory

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A Neglected Classic That Demolishes Classical Production Theory

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F.W. Taussig is most famous for his 1888 Tariff History of the United States and his 1911 Principles of Economics. Less well known is a book he wrote in the interim, Wages and Capital: An Examination of the Wages Fund Doctrine (1896).

In Wages and Capital, Taussig poured the old wages fund doctrine through a Böhm-Bawerkian sieve and collected the valuable insights, all the while discarding the useless, off-the-mark, or plainly wrong ideas of the classical economists and others before him. It is this process that makes the book shine. Taussig’s unbiased and objective scholarship is on display—his careful isolation of good ideas amidst a crowd of bad ideas and explanation of the reasons for each choice.

The wages fund doctrine of Smith, Ricardo, and Mill held that total wages are fixed by the amount capitalists have saved and allotted to pay for labor. The theory was used to combat unions and collective bargaining for higher wages, because capitalists are constrained by their accumulated money funds. Wage determination between industries is a zero-sum game–one group of laborers attaining higher wages would only decrease the wages for their fellow laborers in another industry. Wages are fixed and determined by factors outside the control or characteristics of the laborers, according to the classical theory.

Taussig took a different approach. He realized that there is a real resource constraint, but that the amount and quality of consumers’ goods depends on the laborers’ and entrepreneurs’ (called “active capitalists”) productive efforts in the stages of production. He dissected the classical statement “wages are paid from capital” by diving deep into capital and production theory and left no stone unturned in his quest for a conclusive judgement on and reformulation of the wages fund doctrine.

In the process, he refuted Ricardo’s iron law of wages and the residual theory of wages. He came close to realizing marginal productivity theory, which was being developed by others around the same time, and also included a proto-Hayekian triangle (below) that depicts production in stages. As such, the book is a wonderful snapshot of the development of economic theory at the turn of the century.

Taussig hayekian triangle structure of production

The first half of the book covers Taussig’s take on the wages fund doctrine and production theory. The second half is an excellent survey of the history of economic thought on the relation of capital and wages, beginning with Turgot and ending with what was then the emergent so-called “Austrian” school: Menger and Böhm-Bawerk. Taussig favorably reviewed both Menger and Böhm-Bawerk and heralded them as having the clearest ideas on the subject.

He also compared Böhm-Bawerk’s subsistence fund to his own wages fund theory and only finds a difference in focus. Taussig focused on distribution (“the concrete mode in which the fund reaches laborers”, p. 317) and Böhm-Bawerk focused on defining capital, interest, and the length of the production process. Nevertheless, Taussig concluded that “on these topics economic theory will gain by following the main trend of the exposition which has finally resulted from the labors of the Austrian school” (p. 318).

In my introduction to this reprint, I cover the criticisms that Frank Fetter made against Wages and Capital. I conclude that he misunderstood Taussig’s task and was confused by the fact that Taussig was both criticizing and generating two theories by the same name: “wages fund doctrine”. I argue that Taussig should have renamed his new contribution (perhaps “structure of production and consumption”) to stave off misunderstandings like we see in Fetter’s critical review.

Don’t let Fetter’s review or the age of the book deter you from enjoying this excellent work, however. I encourage any student of the history of economic thought to check it out. Joseph Schumpeter also spoke highly of the book–perhaps his plug will spark your interest:

Its [Wages and Capital] claim to historic importance rests upon his, in great part original, attempt to graft Böhm-Bawerkian doctrine upon the ‘classic’ system. But it is recommended to the attention of the reader also for another reason: it is a masterly performance in a style of theoretical reasoning that has completely gone out of fashion. By perusing it, the reader, besides learning a lot, will be able to acquire an idea what this style was like at its best.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

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