his own capitalist. A very large proportion of the total business of the nation is done in this way. The typical farm in the northern half of the country comes under this description, as do also many small shops and stores in country towns, and a few even in the larger cities. But even the farmer, as well as any other business man who does a part of his own work, may hire additional help and pay wages, though getting wages for himself. He may also rent additional land, though owning some land of his own and getting rent for it. He may borrow additional capital, though owning some capital of his own and getting interest on it. In fact, we can find every possible variation, from the enterprise where every function is performed by the same man to that where no one performs more than a single function. An example of the latter would be the enterprise where laborers do all the work and receive nothing but wages or salaries, where someone else is the landowner, and furnishes nothing but land and receives nothing but rent, where another man, or group of men, furnishes nothing but capital and receives nothing but interest, and where still another man, or group of men, assumes the risks of the enterprise, invests the borrowed capital on the rented land, hires the labor, and undertakes to find sale for the products. In this chapter we are concerned with the income which pays for the function of the laborer. Wages are the price which is paid to call forth the necessary quantity of productive labor.

We may say in general that when one factor of production is oversupplied in proportion to the others which need to be combined with it, the question of getting more of it, or even of maintaining the existing supply, becomes unimportant. Accordingly not much will be paid in order to get more of it, or even to hold the existing supply. But when any factor is undersupplied in proportion to the others which have to be combined with it, the question of getting more of it, or of holding the existing supply, becomes very important. Accordingly a high price will be offered for it.

This principle applies not simply to land, labor, and capital, but to the different kinds of each. If there is a scarcity of skilled labor in proportion to the unskilled labor which has to be combined with it, it becomes very important to get more skilled labor, or at least to keep some of the existing supply from going elsewhere. In that case a high wage will be offered for skilled labor. Under the same conditions there is, of course, a large supply of unskilled labor in proportion to the skilled. It is therefore not very important that there should be more unskilled labor, nor even that the existing supply should be kept from diminishing. Not much is likely to be paid, under such conditions, for unskilled labor.

the

The next question is, What determines the relative supply of the various factors of production?

CHAPTER XXXII

WHAT DETERMINES THE RATE OF WAGES?

Causes of differences of wages in different occupations. Let us consider, first, the causes of the difference of wages in different occupations. If, in order to get efficient production, it is found necessary to have a high degree of specialization, many different kinds of skill will be found in the same establishment, each kind contributing its share toward the production of the same product. Men possessing these different kinds of skill will be needed in slightly variable, but fairly definite, proportions. In the production of cloth, for example, spinners and weavers will be needed in fairly definite proportions. If by any accident it could happen that for a period of time there were more spinners than were necessary to supply yarn for the weavers,1 the value of each spinner would be considerably reduced. Under these conditions, if they could exist, it would be literally true that a few less spinners would be little loss, provided the remaining spinners could still supply all the yarn the weavers could use. On the other hand, the labor of each weaver would be of considerable value.

Since there would not be weavers enough to use all the yarn that could be produced, one less weaver would reduce the total production of cloth, and one more weaver would add to the total production, assuming that machinery and room were available. Under these conditions there would grow up in any free community a difference in wages in favor of the weavers and against the spinners. This would be called the law of supply and demand, but this law rests back on certain fundamental advantages and disadvantages. The addition to the total output 1 Compare Chapter XVIII.

of cloth which would result from an increase in the number of weavers would really be much greater than the addition which would result from an equal increase in the number of spinners. This would be a sufficient reason why a higher price should be offered for the labor of weavers than for that of spinners. In the absence of compulsion, that would be the only way of attracting more weavers and fewer spinners.

Of course this condition would soon correct itself. If the wages of the weavers were allowed to go up and the wages of the spinners to go down, some of the spinners would have an excellent reason for changing their occupation. If they could not easily do so, the oncoming generation of laborers, who have to choose between the occupation of weaver and that of spinner, would be attracted into the one where the wages were higher, and thus restore the equilibrium. But if wages were not allowed to readjust themselves, and, through some compulsion on the part of the government or some other agency, all mills were forced to pay as high wages for spinners as for weavers, and to hire all who applied, then there would be no reason why the oncoming generation should go into the occupation where they were most needed. They would simply choose the one where the work was most agreeable. There is, therefore, a genuine social utility to be achieved by the difference of wages which would grow up under the law of supply and demand. It would tend to attract laborers into the occupation where more men were needed and to discourage them from entering the occupation where more men were not needed. This will be found to be the fundamental reason why wages are as a matter of fact higher in some occupations than in others. Where the ordinary processes of bargaining are not interfered with, wages tend to be high in those occupations where more men are needed, and needed badly, and low in those occupations where more men are not needed, or not needed badly. The function of these differences of wages is to restore the equilibrium between different occupations.

Cost of acquiring skill. If there is some permanent obstacle in the way of a free choice of occupations, there may be a permanent difference in the wages in different occupations, based upon an undersupply of labor in one and an oversupply in another. If, for example, a certain occupation requires a kind of skill which is not widely distributed or easily acquired, whereas another occupation requires a kind of skill which multitudes of people possess or can easily acquire, there is likely to be a permanent undersupply of the one kind of labor and a permanent oversupply, at least relatively, of the other. The cost of training or the difficulty and irksomeness of the necessary study and practice will serve to limit the number of people who succeed in entering the highly skilled occupations.

In this respect the cost of acquiring the necessary skill acts very much as the cost of producing a material commodity. As the price of the material commodity must be high enough to cover the cost or to overcome the disinclination to the work of production, so the wages of labor in a highly skilled occupation must be high enough to pay the cost of acquiring the skill or to overcome whatever disinclination there may be to the preliminary work of study and practice. If this cost is high, the wages must be correspondingly high. If the cost is very low, so that practically no one is deterred from entering the occupation, the wages will be correspondingly low.

Some skill is absolutely limited. There may, however, be certain kinds of skill which are so scarce as to be almost incapable of being increased. Certain kinds of work may require a man of genius rather than a man of training. But in most cases it will be found to be a matter of training. An indefinite number of men could be trained for almost any occupation if the wages were only high enough to furnish a sufficient inducement. This, however, will depend somewhat upon the opportunities for education and training. Under a system of free public education the cost of training is greatly reduced and should naturally greatly increase the supply of highly skilled