Capital and Wages: A Lakatosian History of the Wages Fund Doctrine.

Ekelund, Robert B., Jr.

Episodes in the history of economic thought are sometimes subjected to radical evaluations from those who wish to analyze past theory and theoretical developments from historiographic and methodological perspectives. Much of what attempts to pass as "analysis" revolves around the "paradigmatic" approach of Thomas Kuhn and the "methodology of scientific research programs" (MSRP) of Imre Lakatos. Unfortunately the application of this method has yielded little in the way of understanding the nature of particular episodes in the analysis of the "progress" of economics. This book on the wages fund - one of the key theoretical underpinnings of classical economics - and the "reasons" for Mill's ostensible "recantation of it" is only one of the most recent in the genre. This comment is not meant to imply that Vint has not taken his subject seriously, for he has. He seeks to apply the Lakatosian "theory" to the wages fund alone and not to the classical "paradigm" of which the wages fund theory was an inextricable part. And in his workmanlike "review of the troops" strewn throughout the book Vint shows considerable attention to detail. Unfortunately Vint's discussion is adrift in the sea of relativism that is part and parcel of attempts to apply such methodologies to the development of economic theory. Vint's so-called discoveries simply do not stand up to better and more cogent alternative explanations.

The central problem is the following. Lakatosian concepts, which Vint adopts, include a hard core of theory (in this case wages fund theory), a protective belt (which, due to lack of empirical testing, are factors which protect the hard core) and "monsters" - mainly questions that the theory cannot answer. Unfortunately, identification of the hard core, the protective belt or "monsters" is totally vacuous exercise with equally vacuous results. It uses selective "facts" from history, selective historical interpretation and (in this case) selective "rational reconstruction" of classical wage theory as a research program [p. 29]. The exercise, in short, is subject to severe selection bias (other scenarios are reasonable and observationally equivalent). More importantly, such an exercise contains far more bias than any theoretical or empirical test in modern economics. The method, in effect, substitutes anarchical interpretation for motivations based on self-interested explanations founded on factors (some of them technological) internal to the discipline. It leads Vint [pp. 29-30] to "argue that the Classical economists were rational, in a Lakatosian sense, to subscribe to the wages fund doctrine and long run wage theory, despite the fact that these theories are regarded as erroneous in terms of modern theory." Vint also argues that "Mill's recantation was rational and so was the decision not to abandon the Classical wage theory research programme until a potentially more progressive theory came along. All of this is powerful evidence for MHRP" [methodology of historiographical research programs of Lakatos].

After much sweat and toil to make good on this promise, the method delivers little meaning and less insight. Vint concludes that the classicals were rational (in a Lakatosian sense to be sure) to hold to the wages fund idea. Further, he argues that Mill was rational to give it up to the extent that he did, but that he was also rational to maintain it as theory (he did not abandon it in the final edition of the Principles). Finally, we are all supposed to be rational (from a neoclassical perspective) to consider the wages fund an "erroneous and false theory" [p. 249]. Unfortunately, on the path to these "conclusions," logic and common sense take a holiday.

Vint finds himself in numerous logical pickles as a consequence of his method. He argues [p. 177] that Mill "accepted" and expanded upon the arguments of W. T. Thornton - that alleged idiot savant on the theory of supply and demand - in order to abandon the wages fund.(1) He then argues that "Mill was, in fact, very reluctant to abandon the theory completely given the absence of a superior alternative and this is very much in line with a Lakatosian view." Unfortunately Vint's argument (using Lakatos) is irrefutable. What if Mill had not been "reluctant" to give the theory up? Would that have been out of line with "the" Lakatosian view? Conceptually it could have meant that Mill was defending the "hard core" from attack - an easy score for a Lakatosian view. Such birds, stuffed with legerdemain, will not fly.

Vint apparently does not understand the interface between classical microeconomics and macroeconomics vis-a-vis the wages fund despite the homage he pays to Frank Taussig's masterful analysis of the question [3]. In assuming a discontinuous production function (with fixed production coefficients) for the economy as a whole, the short-run fixity of the aggregate average wage rate is logically assured. Contrary to Vint's supposed "explosion" of this view, the transference of demands between capitalist consumables (luxuries) and goods consumed by the laboring class does not matter as to the logic of the fixity of the fund and, indeed, of all other parts of Gross Domestic Product. That conclusion is driven by the assumption of a point-input/point-output production function. As a logical macroeconomic proposition, the wages fund doctrine is made of far sterner stuff than Vint imagines. From a microeconomic perspective, Mill did not fully flesh out the applications of supply and demand to wages, but he did understand that unemployment would clearly result from real wage rates being temporarily above fully-anticipated and contractual equilibrium either for the economy or for particular markets. This conclusion has cogency even today and, to the best of my knowledge, there is no well-executed empirical evidence that refutes it. That "bargaining" takes place prior to contract (the point input) or that the real wage (either macroeconomic or in a particular market) is elastic over period analysis is quite irrelevant to the primary issue (fixity of the fund) and its primary policy conclusion (non-equilibrium wages create unemployment at points in time).

In the recantation Mill was as confused between real and money versions of the fund as he was imbued with the "socialist mentality" of addressing society's ills. He might not have been led to this position had he not, as Marshall noted, put the cart (the wages fund discussion) before the horse (the theory of markets) in the Principles. Marshall was one neoclassical who did not believe (contrary to Vint) that the wages fund was "false" when correctly stated as either a macroeconomic or microeconomic proposition. In fact, Marshall hit pay dirt in his keen analysis of the wages fund and Mill's recantation of it in Appendix J of the Principles [2, 822-29]. As he emphasized, a large part of Mill's problem in the "recantation" was that he did not make clear whether statements referred "to immediate or ultimate effects" [or] "to short or long periods" [2, 825]. Marshall also appreciated, as Vint does not, that the wages fund doctrine, when analyzed as a part of classical economics, was only another way of asserting Say's Law. In short, to maintain that the doctrine was somehow "rejected" as false in Lakatosian or any other terms is nonsense. Contrary to Vint, the macroeconomic transmission mechanisms involving labor, capital and production are very much retained in modern macroeconomic theory. Marginal productivity theory, as clarified in Marshall's account, now adds the essential supports to Mill's theory of particular markets.

A book which presents a reasonable contrast in interpretations of the wages fund is surely needed, but this book does not fill the bill. There are glaring omissions of important material essential to a well-rounded picture. The so-called "gap" of the middle period of writings on the fund that Vint thinks he's filled was substantially covered in omitted references [e.g., 1]. Mark Blaug suggests in his introduction to this book [p. x] that this work might improve our understanding of the "peculiar strengths" and "peculiar weaknesses" of the Lakatosian approach. I suggest that such attempts amplify the reasons why such jejune frameworks applied to the history of economic doctrines should be abandoned altogether.

Robert B. Ekelund, Jr. Auburn University

1. Here Vint chides those who would use neoclassical theory to try to interpret the likes of Thornton on supply and demand (Thornton used preposterous and serpentine logic in an attempt to refute the "laws"). But how are we to interpret anything - in historiographically relative terms? Vint himself uses a so-called modern "theory" of doctrinal change to explain the historical apogee of the wages fund theory. His theory is, unfortunately, of such elasticity that conclusions drawn therefrom are meaningless.

References

1. Breit, W., "Some Neglected Early Critics of the Wages Fund Theory," Southwestern Social Science Quarterly 48, 1967, 53-60.

2. Marshall, A. Principles of Economics. 8th edition. London: Macmillan, 1920.

3. Taussig, F. Wages and Capital. London: Macmillan, 1896.