Marx called his great work simply Das Kapital, which is to say Capital (leading his mother, who was rather disappointed in her son, to remark "if only Karl had made Capital, instead of just writing about it.") The subtitle of Marx’s work is “Critique of Political Economy.” It is thus, in the first instance, a critique not of capitalist society but rather of what had been written about economics before Marx. The three great theorists preceding Marx who established the discipline that was known as Political Economy were the 18th-century French theorist François Quesney, the 18th-century Scottish theorist Adam Smith, and the 19th century English theorist David Ricardo.
The late medieval reestablishment of Mediterranean trade and
the influx of precious metals from the new world together produced a centuries-long
inflation in European prices, which in turn led to the widespread belief that
wealth consisted primarily in stores of gold and silver. Quesnay, examining the
success of the 18th-century French economy, advanced the radically
new theory that national wealth consisted not in stores of gold but in the
products of a nation’s agriculture. In defending this view, Quesnay made
central to his analysis a concept on which all economic theory came to depend:
the concept of reproduction.
Reproduction is a very simple idea, but it is so important
that we must spend a little time talking about it to make it absolutely clear.
Agriculture in the Northern hemisphere produces a single crop each year. As soon as the snows melt and the ground
softens, seeds are planted. They are tended during the spring and summer until,
in the fall, the crops are harvested. A portion of the crop is set aside to
serve as seed in the next season. Thus,
the output of one season serves as an input into the next season and this
cyclical process of reproduction continues, year after year. The same
fundamental cycle of reproduction is exhibited in the production of the tools
with which the peasants work. The shovels and axes used in one season of
agriculture are made from the wood and metal produced in the previous season.
A cyclical structure of the process of reproduction is of
course exhibited also in the population as well. This generation’s parents are the
last generation’s children who are themselves the product of the previous
generation’s parents.
This elementary idea is, as we shall see, the foundation on
which are built the elaborate mathematical models of the 20th
century re-examination of the classical traditional political economy.
The foundational work of classical political economy is a
large book written by the Scottish philosopher, Adam Smith, and published in
1776, the year in which his friend David Hume died. Smith called his work An Inquiry
into the Nature and Causes of the Wealth of Nations. In his work, Smith presents four powerful
ideas which, taken together with the Physiocratic concept of reproduction,
constitute the theoretical foundation of classical political economy.
The first idea is the
division of labor. As they transform nature to satisfy their needs and
desires, men and women divide their activities.
Some grow wheat, others tend sheep; some spin wool into thread and weave
cloth, others cut the cloth and sew it into coats. This division of labor, as
Smith notes, vastly increases the efficiency of production. But in order for the farmers, shepherds, weavers, and tailors to live, they must exchange what they have produced with
one another so that each can consume a portion of what others have produced.
The farmers, the shepherds, the weavers, and the tailors
meet periodically to exchange their goods with one another. Smith observed that
the ratios in which they exchanged their goods varied from day to day. On one day, the weather might be good and
many farmers and shepherds would bring their wheat and their wool to market. Since there were no laws regulating the
prices of these goods – the ratios in which they exchanged with one another –
on such a day the farmers and shepherds might be compelled to exchange their
wheat and wool for less cloth or fewer coats.
On another day, the weather might be bad and so the farmers might bring
less wheat to the market. On such a day,
the price they could get for their wheat might go up.
However, Smith noted that experienced farmers, shepherds,
weavers, and tailors came to learn in general that the proportions in which their
goods exchanged with one another were stable and predictable. This led Smith to introduce his second great
idea: the distinction between the
fluctuating market prices of goods and what he called the natural prices for
those goods, which is to say the predictable prices that in general governed
the exchange of goods in the marketplace.
Invoking the physical theories of Isaac Newton, which in the 17th
and 18th centuries had so powerful an effect on philosophical thinking,
Smith described the natural prices as “centers of gravity” drawing toward them
the fluctuating market prices.
Having drawn the distinction between market prices and
natural prices, Smith asks the question that would dominate all of classical political
economy: what determines the predictable, stable, “natural” prices of goods in
the marketplace? At this point, bizarre
though it may seem, we must take a detour through the Book of Genesis. What I
have in mind will become clear shortly. Let
me remind you of chapter 3, verses 16 to 19 of Genesis (to those of you who
feel that I have somehow tricked you into Bible study, let me just note that
this passage is the key to understanding the famous 1844 manuscript on the Alienated
Labor, of which more later.)
After God creates the Garden of Eden, He places in it a tree
whose fruits give one knowledge of good and evil. He commands Adam and Eve not
to eat the fruit of that tree but, seduced by the serpent, they do, whereupon
God drives them out of the garden and lays upon each of them a curse. Adam, God says, will henceforth be compelled to
get his bread by the sweat of his brow, which is to say, to labor. Eve is condemned to bear children in sorrow,
which will be her labor. The stain of
this Original Sin shall be passed by Adam to all of his descendents. In short,
God’s curse is that man shall be compelled to labor.
Because labor is a curse laid upon us for our sin, we view
labor as an evil, not as a fulfillment, as something to be shunned, not
something to be embraced. Note that it
is labor that is viewed as an evil, not activity. Activity was considered a good, it was
something that upper-class people did, that philosophers did, that rulers and
warriors and athletes did. But labor is a curse, something to be shunned and
avoided if possible and engaged in only as much as necessary. Labor is, speaking
economically, a cost, not a benefit. Thus Adam Smith concludes that insofar as
we are free to exchange goods in the market without the constraint of laws or
the compulsion of force, we will value the goods we bring to the market by
measuring the amount of labor they have cost us to produce and we shall only be
willing to exchange them for goods the production of which would cost us at
least an equal amount of labor. In short, Smith offers as an explanation for
the ratios in which goods exchange naturally in the market his third great
idea, a Labor Theory of Natural Price. And
since in the 18th century the term “value” was used as a synonym for
the term “price,” what Smith puts forward for the first time is a Labor Theory of Value. This is Adam Smith’s third great idea.
At one point, Smith offers as an example an economic
exchange between two persons, one of whom hunts deer and the other of whom
hunts beaver. (A personal aside: I have
never hunted either, and I am afraid I assumed that it was harder to catch deer
than beaver. Hence, when Smith said that it took the deer hunter one day to
catch a deer and the beaver hunter two days to catch a beaver, and hence that
the only rational basis for exchange would be two deer for one beaver, I kept
getting all of this backwards and had to correct the manuscript of my book on
Marx’s economic theory when it came from Princeton University Press because I
had screwed up the ratios.)
But there is a problem. The deer hunter and the beaver
hunter, or the wheat grower and the tailor, use tools in their production
processes, and these tools require different amounts of time to produce, last
for different amounts of time before they wear out, and so forth. And there is
another problem. The deer hunter hunts in forests which, in England in the 18th
century, were the private property of lords and princes. The wheat grower grows
wheat on land, which in England in the 18th century was owned by the
landed gentry, who will charge a rent for those who wished to grow wheat on their
land.
In short, Smith observes, a simple Labor Theory of Value
does not explain proportions in which goods exchange in the market once the “appropriation
of land and accumulation of stock” have taken effect.
Smith struggles in The Wealth of Nations to deal with these
problems but is quite unsuccessful. It would not be until 41 years later that David
Ricardo would offer solutions to both problems and by doing so put forward a
full-scale theoretically developed Labor Theory of Value.
But Adam Smith had one more great idea, and this is in many
ways his most controversial and important idea. Let me introduce it with a
little personal story from 1978, the year in which I began my serious study of
these subjects. While I was on sabbatical, I attended lectures given in the
UMass economics department by a young scholar visiting from Cambridge
University in England named John Eatwell. Eatwell was then a 32-year-old hotshot, one of
the brilliant young economists around Joan Robinson. He had earned a doctorate
in Economics at Harvard and was visiting the exciting Marxist economics
department at UMass. (He is now Baron Eatwell, a labor member of the House of
Lords – the English are weird.) Eatwell
gave a course on what is called in economics “value theory,” in which he
presented some of the mathematical reinterpretations of the work of Smith and
Ricardo. Early in the semester, he started lecturing about the theoretical
determination of price. At this point I knew absolutely nothing about standard
economics and I was puzzled by the fact that he would spend so much time
talking about what determines the price of wheat or coal or woolen cloth. So I
raise my hand and asked why it was important to know what determines the price
of wheat and coal and cloth. Everybody looked at me as though I were crazy and
Eatwell was so stunned by the question that he did not give me a coherent
answer. I was in my 40s at the time and
I think he could not imagine somebody my age who is that dumb. It took me a
while to figure out what was actually going on.
Why did Smith want to know what determines the price of
wheat and coal and cloth? Because Smith was convinced that the proper way to
understand a society is to divide it into the classes of human beings bearing
different relations to the economic activities of the society, which in his day
meant the workers, the landowners, and the capitalists. The share of
the annual product going to each class was determined for the workers by the
wage rate, for the landowners by the rental rate for land, and for the
capitalists by the profit rate for capital. And because what was being
divided up in any given year was a fixed total of wealth, the interests of
these classes were fundamentally in conflict with one another. What
went to the landowners in rent came out of the pockets of the capitalists and
diminished their profits. What went to the workers as their wage reduced the
profit of the capitalists as well.
This was the fourth great idea of Smith: The Economic Class Structure of Society and the Foundation of Class Struggle.
20 comments:
On an admittedly quickish read, two sentences here don't seem to hang together very well:
1) "...Smith asks the question that would dominate all of classical political economy: what determines the predictable, stable, 'natural' prices of goods in the marketplace?"
2) "Nobody was actually interested in what determines the price of wheat and coal and cloth, of course."
The second statement does not make a great deal of sense to me. If the dominant question of classical political economy was what determines the natural prices of goods in the marketplace, then the question of what determines the price of wheat and coal and cloth must have been of interest, because wheat and coal and cloth obviously are goods (or commodities) that were exchanged in the marketplace. So classical political economists must have been interested in what determines the (natural) prices of wheat, coal, and cloth, because that question is a subset of the question of what determines the natural prices of goods in the marketplace. And from a more practical angle, the sellers of wood, coal, and cloth were likely somewhat interested in what determined both the fluctuating and the "natural" prices of the goods they were selling.
You go on to say that the questions of real interest were the price of labor, the price of land, and the price of capital. Labor was exchanged (or apparently exchanged) for a wage in (some) marketplace, so it seems to fall in the category of "goods" exchanged in the marketplace. But capital (depending on how it's defined) was not directly exchanged in the marketplace all that often (if at all), and land was directly exchanged only within a small subset of the population. So if it is correct that the dominant question of classical political economy was the determinants of the natural prices of goods exchanged in the marketplace, then it follows that while the classical political economists were concerned with the price of labor (i.e. wages), they should not have been especially concerned with the price of land or the price of capital. However, since Smith, as you say, and Ricardo were concerned about the price of land (i.e., rents), as well as the profit rate, and since land was probably (?) not exchanged in the marketplace all that often, not on a daily basis at any rate, maybe the earlier statement that "Smith asks the question that would dominate all of classical political economy: what determines the predictable, stable, 'natural' prices of goods in the marketplace" needs some qualification, or at least the addition of a parenthetical at that point indicating that the question included the price not only of labor but of capital and land as well, even though capital and land seem to be in a different category than the "goods," including labor (or labor-power), that were exchanged in "the marketplace."
(Sorry for the long comment...)
You are correct that I have not been clear. I will clean it up tomorrow. Thank you.
Thanks!
So, you do read comments. Gee, mine seem to have evaporated. I asked about synthesis and the horrible book "The Logic Book." Can't believe you were "analytic," but back then philosophy didn't do philosophy anymore. Have you read Dewey's 1884 article "Kant and Philosophical Method"? He was still Hegelian then. He's trying to unite analysis with synthesis, I think. Says analysis moves from Law of Identity to simple elements to judgment where predicate is identical to subject. Once again, what the hey? Looked at Graham Priest talking about Law of Identity and he didn't help though he believes recent Logicians have more clarity. How does A=A have any functional value? Also, is Euclidian Geometry really about space? Seems to me it's about abstract forms which may or may not promote the imperialism of space!!! I wish you well. Will you be escaping to Paris soon?!!!!
Prof Wolff,
I'm a little unsure of how to interpret the equation of the price of capital with the profit rate in this sentence:
"...there were three prices that everybody was interested in, namely the price of labor, or the wage, the price of land, or rent, and the price of capital, or the profit rate."
It seems to me that the price of capital would be a determinant of the profit rate- as well as Labor and Rent- but is not the same thing as the profit rate. What am I missing?
Here's the Wikipedia article on the cost of capital. I couldn't find much googling "the price of capital", but "cost of capital" would be more or less the same, I assume.
If cost of capital is the same as the price of capital, then as G.M.O. Burt says above,
it is not the same as the profit rate.
https://en.wikipedia.org/wiki/Cost_of_capital
re: class conflict does not and cannot exist
What went to the workers as their wage reduced the profit of the capitalists as well.
First, a quote from Bill Mitchell (emphasis mine):
Prior to the 1930s, there was no separate study called macroeconomics. The mainstream theory – which dominates still today – considered macroeconomics to be an aggregation of the individual. So the representative firm and household were just made bigger but the underlying behavioural principles that were brought to bear on the analysis were those that applied at the individual level.
So the economy is seen as being just like a household or single firm. Accordingly, changes in behaviour or circumstances that might benefit the individual or the firm are automatically claimed to be of benefit to the economy as a whole.
The general reasoning failure that occurs when one tries to apply logic that might operate at a micro level to the macro level is called the fallacy of composition. In fact, it is what led to the establishment of macroeconomics as a separate discipline. As indicated, prior to the Great Depression, macroeconomics was thought of as an aggregation of microeconomics. The neo-classical economists (who are the precursors to the modern neo-liberals) didn’t understand the fallacy of composition trap and advocated spending cuts and wage cuts at the height of the Depression.
Start with a simple economy composed of capitalists and workers. The economy produces consumption goods and investment goods. Capitalist earn profits and workers earn wages.
GDI = GDP
Profits + Wages = Consumption + Investment
Profits = Consumption + Investment - Wages
If we make the simplifying assumption that workers spend all their wages, then wages drop out, and we're left with:
Profits = Investment
Note that profits have nothing to do with wages at the macro level. That isn't to say that workers with strong bargaining power can't get higher wages from a particular capitalist, but that means that that particular capitalist earns below average profits which means that the other capitalists earn above average profits. Remember, the profit pie is fixed by investment and cannot change.
Further to my comment, Anatol Murad wrote a book titled: What Keynes Means. In that book, he says that if capitalists invested zero in a given time period, then profits in that time period would be zero.
Let's use the simple example of the economy I described above. Also, it's been empirically determined that profits are about 1/3 of the pie and wages about 2/3.
Profits + Wages = Consumption + Investment
33 + 67 = 67 + 33
Profits in that year = 33.
Now assume in a given year that no investment takes place, which gives us this:
0 + 67 = 67 + 0
Profits in that year = 0.
Note how in the first example, workers capture 67% of the income pie and that in the second example, workers capture 100% of the income pie, yet in both examples, workers earn exactly the same 67 dollars.
The error is in thinking that the pie is fixed, which it is not. That's why profits can range up and down with no effect on the labor share, because the size of the pie is constantly changing.
Dear Ahmed Fares
You write: Prior to the 1930s, there was no separate study called macroeconomics. The mainstream theory – which dominates still today – considered macroeconomics to be an aggregation of the individual. So the representative firm and household were just made bigger but the underlying behavioural principles that were brought to bear on the analysis were those that applied at the individual level.
I am pretty sure that you are wrong about this. Sure there may not have been a subdiscipline *called* macroecomimcs, but that does not mean that political economists of the past did develop theses and theories of a macroeconomic nature Here is the first hit definition macroeconomics from Google:
'Macroeconomics is a branch of economics that studies how an overall economy—the markets, businesses, consumers, and governments—behave. Macroeconomics examines economy-wide phenomena such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment'.
Having a modest familiarity with Hume, Smith and Marx, I would say that they *all* engage in what we would nowadays call macroeconomics, Nor is their thought on macroeconomics merely aggregative. They all posit various kinds of invisible hand mechanisms whereby many people pursuing their private objectives arrive at a stable result (whether good or bad) that is not part of their intention. Ricardo's theory of rent according to which landlords in fertile areas can exact super profits depends upon the fact that landlords and farms in less fertile areas must be able to make a profit given higher production costs. The produce of the more fertile land is sold at the same price as that of the less fertile land, which means that landowners can extract higher rents from their tenant farmers. This is, so it seems to me, a macroeconomic theory in which a particular economic outcome is explained in terms of the total system, The high rents of the landlords in fertile areas are dependent on the profitability of farming in the less fertile parts and on economic mechanisms which ensure relatively uniform prices for produce across wide geographical areas. The very title of Smith's great work suggests a macroeconomic focus: An Inquiry into the nature and Causes of the Wealth of *Nations*. – NOT individuals or firms. I have on my shelves a book by the war-criminal WW Rostov: 'Theories of Economic Growth from Hume to the Present'. This suggests – correctly – that theories of growth have been a concern of economists since the mid eighteenth century. But in fact such theories date back even further. The early eighteenth century satirist, philosopher and economist Bernard Mandeville argued that luxury spending is the chief engine of economic growth (hence 'Private vices Pubic benefits')
The term 'macroeconomics' may be relatively new, but macroeconomics as a focus of theorising and research is as old as economics itself.
Dear Charles Pigden,
I respectfully disagree.
Here is an example of one of Keynes' key insights which showed the fallacy known as the "loanable funds theory", a theory still held incorrectly by people including Paul Krugman. The classical and neoclassical economists were all wrong on this. Until Keynes came along, people actually thought that Saving could be greater than Investment, i.e., S > I, which is of course impossible.
For example, [the reader] might naturally suppose — for anything the Committee say to the contrary — that the right way to prepare for an increase of investment is to save more at an appropriately prior date. But the corollary shows that this is impossible. Saving at the prior date cannot be greater than the investment at that date. Increased investment will always be accompanied by increased saving, but it can never be preceded by it. Dishoarding and credit expansion provides not an alternative to increased saving, but a necessary preparation for it. It is the parent, not the twin, of increased saving. —(Keynes - The Process of Capital Formation - [Economic Journal in 1939])
Another fallacy which the classical and neoclassical economists believed was that greater worker bargaining power would lead to higher real wages. In fact, the opposite is true. Keynes again (the term "money wages" is what we now call "nominal wages"):
[emphasis mine]
It would be interesting to see the results of a statistical enquiry into the actual relationship between changes in money-wages and changes in real wages. In the case of a change peculiar to a particular industry one would expect the change in real wages to be in the same direction as the change in money-wages. But in the case of changes in the general level of wages, it will be found, I think, that the change in real wages associated with a change in money-wages, so far from being usually in the same direction, is almost always in the opposite direction. When money-wages are rising, that is to say, it will be found that real wages are falling; and when money-wages are falling, real wages are rising. This is because, in the short period, falling money-wages and rising real wages are each, for independent reasons, likely to accompany decreasing employment; labour being readier to accept wage-cuts when employment is falling off, yet real wages inevitably rising in the same circumstances on account of the increasing marginal return to a given capital equipment when output is diminished.
Ask yourself how many people, including people in this forum, would believe that increased worker bargaining power leads to lower real wages? Even if you prove it to them with current statistics?
My new study with Alex Domash shows that nominal wage growth and real wage growth are historically not correlated. Indeed, faster nominal wage growth above 4 percent is associated with slower real wage growth. —Lawrence H. Summers
source: Lawrence Summers tweet
source: The relation between nominal and real wage growth
Note that Adam Smith was saying exactly the opposite of this when he discussed the bargaining power between capitalists and workers.
Reply to Ahmed Fares 1
Dear Ahmed Fares
Even if we accept your thesis that an increase in the bargaining powers of the workers does not lead to an increase in real wages this would not entail that nobody did macro until the interwar period.
Let me repeat my first hit Google quote: Macroeconomics is a branch of economics that studies how an overall economy—the markets, businesses, consumers, and governments—behave. Macroeconomics examines economy-wide phenomena such as inflation, price levels, rate of economic growth, national income, gross domestic product (GDP), and changes in unemployment'.
My thesis is that from the very beginning, political economists have been concerned with these issues and thus that they were doing what we now describe as macro. Furthermore they were well aware that the macro isn't just the micro writ large. Mandeville, for instance is famous for the thesis (later taken up in a more sophisticated form by Keynes and Kahn) that private vices are (often) public benefits and that behaviours that are individually wise, prudent and provident can be bad for the economy as a whole. (That's the chief point of the Fable of the Bees, which prefigures the concept of the multiplier)
Reply to Ahmed Fares 2
Now as to the bargaining power of the workers. Real wage growth comes under two conditions:
1) a rise in nominal wages that is in excess of inflation.
and
2) stable nominal wages accompanied by a decline in the price of staple commodities.
The fact that real wages can be going down whilst nominal wages are going up does not entail that the bargaining position of the workers does not have an effect on real wages. In case 1) the bargaining power of the workers may enable them to extract wage rises in excess of (or equal to) inflation. In case 2) the bargaining power of workers may enable them to resist nominal wage reductions if employers are trying to take advantage of the declining cost of commodities by paying their workers less.
Reply to Ahmed Fares 3
Now it may be that a short-term increase in real wages in one sector can lead to a long term decrease, if the sector becomes relatively unprofitable leading to capital flight or a series of business failures. Sure. But that does not mean that the bargaining power of the workers has not had an influence on real wages *in the short term*. Perhaps the point is that employers can simply pass on the costs of increased wages to their customers by hiking prices. Sure, this can and does happen. This is wage-push inflation. And over time inflation *may* reduce the gains in real wages deriving from the worker’s increased bargaining power to nothing. This problem was the big obsession of politicians and economists in Britain during the seventies. when I was young. But it does not follow that an increase in the bargaining power of workers *can’t* put them in a better position overall or that a *decrease* in bargaining power might not *diminish* their share of the social product. One reason is that there are other factors at work. A powerful trade union movement backed by a generous welfare regime might enable an enlightened capitalist state to overcome one of the ‘contradictions’ of capitalism. Every enterprise is under pressure to reduce or contain costs and the obvious way to do this is by keeping a lid on wages#. (There is also automation but that is a different and more complex story) But every enterprise (or almost every enterprise) would prefer to operate in the context of a high-wage economy in order to able to sell its products. Thus capitalists (or capitalistic enterprises) *as individuals* are under pressure to operate against their interests *as a class*. (To put the point another way, the policies preferred by the manufacturing and HR divisions are often at odds with the preferences of the marketing team.) A high wage economy is in the interests of capital but it is in the interests of each capitalist enterprise to keep the wages of its own workers low. A powerful trade-union movement can force individual capitalist enterprises to act in such a way as to produce the kind of high-wage environment in which they would prefer to operate. Moreover a multiplier effect may well come into play. Although a company has to pay out a larger share of the price of each item to the workers, profits can still go up if sales go up.
# Of course there are many exceptions to this overall rule. A company that pays relatively high wages may well do better than its competitors by attracting a class of workers whose skills are at a premium, leading to better products and better sales. Which is to say that scarce skills enhance the bargaining power of *some* classes of workers, leading to higher real wages of *for them*. And even in the absence of scarce skills an enterprise may do better than its competitors if it adopts a ‘happy families’ approach leading to significantly higher returns in terms of productivity from its better paid workers. But even here bargaining power is a factor. A company will have less of an incentive to adopt this approach if workers are compelled to take the first job on offer rather than hanging out for a decent employer.
Reply to Ahmed Fares 4
Okay, moving on to Keynes and Larry Summers. If I understand the passage correctly Keynes seems to be saying that in time of high unemployment the marginal utility of each worker to a firm goes up which means the employers can afford to pay them more. But it certainly does not follow that under these circumstances either their real or their nominal wages *will* go up . It is far more likely that employers will simply take advantage of their better bargaining position to keep wages down. It is true that when unemployment is high firms are incentivised to cut the prices of key commodities thus leading to an increase in real wages for those in employment. (In fact this seems to have happened in both the UK and the US during the early years Great Depression.) But there is absolutely no guarantee of this nor is there any guarantee that price cuts will be sufficient to produce a gain in real wages if nominal wages are *also* being cut. Indeed the ‘stickiness’ of nominal wages during the Great Depression (leading to real wage growth at certain periods) was probably due to the bargaining power of the remaining workers.
Reply to Ahmed Fares 5
You write: Ask yourself how many people, including people in this forum, would believe that increased worker bargaining power leads to lower real wages? Even if you prove it to them with current statistics?
Well *I* would not believe it at least if this is supposed to be an inevitable effect and Larry Summers’ study does not prove me wrong. According to his tweet his study shows *that nominal wage growth and real wage growth are historically not correlated. Indeed, faster nominal wage growth above 4 percent is associated with slower real wage growth* Supposing Summers to be correct (and I must admit I am a little suspicious for reasons outlined below) what this shows is that an increase in nominal wages *need not* and *often does not* lead to a growth real wages. Does this show that ‘increased worker bargaining power leads to lower real wages’ ? Obviously – and I mean *obviously* – not. It only shows that *in an inflationary situation*, if the bargaining power of of the workers is used to extract higher nominal wages, this often does not lead to an overall increase in real wages in the longer term, and *sometimes* leads to a reduction.
Reply to Ahmed Fares 6
Now why am I sceptical about this alleged result? Well there are many studies which show that although there was a steep increase in real wages in the US, the UK from 1945 to about 1975 (Picketty’s Les Trente Glorieuses), since about 1980, the growth in real wages has slackened off or gone into reverse – and this despite massive gains in productivity. Why so? Here let me quote Krugman ‘Arguing with Zombies’ pp. 289-90: ‘Until the 1970s rising productivity translated into rising wages for a great majority of workers [but] then the connection was broken [Why?] There is a growing though incomplete consensus among economists that a key factor in wage stagnation has been workers’ declining bargaining power – a decline whose roots are ultimately political… unions which covered a quarter of private sector workers in 1973 but [now] cover only 6% … What made America exceptional was a political environment deeply hostile to labour organising and friendly towards union-busting employers. [The environment in the UK was not quite so hostile but it was evidently one of the objectives of Margaret Thatcher to break the power of the trade unions, something she effectively did with the defeat of the miners’ strike.] And the decline of unions has made a huge difference. Consider the case of trucking, which used to be a good job but now pays a third less than it did in the 1970s, with terrible working conditions. What made the difference? De-unionisation was a big part of the story. And these easily quantifiable factors are just indicators of a sustained, across-the-board antiworker bias in our politics’.
So we do have quite a lot of evidence that the bargaining power of the workers (strong during Les Trente Glorieuses, substantially weakened thereafter in both the US and the UK) *sometimes* effects an increase in real wages and that the lack of it can lead (and has led) to stagnation or decline. Perhaps Adam Smith was not so naive after all.
Charles Pigden,
As regards nominal and real wages, I made a couple of comments on Prof. Wolff's next article which is in more detail. This is the second comment (emphasis in the original:
Pasinetti presents an approach that is more complete but arrives at the same result. The most striking conclusion remains that workers can in no way influence the distribution between wages and profits. And the savings rate of workers still cannot influence the macroeconomic division between wages and profits, which is solely determined by the decisions of capitalists.
First some quotes from Bill Mitchell (emphasis mine):
The US Federal Reserve paper is important because it signifies an acceptance of the class conflict framework and a recognition that class is important in a capitalist society.
For all those who think Left and Right, Labour and Capital, are meaningless dichotomies, I suggest you read the paper.
For others – you are entitled to say – we knew it all along!
https://billmitchell.org/blog/?p=49871
First, we saw the stark ideology of the elites on full display in Sydney yesterday with a property developer demanding the government increase unemployment by 40-50 per cent to show the workers that the employer is boss and redistribute more national income back to profits. For anyone who doubts the relevance of a framework based on underlying class conflict between labour and capital, then this outburst should eliminate those doubts.
https://billmitchell.org/blog/
One last quote:
Macroeconomics emerged out of the failure of mainstream economics to conceptualise economy-wide problems – in particular, the problem of mass unemployment. …
Marx had already worked this out and you might like to read Theories of Surplus value where he discusses the problem of realisation when there is unemployment. In my view, Marx was the first to really understand the notion of effective demand – in his distinction between a notional demand for a good (a desire) and an effective demand (one that is backed with cash).
Guess where that quote comes from. From the same post where Ahmed Fares took his quote:
https://billmitchell.org/blog/?p=10547
I suppose it was a case of TLDR. :)
Start with a simple economy composed of capitalists and workers. The economy produces consumption goods and investment goods. Capitalist earn profits and workers earn wages.
GDI = GDP
Profits + Wages = Consumption + Investment
Wages = Consumption + Investment - Profits
If we make the simplifying assumption that capitalists spend all their profits, then profits and investment drop out, and we're left with:
Wages = Consumption
Just like Ahmed Fares' investment causes profits, in this case consumption causes wages. Workers are paid to consume. :)
re: the Pasinetti Paradox
The Pasinetti Paradox arises in a model of an idealized economy inhabited by two distinct classes: workers who save a fraction of their wages and of any profit income (also called interest) earned by their past savings; and capitalists who live exclusively off the profits generated by their wealth, saving a fraction, sc,, of their profit income. All wealth is held in the form of capital, and the ratio of profit to capital is called the rate of profit (or the rate of interest by some writers), r. The growth rate of capital is equal to the growth rate of the labor force, n, so that the economy remains in a state of full employment. Under these conditions, Luigi L. Pasinetti showed that a very simple equation describes the long-run (or steady state) relationship between the rate of profit and the rate of growth: r = n/sc.. This remarkable equation implies that the rate of profit is determined by the rate of growth and the saving rate of the capitalists, independently of the saving of workers or the underlying technology of the economy, which constitutes the Pasinetti Paradox. It has been at the center of a lively controversy between two different schools of economic thought since its discovery.
One might find it paradoxical that an increase in the saving rate of workers would have no effect on the rate of profit since this, by making capital (e.g., machines and factories) more abundant in relation to labor, might bid up wages and drive down the rate of profit. Pasinetti (a leading classical or neo-Ricardian economist) showed that this effect will not persist into the long run. The rate of profit will decline temporarily, but that would reduce the income of capitalists, allowing the share of wealth owned by workers to increase. Because workers are, by assumption, less thrifty than capitalists, this redistribution will eliminate the need for any change in the rate of profit in the long run. Profits thus have a privileged status in the classical theory of income distribution, for capitalists receive a rate of profit that is just high enough, after deductions for their own consumption, to support the saving necessary for sustained full employment; wages emerge as a kind of residual.
As you can see, even at low rates of saving for workers, which is more realistic, profits are not affected. As for the simplifying assumption that capitalists spend all their profits, that's not possible because of the laws of physics. For example, rich and poor both consume about 2,000 calories a day. Maybe the rich eat more expensive food, but it doesn't change the math by much. The same for housing, transportation, etc.
As an aside, perhaps Bill Mitchell hasn't heard of the Pasinetti Paradox, or maybe he learned it and forgot about it, or maybe he doesn't agree with it for some unknown reason. In any event, if something holds true even without the simplifying assumption, then that makes the argument even stronger.
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