The wage fund theory is a concept developed by Adam Smith, the 18th-century Scottish economist and philosopher. According to this theory, wages are determined by the amount of capital that is available to be used for the payment of wages, or the "wage fund." This fund is comprised of the profits that are set aside by employers specifically for the purpose of paying wages to their employees.
Smith argued that the size of the wage fund is determined by the amount of capital that is invested in the production of goods and services. As more capital is invested, the wage fund grows, allowing for higher wages to be paid to workers. Conversely, if capital investment decreases, the wage fund shrinks, leading to lower wages for workers.
One key aspect of the wage fund theory is that it assumes that the demand for labor is constant. This means that employers are always looking to hire workers, and the number of job openings is always the same. As a result, wages are determined by the availability of capital, rather than the supply and demand of labor.
According to Smith, the wage fund theory explains why wages tend to be higher in countries with more developed economies, where there is more capital available for investment. It also explains why wages tend to be lower in countries with less developed economies, where there is less capital available for investment.
One criticism of the wage fund theory is that it does not account for changes in the supply and demand of labor. While it may be true that the wage fund determines the overall level of wages, the specific wages paid to individual workers can still be influenced by supply and demand. For example, if there is a high demand for skilled workers in a particular field, their wages may be higher than those of unskilled workers, even if the overall wage fund is the same.
Overall, the wage fund theory offers a useful framework for understanding how wages are determined in an economy. While it has been challenged by more modern theories, it remains an important contribution to the field of economics and continues to be a useful tool for understanding the relationship between capital and wages.
Theory of Wages: Top 6 Theories (With Criticisms)
Rather, it flows the opposite way. Wage fund theory This theory was given by Adam Smith 1723-1790. If these various trades are yielding equal annual rates of return on capital, a shift from foreign to domestic trade would reduce aggregate national output although the export of capital can of course affect wages. When consumers demand for a particular commodity producer will also produce more of that commodity and demand for labour will increase. If the labor is paid below the subsistence level, they will die out of malnutrition, disease or hunger and therefore, the number of workers gets reduced. So this explains the water-diamond paradox, but what of the labor theory of value? The masters, being fewer in number, can combine much more easily. He also propounded the theory of productivity of labour or theory of value and regarded labour as the source of the fund which originally supplied every nation with all the necessaries and conveniences of life which it annually consumed.
Theories of Wages
According to this theory, rent, interest and profits are determined on the basis of some principles of remuneration but there is no theory as such for the determination of wages. Yet there is no evidence, so far as I know, of any serious advance in the theory of the subject since his time, and specialization is not an integral part of the modern theory of production. Thus theory seems impracticable. The demand and labour and supply of labour are studied separately with the rate and the combined effect of both the sides demand and supply with wage rate determination is studied and the wages are determined accordingly. Mill, and according to him the wage fund is fixed, and the wages can be determined on the basis of demand for and supply of labor.
Adam Smith and the Theory of Wages
Wages will stagnate, Smith argues, and profits will rise. Interestingly, it is equally true that one cannot fully understand the importance of marginal thinking for a theory of value without subjectivism. Demand for Labour: The demand for labour is a derived demand. Making changes to current benefits may be somewhat unsettling to employees, but there are times when it is necessary in order to drive costs down. Residual Claimant Theory of Wages 5. The price of any product was determined by the labour time needed for producing it. If the trade union is stronger, then the wages will be high, and if the employer is powerful, the wages tend to be low.
Adam Smith on the Labor Theory of Value
On this fundamental point, Smith and the others got it exactly backward. This is called MRP. Wage that is paid to an employee should be equal to the extra value of productivity that the employees add to total production. The first, up to 1870, was dominated by the wage fund theory; the second, up to 1914, was the period when the theory of marginal productivity held sway; and the third, extending from the First World War till the present day was characterised by the process of collective bargaining and the Keynesian enquiry into the general wage level and employment. But the serious flaw in this argument is that even though a general cut in money wages means reduced costs, it also means a serious reduction in aggregate effective demand on account of a cut in the purchasing power of the working class. It is based on the assumption that the law of diminishing returns applies to the industry, and the population tends to increase.
