Marx, Keynes and the limits to wage increases

“Marx is very clear that labour is exploited and that a higher wage would make workers’ lives less miserable without removing the exploitation per se. But he doesn’t think, therefore, that a higher wage  will make the system operate better or indeed even make workers as a whole better off. In fact, in the discussions of this in “The Reserve Army of Labour” he argues something quite striking given his political view: namely, that if workers get into a better situation to the point that the reserve army of unemployed labour shrinks and the wage begins to rise relative to productivity, then the wage share rises and the profit rate falls. If the profit rate falls, accumulation slows down, mechanisation speeds up, the import of labour becomes more feasible, and the system re-creates the reserve army of labour. So, now you have a situation where the success of labour leads to the undermining of that success – from the internal logic of the system. Many people, many of my friends who are Post Keynesians, argue this is not true, because if workers’ wages are higher, consumption demand will be higher, then demand will be higher, and capitalists will hire more people. I think that’s not true as a general proposition because of the limits I described. I would like it to be true, but for me you cannot, you should not, persuade yourself that something is true because you would like it.”

In the spirit of recent posts, the above is another extract from an interview with Anwar Shaikh in the book What is Heterodox Economics? Conversations with Leading Economists. Shaikh is clearly being intellectually honest here, admitting that he would like capitalism to enable wage increases for ordinary workers across the economy that drive faster growth and falling unemployment in a win-win sustainable process, but that his own theoretical understanding suggests that this is unlikely to be sustainable. For Shaikh, falling unemployment will tend to strengthen the bargaining power of labour, such that at some point wages for the economy as a whole will start to rise faster than productivity growth, leading to a rising wage share and a falling profit share. The latter will blunt the stimulus to investment and growth will then slow down, leading to rising unemployment once again, and ‘re-creating the reserve army of labour’. Continue reading

Robert Reich destroys minimum wage myths

In this video, Robert Reich, former labour secretary under Bill Clinton, and founder of Inequality Media, destroys a number of the myths surrounding the minimum wage, which in the US has not risen since 2009. In particular, he challenges the notions that raising it will kill jobs, damage business, raise inflation and even benefit the wrong people. In fact, it is likely to raise productivity, reduce worker turnover and training costs, boost demand by increasing consumer spending and have a negligible impact on the inflation rate. It will also reduce both racial inequality and the need for welfare spending to support those on the lowest incomes. As he says, if business owners rely on paying workers ‘starvation wages’ in order to survive, they should not be in business!

Decent employment: the role of labour market institutions in creating prosperity and justice

The creation of full and decent employment under capitalism may well be vital to creating and sustaining material prosperity and social justice alike, as well as democratic institutions, attitudes and policies. In this post I summarise an article which compares labour market outcomes in recent years across 24 advanced countries with a variety of institutional frameworks. I go on to explore some of the practical policy implications of marrying prosperity and justice at the national and international levels.

Before the advent of the pandemic and war in Ukraine, the rise of populism since the Great Recession was an important story in many countries, and dismayed centrists and liberals alike. Appealing to rational political argument has not been enough to stem the tide, not least in the US with the rise of Trump, and Brexit in the UK. But many analysts, including economists, have pointed to the genuine concerns of disaffected polities, not least the failure of national economies to generate and sustain decent employment in recent years. Such developments provide at least a partial explanation of the appeal of populist figures, and their ability to tap in to these concerns, even if they have not provided real solutions.

An article in the January 2021 issue of the Cambridge Journal of Economics (paywall, but you can read the abstract), by Hang Le, Geoffrey Wood and Shuxing Yin, employs a comparative institutional analysis of various labour market institutional regimes among 24 OECD countries between 2000 and 2015, in order to explore the impact of institutional differences on economic and social outcomes.

In general, “the state, firms and stakeholders play different roles in the employment relations in different countries”. While it may not be straightforward for particular countries to import institutions from abroad without adapting them to their own framework, governments and policymakers can certainly learn from each other and improve the functioning of labour markets in order to try and generate fuller and more decent employment in their economies and societies. Continue reading

The high wage economy: marrying social justice with economic success – Part 2

innovative-manufacturing-headerThis post is part 2 of a discussion of the potential of the high wage economy to overcome conflicts between the progressive goals of achieving social justice and economic efficiency, or what could be called a widely-shared prosperity. It is inspired by Morris Altman’s book Economic Growth and the High Wage Economy. In part 1, I described his idea that even with perfect competition in product markets, firms can find themselves producing at a low-wage-low productivity equilibrium with little incentive to change this situation. Similarly, other firms may be producing at a high wage-high productivity equilibrium, with the two types of firms able to produce at the same output price, but with the second type operating at a greater level of X-efficiency. This is due to the incentives provided by higher labour costs for workers, managers and owners to combine their efforts in the organisation of the workplace in order to work “smarter”. Increased worker effort is incentivised by labour market institutions which prevent cost-cutting, or more accurately labour cost-cutting, as a path to competitiveness. This is a supply-side theory of economic change.

Altman spends much of his book applying his theory to a variety of economic situations. Here is a brief account of some of them. Continue reading

The high wage economy: marrying social justice with economic success – Part 1

Production_LineA persistent goal of many progressive economists and policymakers is to enable a widely-shared prosperity, thus bringing together social justice and economic efficiency, while sustaining individual freedoms. Some economists argue that low labour costs in the form of wages and, more broadly, minimal labour market regulations and taxes which fund the welfare state, are necessary to achieve “competitiveness” among firms so that the price of output can be kept low in order to encourage sales, while sustaining profits. This is especially so for developing countries with relatively low levels of productivity, which simply can’t compete with higher wage, higher productivity countries in the rich world. Continue reading

The various impacts of a tight labour market

Hiring-675x380Labour markets in a number of advanced countries, not least the US and UK, have been running hot recently. Employers in various sectors are short of staff, and as economies reopened and consumption, a key driver of aggregate demand, picked up, this has put upward pressure on wages, particularly for jobs offering relatively low pay. This would seem to be good for earners at the bottom of the pay scale, even if it makes life more difficult for employers, for the moment at least. But what kind of economic, social and political forces are at work here? Will markets adjust towards a new optimum equilibrium? And how sustainable are such trends? Will they force dramatic changes upon policymakers? Continue reading

Tax incentives and work: maybe Europeans want more free time — Real-World Economics Review Blog

from Dean Baker. Greg Mankiw warned New York Times readers about the dangers of adopting the Biden agenda and moving more towards a European-style welfare state. In his piece, titled “Can America Afford to be a Major Welfare State,” Mankiw noted: “Compared with the United States, G.D.P. per person in 2019 was 14 percent lower in Germany, 24 […]

Alternative to Mankiw’s view on tax incentives and work: maybe Europeans want more free time — Real-World Economics Review Blog

The hidden agenda of austerity

EdwardJNell“Besides their supposed beneficial effects on inflation and the balance of payments, austerity programmes are commended for other reasons, too, and these may be the real basis for their popularity in business circles. For example, high unemployment and the increased likelihood of lay-offs certainly helps business maintain labour discipline. When sales are strong and labour is badly needed to maintain high levels of production, strikes and slowdowns are costly; labour is in a strong position. But when sales are slow, and inventories are high, so that production is not urgent, labour has no ground to stand on. In general, austerity forces people to think more about profit and loss, and less about environmental and social issues. In boom times, popular democracy will force business to curb pollution, restrict the dumping of dangerous wastes, improve unsafe working conditions, and the like, but in hard times no one wants to risk driving business over the edge and making things even worse.

In short, austerity has helped to banish the spectre of the 1960s – no more unbridled challenges to corporate authority, or angry demands for regulation and social accountability, perhaps most important, no more mass refusals of talented youth to start the scramble up the corporate ladder, preferring instead to ‘turn on, tune in and drop out’. In times of austerity the college-minded look to business school; everyone is glad of a job – if they are lucky enough to get one!…

Austerity promotes control; it strengthens authority and weakens labour. Expansion undermines authority; by creating prosperity it provides the weak and the powerless, the underdogs, with the resources to stand up to the system. Austerity supports the center, weakens the periphery, creates dependency and intensifies competition. It promotes innovation and cost-cutting, weeding out the weak and rewarding the strong, who therefore favour it. Austerity removes the state and popular forces from the marketplace; expansion both requires and promotes control over business by labour and popular sentiment.

Perhaps equally important, austerity favours finance over production. Austerity raises the earnings of finance at the expense of production capital; at the same time it weakens the position of the latter, by simultaneously shrinking their markets and raising their costs…

[I]t would seem that a policy of Expansion is clearly superior, and so it is from the point of view of the public. But this is not at all how it appears to business. For Expansion improves the bargaining position of labour, and not just over wages. After a long period of full employment, labour is likely to bargain to increase job safety, reduce pollution, re-design jobs to make them less repetitive, and generally improve the quality of life. What labour gains in these respects, restricting management powers, businesses of all kinds lose. Consumers and citizens may likewise be emboldened to demand regulation of dangerous or unsavoury business practices. Hence Austerity, by weakening labour, promotes the interests of both kinds of capital, whereas Expansion, by strengthening labour does both kinds of capital a disservice. From the point of view of business, austerity is indispensable in maintaining the freedom of business to do what it pleases with its assets.”

Edward J. Nell (1996), Making Sense of a Changing Economy, Routledge, p.120-2.

John Weeks on the econfakers, wages and unemployment

EconOfthe1%Another quote from the late John Weeks to focus one’s thinking. In the book which contains this passage, he refers to the intellectual mythmakers in economics as the “econfakers”. Here he argues that there is no simple one-way relationship between wages (and working conditions) and employment or unemployment, as is often claimed (and taught):

“What seemed so simple and obvious – lower wages, cheaper labor, more employment – proves impossible to establish as a general rule. For an individual company reducing wages may result in more employment. That is not the issue. At the level of the company, lower wages may allow for lower prices, and the lower-wage company takes business away from its rivals. The “higher wages cause unemployment” accusation is quite different. It alleges a fakeconomics faux law that a general increase in wages for the economy as a whole will reduce employment (and vice versa). This allegation cannot be established in theory, nor is it supported by empirical evidence. It is an ideological construction intended to justify lower wages and higher profits, and to blame unemployment on workers themselves.

In practice the econfakers and those they have indoctrinated trumpet this argument as a law of nature, and use it against all attempts to improve the conditions and hours of work. For example, laws that regulate working hours and require additional pay for overtime allegedly reduce employment because they increase labor costs. The same ideological illogic applies to workplace protection, health and safety legislation, and protection of vulnerable workers. They all raise the cost of employing people. Therefore, they must contribute to unemployment. All attempts to improve the conditions of labor, either through the collective action of workers or legislation, are self-defeating. These arguments are wrong, technically, empirically and morally. In civilized societies all people are paid decently and work in healthy conditions to the extent that the level of economic development allows. This is a simple and straightforward hypothesis that requires no fanciful assumptions to establish.

The econfakers look back to Adam Smith as their intellectual ancestor and their inspiration for the free market. However, the great contributor to the Scottish Enlightenment had no truck with “labor markets”:

What are the common wages of labour depends everywhere upon the contract usually made between [workers and employers]… It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms. The masters, being fewer in number, can combine much more easily, and the law, besides, authorizes, or at least does not prohibit their combinations, while it prohibits those of the workmen… In all such disputes the masters can hold out much longer.

Anyone familiar with the union-busting campaigns of the closing decades of the twentieth century in the US and Europe would recognize the similarities with the closing decades of the eighteenth century.”

John F. Weeks (2014), Economics of the 1%, Anthem Press, p.37-8.

Social justice and economic performance: beyond the trade-offs?

workersThe subtitle of this blog refers to two of its key concerns when it comes to the application of our ‘dismal science’: economic progress and social justice. The third is individual liberty. It was John Maynard Keynes who in 1926 coined these three as part of the “political problem of mankind” (although he referred to efficiency rather than progress), and noted how difficult they are to reconcile.

A fourth, modern, concern might be sustainability, though this can be incorporated into them in the sense that without them, the economy and society cannot be sustained in the long run. This would include environmental concerns. Theories of sustainable development look at the interaction between the economy, society and environment and try to forge a path in which, being dependent on each other, they are balanced and, literally, sustainable and sustained!

A broad conception of economic progress would necessarily see it as sustainable. If, for example, a particular pattern of economic growth destroys the nature on which it depends, then it will be undermined. At the same time, modern economic growth, which is still part of what most economists consider to be ‘progress’, is a process of transformation, not least of nature, and of society. The task is to ensure that progress can be sustained and this may require that we adopt richer measures of development. For me this needs to include social justice and well-being.

This post explores some themes relevant to the achievement of social justice and economic progress in both developed and developing economies. Some economists consider there to be a trade-off between the two, but plenty of progressive thinkers reject this pessimistic outlook. Indeed they are, together, probably two of the essential ingredients of political stability and a sustainable democracy. Continue reading