26 September 2022
Professor John Quiggin’s insinuations that profits come at the expense of labour sail close to the Marxist idea that profits are extracted from labour and that labour is entitled to the whole of the profit because it and only it creates value. Labour, like capital goods does not, create value. Labour produces only those things that already have value or are expected to have value. Bishop Whately rightly observed:
It is not because pearls fetch a high price because men have dived for them; but on the contrary, men dive for them because they fetch a high price1.
The title of this little essay might seem a little farfetched but what else is one supposed to think when Professor Quiggin emphatically stated:
For decades, government policy has been designed to weaken unions and push wages down. It’s time to put that process into reverse2.
The significance of John Quiggin’s statement is striking for it is a direct attack on the productivity theory of wages that is found in every standard economics textbook. A theory that no one has been able to refute. But according to Quiggin’s logic wages are
indeterminate, meaning there is a zone where, in his mind, there exists a considerable range of wage rates that do not affect the level of output and employment. Hence, wages are really the result of a power struggle between labour and capital with capital now having the upper hand. It follows that unions must be granted more power in order to enforce a rise in real wages.
The first thing to note is that similar statements are scatter throughout his blog he makes no attempt to refute the productivity theory of wages. He merely pretends it is not there. Secondly, he makes no effort to prove that unions ever increased the standard of living. Thirdly, he is utterly ignorant of the fact that economic history refutes his argument that unions are needed to raise the general level of real wages. At this point we need to return to the past. In 1905 Professor Fetter gave John Quiggin’s argument a well-deserved slap-down with the glaring observation that the “purchasing power of wages in England increased ninety per cent in the thirty years between 1860 and 1891.” He stressed his point with the statistic that only
Pabout one tenth of the workers in England are unionists and of the twenty-two million workers in the United States, far less than ten per cent, are organized. Can it be maintained that one tenth of the labor supply fixes the value of all3 .
I doubt that even Professor Quiggin would be bold enough to argue that unions could claim credit for this rise in real wages. The historical picture becomes even grimmer for his argument when we consider the situation in Australia during the 1920s. Professor Benham commented that in North America
[t]here is hardly any correlation between the growth of wage regulation and rising real wages, Nor is there any evidence that wage-fixing has made average real wages higher than they would otherwise have been. Women and juniors are within the ambit of wage-regulation to a smaller extent than adult males, yet during recent years their wages have risen more than those of adult males. In the United States and Canada where there is relatively little wage-fixing, average real wages have risen more than in Australia4.
When Benham wrote those words union membership per 100 non-agricultural workers in Canada was 11.6 per cent while it was 46.2 per cent in Australia and about 10 per cent for the US. With respect to unemployment in this period it averaged about 8 per cent for Australia, 3.6 per cent for America and 5.7 per cent for Canada. But according to Quiggin’s reasoning the most unionised countries should have the highest real wages. Arthur Smithies, a Keynesian economist, correctly pointed out that
[c]oncerted action by the whole labour movement to increase money wages will leave real wages unchanged. Real wage gains by a single union are won at the expense of real wages elsewhere5.
In preindustrial societies it was the ratio of labour to land6 that determined the height of real wages, a fact the devastating appearance of the Black Death revealed with crystal clarity. The plague struck Sicily in 1347 and then swept throughout Europe, striking England in 1348 where it rapidly wiped out about 30 per cent of the population. (The figure is only an estimate.) The result was a severe labour shortage that drove up wages. The efforts of Edward III to freeze them at the previous level proved futile against the power of the market. As Gimpel pointed out:
But now the landlords could not refuse the demands for higher wages, otherwise the peasants and their families would move to the demesnes. In the city, the skilled a s well as the unskilled workmen offered their work to the highest bidder. The shortest of labour was of the great benefit to the unskilled, for it led to a substantial narrowing of wage differentials7.
Likewise, in 1356 the managers of the Florentine mint reported that the workers
at the mint do not want to work except when it suits them. And if one remonstrates with them, they reply with vulgar and arrogant curse words say they only want to work when it is convenient to them and provided there are increases in salary8.
Wages reached the stage where canons in Normandy complained that the demand for labour had risen to the point that they could not find any farmhands
who did not demand more than six servants would have been paid at the beginning of the century9.
Paul Samuelson constructed a table illustrating the process that showed how an increase in the ratio of land to labour raised wages until the optimum is passed and the ratio of labour to land begins to increase resulting in falling wages10. This is what happened in Europe once increase in population growth began to drive down wages. Given this situation I doubt that even our socialist-minded Professor Quiggin would argue that forming an agricultural union or imposing a minimum wage could prevent a general fall in wages.
The question of determinacy with respect to wages is one that befuddled Adam Smith. On the one hand he argued that the “master must generally have the advantage”11, strongly suggesting that indeterminacy was the order of day, leaving the reader with the thought that capitalists are indeed able to drive down wages. Yet he contradicted this comment with the fact that policies specifically designed to set wages had proven to be
equally ineffectual, and has never either been able to raise the wages of curates or to sink those of labourers to the degree that was intended12.
If the power of the crown was unable to successfully drive down wage I fail to see how capitalists could succeed where regal power failed. However, there did emerge from Smith’s confused treatment of the subject the fundamental economic truth that
[i]t is not the actual greatness of national wealth [capital], but its continual increase, which occasions a rise in the wages of labour13.
This is because as capital accumulation increased faster than the increase population workers
easily find employment, but the owners of capitals find it difficult to get labourers to employ. Their competition raises the wages of labour, and sinks the profits of stock14.
Therefore, it is the capital to labour ratio raises real wages, not unions or politicians, a fact that every classical economist understood15. This point was greatly stressed in Mill’s greatly misunderstood fourth proposition that states:
I apprehend, that if by demand for labour be meant the demand by which wages are raised, or the number of labourers in employment increased, demand for commodities [consumer goods] does not constitute demand for labour16. (Emphasis added.)
How any economist who actually read Mill’s two volume work on political economy could misconstrue the meaning of this proposition leaves me utterly baffled. The first clause of the sentence clearly refers to an increase in the ratio of capital to labour. This is the difference in demand for future goods as against present goods17.
Classical economists understood that there was a link between wages and productivity but they failed to devise a theory to explain it. Scrope18 realised that it was the productivity of English workers that raised their wages above their Continental counterparts. Malthus made precisely the same point without being able to explain the process that directly linked productivity to wage rates. Nassau William Senior openly repudiated Ricardo’s theory that wages were determined by the price of corn, preferring, and correctly so, a productivity theory, stated that
…the extent of the fund for the maintenance of labour depends mainly on the productiveness of labour19.
In the same work Senior related the wages of factory spinners to the value of the output but still failed to discover the marginal principle. Nevertheless, he fully understood the necessity for capital defined as the material means of production. The following year saw the brilliant Irish lawyer and economist Mountifort Longfield produce a truly remarkable piece of economic reasoning that described the process by which capital accumulation raised real wage rates by shifting earnings from capital to labour. As he put it:
…if a spade makes a man’s work 20 times as efficacious as it would be if unassisted by any instrument, 1/20 only of his work is performed by himself, and the remaining 19/20 must be attributed to capital. [Emphasis added.] And this is the measure of the intensity of the demand for such an instrument. A labourer working for himself would find it for his interest to give up 19/20 of the produce of his labour to the person who would lend him one, if the alternative was that he should turn up the earth with his naked hands; or if he worked for another, his employer might pay a similar sum for the purpose of supplying him with an instrument20.
Longfield had provided a carefully thought out productivity theory of wages. Little wonder that no less a personage than Joseph Schumpeter felt impelled to write that Longfield had
overhauled the whole of economic theory and produced a system that would have stood up well in 189021 .
And then for some strange reason Longfield’s discovery seem to pass into the shadows, despite Isaac Butt’s refinement of what was in fact the marginal productivity theory of wages. It was not until the early 1870s when the ‘marginal revolution’, led by Carl Menger, fully emerged that marginal productivity found its rightful place in economics. Let us now take a closer look at the theory that Quiggin is indirectly attacking. Simply expressed, the theory states that the demand for labor is determined by the marginal productivity of labor, meaning the additional increase in output from hiring an extra worker.
It follows that a worker will be hired only up to the point where the value of the marginal product just covers the additional cost of hiring him. Therefore, if the cost of labour exceeds the value of labour’s marginal product then unemployment will rise. It has been argued that where factors have to be combined in fixed proportions to produce a given output then it is impossible to determine the price of any factor. This is a fallacious argument. So long as a factor can be isolated then its price can be determined, even if all production processes consist of fix proportions.
Labour is faced by a general descending array of value marginal productivities. This is the demand curve for labour22. The market clearing wage is therefore set where the supply of labour intersects the demand curve. It follows that were the labour force to rapidly increase, as would be the case with large-scale immigration, the supply curve would be shifted down the demand curve, driving down productivity and wages23. Critics argue that the demand curve is not smooth and this means there are gaps, indeterminate zones, between the marginal productivities that can be used to raise wages to the top of the zone, leaving significant room for bargaining. These critics overlook the fact that the existence of large numbers of workers, skilled, unskilled and semi-skilled would eliminate an indeterminate zone.
If the critics are right and wages are indeterminate then it is obvious there would be an upper limit to the indeterminate zone and a lower limit. Were wages below the upper limit then the difference between the limit and the wage would be a profit. Hence, hiring more labour would increase a firm’s revenue. Firms would compete against each other for labour until wage rates until the zone disappeared. To raise wages above the limit would mean they now exceed the value of the workers’ marginal product with the result that unemployment would rise.
Let us take a closer look the bargaining zone. There are outstanding sportsmen and extremely popular actors who command a tremendous salary. Within their indeterminate bargaining zones there is a maximum limit above which their demands would not be accepted. Naturally, they have a minimum limit below which they will not go. Clearly, those celebrities who over estimate the value of their services by stubbornly insisting on a payment that exceeds the upper limit will find themselves enjoying an early retirement.
Any conspiracy to force down wages would, as Professor Quiggin well knows, require a policy of unrestricted immigration, which is precisely what the misnamed Democratic Party has implemented. Although Quiggin is quick to smear Republicans as racists and fascists he doesn’t seem able to condemn the Biden administration’s attack on the standard of living of the mass of Americans or its own fascist behaviour. Quiggin even went so far as to sneer at the possibility that large-scale immigration into Australia had a detrimental effect on wage rates. No wonder he was one of the 51 economists24 who made the utterly absurd argument that the supply of labour had nothing to do with wages25. (Perhaps Quiggin and his 51 pals should be called historical and economic denialists.) I disagree with Professor Bill Mitchell, a modern monetary theorist, on most things but when it comes to wages and large-scale immigration he is spot on26.
1Richard Whately. Introductory Lectures on Political Economy, 1832, Augustus M. Kelley, 1966, p. 253.
3Francis A. Fetter, The Principles of Economics with Application to Practical Problems, New York, The Century Co., 1905, p. 130).
4benham, The Prosperity of Australia, P. S. King & Son, LTD, Orchard House, Westminster, 1928, p. 207,
5Arthur Smithies in Harris ed., The New Economics, Dennis Dobson LTD, 1947, p. 561.
6Simon Kuznets, Population, Capital, and Growth: Selected Essays,
Heinemann Educational Books, 1974, p 158.
7Jean Gimpel, The Medieval Machine: The Industrial Revolution of the Middle Ages, Pimlico, 1988, p. 213.
8Carlo M. Cipolla. Before the Industrial Revolution: European Society and Economy 1000-1700, p. 203, 1976
9Fernand Braudel. The Structure of Everyday Life: Civilisation & Capitalism, 15th – 18th Century Vol. I, Phoenix Press, 1988, pp. 193-194.
10Paul Samuelson. Economics, 10th edition, McGraw-Hill Book Company Vol, 1976, p.731.
11Adam Smith. An Inquiry into the Causes of the Wealth of Nations Vol. I, LibertyClassics, 1981, p. 85.
15Nassau William Senior, An Outline of the Science of Political Economy. An outline of the Science, 1836, Augustus M. Kelley, New York, 1965, p. 44. Senior, a greatly underestimated economist, treated the definition of capital, as did his contemporaries, rather loosely. Nevertheless, they understood that the material means of production, that which raises the productivity of labour, was what mattered.
16John Stuart Mill. Principles of Political Economy Vol. I, Liberty Fund Inc., 2006, p. 80. This is a greatly misunderstood statement. In volume II (528) his position becomes clearer when he explains how encouraging consumer spending can lead to capital consumption.
17Capital goods are future goods while cosumer goods are present goods. A shift from present goods to future good increases economic growth while the reverse decreases it. It’s interesting to note that Mill used the same terminology to explain the process of saving. Ibid. p. 161.
18George Poulett Scrope was explaining why an English day-labourer’s wages greatly exceeded those of French, Russian and Indian labourers.
Principles of Political-Economy: Deducted from the natural laws of social welfare, and applied to the present state of Britain, Longman, Rees, Orme, Brown, Green, & Longman, 1833, p. 161.
19Nassau William Senior. Political Economy, Richard Griffin and Company, 1854, pp. 45, 53, 70, 140, 145, 151, 166, 189.
20Mountfort Longfield, Lectures on Political Economy, Richard Milliken and Son, 1834, p. 195.
21Schumpeter, History of Economic Analysis, Oxford University Press, New York, 1994, p. 465.
22There are in a fact a multitude of demand curves for different labour skills
23Benjamin Anderson noted that once WWI ended mass immigration into the United States and capital accumulation was allowed to rise faster than the labour force wages rose. Unfortunately, the so-called Democratic Party and it business allies have implemented a policy of driving down real wages.
Benjamin Anderson. Economics and The Public welfare: A Financial and Economic History of the United States, 1914-1946,
- Van Nostrand Company, LTD, 1965, pp. 74,75.
Anderson’s observation was confirmed by a study containing references to the detrimental effects that large-scale immigration had on wages in the United States from the 1890s to 1914. The result of this mass immigration was that “real weekly earnings in manufacturing and real full-time annual earning were lower in 1914 than in 1890.”
Vladimir S. Woytinsky and Associates. Employment and Wages in the U.S., Arno Press, 1976, pp. 48, 49.
According to O’Rourke and Williamson mass immigration into the United States prior to WWI had a detrimental effect on labour by slowing down the growth in real wages.
Kevin H. O’Rourke, Jeffrey G. Williamson. Globalization and History: The Evolution of a Nineteenth-Century Atlantic Economy, MIT Press, 2001, pp. 156, 159.
25Paul Samuelson would disagree with these 56 learned economists. He rightly pointed out that “[t]he limitation of any grade of labor relative to all other productive factors can be expected to raise its wage rate.” In plain English, limiting the supply of labour raises its price.
Paul Samuelson. Economics, 10th edition, McGraw-Hill Book Company, 1976, pp. 575, 736.