8: Wages are Set According to Production
A popular theory of wages maintains that wages are paid out of the capital of the producer - but this is a misconception. While the workers must be paid out of capital because the product they produce is not available until after the labor has been furnished, this is merely a loan against the future profit that will be made. Wages are a cost of production, and are set according to the revenue that the goods produced are expected to sell - at the risk to the employer should the goods sell for a lower price (or be unavailable for sale).
An employer has established a productive operation not for his own amusement, but in order to produce a product to sell for a profit to himself. He purchase labor not because he wishes to have laborers at his beck and call, but as a means to produce the product he intends to sell. These facts should be taken as self-evident, but are so often ignored that they bear stating.
An employer must accept that, for a time, he will produce without profits. Just as the farmer must labor for months before he will have a crop. He must pay his laborers out of his savings, or borrowed moneys, in the meantime. He must also purchase equipment and supplies in a similar manner. All of these costs are undertaken with the expectation that he will eventually be able to restore his savings and repay his creditors from the sale of his goods.
He sets a goal to produce as much as he feels confident he can sell, and predicts the price his goods will fetch, and this determines the amount he will be able to spend on all things necessary to produce the goods: the rent of his facilities, the cost of his supplies, and the wages of his labor. If through these calculations a producer discovers that production will result in a loss instead of a profit, he chooses not to produce. No-one has ever built a factory for the purpose of putting himself into debt.
It can also be said that his ability to have capital at all, particularly when he must borrow to establish his operation, is also dependent on an expectation of profitable sale. His creditors, who naturally desire to be repaid, will be curious of his plans for the borrowed capital and will likely refuse him the loan if he cannot demonstrate a plausible plan to generate sufficient revenue to repay them.
And to bring the matter back to the thesis: it is thus that the wages of employees are set according to the revenue of their production, not the capital that the producer can borrow to start his operations.
(EN: This has been fairly tedious so far, and gets more tedious still, as the author seems to be defending against the argument that an employer's ability to pay a wage should be assessed according to his capital resources rather than projected revenue. Apparently, this perspective was taken seriously at the time this book was written - but it seems rather pointless today, so I will be skipping much.)
Capital is necessary to sustain a business until its products can be sold. For a new business, this capital comes from the personal wealth of the founder or is borrowed from creditors. Over time, the business begins to create its own treasury from the profits of production. Once that occurs it can be said that production of the past is the source of financing for the production of the present. Some businesses, however, never get to this point, and are constantly in need of credit to finance each period of production - much in the way that many farmers do not build a cash reserve, and must visit the bank every time they wish to plant.
The use of farmers as an example underscores that the manner in which manufacturers set wages is not a new phenomenon, but has been going on for quite some time. The farmer must likewise predict the profit of his crop to determine how much he can afford to pay the workers - and bears the risk of bankruptcy if he fails to predict this accurately.
It is likewise true of those who produce for their own consumption. Even if the farmer is to be the sole laborer on his own land, and his only profit is food for his family, he must predict whether he can by his own labor produce as much food as he will need. And in that way he sets the price of his own labor.
(EN: Many people, even in the present day, fail to recognize this. It's particularly obvious among the "do it yourself" crowd, who think it a fine deal to save the money to pay a professional by doing things themselves, and calculate the cost of the materials alone, and not their own labor, which they regard to be essentially free. All they waste is their own time, which is of no consequence as it amuses them to do the "work" - but when they consider turning their hobby into a business, they get a very rude awakening.)
He considers that farm-hands work to produce food that the farmer will sell, and while they are working they purchase food from their wages. In essence, they are eating their future crops. And seen in that way, the farm-hand receives in exchange for his labor some portion of the crop he creates, the remainder going to the farmer who hired him, furnished his tools and equipment, and the like.
To work for a wage is to borrow from one's own future production - and the portion of work retained by one's employer is like interest charged on the loan.
It would be entirely possible that a worker, able to sustain himself during the time of production, might refuse to accept a wage and instead negotiate a salary that reflects a portion of the goods produced. There are instances in which this has been attempted, but it requires the worker to have sufficient capital to pay his bills until the product is sold, and it also requires the worker to bear the risk that the product will not generate a profit.
Most workers are unwilling to face this risk. They wish their employer to assume all risk of the salability of the product, and they wish to receive their wages daily or weekly, or at the very least once a month, to be secure in their income. There are likewise many instances in which this rate is not fast enough to suit the desires of the worker, and he demands of his employer an advance on his wages to tend to some expense or another.
There are unusual agreements, which sometimes occur. A worker might agree to work for a long period of time, and to be paid at the end of the season provided that his employer provide for his basic necessities (food and housing) or provide a small stipend for accommodation. The crew of sailing ships often work under this arrangement, being housed and fed during their journey and receiving payment only at its completion.
There is also the mention of workers being paid for piece-work: a seamstress in a factory may be paid daily according to the number of shirts she produced that day, or a woodcutter paid for each load of wood as it is delivered, or a salesman paid a commission on each sale. It may be a stretch to consider this kind of income to be "wages" at all, as such employees act as independent businesses selling the labor of one person to a firm, receiving payment for work after it has been completed.
Walker mentions that wages are a relatively new phenomenon, as it was unusual to pay freemen more than once per year for their work, and for their compensation to be proportional to profit. While wages are often blasted by social reformers, they were in fact an accommodation to workers who could ill afford to cover their expenses until the work was completed, and who wanted a certain income.
Before wages, farm workers had to wait until the crop was harvested and the goods sold to receive any money from their employers, and "they gladly did." Moreover when this was the arrangement, there was never a doubt that wages were paid out of production. It is even arguable that the old ways gave workers greater morale and sense of purpose, and greater responsibility. No worker who recognized that his income depended on the profit of the sale of the goods he was making ever sabotaged his employer's machinery - to do so would be to destroy his own reward.
(EN: I think this expects a bit too much logic and reason of humans in general. It can often be seen that people express frustration by destroying their own homes and neighborhoods, and smash their own possessions to pieces in fits of rage.)