For the record, can I just say that I fully concur with both Kevin Hoover and Mason
Gaffney in their respective responses to the two parts of James's last post.
While following up on the wages fund and on what Lauchlin Currie (1902-93) had to say (in
the HOPE 1997 article) on the way that business, in the aggregate, is self-financing, I
re-read the profound analysis of Currie's mentor, Allyn Young (1876-1929) on the circular
flow of income in the 1908 edition of Ely et al's _Outlines of Economics_, reprinted as
"The Social Dividend", in ch.6 of Mehrling and Sandilands, _Selected Papers of Allyn
Abbott Young_ (Routledge 1999, pp.65-73). This, I think captures my understanding of Henry
George's criticism of the wages fund, though I defer to Mason Gaffney on whether George
(or I) did really understand the classical wages fund doctrine. In explaining the
difference between the "social dividend" (or current sales of items produced in the past),
and "current production", Young writes:
"The flow of money income which originates in the prices consumers pay to the
entrepreneurs with whom they deal emerges in the form of capital expenditures, and so far
as these take the form of the purchase of capital goods they constitute the fund from
which other capital expenditures are made by other entrepreneurs. The gross money income
of entrepreneurs, then, furnishes by far the most important part of the current supply of
capital funds, and the most important form of capital investment is the entrepreneur's
customary practice of "putting money back into business." ... He is apt to devote a fairly
constant proportion of [his income]to the replacement of the capital goods that are being
used up or worn out and to the other necessary expenses of continued production.
"It rarely happens, however, in any undertaking, that income and expenditure are so
nicely adjusted and so evenly distributed through the year that the one always suffices to
provide for the other. A temporary surplus may be followed by a temporary deficit. _[Here
Young applauds James Ahiakpor, but continues...]_ Transfers of goods on credit smooth over
some of these irregularities, while the institution of banking provides a mechanism
whereby the temporary surpluses of some entrepreneurs are made use of in meeting the
temporary deficits of others."
Then there is Allyn Young, writing the entry on "Economics" for the 1929 edition of the
_Encyclopaedia Britannica_ (this was reproduced, with minor changes, under Frank Knight's
name in the 1929 edition of the EB). After surveying the classical (_cost_) theory of
value and distribution, he writes:
"The rent of land, however, was held not to be governed or determined by the
principles of cost... Rent, from the communal point of view, was held to be neither
determined by cost nor itself a determining element in the prices of commodities, but to
be a surplus arising from the circumstance that the value of the produce of the better
lands is more than enough to pay the cost of cultivating them. [Elsewhere Young stresses
that rent is indeed a cost to the individual entrepreneur.] ... "
He then deals with the classicals' view of long-run price tendencies (cost-driven) versus
short-run deviations that "for the most part the older economists were content to
attribute to 'variations of supply and demand'." However, when applied to the labour
market, they argued [like James?]:
"[F]or the time being, the supply of labour is determined by the present numbers of
the working population. The demand for labour was held to be determined, _not by the
demand of final consumers for the products of labour_ [itals added], but (since most
labour has to be paid for and the labourers supported before their products are ready for
the market) by the amount of capital that can be devoted to the making of 'advances' to
labour. This was the famous wages-fund doctrine. It was found to be so misleading,
however, that it has been pretty generally abandoned, the elements of truth which it
contained being taken account of in other ways."
Roger Sandilands
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