Taussig’s Theory of  wages

The American economist Taussig gives a modified version of the Marginal Productivity Theory of Wages. According to him, wages represent the.marginal discounted product of labour. Tau ig thinks that the labourer cannot get the full amount of the marginal output. This is because production takes time and the final product of labour cannot be obtained immediately. But the labourers have to be supported in the meantime. This is done by the capitalist employer. The employer does not pay the full amount of the expected marginal product of labour. He deducts a certain percentage from the final output in order to compensate himself for the risk he takes in making an advance payment. This deduction, according to Taussig, is made at the current rate of interest. Thus. wages equal the total product of labour on the marginal land or in the marginal linn minus the amount discounted explained above. The present value of the product is ascertained by discounting its anticipated future returns.  Two weaknesses of the theory have been recognised by Taussig himself. First, that it is “a dim and abstract one, remote from the problem of real life”. To this he replies that this weakness is common to all economic generalisations. Second, and a more serious, objection is that the joint product is discounted at the current rate of interest. But according to his own analysis. the rate of interest is a result of the process of ad ance to the labourers. because it depends on the excess of what the labourers produce in the future over what is advanced to them in the present. This would mean arguing in a circle. To meet this difficulty Taussig suggests that we determine the rate of interest independently of marginal productivity by the rate of time preference. and with the interest thus determined discount the marginal product of labour. This. however hardly solves the difficulty; it merely evades it. Taussig’s theory ultimately analysed is another version of the Residual Claimant Theory of Wages. He says, in fact, that wages are what is left after rent, interest and profits are deducted from the total output. As such, the theory is open to al\ the objections put forward against the Residual Claimant Theory