Theories of wage determination

Early theories about wages

The earliest theories about wage determination were those put forward by Thomas Malthus, David Ricardo and Karl Marx.

i.     Thomas Robert Malthus (1766 - 1834) and the Subsistence Theory of Wages:

The germ of Malthus' Theory does come from the French "physioirats" who held that it was in the nature of things that wages could never rises above a bare subsistence level.  When wages did for a time rise much above the bare necessities of life, the illusion of prosperity produced larger families, and the severe competition among workers was soon at work to reduce wages again.  In a world where child labour was the rule it was only a few years before the children forced unemployment upon the parents, and all were again reduced to poverty.  Such was the subsistence theory of wages.

ii.     Ricardo and the Wages Fund Theory:

Ricardo held that, like any other commodity, the price of labour depended on supply and demand.  On the demand side, the capital available to entrepreneurs was the sole source of payment for the workers, and represented a wages fund from which they could be paid.  On the supply side, labour supply depended upon Malthus' arguments about population.  The intense competition of labourers one with another, at a time when combinations of workers to withdraw their labour from the market were illegal, kept the price of labour low.  The fraction:

Total wages fund (capital available)

Total population

Fixed the wages of working men.

iii.      Karl Marx  (1818 - 83) and the 'Full Fruits of Production' Theory of Wages:

Karl Marx was a scholar, philosopher, journalist and revolutionary extraordinary who spent much of his life in dedicated poverty reading in the British Museum Library.

His labour theory of value held that a commodity's worth was directly proportional to the hours of work that had gone into making it, under the normal conditions of production and the worth the average degree of skill and intensity prevalent at that time.  Because only labour created value, the worker was entitled to the full fruits of production.  Those sums distributed as rent, interest and profits, which Marx called surplus values, were stolen from the worker by the capitalist class.