Sec.4. The Supply of Labor in General.  The efficiency of labor may be regarded as affecting either the demand for labor on the one hand or the supply of it on the other, according as we look at the matter from the worker’s or the employer’s standpoint.  The employer is concerned with the labor costs per unit of his output, the worker is concerned with the wages he receives.  An increase in the efficiency of labor may, and usually will, mean both a decrease in labor costs to the employer and an increase in the earnings of the worker.  It is thus wholly to the good.  But the effects of an increase in the supply of labor in the sense of a growth in the numbers of the population are far more dubious.  Unaccompanied by an increase in the demand for labor, it must result in a diminished remuneration for the individual worker.  To some extent indeed the demand for labor would almost certainly be increased.  The supply of Capital may expand, perhaps proportionately, perhaps more than proportionately to the increase in population.  But one factor of production, as we have seen, is not capable of such expansion.  This is the factor of Land, or Natural Resources.  It is the limitation of this factor which gives rise to what we have most of us heard of as The Law of Diminishing Returns.  It is this that is the essence of the problem of Population, portrayed in somber hues more than a hundred years ago by Malthus.

This problem will form the subject of the sixth volume of the present series.  In the meantime it may be suggested that we are easily credulous if we suppose that the problem has been finally disposed of by the peculiar progress of an abnormal century.  But that experience has at least destroyed the view that there need be, or even is in fact in Western countries, a relation between real wages and the numbers of the people so close and direct that an improved standard of living must be temporary only, doomed to destroy itself by the increased population it engenders.  One may perhaps go further and say that it is doubtful even in what direction changes in remuneration will influence the aggregate supply of labor.  When we pass to “what should be,” it is plain that there is nothing whatever to be said for the sort of relation indicated above.  The view once widely held that the principle of population must inevitably keep the mass of people close to the verge of the bare means of subsistence was no statement of a desirable ideal.  It was a nightmare; a nightmare none the less though it may haunt us yet.  It is far from fanciful to suggest that it is because this relation is so obviously not “what should be” that it may be ceasing to hold true in fact.  But it would be very fanciful indeed to maintain that as yet “what should be” is represented by the actual population.  Thus, just as with capital, so with labor, there is no reason to suppose that the aggregate supply is determined by any fundamental economic law, or corresponds in practice to what is socially desirable.