Tuesday, December 29, 2015

Marx and the “Iron Law of Wages”

This is an interesting point about Marx’s economic theory: he rejected the orthodox Classical “iron law of wages.” Nevertheless, there are still severe problems with Marx’s theory of wages.

In essence, the Classical “iron law of wages” was derived from (1) the wage fund theory in Classical economics and (2) Malthusian population theory. The “iron law of wages” was, then, in view of (2) a kind of “law of nature.”

By contrast, Marx rejected Malthusian population theory (Baumol 1983: 304, 305), as, for example, can be seen in his Critique of the Gotha Programme (based on a letter he wrote in 1875 but first published in 1891), and so Marx did not subscribe to the Classical “iron law of wages.”

So what was Marx’s view? The view he published to the public in his own lifetime is mainly to be found in volume 1 of Capital. Here Marx thought that workers receive a wage that is equal to the value of labour-power. This appears to be what the capitalists deliberately pay, rather than some inevitable law of nature.

Marx explains it as follows:
The value of labour-power is determined, as in the case of every other commodity, by the labour-time necessary for the production, and consequently also the reproduction, of this special article. So far as it has value, it represents no more than a definite quantity of the average labour of society incorporated in it. Labour-power exists only as a capacity, or power of the living individual. Its production consequently presupposes his existence. Given the individual, the production of labour-power consists in his reproduction of himself or his maintenance. For his maintenance he requires a given quantity of the means of subsistence. Therefore the labour-time requisite for the production of labour-power reduces itself to that necessary for the production of those means of subsistence; in other words, the value of labour-power is the value of the means of subsistence necessary for the maintenance of the labourer. Labour-power, however, becomes a reality only by its exercise; it sets itself in action only by working. But thereby a definite quantity of human muscle, nerve, brain, &c, is wasted, and these require to be restored. This increased expenditure demands a larger income. If the owner of labour-power works to-day, to-morrow he must again be able to repeat the same process in the same conditions as regards health and strength. His means of subsistence must therefore be sufficient to maintain him in his normal state as a labouring individual. His natural wants, such as food, clothing, fuel, and housing, vary according to the climatic and other physical conditions of his country. On the other hand, the number and extent of his so-called necessary wants, as also the modes of satisfying them, are themselves the product of historical development, and depend therefore to a great extent on the degree of civilisation of a country, more particularly on the conditions under which, and consequently on the habits and degree of comfort in which, the class of free labourers has been formed. In contradistinction therefore to the case of other commodities, there enters into the determination of the value of labour-power a historical and moral element. Nevertheless, in a given country, at a given period, the average quantity of the means of subsistence necessary for the labourer is practically known.

The owner of labour-power is mortal. If then his appearance in the market is to be continuous, and the continuous conversion of money into capital assumes this, the seller of labour-power must perpetuate himself, ‘in the way that every living individual perpetuates himself, by procreation.’ The labour-power withdrawn from the market by wear and tear and death, must be continually replaced by, at the very least, an equal amount of fresh labour-power. Hence the sum of the means of subsistence necessary for the production of labour-power must include the means necessary for the labourer’s substitutes, i.e., his children, in order that this race of peculiar commodity-owners may perpetuate its appearance in the market.

In order to modify the human organism, so that it may acquire skill and handiness in a given branch of industry, and become labour-power of a special kind, a special education or training is requisite, and this, on its part, costs an equivalent in commodities of a greater or less amount. This amount varies according to the more or less complicated character of the labour-power. The expenses of this education (excessively small in the case of ordinary labour-power), enter pro tanto into the total value spent in its production.” (Marx 1906: 189–191).
In Marx’s system in volume 1 of Capital, then, wages tend towards the value of labour-power as determined by the abstract labour necessary for the maintenance and reproduction of workers, so that this includes:
(1) the commodities needed for the worker’s subsistence;

(2) the commodities needed for the workforce to have families and reproduce itself and

(3) the cost of education and training of the skilled forms of labour (Brewer 1984: 37).
But Marx admits that different countries at different levels of development might have differences in “necessary wants” given to workers because of a “historical and moral element.” However, it is difficult to see how this can be greatly above the level needed for subsistence and reproduction of workers without the whole theory unravelling.

If, for example, Marx’s “historical and moral element” in wage determination results in real wages greatly above subsistence wages and that keep rising, then his theory is bizarrely contradictory.

If, however, wages in different countries might have some minor or moderate differences from the “historical and moral element” but still tend towards that national value needed for subsistence and reproduction, then the theory can be made coherent, but is still empirically false, as we can see from the data here.

Furthermore, in Marx’s other writings like Value, Price and Profit (1865), he accepted that unions might increase wages above subsistence levels (Baumol 1983: 305), but a “reserve army of the unemployed” also acts to keep wages in check (Howard 2000: 1039).

But the final and serious problem is that Marx’s whole theory of price determination in volume 1 appears to be overthrown in volume 3 (later edited and published by Engels after Marx’s death), where Marx admits prices do not tend to labour values. This would appear to apply to wages too, so that wage rates in volume 3 would not necessarily tend towards the value of labour-power (which is the level needed for subsistence and reproduction of workers) (Baumol 1983: 304). At that point, Marx’s theory of wage determination in volume 1 – like the theory of price determination there – falls apart.

However, even in 1878 in Friedrich Engels’s Herr Eugen Dühring’s Revolution in Science (1894 [1878]), Engels described the propensity of capitalism to drive workers’ wages down to a subsistence through use of machines in these terms:
“Thus it comes about that the excessive labour of some becomes the necessary condition for the lack of employment of others, and that large-scale industry, which hunts all over the world for new consumers, restricts the consumption of the masses at home to a famine minimum and thereby undermines its own internal market.” (Engels [1894]: 308).
A “famine minimum” strongly implies subsistence wages, or perhaps even something worse.

At the end of volume 1 of Capital in the “Historical Tendency of Capitalist Accumulation” chapter, Marx also states that workers suffer increasing “misery” under capitalism, which seems to imply subsistence wages:
Along with the constantly diminishing number of the magnates of capital, who usurp and monopolise all advantages of this process of transformation, grows the mass of misery, oppression, slavery, degradation, exploitation; but with this too grows the revolt of the working-class, a class always increasing in numbers, and disciplined, united, organised by the very mechanism of the process of capitalist production itself. The monopoly of capital becomes a fetter upon the mode of production, which has sprung up and flourished along with, and under it. Centralisation of the means of production and socialisation of labour at last reach a point where they become incompatible with their capitalist integument. This integument is burst asunder. The knell of capitalist private property sounds. The expropriators are expropriated.” (Marx 1906: 836–837).

Further Reading
“Marx’s Capital, Volume 1, Chapter 6: A Critical Summary,” July 13, 2015.

Baumol, William J. 1983. “Marx and the Iron Law of Wages,” The American Economic Review 73.2: 303–308.

Brewer, Anthony. 1984. A Guide to Marx’s Capital. Cambridge University Press, Cambridge.

Engels, Friedrich. [1894]. Herr Eugen Dühring’s Revolution in Science (trans. Emile Burns from 1894 edn.). International Publishers, New York.

Howard, Michael Charles. 2000. “Marx’s Wage Theory in Historical Perspective: Its Origins, Development, and Interpretation,” History of Political Economy 32.4: 1039–1041.

Marx, Karl. 1906. Capital. A Critique of Political Economy (vol. 1; rev. trans. by Ernest Untermann from 4th German edn.). The Modern Library, New York.

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