Maurice Dobb on the Work-Fund Fallacy

Maurice Dobb, Wages (1928), the influence of bargaining power, pages 97-99:

When in reply to the economists' theory that wages were inexorably determined by supply and demand, the trade unionists of the middle nineteenth century declared that they would influence wages by limiting the supply of labour through restrictions on working overtime etc., the economists retorted by accusing them of harbouring a fallacious "Work-Fund" doctrine—of thinking that by limiting the work done by each more employment could be created for others [n.b.: the fixed "Work-Fund" was Alfred Marshall's term for what D.F. Schloss dubbed "The Theory of the Lump of Labour"]. The retort partly missed the point of the argument in so far as the trade unionists were trying to raise the supply-price of their labour by limiting its amount. But at the same time the economists' ignoratio elenchi contained a point of its own that was important. What they intended to say was that a restriction on the supply of labour could not increase aggregate earnings, and, unless it took the form of restriction of the numbers of the working population, could not increase aggregate earnings per head. This follows if the demand for labour, or the Wages-Fund, is elastic—if it is larger when there is more profit to be made than when there is less. Such restriction can, however, increase wages in proportion to the worker's expenditure of energy and his "wear and tear," and it can increase Relative Wages, or wages as a proportion of the total social income.

The same applies to modern trade union methods of collective bargaining, which aim, not primarily at restricting the supply of labour, but at raising the supply-price of labour and setting a minimum below which labour cannot be purchased. Such action has quite a wide power of influencing the rate of wages that is paid in proportion to the amount of work that is done, and so of increasing welfare. But, while it can do this, it is unlikely to add to aggregate earnings; and if trade union action goes beyond the attempt to raise the wages of particular grades or particularly exploited groups in special circumstances, it is likely to result in unemployment. What was implied in the economists' retort to the advocates of the so-called Work-Fund leads to the apparent paradox that the more the workers allow themselves to be exploited, the more their aggregate earnings will increase (at least in the long run), even if the result is for the earnings of the propertied class to increase still faster. And on this base is erected a doctrine of social harmony between the classes. But it does not follow that the workers will prefer to be exploited to a maximum degree, or that attempts to limit this exploitation are based on fallacious reasoning. And if in raising the supply-price of their labour the choice lies between restricting the number of men employed or of restricting the amount of work done by each man, the latter seems clearly the preferable alternative.