Mass Immigration for Thee, but not for Me

That is, if you are a highly paid, middle class professional in the West, as Dean Baker notes:

“The trade agreements that the United States has negotiated over the last three decades have been about getting low cost auto workers, steel workers, and textile workers. In addition, immigration policy has been designed to ensure that custodians, farmworkers, and dishwashers all work for low wages. These policies have been successful in pushing down wages for large segments of the work force, not only those who were directly displaced by trade or immigrant workers, but also those who face heightened competition from workers who were displaced by trade or immigration.

But trade does not have to depress the wages of less-skilled workers. Trade agreements can also be structured to get us low cost doctors, lawyers, accountants, economists, reporters, and editorial writers. There are tens of millions of smart and energetic people in the developing world who could do these jobs better than most of the people who currently hold these positions in the United States. And they would be willing to do these jobs for a fraction of the wage. Real free traders would be jumping at this opportunity to increase economic growth and aid consumers in the United States, while at the same time increasing prosperity in developing countries.

But the economists, editorialists, and political pundits are not likely to raise the call for eliminating the barriers that prevent competition from professionals in the developing world. The truth is that the ‘free traders’ don’t want free trade – they want cheap nannies – but ‘free trade’ sounds much more noble.” (Baker 2006: 26–27).

Of course, even some of these people are starting to feel the effects of mass immigration on their employment prospects too, but Dean Baker’s general point still stands.

Logically, free movement of people and open borders are the natural corollary of free trade, as Ha-Joon Chang has noted here. But your average idiot neoclassical economist has nothing to say about this. The small fringe of hard libertarians and anarcho-capitalists love open borders, not least of all because they see (correctly) that it would destroy the welfare state.

Unlike Baker, however, who does seem at one point to endorse mass immigration of some Third World professionals to the West (Baker 2006: 103) to lower costs and increase supply, I don’t think this can be a sensible solution. The long-term solution is: educating more people in the West to overcome any supply issues with, say, doctors or health care professionals.

BIBLIOGRAPHY
Baker, Dean. 2006. The Conservative Nanny State: How the Wealthy use the Government to Stay Rich and Get Richer. Center for Economic and Policy Research, Washington, DC.
http://deanbaker.net/images/stories/documents/cnswebbook.pdf

I’m on Twitter:
Lord Keynes @Lord_Keynes2
https://twitter.com/Lord_Keynes2

Engels’ Pause: A Cause of Marx and Engels’ Hasty and False Generalisations about Capitalism

The expression “Engels’ Pause” was coined by Robert C. Allen and refers to the period of real wage stagnation or low real wage growth in Britain in the early 19th century from about 1800 to 1840, even when real per capita GDP was rising in an historically unprecedented manner. You can see the “pause” in the graph of historical British real wages and per capita GDP per worker here.

First, it is important to note that some economic historians have challenged the data on GDP and real wages in this period. For example, Gregory Clark (Clark 2001; 2005 and 2007) argues that GDP has been overestimated and real wage growth in the early 19th century underestimated, so real wages did in fact grow more than per capita output growth (Allen, “Engels’ Pause,” p. 2).

However, for the sake for argument and to make it easy for Marxists, let me assume that the data used by Allen is correct: that Engels’ Pause was real.

However, we now know that this was very much a short-term trend in the history of capitalism and that, after the 1840s, capitalism – even in its inefficient 19th century form – caused real wages, even of workers, to soar above the levels of the early years of the 1800s.

Allen (2007) examines this issue and has some interesting insights.

Essentially, not only Marx and Engels but also the earlier Classical Political economists like Ricardo and Malthus were misled by this short-run trend, and they all concluded that capitalism would lead to wage stagnation for workers (Allen, “Engels’ Pause,” p. 1).

However, the early Marxists and the early Classical economists differed on why this was the case – and this is a crucial point. Allen argues as follows:

“Among economists, Ricardo, Malthus, and Marx all believed that real wages would remain constant during capitalist development. They differed, however, in their explanations: Ricardo and Malthus believed that population growth would accelerate in response to any rise in income and ultimately force wages back to subsistence; Marx, on the other hand, believed that technological progress had a labour saving bias that would eliminate any upward demand pressure on wages even as output per worker surged.” (Allen, “Engels’ Pause,” p. 1).

“While the classical economists all expected the real wage to remain constant, they disagreed about the reason: Malthus and Ricardo emphasized the growth of population, while Marx emphasized the labour saving bias of technical change.” (Allen, “Engels’ Pause,” p. 5).

This is an important point: Marx and Engels also thought that wages would stagnate, but they rejected Malthusian population theory (on this, see here; see also Marx 1922 [1891]: 40).

However, Marx still held that wages would tend towards the value of labour-power: that is, the value of the maintenance and reproduction of labour, with only two additional qualifications as explained in Chapter 6 of volume 1 of Capital.

Marx only adds two minor additions to the value of the maintenance and reproduction of labour:

(1) the cost of education and training of the skilled forms of labour (Brewer 1984: 37), but this only applies to skilled labour and is just a part of the cost of reproduction of skilled workers, and

(2) sometimes a “historical and moral element” which as Marx explains in Value, Price and Profit (1865) was mainly a legacy of the pre-capitalist national differences in standards of living.

However, for Marx, the “historical and moral element” is clearly not greatly above the level needed for subsistence and reproduction of workers, and in Value, Price and Profit Marx seems to imply that capitalism will reduce even the “historical and moral element” and, generally speaking, will tend to keep wages to a minimum.

Moreover, in the rest of volume 1 of Capital, we hear nothing further about the “historical and moral element”: for example, this is clear in Chapter 10 where Marx explicitly assumes his theory that

“labour-power is bought and sold at its value. Its value, like that of all other commodities, is determined by the working time necessary to its production. If the production of the average daily means of subsistence of the labourer takes up 6 hours, he must work, on the average, 6 hours every day, to produce his daily labour-power, or to reproduce the value received as the result of its sale.” (Marx 1906: 255).

It is the same in Chapter 11 where wages are “the value of labour-power” which is “therefore the part of the working-day necessary for the reproduction or maintenance of that labour-power” (Marx 1906: 331). We can also see this view more starkly in Marx’s Critique of the Gotha Program where Marx says that in capitalism wages are set so that the worker “is only permitted to work for his living, i.e., to live” (Marx 1922 [1891]: 40; see appendix).

In Friedrich Engels’ Herr Eugen Dühring’s Revolution in Science (1894; first published in 1878), he defended this view of Marx, and Engels even argued that industrial capitalism, partly by means of automation and use of machines, drove workers’ wages down to a subsistence level and tended to keep them there:

“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).

So the crucial point is: even Marx and Engels, like Ricardo, thought that capitalism would tend to keep real wages to a minimum, even if for different reasons.

Allen points out that from 1780 to 1840 British real wages increased by only 12%, even when real GDP per worker rose by 46% (Allen, “Engels’ Pause,” p. 1). Again, a graph of the data on real wages and per capita GDP per worker can be seen here. After 1840, however, real wages began an upward trend and living standards soared.

Now Lewis (1954) argued that the greater share of income to capital in the 1800–1840 period allowed capital accumulation and that the flow of migration from the country-side contributed to holding down real wages (Allen, “Engels’ Pause,” p. 4).

However, Allen rejects this and argues as follows:

“Although Lewis’ model was inspired by the classical economists analysing the British industrial revolution, the emphasis he placed on surplus labour is hard to reconcile with British history. As a general matter, surplus labour in the countryside is difficult to reconcile with a positive wage. In addition, there are particular problems to applying it to the British industrial revolution. British agriculture did not function as source of surplus labour that kept wages down. For one thing it was too small. In 1801 only 36% of the work force was in agriculture (Deane and Cole 1969, p. 142) compared to the 75–80% that characterized the less developed countries Lewis was describing. Moreover, contrary to Marx, the parliament enclosures did not drive workers from the land; indeed, the poor law (through the Speenhamland system) paid men to stay in the countryside and reduced rural-urban migration. … This does not square with Lewis’ scenario.” (Allen, “Engels’ Pause,” p. 4).

Instead, Allen explains the two stages of capitalist development in Britain with the view that accumulation of capital and productivity growth in the early 1800s were out of balance, and that technical progress was labour-augmenting (Allen, “Engels’ Pause,” p. 11–12).

Allen analyses Marx’s views on capitalism as follows:

“The transition from the first stage to the second, which occurred around the time of the publication of the Communist Manifesto (1848), provides a wry commentary on Marx’s expectations. The acceleration of productivity growth did, indeed, shift income from workers to capitalists, as he expected. The result, however, was not continually increasing immiseration, for the capitalists invested a portion of their extra income and the increase in the capital stock eventually allowed rising productivity to be manifest as rising real wages. History did, indeed, exhibit a stage pattern of evolution, but the stage of flat real wages was followed by the most sustained rise in real wages ever seen–not by socialist revolution.” (Allen, “Engels’ Pause,” p. 12).

Allen suggests that the rising demand for capital investment pushed up the rate of return and capitalist profits, which suppressed wage growth. This changed after 1840.

Whatever the merits of this explanation an important point still emerges.

It still follows that Marx and Engels generalised from limited data on wages and made a hasty and inaccurate inference about the trajectory of capitalism. Marx was guilty of a type of fallacy of hasty generalisation on the basis of Engels’ Pause.

We can see this clearly in the graph below using Wood’s data (Wood 1909: 102–103, Appendix) on UK real wages from 1850 to 1902, constructed from the wage data for working people in a whole range of industries.

As we can see, after 1848 living standards soared. Even if we assume wages were at subsistence levels in 1850, it is clear that by 1900 they had risen well above that level. It seems that already in the 1870s Marx’s socialist critic Eugen Dühring accused Marx of falling to take account of the rising standard of living (see Fabian 2011: 463, citing Dühring 1875).

It is now perfectly clear that Marx’s theory of wages – that wages would tend to “the value of labour-power” which is “part of the working-day necessary for the reproduction or maintenance of that labour-power” (Marx 1906: 331) – was proven false even in the 19th century and even by gold standard capitalism, which was certainly more unstable and inefficient than the far more dynamic, efficient and stable forms of mixed economy capitalism developed in the 20th century.

Appendix: Marx on Wages in the Critique of the Gotha Program
Marx’s Critique of the Gotha Program was based on a letter he wrote in 1875 and was published in 1891.

We have the following discussion of wages here:

“Since Lassalle’s death the scientific knowledge has made way in our party that wages are not what they seem, namely, the value or price of labor, but only a disguised form for the value of price of labor-power.

Thereby the whole capitalist theory of wages, hitherto prevailing, together with all the criticism hitherto directed against it, was once and for all overthrown, and the fact clearly established that the laborer is only permitted to work for his living, i.e., to live, so long as he works a certain time gratis for the capitalist (hence also for those who share the surplus-value with the latter); that the pivot around which the entire capitalist system of production turns, is to increase this unpaid labor either by lengthening the working day, or by developing the productive powers of labor, or by straining the laborer to more intense exertion, etc., etc.; that, therefore, the system of wage-labor is a system of slavery, and indeed slavery, which, moreover, grows harder in proportion as the productive powers of labor are developed in society, no matter whether the laborer’s pay is better or worse.” (Marx 1922 [1891]: 40–41).

So here Marx can even refer to his theory of wages as the view that “the laborer is only permitted to work for his living, i.e., to live.”

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

“The Debate on Marx’s View of Wages in Capitalism,” January 12, 2016.

“Marx on Wages in Value, Price and Profit (1865),” December 30, 2015

“Marx and the ‘Iron Law of Wages,’” December 29, 2015.

“Engels on Subsistence Wages,” December 21, 2015.

BIBLIOGRAPHY
Allen, Robert C. 2007. “Engels’ Pause: A Pessimist’s Guide to the British Industrial Revolution” Oxford University, Department of Economics Working Paper No. 315
https://ideas.repec.org/p/oxf/wpaper/315.html

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

Clark, Gregory. 2001. “The Secret History of the Industrial Revolution,”
http://faculty.econ.ucdavis.edu/faculty/gclark/papers/secret2001.pdf

Clark, Gregory. 2005. “The Condition of the Working Class in England, 1209–2004,” Journal of Political Economy 113: 1307–1340.

Clark, Gregory. 2007. “What made Britannia great? How much of the rise of Britain to World Dominance by 1850 does the Industrial Revolution explain” in Tim Hatton, Kevin O’Rourke, and Alan Taylor (eds.), Comparative Economic History: Essays in Honor of Jeffrey Williamson. MIT Press, Cambridge. 33–57.

Dühring, Eugen. 1875. Kritische Geschichte der Nationalökonomie und des Sozialismus (2nd edn.). Theobald Grieben, Berlin.

Fabian, George. 2011. Karl Marx: Prince of Darkness. Xlibris Corporation, US.

Lewis, William Arthur. 1954. “Economic Development with Unlimited Supplies of Labour,” Manchester School of Economics and Social Studies 22: 139–191.

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.

Marx, Karl. 1922. “Critique of the Gotha Programme,” in Marx and Daniel de Leon, Critique of the Gotha Programme and Did Marx Err?. National Executive Committee, Socialist Labor Party, New York.

Wood, George H. 1909. “Real Wages and the Standard of Comfort since 1850,” Journal of the Royal Statistical Society 72: 91–103.

Marx on Wages in Value, Price and Profit (1865)

Marx’s Value, Price and Profit was a series of lectures he delivered in 1865, even though it was first published in 1898.

In this work, Marx has the following to say about the determination of wages in capitalism:

(1) “I might answer by a generalization, and say that, as with all other commodities, so with labor, its market price will, in the long run, adapt itself to its value; that, therefore, despite all the ups and downs, and do what he may, the working man will, on an average, only receive the value of his labor, which resolves into the value of his laboring power, which is determined by the value of the necessaries required for its maintenance and reproduction, which value of necessaries finally is regulated by the quantity of labor wanted to produce them.

But there are some peculiar features which distinguish the value of the labouring power, or the value of labor, from the values of all other commodities. The value of the laboring power is formed by two elements—the one merely physical, the other historical or social. Its ultimate limit is determined by the physical element, that is to say, to maintain and reproduce itself, to perpetuate its physical existence, the working class must receive the necessaries absolutely indispensable for living and multiplying. The value of those indispensable necessaries forms, therefore, the ultimate limit of the value of labor. On the other hand, the length of the working day is also limited by ultimate, although very elastic boundaries. Its ultimate limit is given by the physical force of the laboring man. If the daily exhaustion of his vital forces exceeds a certain degree, it cannot be exerted anew, day by day. However, as I said, this limit is very elastic. A quick succession of unhealthy and short-lived generations will keep the labor market as well supplied as a series of vigorous and long-lived generations.

Besides this mere physical element, the value of labor is in every country determined by a traditional standard of life. It is not mere physical life, but it is the satisfaction of certain wants springing from the social conditions in which people are placed and reared up. The English standard of life may be reduced to the Irish standard; the standard of life of a German peasant to that of a Livonian peasant. The important part which historical tradition and social habitude play in this respect, you may learn from Mr. Thornton’s work on Over-population, where he shows that the average wages in different agricultural districts of England still nowadays differ more or less according to the more or less favorable circumstances under which the districts have emerged from the state of serfdom.

This historical or social element, entering into the value of labor, may be expanded, or contracted, or altogether extinguished, so that nothing remains but the physical limit. ....

By comparing the standard wages or values of labor in different countries, and by comparing them in different historical epochs of the same country, you will find that the value of labor itself is not a fixed but a variable magnitude, even supposing the values of all other commodities to remain constant.” (Marx 1913: 115–119).

(2) “These few hints will suffice to show that the very development of modern industry must progressively turn the scale in favour of the capitalist against the working man, and that consequently the general tendency of capitalistic production is not to raise, but to sink the average standard of wages, or to push the value of labor more or less to its minimum limit. Such being the tendency of things in this system, is this saying that the working class ought to renounce their resistance against the encroachments of capital, and abandon their attempts at making the best of the occasional chances for their temporary improvement? If they did, they would be degraded to one level mass of broken wretches past salvation. I think I have shown that their struggles for the standard of wages are incidents inseparable from the whole wages system, that in 99 cases out of 100 their efforts at raising wages are only efforts at maintaining the given value of labor, and that the necessity of debating their price with the capitalist is inherent to their condition of having to sell themselves as commodities. By cowardly giving way in their every-day conflict with capital, they would certainly disqualify themselves for the initiating of any large movement.

At the same time, and quite apart from the general servitude involved in the wages system, the working class ought not to exaggerate to themselves the ultimate working of these every-day struggles. They ought not to forget that they are fighting with effects, but not with the causes of those effects; that they are retarding the downward movement, but not changing its direction; that they are applying palliatives, not curing the malady. They ought, therefore, not to be exclusively absorbed in these unavoidable guerilla fights incessantly springing up from the ever-ceasing encroachments of capital or changes of the market.” (Marx 1913: 124–126).

These passages do show that Marx in Value, Price and Profit did think that capitalism has a tendency to reduce wages towards the “value of labor” which is “more or less to its minimum limit.” The market price of labour, whatever the rises and falls caused by supply and demand – still converges towards the value of labour-power.

But the point is that Marx did not think that the “value of labour-power” was identical throughout every economy, and he did not hold that it is simply determined by the bare physical necessities to allow people to live and have children. Rather, he admitted a “historical and moral element” to what determines the “necessary wants” in some nations so that there could be differences in the “subsistence wage” or value of labour-power. This was partly determined by the historical and pre-capitalist standard of living and how the proletariat arose in each country in historical terms.

But even so “the ultimate limit is determined by the physical element,” and Marx seems to think that capitalism drives wages towards a level that is made up of (1) the “physical element” and (2) whatever additional commodities that the “historical and moral element” in each country can continue to add to a bare physical minimum even under capitalism.

BIBLIOGRAPHY
Marx, Karl. 1913. Value, Price and Profit (ed. by Eleanor Marx Aveling). Charles H. Kerr & Company, Chicago.

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.

BIBLIOGRAPHY
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.

Some Evidence on why Wages tend to be Inflexible Downwards

Some very interesting papers on wage rigidity and why money wages tend to be flexible downwards and why even business people prefer not to cut nominal wages:

(1) Du Caju, P., Kosma, T., Lawless, M., Messina, J. and T. Rõõm. 2013. “Why Firms Avoid Cutting Wages: Survey Evidence from European Firms,” Central Bank of Ireland, Research Technical Papers 03/RT/13
http://www.centralbank.ie/publications/Documents/03RT13.pdf

The summary of this paper:

“This paper uses evidence from a firm survey conducted in a number of EU countries to investigate a range of different theories as to why firms appear reluctant to lower wages. The sample covers 14,975 firms from 14 European countries, representing around 47.3 million employees. .... Across all countries and sectors, the two most important causes for avoiding base wage cuts are the belief that this would result in a reduction in morale or effort and the danger that the most productive workers would leave as a consequence.” (Du Caju et al. 2013: 2).

(2) Kube, Sebastian, Maréchal, Michel André, and Clemens Puppe. 2013. “Do Wage Cuts Damage Work Morale? Evidence from a Natural Field Experiment,” Journal of the European Economic Association 11.4: 853–870.

A brief summary of the paper:

“We conducted a field experiment to test whether workers reciprocate wage cuts and raises with low or high work productivity. Wage cuts had a detrimental and persistent impact on productivity, reducing average output by more than 20%.” (Kube et al. 2013: 853).

(3) Campbell, Carl M. and Kunal S. Kamlani. 1997. “The Reasons for Wage Rigidity: Evidence from a Survey of Firms,” The Quarterly Journal of Economics 112.3: 759–789.

A quick summary of their survey of US firms:

“A survey of 184 firms was conducted to investigate the reasons for wage rigidity. The strongest support was found for explanations based on adverse selection in quits and on the effect of wages on effort. In addition, survey respondents indicated that reducing turnover is an important explanation of wage rigidity for white-collar workers, and that implicit contracts are an important explanation for other workers.” (Campbell 1997: 759).

(4) Agell, Jonas and Per Lundborg. 2003. “Survey Evidence on Wage Rigidity: Sweden in the 1990s,” Scandinavian Journal of Economics 105.1: 15–29.

A summary:

“We document the results of a repeat survey, which updates Agell and Lundborg (1995), on wage rigidity in a sample of 159 Swedish manufacturing firms, conducted during the severe Swedish recession of the 1990s. It is found that not even a prolonged period of very high unemployment and quite low inflation softened workers’ resistance to wage cuts.” (Agell and Lundborg 2003: 15).

BIBLIOGRAPHY
Agell, Jonas and Per Lundborg. 2003. “Survey Evidence on Wage Rigidity: Sweden in the 1990s,” Scandinavian Journal of Economics 105.1: 15–29.

Campbell, Carl M. and Kunal S. Kamlani. 1997. “The Reasons for Wage Rigidity: Evidence From a Survey of Firms,” The Quarterly Journal of Economics 112.3: 759–789.

Du Caju, P., Kosma, T., Lawless, M., Messina, J. and T. Rõõm. 2013. “Why Firms Avoid Cutting Wages: Survey Evidence from European Firms,” Central Bank of Ireland, Research Technical Papers 03/RT/13
http://www.centralbank.ie/publications/Documents/03RT13.pdf

Kube, Sebastian, Maréchal, Michel André, and Clemens Puppe. 2013. “Do Wage Cuts Damage Work Morale? Evidence from a Natural Field Experiment,” Journal of the European Economic Association 11.4: 853–870.

Steve Keen, Debunking Economics, Chapter 6: Wages

I review Chapter 6 of Steve Keen’s Debunking Economics below, which is a discussion of wages and labour markets.

Neoclassical economics analyses labour as a commodity, like any other, governed by the law of supply and demand (Keen 2011: 129).

Two crucial requirements of standard neoclassical analysis of labour markets are that (1) labour demand curves are necessarily downward-sloping and supply curves upwards-sloping, and (2) each worker tends to be paid the marginal product of labour (Keen 2011: 130–131).

Yet labour is fundamentally different from other commodities: whereas demand for some commodity like bread is determined by consumers and supply decisions by producers, the supply of labour is offered by consumers, and demand decisions are made by producers (Keen 2011: 129).

Steve Keen sees a number of problems with the neoclassical analysis:

(1) the labour supply curve can “slope backwards”: e.g., a fall in the wage rate can induce an increase in the supply of labour;

(2) the market power of some employers can result in unfair wages even in neoclassical theory, so that worker trade unions or collective bargaining can make wages fairer;

(3) standard supply and demand analysis can be inappropriate when applied to labour markets in light of Piero Sraffa’s aggregation problem;

(4) the fundamental explanation of labour supply as workers choosing between leisure and work is flawed;

(5) that market demand curves, including labour demand curves, necessarily obey the law of demand is unrealistic.

In regard to (1), Keen notes how a higher wage rate can result in the same income level for a worker if he or she works fewer hours: therefore less labour might be supplied as the wage rises (Keen 2011: 133–134).

Attempts to overcome this problem with the substitution effect are not convincing:

“… it makes no sense to separate the impact of an increase in the wage rate into its substitution effect and income effect: the fact that the substitution effect will always result in an increase in hours worked is irrelevant, since everyone will always have twenty-four hours to allocate between work and leisure.

Since an increase in wages will make workers better off, individual workers are just as likely to work fewer hours as more when the wage rate increases. Individual labor supply curves are just as likely then to slope backwards – showing falling supply as wages rise – as they are to slope forwards.

At the aggregate level, a labor supply curve derived by summing many such individual supply curves could have any shape at all. There could be multiple intersections of the supply curve with the demand curve (accepting, for the moment, that a downward-sloping demand curve is valid). There may be more than one equilibrium wage rate, and who is to say which one is valid? There is therefore no basis on which the aggregate amount of labor that workers wish to supply can be unambiguously related to the wage offered. Economic theory thus fails to prove that employment is determined by supply and demand, and reinforces the real-world observation that involuntary unemployment can exist: that the employment offered by firms can be less than the labor offered by workers, and that reducing the wage won’t necessarily reduce the gap.

This imperfection in the theory – the possibility of backward-bending labor supply curves – is sometimes pointed out to students of economics, but then glossed over with the assumption that, in general, labor supply curves will be upward sloping. But there is no theoretical – or empirical – justification for this assumption” (Keen 2011: 134).

The problem Keen identifies here is that labour supply curves need not be well behaved.

This is just as easy to see in reductions in wages. A strong general characteristic of most households is that they wish to maintain their standard of living, as they face fixed contractual obligations like debt, and hence the need to maintain income levels (Lavoie 1992: 222).

Therefore labour supply often depends on a perceived target wage rate and past standards of living (Lavoie 1992: 222–223), not necessarily on actual movements of the wage rate. If wages fall, this may well increase labour supply as a breadwinner or other members of the household decide to look for more work to maintain household income.

To turn to point (2) above, the real world is far from the perfect or near competition models of neoclassical theory.

Even if one wants to assume that workers should be paid their marginal product, firms with market power will pay wages below this value, so that a trade union acting as a single seller of labour will drive wages higher, so that wages will be fairer (the so-called monopsony argument).

In regard to point (4), neoclassical theory holds work and leisure to be two “goods,” between which workers freely choose as the wage rate changes. In a truly laissez faire society with no welfare or social security, this idea is of course nothing more than a sick joke: either you work for whatever wages so can obtain or starve.

Even in modern welfare states, the idea is still dubious: for most forms of leisure require money and income, and in most full-time work hours worked are strictly set by employers and not often negotiable.

Keen also notes how in recessions or depressions where there is a very high level of (normally) fixed private nominal debt, cutting wages and prices (and hence profits, which are the income of businesses) to increase demand for labour will induce debt deflationary pressures, a self-defeating exercise (Keen 2011: 138).

BIBLIOGRAPHY
Keen, Steve. 2011. Debunking Economics: The Naked Emperor Dethroned? (rev. and expanded edn.). Zed Books, London and New York.

Lavoie, Marc. 1992. Foundations of Post-Keynesian Economic Analysis. Edward Elgar Publishing, Aldershot, UK.

Kalecki, Keynes, Wages and Capacity Utilisation

In this fascinating interview of heterodox economist Bob Rowthorn, he makes a very interesting point about the importance of capacity utilisation and fixprices in Keynesian economics, in terms of the differences between the views of Keynes in the General Theory and Kalecki (N.B. the video may start at an earlier point than I set it at in Mozilla Firefox!).



Now I have not looked carefully into this, but does anyone know any good literature about this subject, and specific references in Kalecki’s work?

The crucial point is that Keynes was opposed to nominal wage cuts (for reasons explained in Chapter 19 of the General Theory), and his analysis there seems to assume a flexprice world (Hayes 2006: 178: “The General Theory itself is a ‘flex-price’ system, but not of Hick’s Walrasian type”) as a concession to the neoclassical theory of Keynes’s day, in order to show that even flexible prices and wages do not necessarily cure unemployment.

But, once we have a mark-up pricing world with adjustments in capacity utilisation where prices are generally relatively inflexible, then expansion of aggregate demand does not simply cause inflation as it would if prices were generally flexprice.

And once we move to the real world of fixprices (the world of mark-up prices and capacity utilisation as in Kalecki’s models), Keynesian economics simply becomes an even stronger and more robust theory of modern market economies.


BIBLIOGRAPHY
Hayes, Mark. 2006. The Economics of Keynes: A New Guide to The General Theory. Edward Elgar, Cheltenham.

Paul Krugman cites Yours Truly

That is, Krugman cites my critique of Mises’s explanation of the Great Depression here in his New York Times blog:

Paul Krugman, “Soup Kitchens Caused the Great Depression, AFF Edition. That’s AFF for “Austrian Founding Fathers,” Conscience of a Liberal, January 27, 2014.

That was nice of him!

I suppose frenzied Austrian counter-reponses will appear in due course.

Mises’s Explanation of the Great Depression: A Critique

Ludwig von Mises lived through the Great Depression as Keynes did, and produced his own explanation of it. I present a critique of Mises’s explanation of the Great Depression below.

First, some background. Around 1930 Mises joined an Austrian government economic commission to study the causes of the depression in Austria, along with (interestingly enough) the future Austro-fascist leader Engelbert Dollfuss (Hülsmann 2007: 614), to whom Mises was later to give economic advice (see below on this). The report of the committee blamed (1) inflationary expectations in Austria and (2) rises in taxation and government spending and increased wage rates (which had all squeezed business profits) for the inability of Austria to attract foreign capital needed to facilitate quicker adjustment and recovery from the depression (Hülsmann 2007: 614–615).

But Mises was not satisfied with the report (Hülsmann 2007: 615), and formed his own explanations for the depression, which were published as various articles and papers (see Mises 2006 [1931]; Mises 2002a [1931]; Mises 2002b [1932]).

On February 28, 1931, Mises gave a lecture called “The Causes of the World Economic Crisis” in Czechoslovakia (Mises 2006 [1931]).

In the published version of that lecture, Mises expounded his Austrian business cycle theory (ABCT) (Mises 2006 [1931]): 160–162), with its belief in monetary expansion driving the market rate of interest below its Wicksellian natural level, causing malinvestment which is physically unsustainable. This theory is, of course, false and untenable, for reasons explained here (in the links in section 32). Amongst the many reasons why the theory is wrong is that there is no such thing as a Wicksellian natural rate of interest, and neither the Great Depression nor booms and busts in general are explained by the ABCT because banks cannot push interest rates below a non-existent natural rate.

However, it is interesting that Mises thought that his Austrian monetary theory of the cycle could not adequately explain the severity and length of the Great Depression (as also noted by Hülsmann 2007: 617–618):

“The crisis from which we are now suffering is also the outcome of a credit expansion. The present crisis is the unavoidable sequel to a boom. Such a crisis necessarily follows every boom generated by the attempt to reduce the ‘natural rate of interest’ through increasing the fiduciary media. However, the present crisis differs in some essential points from earlier crises, just as the preceding boom differed from earlier economic upswings. The most recent boom period did not run its course completely, at least not in Europe. Some countries and some branches of production were not generally or very seriously affected by the upswing which, in many lands, was quite turbulent. A bit of the previous depression continued, even into the upswing. On that account—in line with our theory and on the basis of past experience—one would assume that this time the crisis will be milder. However, it is certainly much more severe than earlier crises and it does not appear likely that business conditions will soon improve.

The unprofitability of many branches of production and the unemployment of a sizable portion of the workers can obviously not be due to the slowdown in business alone. Both the unprofitability and the unemployment are being intensified right now by the general depression. However, in this postwar period, they have become lasting phenomena which do not disappear entirely even in the upswing. We are confronted here with a new problem, one that cannot be answered by the theory of cyclical changes alone.” (Mises 2006 [1931]: 163–164).

Mises saw the answer in his belief that (1) the high unemployment of the depression was caused by trade unions forcing wages up above market clearing levels (confirmed in Hülsmann 2007: 620), (2) governments had allegedly “capitulated to the labor unions,” and (3) the state provision of unemployment relief had allowed wage rates to remain high:

“The unions now have the power to raise wage rates above what they would be on the unhampered market. However, interventions of this type evoke a reaction. At market wage rates, everyone looking for work can find work. Precisely this is the essence of market wages—they are established at the point at which demand and supply tend to coincide. If the wage rates are higher than this, the number of employed workers goes down. Unemployment then develops as a lasting phenomenon. At the wage rates established by the unions, a substantial portion of the workers cannot find any work at all. Wage increases for a portion of the workers are at the expense of an ever more sharply rising number of unemployed.

Those without work would probably tolerate this situation for a limited time only. Eventually they would say: ‘Better a lower wage, than no wage at all.’ Even the labor unions could not withstand an assault by hundreds of thousands, or millions of would-be workers. The labor union policy of holding off those willing to work would collapse. Market wage rates would prevail once again. It is here that unemployment relief is brought into play and its role [in keeping workers from competing on the labor market] needs no further explanation.

Thus, we see that unemployment, as a long-term mass phenomenon, is the consequence of the labor union policy of driving wage rates up. Without unemployment relief, this policy would have collapsed long ago. Thus, unemployment relief is not a means for alleviating the want caused by unemployment, as is link in the chain of causes which actually makes unemployment a long-term mass phenomenon.” (Mises 2006 [1931]: 167–168).

The solution, then, for Mises was eliminating unemployment relief (presumably forcing the unemployed to starve and accept lower wages), cutting government spending and taxes (Mises 2006 [1931]: 175), and not only to cut wages but also to make wage determination free from labour unions (Mises 2006 [1931]: 169).

How suppression of trade unions was to be achieved and their freedom of association restricted was left understated, and Mises’s feeble hope that the “formation of wage rates should be hampered neither by the clubs of striking pickets nor by government’s apparatus of force” (Mises 2006 [1931]: 169) rings hollow.

How else could such suppression of trade unions be realistically achieved except by government coercion?

Mises hints at the solution in a passage where unions are themselves blamed as perpetrators of all sorts of evil:

“If the government were to proceed against those who molest persons willing to work and those who destroy machines and industrial equipment in enterprises that want to hire strikebreakers, as it normally does against the other perpetrators of violence, the situation would be very different. However, the characteristic feature of modern governments is that they have capitulated to the labor unions.” (Mises 2006 [1931]: 167).

This is the point in the essay where Mises may as well have been winking at his audience to indicate what his words imply: that governments should break up and repress unions and restore labour market freedom.

It comes as no surprise that Mises had praised Mussolini’s fascism in 1927 because it had (according to Mises) “saved European civilization.” Mises also contended that the “merit that Fascism … [had] thereby won for itself will live on eternally in history.” Part of the reason for this sickening praise was no doubt that Italian fascism had smashed independent trade unions. And, if that wasn’t enough, Mises was himself in the 1930s to become an economic adviser to the Austro-fascist Engelbert Dollfuss (Chancellor of Austria from 1932), who did indeed smash independent trade unions in Austria.

But to return to the point at hand. Why was Mises’s wage rate explanation wrong?

The reason is that capitalist investment and demand for labour is not a simple function of the wage rate or interest rate, as naïve, ignorant and incompetent Austrian ideologues like Mises thought, and many still think.

The propensity to invest is a complex phenomenon involving many factors, not just interest rates and the wage rate, but fundamentally the level of demand for output, the degree of uncertainty of capitalists about the future, the expectations of business people, the general state of expectations, and the state of the financial system and credit markets, and so on. Above all, the first three factors – demand for output, uncertainty and expectations – must be considered fundamental causes of the inducement to invest for many businesses, especially those that are mark-up price enterprises with excess capacity and inventories.

In the Great Depression, business expectations were shattered in an unprecedented way, as was demand for output. Simply reducing wages was no reliable or effective cure for unemployment in the 1930s (or indeed during recessions in general) when business expectations were deeply pessimistic, demand was stagnant and uncertainty about the future deep. If we also add to this the fact that many nations had banking crises and lending practices would have become deeply conservative, Mises’s focus on wages as the main cause of 1930s unemployment can be seen as the folly it was.

Whatever lowering of demand for labour that might have been caused by higher wage rates during the depression could have been overcome and rendered irrelevant by effective expansion of aggregate demand.

Furthermore, Mises’s economic analysis was just as flawed when he came to analyse prices:

“The demand that a reduction in prices be tied in with the reduction in wage rates ignores the fact that wage rates appear too high precisely because wage reductions have not accompanied the practically universal reduction in prices. Granted, the prices of many articles could not join the drop in prices as they would on an unhampered market, either because they were protected by special governmental interventions (tariffs, for instance) or because they contained substantial costs in the form of taxes and higher than unhampered market wage rates. The decline in the price of coal was held up in Germany because of the rigidity of wage rates which, in the mining of hard coal, come to 56 percent of the value of production. The domestic price of iron in Germany can remain above the world market price only because tariff policy permits the creation of a national iron cartel and international agreements among national cartels. Here too, one need ask only that those interferences which thwart the free market formation of prices be abolished. There is no need to call for a price reduction to be dictated by government, labor unions, public opinion or anyone else.” (Mises 2006 [1931]: 169–170).

Mises was blissfully unaware of what many economists were to discover in the 1930s and what Gardiner Means had already discovered: that real world price rigidities are mainly caused by the private sector itself, because most businesses adopt relatively inflexible mark-up/administered prices.

The type of price setting required by Mises’s economic theory is largely shunned by the private sector itself, so that the price flexibility Mises thought would clear markets cannot be attained.

Even though many nations saw price deflation in the Great Depression, even in the 1930s mark-up prices were significant and relatively inflexible as compared with other markets: Gardiner Means, for example, discovered that the administered pricing sector of the US economy had seen price declines of only about 10% during the depression, whereas the more competitive or flexprice sectors had seen price falls of about 40 to 60% (Means 1975) – a very clear disparity.

Finally, there is not a shred of evidence that Mises ever understood that even if wages and price were highly flexible, the existence of fixed nominal debt impedes and thwarts his imagined type of market clearing dynamics. For if debts remain fixed and wages and prices fall (or even more disastrously if wages fall but prices are less flexible), then it is likely that debtors will face severe problems as their burden of debt soars, and most probably deflation will induce bankruptcy of debtors and then bankruptcy of creditors and banks.

All in all, Mises’s analysis of the Great Depression was wrong, and he was ignorant of economics and economic reality. Austrians who still adhere to Mises’s ideas are just as ignorant and mistaken.

BIBLIOGRAPHY
Hülsmann, J. G. 2007. Mises: The Last Knight of Liberalism. Ludwig von Mises Institute, Auburn, Ala.

Means, Gardiner C. 1975. “Simultaneous Inflation and Unemployment: A Challenge to Theory and Policy,” in Gardiner C. Means et al., The Roots of Inflation: The International Crisis. Wilton House Publications, London.

Mises, Ludwig von. 2006 [1931]. “The Causes of the Economic Crisis,” in Percy L. Greaves (ed.). The Causes of the Economic Crisis, and Other Essays Before and After the Great Depression. Ludwig von Mises Institute, Auburn, Ala. 155–181.

Mises, L. von. 2002a [1931]. “The Economic Crisis and Capitalism,” in Richard M. Ebeling (ed.). 2002. Selected Writings of Ludwig von Mises: Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression (vol. 2). Liberty Fund, Indianapolis, Ind.

Mises, L. von. 2002b [1932]. “The Myth of the Failure of Capitalism,” in Richard M. Ebeling (ed.), Selected Writings of Ludwig von Mises: Between the Two World Wars: Monetary Disorder, Interventionism, Socialism, and the Great Depression (vol. 2). Liberty Fund, Indianapolis, Ind. 182–191.

Voice Recording of Ludwig von Mises

This is a recording of Ludwig von Mises (1881–1973) speaking on May 17, 1962. Mises discusses the history of capitalism and wages, and he was speaking at the height of the era of classical Keynesianism. Curiously, at the end, he proclaims that good profits and high wages “go hand-in-hand.” That was so in the Golden Age of Capitalism (1945-1973), but, with the advent of the new neoclassical economics in the 1970s and 1980s, real wages have stagnated or performed poorly in capitalist country after country.