Capital and Labour

Marshall’s explanation of the determination of factor prices was developed largely within the type of framework described above. During Marshall’s time at Cambridge, important debates over capital and distribution theory occurred, centred on the contributions of Eugen Bohm-Bawerk, Friedrich Wieser, J.B. Clark, Irving Fisher, and Thorstein Veblen. However, Marshall declined to become actively involved in these controversies. Indeed, as Christopher Bliss (1990: 227) observed, the reader has to dig deeply and even then without much success to find a theory of capital in Marshall’s writings, and a consistently applied definition or measure of ‘capital’ cannot be found in his Principles. Instead, what is found in Marshall’s theory is a rather intricate and at times perplexing mixture of explanations of income distribution based on technologically based and socially determined elements. On the demand side, an inverse relationship between the value of ‘capital’ and productivity is hypothesised; however, the association is established more by assertion than through tightly woven theoretical reasoning. The rate of interest is intended to provide the mechanism through which the supply of money capital (or ‘waiting’) could be equated with the demand for capital, but the relationship between the rates of interest and the normal rate of profit is not established by Marshall.

Much more attention was devoted to the theoretical and practical issues associated with the determination of wages and employment. Initially, Marshall’s thinking was heavily influenced by Mill’s version of the classical Wages-Fund theory, although by the publication of the first edition of the Marshalls’ Economics of Industry (1879), the ‘wages fund’ had been widened to what may be termed a wages and profits fund (or, more precisely, flow). By the arrival of the Principles, Marshall resorted to a more familiar demand and supply setting, with the preliminary observation being that, like capital, the share of wages in the national dividend is related to its efficiency or contributions to production. The application of this simple principle became somewhat tempered when Marshall widened the discussion to consider a range of issues which would constitute a comprehensive course in labour economics. Included amongst these were the effects of different grades of efficiency amongst workers and market segmentation, together with the existence of workers’ and employers’ groups and other ‘immobilities’ which extinguished any tendencies towards free competition in labour markets. In terms of policy debates, Marshall was highly critical of attempts by labour unions and others to move towards a national minimum wage, partly because unemployment may result if it were set too high. More importantly, standard wages failed to account for the need to allow for regional wage differentials, and would force employers to put relatively inefficient workers in the same payment class as more efficient workers. This is not to suggest that Marshall supported as a general principle the notion that there was a negative relationship between wages and labour productivity and employment, for, as the following discussion would suggest, we find the seeds of modern efficiency wages theory in Marshall’s writings:

But it was only in the last generation that a careful study was begun to be made of the effects that high wages have in increasing the efficiency not only of those who receive them, but also of their children and grandchildren. In this matter the lead has been taken by Walker and other American economists; and the application of the comparative method of study to the indus?trial problems of different countries of the old and new worlds is forcing constantly more and more attention to the fact that highly paid labour is generally efficient and therefore not dear labour; a fact which, though it is more full of hope for the future of the human race than any other that is known to us, will be found to exercise a very complicating influence on the theory of distribution (Principles: 510).

When policy issues were being contemplated, Marshall’s theoretical analysis of labour became heavily qualified. This can be observed, for example, during his extensive participation in public debates while serving as a member of the Labour Commission (1891-1894). Likewise, in the Preface contributed to L.L.F.R. Price’s Industrial Peace, Marshall’s contemplation of what constituted a ‘fair rate of wages’ led to the development of a detailed consideration of the potential role of conciliation and arbitration in the determination of wages, reaching the following conclusion: ‘Though, however, for helping the lowest class of workers we must look elsewhere than to systems of conciliation, these systems are, as has been shown above, a powerful means of raising the working classes as a whole. They are scarcely less powerful a means of raising their employers’ (Marshall 1887: 226).

Even more pronounced in Marshall’s writings are the effects of general education on labour efficiency and economic progress. General education was seen as shaping human character and mental attitudes, essential for progress embodied in vigour, initiative, versatility, and spontaneity. It also provided the means for individuals to rise above the deprivations that characterised the everyday lives of the working class.