OLD THEORIES OF WAGES
Several theories have been put forward to explain the general level of wages prevalent in a country. Take first the Subsistence Theory. This theory originated with the Hippocratic School of the French economists and was developed by Adam Smith and the later economists of the classical school. TIle German economist Assailable called it the Iron Law of Wages or the Brazen Law of Wages. Karl Marx made it the basis of his theory of exploitation.
According to this theory. wages tend to settle at the level just sufficient to maintain the worker and his family at the minimum subsistence level. If wages rise above the subsistence level. the workers arc enc our aged to marry and to have large families. TIle large supply of labor brings wages down to the subsistence level. If wages fall below this level, marriages and births are discouraged and undernourishment increases the death-rate. Ultimately, labor supply is decreased. until wages rise again to the subsistence level. It is supposed that the supply of labor is infinitely elastic. That is, its supply would increase if the price (i.e .. wage) offered rises. Criticism. In.In backward countries. wages no doubt are to be found at or near the subsistence level. But the theory docs not apply to advanced countries like England and America. The theory evidently is based 011 the Malthusian Theory of Population. But it is wrong tl}say that every increase in wages must inevitably be followed by an increase in birth rate. An increase in wages may be followed by a higher standard of living which in turn influences the wage level. Ricardo, one of the exponents of the theory,. stressed the influence of custom and habit in determining what was ‘necessary’ for the workers. But habits and customs change over time. Hence, the theory can hold good for only a limited period of time and
cannot be true of all times, especially of a world characterized by fast changing habits. Ricardo, therefore, admitted that wages might rise above the subsistence level ‘for an indefinite period in an improving society.’
Another criticism of the theory is that the subsistence level is more or less uniform for all working classes with certain exceptions. The theory. thus. docs not explain differences of wages in different employments. Further, it may be said that the theory explains wages only with reference to supply; the demand side side is entirely ignored. On the demand ide. the employer has to consider the amount of wor which the Employee give him and not the ub distinct of the employee. Moreover, the fundamental weakness or the subsistence theory lies in it! long-term character. It explains the adjustment of wages over the lifetime of a generation nnd docs not explain wage fluctuations from year to year. As uch it has little practical value. Filial. the ‘subsistence minimum’ is a very Ctn. Docs it refer to the minimum requirements of a modern man or of a tribal savage? There i~no rigidly fixed minimum and it is IIP[ independent of the wages ruling over a period of lime.