Today, I am planning to just go back a bit in order to be able to go forward. The only diary that I did on the classical theory of wages examined in detail the best of what is normally considered to be the classical discussion, that of Adam Smith.
http://www.dailykos.com/...
http://www.dailykos.com/...
http://www.dailykos.com/...
This, of course, does not include Marx’s discussion on wages which does fall into the classical tradition irrespective of his rejection of many of the conclusions of the classical economists. Marx’s argument is complex and incorporates historical evidence and discussions and imho it is the best discussion of wages and their determination in economic both historical and modern discussions.
I decided to go backwards to Ricardo as if I am going to cover the attack on classical economics, the wages-fund argument must be considered, and I cannot derive the argument off of the writings of Adam Smith as his analysis is lacking an essential component, the principle of population. What occurs is that Ricardo takes Smith’s analysis and incorporates Malthus’s principle of population. The latter introduces contradictions and enables the transformation of the classical theory from one which recognises persistent and permanent unemployment into the wages-fund theory which is an argument based upon the full-employment discussion of wages. Needless to say, this has an effect on the discussions of poverty and which justifies poverty not as the fault of the economic system (as it was in the case of Smith and Ricardo), but rather the fault of the poor (e.g., they over-reproduce, they are immoral, they are lazy, etc.). I’ll discuss this transformation from the old-poor law to the new poor law after I complete the discussion of the wages-fund theorists (e.g., James Mill, J. R. McCulloch).
This discussion of Ricardo’s theory of wages closely follows the research done by Antonella Stirati (1991), The Theory of Wages in Classical Economics, both in terms of the view of Ricardo’s theory and it is the inspiration for the discussion here.
Ricardo's theory of wages
The discussion of wages in Ricardo is based upon Ricardo's belief that labour is a commodity like any other in the economy. As such, Ricardo argues that labour is producible and is bought and sold in the market. This means that Ricardo's theory of wages, which is analogous to the discussion of commodity prices, contains the notion of the natural and market rate of wages.
Labour, like all other things which are purchased and sold, and which may be increased or diminished in quantity, has its natural and its market price. The natural price of labour is that price which is necessary to enable the labourers, one with another, to subsist and to perpetuate their race, without either increase or diminution (Ricardo, 1821, p. 93).
A slight divergence: Is there a stationary state assumption?
The discussion of wages that appears in Ricardo's Principles has led to a massive amount of debate and discussion. In the chapter "On Wages" Ricardo discusses the natural wage as that level of wages which is necessary for the workers to subsist and reproduce without increase or diminution. To many authors of the history of economic thought who are attempting to place neoclassical analysis in the context of a continuity with the classical school or are trying to subsume the classical discussion to modern terms, this implies that Ricardo's theory of wages implies a stationary state, as the natural wage is consistent with a given size of the working class [e.g., Hicks and Hollander (1977), Samuelson (1978), Casarosa (1978)].
By definition, a stationary state means a given size of the working class and the size of the capital stock maintained at the same level, gross product is sufficient only to cover the maintenance of the same size of the capital stock and to ensure that the share of wages out of total product is maintained.
Actually, Ricardo allowed for increases in the size of the gross (total product) and net product (surplus product), that is capital accumulation; it is an essential component of any discussion of economic growth. So what does this mean? What has happened is that due to Ricardo’s acceptance of Malthus’s principle of population it means that, unlike in Smith's analysis, the natural and subsistence wages were equal. In order to allow for the influence of capital accumulation on wages (a' la Smith, where wages can increase due to economic growth; specifically, if the increase in capital accumulation leads to increased employment of labour, this shifts the power balance from capitalists to workers.
In order to allow for this mechanism enabling workers to get increased wages arising from increased employment and productivity, Ricardo allows for a divergence, for a long period of time, between the market wage and the natural (subsistence wage). Thus, there are differences between Ricardo and Malthus and Ricardo and Smith.
But one thing that must be clear is that Ricardo has a subsistence wage argument, which at the same time allows for capital accumulation. Moreover, Ricardo has different adjustment mechanisms for short and long period adjustments which makes the chapter rather complex even for those initiated into arcane discussions of classical economic theory.
Natural Wages
Let's return to Ricardo's argument. He begins by saying that the natural wage is that wage which allows the workers to subsist and reproduce at a given level of population of the working class. He then clarifies that the ability of workers to subsist and reproduce, does not depend on the amount of money received as wages (money wage) but rather on the quantity of commodities required (by habit and custom) for the support of the labourer and his family which that money wage can purchase. A rise in the price of food and necessaries will mean that the natural price of labour (wage) must rise and a fall in the price of food and necessaries means that the natural wage must fall. A change in the price of goods consumed by the workers means that the natural wage has to change so as to remain constant in real terms (Ricardo, 1821, p. 93).
Thus, Ricardo distinguishes between the real value of wages (the quantity of labour and capital required to produce the wage goods) and the nominal value of wages, which refers to that amount of commodities measured in terms of money. Just as in the theory of wages of Smith, arising from the fact that the natural wage is linked to the habits of consumption of the workers, the natural wage will not be constant over time, and it will vary at different times in the same country and it differs between countries depending on the habits and customs of the population.
With the progress of society the natural price of labour has always a tendency to rise, because one of the principal commodities by which its natural price is regulated, has a tendency to become dearer, from the greater difficulty of producing it. As, however, the improvements in agriculture, the discovery of new markets, when provisions may be imported, may for a time counteract the tendency to a rise in the price of necessaries, and may even occasion their natural price to fall, so will the same causes produce the correspondent effects on the natural price of labour (Ricardo, 1821, p. 93).
Ricardo argues that since a primary component of the workers' consumption bundle (food produced in agriculture) rises over time due to the greater difficulty of producing it, then with the progress of society the natural wage must be rising. This argument, like Malthus's derives from the theory of differential rent: essentially agricultural prices increase as due to the increase in population, we are forced to use land of lesser and lesser fertility which requires more labour in its production. Thus, the value of the commodities composing the natural wage which is determined by the quantity of labour required for their production, will have to rise over time, unless there is a manner of decreasing the quantity of labour required for production, e.g., innovations in agricultural production which increase the productivity of the working class, and hence lead to less labour being used in the production process.
The Market Wage:
The market wage is defined by Ricardo as the price which is actually paid for labour deriving from the operation of competition. Thus, the market wage is determined by the proportions of the supply of labour to the demand for labour. The supply of labour clearly depends on the level of employable population and the demand for labour depends on the capital which is available for its employment.
Ricardo uses Malthus's principle of population to describe the relation between the market wage (the actual wage) and the natural wage. That is, Ricardo attributes the gravitation of the market wage around the natural/subsistence wage to the mechanisms of population adjustment induced by variations in the market wage relative to the natural wage. He argues that there is a tendency for the market wage to conform to the natural wage due to the population mechanism (Ricardo, 1821, p 94).
The Principle of Population as adjustment mechanism:
Some tensions are already being introduced. Ricardo argues that the market wage can remain above the natural wage for a long period of time.
It is when the market price of labour exceeds its natural prices that the condition of the labourer is flourishing and happy, that he has it in his power to command a greater proportion of the necessaries and enjoyments of life, and therefore to rear a healthy and numerous family. When, however, by the encouragement which high wages give to the increase of population, the number of labourers is increased, wages again fall to their natural prices, and indeed from a re-action sometimes fall below it (Ricardo, 1821, p 94).
This situation arises due to the relative increase in capital used to employ workers compared to the supply of labour (population). Ricardo argues that in a progressive society, if the accumulation of capital proceeds faster than the increase in population, then the market wage will remain above the natural wage for a significant period of time. He argues that the high level of market wages will result in an increase of population which could bring the market wage back to the level of the natural wage.
In a situation where the market wage is below the natural wage that would occur when the increase in population has outstripped the increase in capital accumulation, the situation of the workers is needless to say wretched. In this situation, either the population of workers must fall (their supply falls due to starvation) or there is an increase in the demand for labour because of an increase in capital accumulation relative to the increase in the labour supply. This will raise the market wage to the level of the natural wage.
It is only after their privations have reduced their number, or the demand for labour has increased, that the market price of labour will rise to its natural prices, and that the labourer will have the moderate comforts which the natural rate of wages will afford (Ricardo, 1821, p. 94).
Ricardo argues that, in general, in a progressive society, the market wage of labour will be greater than the natural wage because the constant increase in capital accumulation will be such that it will support an ever increasing size of the labouring population.
Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse, which an increase capital give to a new demand for labour be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labour may give a continued stimulus to an increase of people (Ricardo, 1821, pp. 94-5).
Differences between Smith and Ricardo:
Stirati (pp. 147-52) discusses the changes between Ricardo and Smith’s theories in detail, I am basically summarising her argument and extending its implications. Essentially, what is distinct in Ricardo's theory of the natural wage with respect to Smith is that Ricardo draws a close analogy between the determination of the natural wage and the natural price of commodities.
- Ricardo differs from Smith in that Smith did not mention the adjustment of the labour supply to the level of demand as a condition for the establishment of the natural rate of wages in the market. Smith argued that the natural wage was influenced by labour market conditions, but did not argue that this adjustment was a precondition for the movement of market to natural wages.
This change in Ricardo's analysis with respect to Smith derives from the introduction of the mechanism of population change to correct deviations of the market wage from the natural wage arising from imbalances between the supply and demand for labour.
This results in a difficulty for Ricardo's theory which derives from the long period of time that this adjustment process needs for changes in population to be felt in the labour market; it takes (even in Britain of the early 19th century), a certain amount of time between the birth of a child and its availability to work. Until the child enters the labour market, it cannot have an effect on the supply of labour and hence on wages. The slowness of the population adjustment process is in conflict with the central role that this adjustment process must play in bringing the market wage into harmony with the natural wage. There is a serious time lag in the adjustment process, theoretically capital can be continually increasing during the initial increase in labour supply (arising from higher wages); as such, population growth may never catch up with the increased capital accumulation until a massive slowdown in economic growth (commensurate with a decreased accumulation of capital). Is this problem clear? Is it clear why the population argument may not actually cause the adjustment of market to natural wages?
- Ricardo's theory considers the proportion of supply to demand for labour as one of the causes of the variations in the market wage (Stirati, 1991, pp 132-3). In the Principles, Ricardo criticised Malthus for arguing that the food supply is given prior to and independently of the demand for food; if Ricardo accepted this argument, he could be said to have a wages-fund argument. Ricardo argues that an increase in the capital available to employ workers and to provide for wages leads to the growth of population. Thus, the resulting increase in the demand for food deriving from more workers being employed leads to the increased production (supply) of food. The amount of food produced (like all other commodities) depends on the effectual demand for food. Thus, the amount of food produced depends on the purchasing power of the workers which depends upon the distribution of income. In this situation, the supply of food can not be taken, as a given, prior to the determination of wages.
- What is the proportion between supply and demand (or between population and capital) that then determines the gravitation of the market wage around the natural wage? The demand for labour (the level of employment) depends on the existing capital and on its growth. According to Stirati (1991, pp. 135-9), capital should be understood as productive capacity. Ricardo assumes the full utilisation of the existing productive capacity will correspond to a certain level of employment of labour. The employment of labour times the natural wage is the fund for the maintenance of labour which is determined after the wage and the employment level of labour is known.
According to Stirati, the proportion between supply and demand for labour refers to the ratio of the demand for waged labour (capital available) in relation to the working class population -- this ratio then can serve as an indicator of the labour market conditions as its variations serve as a way to quantify unemployment.
Thus, Ricardo's theory explicitly, while assuming full capacity utilisation, does not assume full employment of labour, employment of labour depends on the capital available to employ labour. As in Smith, unemployment exists because of an insufficient amount of capital available with which to employ the total labouring population.
The proportion between population and the demand for labour affects the market wage because it is an indicator of unemployment. The growth of unemployment would occur when the increase of capital is outstripped by the increase in the population available to work. On the other hand, when the increase in capital is greater than the increase in population, or the labour supply, then the scarcity of labour (or full employment) results in a situation whereby the market wage will be greater than the natural wage. Is that clear?
As in Smith, persistent unemployment is possible and can only be correctly gradually by changing the pace of accumulation of capital and population (Stirati, 1991, p. 139). This mechanism which ensures the gravitation of market wages around natural wages is clearly a slow process due to amount of time it takes to adjust the size of the available labouring population.
And in a rare moment of non-total agreement with Stirati, I would argue that population does not alter in this manner in Smith. Unlike Smith, Ricardo allows for population changes (upwards and downwards) in the face of changes in market wages (this would be parallel to the relation in Smith between natural and subsistence wages in the upturn and market and subsistence wages in the economic downturn). Smith does not hold that increased wages will lead to increased population; to the contrary, Smith believed that increased wages will lead to changes in taste by the working class and hence changes in demand. His downward population mechanism possibly only comes into play in a case of a declining capital stock and declining economy and not because of some arcane Malthusian population principle, but rather due to the collapse of the standard of living of the middle and working classes which throws them all into poverty.
Are there any questions?
Next week, I will do a short diary on Ricardo on the introduction of machinery, permanent unemployment. After that I will begin the discussion of the role of ideology and political apologetics in the decline of Ricardian (and Classical) economic theory.
Suggested and Referenced Readings
Casarosa, C. (1978) "A New Formulation of the Ricardian System," Oxford Economic Papers, XXX, pp. 38-63.
Hicks, J. and S. Hollander (1977) "Mr. Ricardo and the Moderns," Quarterly Journal of Economics, vol. XCI, no. 1, pp. 351-69.
Ricardo, D (1821) Principles of Political Economy and Taxation, Vol I Of the Collected Works and Correspondence of David Ricardo edited by P Sraffa, Cambridge University Press, 1951.
Samuelson, P. (1978) "The Canonical Classical Model of Political Economy, Journal of Economic Literature, vol. XVI, Dec., pp. 1415-1435.