Frank Albert Fetter: Review of F. W. Taussig, Wages and Capital: An Examination of the Wages Fund Doctrine

Frank Albert Fetter’s review, originally published in 1897 and reprinted in 1977, examines Taussig’s attempt to preserve a defensible wages-fund doctrine. Fetter praises the book’s historical treatment for its impartiality, critical acuity, knowledge, and clarity, but concentrates his review on its “positive theory,” presented in the first 125 pages. His central judgment is that Taussig’s analysis undermines the doctrine it seeks to conserve. The argument moves from a criticism of aggregate wages as an explanatory starting point, through an examination of capital and real income, to three requirements that a distinctive wages-fund theory would have to satisfy.

The fundamental disagreement concerns Taussig’s separation of the forces determining laborers’ total income from those determining the earnings of particular workers. Fetter regards this distinction, widely accepted by wages-fund theorists, as a reversal of explanatory order:

Total wages are merely the arithmetical sum of individual wages. The latter are in a sense the dynamic element; the total is a passive result.

This objection establishes the review’s conceptual orientation. A total cannot explain its constituent payments merely because it can be calculated from them. Treating aggregate wages as independently determined encourages economists to search for a fund whose existence and boundaries remain uncertain. Fetter therefore challenges more than Taussig’s terminology: he disputes the assumption that distribution proceeds first by assigning a collective share to labor and then dividing that share among workers.

Fetter nevertheless accepts much of Taussig’s account of production. Modern industry involves sequences of operations extending over time; current workers commonly produce unfinished goods while consuming goods resulting from earlier labor. Taussig’s first chapter clarifies this temporal separation, and his second defines capital broadly as goods at successive stages of completion from which real income flows. In that sense, wages derive from capital. But Taussig acknowledges that the same reasoning applies to interest, rent, and business profits. For Fetter, this concession removes the basis for treating wages as the product of a uniquely identifiable fund:

The result thus reached would appear very neatly and conclusively to dispose of the concept and phrase “wages fund,” except as a literary curio.

If all income comes from the same productive provision, one could speak with equal justification of profit, interest, or rent funds. The general proposition explains the material origin of consumption, not the allocation of consumption among recipients. Fetter sees Taussig’s subsequent qualifications as an effort to retain the inherited expression despite this loss of explanatory distinctiveness.

The review’s central section tests that effort against three minimum requirements. First, the argument must concern real wages—the commodities and services workers enjoy—rather than simply money payments. Second, it must not assume that the capital supplying those real wages belongs to the immediate employers who pay workers. Third, it must explain how labor’s portion is separated from the community’s total income, and why this separation differs significantly from the allocation of other incomes. These requirements draw force from Taussig’s own criticisms of earlier writers. Fetter also invokes Taussig’s discussion of Böhm-Bawerk’s subsistence fund: identifying a provision supporting the whole community does not explain how its successive installments reach different classes.

Fetter finds that Taussig fails all three tests. On the first, the discussion shifts from real income to the monetary arrangements through which employers remunerate hired workers:

Money income and money payments, flowing first into the hands of the immediate employers, absorb all the author’s attention.

The problem is not that monetary arrangements lack practical importance, but that their description substitutes for the promised explanation of real wages. An employer’s decision about money expenditure does not by itself establish a distinct fund of consumable goods. On the second test, widening the employing class to include lenders still leaves the analysis centered on employer-controlled resources. It neglects goods held by independent producers and the personal services that also enter workers’ real income. The sources of workers’ consumption cannot therefore be identified simply with funds possessed by those who hire them.

The third failure brings the argument back to distribution:

Nowhere does he show that there is anything peculiar about the part going to labor that can entitle it, in distinction from the other parts, to be called a fund.

Fetter emphasizes Taussig’s admission that the doctrine explains little about the fundamental causes determining the shares of wages, interest, and rent. Nor, he argues, does the book adequately explain their determination at a given time. The important inquiry into real wages remains in the background while the machinery of immediate money payments occupies the foreground.

The conclusion distinguishes two surviving meanings of “wages fund.” One is so broad that it says only that workers consume part of society’s total income; the other identifies their money earnings with sums capitalists find it profitable to pay. Fetter judges the former a truism and the latter a superficial monetary account. The review’s significance lies in distinguishing the material conditions sustaining income from the causes distributing it. Although Fetter offers no complete alternative wage theory here, he argues that Taussig’s own distinctions make the old doctrine untenable: the attempted conservative reconstruction becomes, unintentionally, its most effective criticism.