Before proceeding to a critical estimate of this theory let us trace the history of its development in order to see how deep it has struck its fangs into the economic life of the modern world.

In an unformulated way the general outline or fabric of the theory was put forward by Adam Smith more than 125 years since. Writing in 1773, he speaks as follows on this subject in the eighth chapter of the first book of the "Wealth of Nations."

The demand for those who live by wages cannot increase but in proportion to the increase of the funds which are destined for the payment of wages. These funds are of two kinds: first, the revenue which is over and above what is necessary for the maintenance, and secondly, the stock which is over and above what is necessary for the employment of their masters.

The demand for those who live by wages necessarily increases with the increase of the revenue and stock of every country and cannot possibly increase without it. The increase of revenue and stock is the increase of national wealth. The demand for those who live by wages therefore naturally increases with the increase of national wealth, and cannot possibly increase without it. .

...

Though the wealth of a country should be very great, yet if it has been long stationary

we must not expect to find the wages of labour very high in it. The funds destined for the payment of wages, the revenue and stock of its inhabitants, may be of the greatest extent, but if they have continued for several centuries of the same or very nearly the same extent, the number of labourers employed every year could easily supply and even more than supply the number wanted the following year. There could seldom be any scarcity of hands, nor could the masters be obliged to bid against one another in order to get them. The hands would, on the contrary, in this case naturally multiply beyond their employment. There would be a constant scarcity of employment, and the labourers would be obliged to bid against one another in order to get it. If in such a country, the wages of labour had ever been more than sufficient to maintain the labourer and to enable him to bring up a family, the competition of the labourers and the interest of the masters would soon reduce them to this lowest rate which is consistent with common humanity. ...

It would be otherwise in a country where the funds destined for the maintenance of labour were sensibly decaying. Every year the demand for servants and labourers would, in all the different classes of employments, be less than it had been the year before. Many who had been bred in

the superior classes, not being able to find employment in their own business, would be glad to seek it in the lowest. The lowest class being not only overstocked with its own workmen, but with the overflowings of all the other classes, the competition for employment would be so great in it as to reduce the wages of labour to the most miserable and scanty subsistence. . . . In a year of sudden and extraordinary plenty there are funds in the hands of many of the employers of industry sufficient to maintain and employ a greater number of industrious people than had been employed the year before. . . . The contrary of this happens in a year of sudden and extraordinary scarcity. The funds destined for employing industry are less than they had been the year before. A considerable number of people are thrown out of employment.

In Adam Smith's hands, however, this unformulated theory of a wage - fund did not assume the malignant aspect that it was destined to do later. He did not conceive it as yielding an iron law which tended to reduce wages to a minimum-the minimum of mere bare necessaries for existence. On the contrary, he recognised that in what he calls thriving countries, such as the America and

England of his days, the wages of labour are considerably above this minimum.

There are many plain symptoms that the wages of labour are nowhere in this country regulated by this lowest rate which is consistent with common humanity.

The simple fact of the matter was that Adam Smith lived in a time of commercial and national prosperity, and his teaching possesses as a consequence none of the pessimism which was later to make the iron law of wages the most hated of all economic theories. The working-man of Adam Smith's day could have drawn from his teaching on this point only consolation and hopefulness and wise counsel; for here was one who showed him, both by theory and by historical illustration, that in a state which was thriving and in which population was increasing, wages, too, would and must move upwards, not downwards.

But a change was quickly to come over the scene. The end of the eighteenth century and the first quarter of the nineteenth was a period of the most intense commercial distress.

The poverty and demoralisation among the working-classes, which were induced by this commercial distress of the Napoleonic period, were aggravated by the working of the most rotten poor-law system that has ever been known.

In addition to that there was a great dislocation of industry. Machinery was being more and more introduced, and wherever machinery appeared the old household industries died out as of a palsy. Men left the villages only to flock as paupers into the towns, and machine-breaking riots spread through the breadth of the land. It is easy, looking back on that period, to see that one industrial era, that of handicrafts, was passing away, and that the distress which ensued was an inevitable result of the change-inevitable, that is to say, until the transition stage had been got over, and until the modern factory system had been so far evolved as to find labour for or to absorb the dispossessed handicraftsmen. But such far-off wisdom as this is not given to contemporaries, to those who are called upon to live through such a period of distress. Accordingly, when next we find a theorist entering the field, we meet not a genial optimist like Adam Smith, but a confirmed pessimist like Malthus. To a superficial eye the evil of Malthus's day resulted from over-population. For what but over-population could give the country such swarms of unemployed and indigent? It was from this point of view that Malthus approached the subject of wages, and his attitude of mind coloured and stamped the whole of his theory.

B