Even more than the explicit rejection of Malthusianism, the periodicals vehemently attacked the Ricardian view that wages and profits move inversely to each other. The British Critic denounced this thesis as early as October 1817, and two years later another writer zeroed in on the methodology of what would later be called the 'Ricardian Vice' with proper scorn:
taking for granted, as usual, that money never changes in value and the proportion between the supply and demand of any given commodity never alters (which is as if the astronomer were to assume as the basis of his calculations, that all the planets stand still and that they all stand still to all eternity), he assigns a specific sum to be divided between the master and the workman, as the unalterable price of the goods which they produce; from which adaptation of hypothetical conditions, it naturally follows, that, if the workmen get more, the master-manufacturer must receive less, there being only a certain sum to divide between them.*
Other writers, including Malthus in 1824, made similar critiques, and also noted that, empirically, wages and profits generally increase or decrease in the same direction. Thus, John Craig pointed out that historically wages and profits moved not inversely but together: 'It is rather a startling circumstance attending this theory, that what it represents as the necessary effect produced by high wages upon profits in all branches of industry, is directly contrary to the experience in each particular trade.' Craig went on to explain that 'a new demand for a commodity at first enriched those, who, being in possession of this commodity, are enabled to raise the price; the desire to participate in their gains soon directs new capital to its production, and a rise in wages speedily ensures'.
Once again, it is not legitimate for Ricardian apologists to dismiss this critique as historical rather than analytical in nature, for empirical generalizations meant to apply directly to reality as in the Ricardian system are properly open to empirical rebuttal. Such rebuttal may challenge the conclusions as well as the more familiarly 'theoretical' procedure of challenging the realism of the theory's premises.
By the 1840s, the idea of an inverse relation between wages and profits had been completely discarded. But if the Malthusian subsistence theory did not determine wages themselves, then what did? Not many wandered into this unknown territory. But as early as 1821 the unknown but remarkable Scotsman John Craig emphasized that wages are determined by the supply and demand for labour, and not in any sense by the price of food. Two elements in the demand for labour were stated though not analysed in full: the 'capital from which wages are advanced to the workman', and the 'demand for the produce of his labour'. Craig, by the way, neatly demolished Adam Smith's spurious distinction between 'productive' and 'unproductive' labour. He cogently concluded that 'wealth may consist in whatever be the object of man's desire, and every, employment which multiplies those objects of desire, or which adds to their property of yielding enjoyment is productive'.
The next important step in the theory of wages came from Samuel Bailey who, in the course of his definitive critique of Ricardian value theory in 1825, pointed to the crucial role of the productivity of labour in determining wages:
the value of labour does not entirely depend on the proportion of the whole produce which is given to the labourers in exchange for their labour, but also on the productiveness of labour... The proposition, that when labour rises profits must fall, is true only when its rise is not owing to an increase in its productive powers... If the productive power of labour be augmented, that is, if the same labour produce more commodities in the same time, labour may rise in value without a fall, nay, even with a rise of profits.
One of the critical problems in developing the productivity theory of wages was the Ricardian insistence on emphasizing the alleged laws of aggregate distribution, of 'wages' as a whole and as a total share of national product and income, rather than as wage rates of individual units of labour. J.B. Say had presented a productivity theory of wages, but had not analysed the determination of particular wage rates in any detail. Nassau Senior, in the early 1830s, while confused on the topic of wages, came out for the productivity theory. He also managed to demolish Adam Smith's 'productive' vs 'unproductive' labour doctrine, stressing, as had J.B. Say, 'production' as the flow of services, which emanate both from material and immaterial products.
The truly revolutionary step forward in the theory of wages - indeed in the theory of all factor pricing - came with Mountifort Longfield, in his Lectures on Political Economy. As we have seen, Longfield was concerned to show, in contrast to the Ricardian class-conflict theory of income distribution, that workers benefit from capitalist development. (Ironically, Longfield's laissezfaire Harmonielehre was replaced by a far more statist attitude in later life.) In the course of doing so, Longfield took J.B. Say's correct but vague productivity theory of factor incomes, and worked out, for the first time, a remarkable marginal productivity theory of the rental prices (i.e. prices per unit time) of capital goods (which Longfield oddly called 'profits', in a typical confusion of returns on capital with the pricing of capital goods that has plagued economics since the early nineteenth century). Working out the specifics, Longfield showed that the price of each machine will tend to equal the marginal productivity of the machine, i.e. the productive value (in terms of value of their products) of the least productive machine which it pays to keep employed on the market, i.e. the marginal machine.
Thus, for the first time, in an unknowing echo of Turgot, Longfield used the proper ceteris paribus method of analysing productive returns, holding one factor or class of factors constant, varying another set of factors, and analysing the result.
Longfield stopped there in his brilliant pre-Austrian contribution, applying marginal productivity analysis only to capital goods. He was content that the analysis showed that wages - the residual labour income left over after payment to capital - rose as the marginal productivity of capital goods fell with each increase in the amount of capital. In short, the accumulation of capital led to an increase in wages. Furthermore, Longfield demolished any Malthusian fears totally. Not only was hard-core malthusianism long in the discard, but even the soft-core emphasis on the workers' customary level of wages as determining the supply of labour had the causal chain reversed. Instead, custom, he sensibly pointed out, is guided by the actual prevailing market wage rather than the other way round. As an anonymous Irish follower wrote in the Dublin University Magazine a decade later (July 1845), custom will render it suitable to be paid whatever the prevailing wage rate may be, while it would be considered disgraceful to be paid below that norm. Hence the demand for labour, rather than its supply, will dominate the determination of the market wage.
Longfield's further demolition of even soft-core Malthusianism pointed out that population growth can have a favourable effect by widening the market for manufactured goods, thereby raising the marginal productivity of capital goods across the board. Hence population can grow, capital can develop, and both capitalists and workers will benefit - a far more realistic picture of capitalist development than the Ricardian.
Longfield's successor and disciple Isaac Butt, however, was not content to stop there, and he provided an outstanding development of the Longfieldian analysis. In the first place, Butt took the crucial step of seeing that Longfield's marginal productivity analysis could be generalized from capital goods to all factors of production: to wages, and to land rent. Each of these classes of factors could be analysed in terms of marginal productivity, and the result The decline of the Ricardian system would be that each of them would obtain the return, or price, of the least productive factor profitable to be employed on the market (the marginal labourer or acre of land). Thus, whatever kernel of sense there was to the Ricardian differential return theory of land rent, was isolated and incorporated into Butt's brilliant pioneering generalized theory of marginal factor pricing.
Not only that: Butt also built on Say's utility analysis and correct but vague productivity analysis, and integrated it at least in outline, with generalized Longfieldian marginal productivity theory. In short, in a prefiguring of the Austrian Menger-Bohm-Bawerk insight, the value of consumer goods, determined by the subjective utility of the goods to consumers, is imputed back on the market to the values of the various factors of production, which will be set equal to the marginal value productivity of each factor. Thus the unit price of every type of factor will tend to be equal to its marginal value productivity as imputed back through the competitive market process from the subjective utility of the final products.
Unfortunately, this excellent Say-Longfield-Butt tradition of productivity theory had no influence and no successors. Although Senior, as a fellow Whatelyan, certainly knew Longfield's work, he never referred to him or to Butt, and even Longfield's Irish successors at Trinity College, Dublin, while continuing the utility theory of value, neglected the corollary theory of imputation and productivity.
It is true that Longfield's marginal productivity analysis gained one faithful follower in England, Joseph Salway Eisdell, whose two-volume work, A Treatise of the Industry of Nations (1839), propounded a sophisticated version of the Longfieldian theory. The book by the unknown Eisdell, however, sank without trace, gaining no reviews in the journals, or citations anywhere else.
But if factor pricing had been analysed, what of profits? If profits could not be explained simply as a residual, then they had to be explained directly, and so some economists began to search for a satisfactory theory of what would determine long-run profits or what would later be called long-run interest return. For one thing, it was pointed out that Ricardo erred greatly in assuming instantaneous and total mobility of capital, and there was a harkening back to the more realistic outlook of Adam Smith. A writer in Monthly Review, in 1822, for example, stressed 'the impracticability of transferring capital and the personal acquirements of skill from one business to another'.
But if profits were only uniform as a long-run tendency, what explained them? Malthus moved closer to the correct view, in the Quarterly Review in 1824, by stressing that whereas rents are determined by productivity, profit, for example, that is earned in keeping wine and selling it when it matures, is due to 'waiting', and the longer the waiting the greater the margin of profit.
A particularly important contribution to the journal literature pointed to the eventually correct theories of profit and interest. This was an article by William Ellis (1794-1872) in the Benthamite Westminster Review for January1826. In a highly sophisticated analysis of saving and investment, Ellis pointed out that saving is induced by 'the expectation of greater enjoyment from deferred than immediate consumption', while, on the other hand, investment is called forth by the expectation of profit. In the course of analysing investment, Ellis, with great perceptiveness, distinguished between profit as a return to risk taking as against interest as a return on savings that may also carry a risk premium.
Particularly interesting was Ellis's pioneering risk theory of profits. 'The largeness of the profit', he maintained, 'must be proportioned to the risk incurred in drawing treasure from the hoard and employing it in production'. He also keenly stressed the importance of a large expected profit for undertaking technological innovation. New technology is 'untried' and its introduction must overcome 'the loss of superseded machinery, the want of skill and practice, in workmen and the uncertainty of the result, all unite in preventing the adoption and application of that which is untried' . Chiding previous writers for ignoring innovation and its problems, Ellis pointed out that its difficulties 'are only conquered ... by the prospect of the great additional profit, with which the adopted invention is expected to be accompanied'.
Ellis also introduced separating out the elements of 'gross profit' in a business firm, and distinguishing them from long-run normal interest. Where an entrepreneur uses his own capital exclusively, his gross profit, Ellis perceptively pointed out, can be broken down into premium for risk, remuneration for the entrepreneur's labour and supervision, and, finally the 'remuneration for the productive employment of his savings, which is called interest'. Productive loans in business tend to comprise the interest part of gross business profit.
Who was William Ellis who contributed such a startlingly perceptive and advanced article to one of Britain's distinguished journals? Apparently this was Ellis's sole foray into economics. Born in London, Ellis became a nonconformist missionary, and spent his life working and travelling for the London Missionary Society. Sent to Polynesia from 1816 to 1824, Ellis, who had worked as a gardener in his boyhood, acclimatized many tropical fruits and plants in Polynesia, and also set up the first printing press in the South Seas. The fruits of this labour appeared in his two-volume Polynesian Researches (1829). His interest in the theory of profits soon upon his return from his first Polynesian sojourn appears to have been a sport in Ellis's busy missionary career.
While he was not as perceptive as Ellis, a similar analytic division of gross and net profits was contributed by the Scottish philosopher Sir George Ramsay (1800-71), in an unknown and unremarked work, An Essay on the Distribution of Wealth (1836). While much of the book was Ricardian, Ramsay adopted the concept of entrepreneur from the French, and he too broke down the gross profits of capital into interest on the use of capital, and the 'profits of enterprise', which was in turn divided into wages of management and superintendence, and payment for the risk incurred by the 'masters', or entrepreneurs. Ramsay pointed out that, analytically, entrepreneurs receive the profits of enterprise, while capitalists receive interest or 'profits' on capital. In practice, however, the two returns are generally combined as the
gross profits of capitalist entrepreneurs.
Ramsay was also the first Briton to adopt Destutt de Tracy's analysis of the process of production as either change of the form of matter, or the geographical place, to which Ramsay added, a change in time."
[*nota: "Quoted in Barry Gordon, 'Criticism of Ricardian Views on Value and Distribution in the British Periodicals, 1820-1850', History of Political Economy, 1 (Autumn 1969), p. 384"]
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