"The classical theory of employment - supposedly simple and obvious - has been based, I think, on two fundamental postulates, though practically without discussion, namely:
I. The wage is equal to the marginal product of labour
That is to say, the wage of an employed person is equal to the value which would be lost if employment were to be reduced by one unit (after deducting any other costs which this reduction of output would avoid); subject to the qualification that the equality may be disturbed in accordance with certain principles, if competition and markets are imperfect.
II. The utility of the wage when a given volume of labour is employed is equal to the marginal disutility of that amount of employment.
That is to say, the real wage of an employed person is that which is just sufficient (in the estimation of the employed persons themselves) to induce the volume of labour actually employed to be forthcoming; subject to the qualification that the equality for each individual unit of labour may be disturbed by combination between employable units analogous to the imperfections of competition which qualify the first postulate. Disutility must be here understood to cover every kind of reason which might lead a man, or a body of men, to withhold their labour rather than accecpt a wage which has to them a utility below a certain minimum...
...Subject to these qualifications, the volume of employed resources is duly determined, according to the classical theory, by the two postulates. The first gives us the demand schedule for employment, the second gives us the supply schedule; and the amount of employment is fixed at the point where the utility of the marginal product balances the disutility of the marginal employment." -- J. M. Keynes (1936). The General Theory of Employment Interest and Money
Here's Hazlitt, with my interjections, revealing an ignorance of the theory he wants to defend:
"'The classical theory of employment - supposedly simple and obvious - has been based,' Keynes thinks, 'on two fundamental postulates, though practically without discussion' (p. 5). The first of these is 'I. The wage is equal to the marginal product of labor.' (His italics, p. 5)
This postulate is correctly and clearly stated. It is not, of course, part of the classical theory of employment. That adjective should be reserved, in accordance with custom and in the interests of precision, for theory prior to the subjective-value or 'marginalist' revolution of Jevons and Menger.”
Hazlitt is correct (and unoriginal) in asserting that Keynes’ usage of “classical” is confusing.
”But the postulate has become part of 'orthodox' theory since its formulation by the 'Austrian' school and, particularly in America, by John Bates Clark. Having written this simple postulate, Keynes adds eight lines of 'explanation' which are amazingly awkward and involved and do more to obfuscate than to clarify.”
Let me put aside arguments about who originated the theory of marginal productivity. Keynes’ qualitifications are obviously getting at imperfections of competition. For example, if the firm is a monopolist in the product market, the wage, when the firm is in equilibrium, is equal to the marginal value product of labor, not the value of the marginal product of labor. Because Hazlitt is incompetent, he finds Keynes’ qualifications “awkward”.
”He then proceeds to state the second alleged 'fundamental postulate' of the 'classical theory of employment,' to wit: ‘II. The utility of the wage when a given volume of labor is employed is equal to the marginal disutility of that amount of employment.' (His italics, p. 5.) He adds, as part of his explanation: 'Disutility must be here understood to cover every kind of reason which might lead a man, or a body of men, to withhold their labor rather than accept a wage which had to them a utility below a certain minimum' (p. 6).
'Disutility' is here so broadly defined as to be almost meaningless. It may be seriously doubted, in fact, whether this whole second 'fundamental postulate,' as Keynes frames and explains it, is or ever was a necessary part of the 'classical' or traditional theory of employment. Keynes does name and (later) quote A. C. Pigou as one whose theories rested on it. Yet it may be seriously questioned whether this 'second postulate' is representative of any substantial body of thought, particularly in the complicated form that Keynes states it.”
Keynes is here describing the neoclassical theory of the worker trading off leisure with the consumption he can purchase with his wages. Figure 1, which formulates the theory in terms of the utility of leisure, rather than the disutility of labor, may remind you of the textbook theory. Once again, Hazlitt’s ignorance of varieties of this theory reveals nothing more than his incompetence.
|Figure 1: Equilibrium Of The Utility-Maximizing Worker|
”The 'orthodox' marginal theory of wages and employment is simple. It is that wage-rates are determined by the marginal productivity of workers; that when employment is 'full' wage-rates are equal to the marginal productivity of all those seeking work and able to work; but that there will be unemployment whenever wage-rates exceed this marginal productivity.”
Note that here Hazlitt describes the marginal productivity of labor as being “determined” for a specific volume of labor, the “full” employment level. When the level of employment of labor is less than “full”, the wage can still be equal to the marginal productivity of workers, as calculated for that lower level of employment. Obviously, then, the equality of the wage and the marginal productivity of labor is not enough to determine either wages or employment. Some other relationship must be put forward, in neoclassical theory, to help determine these quantities. That is where the theory of the supply of labor, summarized in the figure, comes in.
“Wage-rates may exceed this marginal productivity either through an increase in union demands or through a drop in this marginal productivity. (The latter may be caused either by less efficient work, or by a drop in the price of, or demand for, the products that workers are helping to produce.)
That is all there is to the theory in its broadest outlines. The 'second postulate,' in the form stated by Keynes, is unnecessary and unilluminating.”
I have shown the role the second postulate fills in neoclassical theory. Hazlitt, being incompentent, isn’t able to even count variables and equations.
”Subject to certain qualifications, Keynes contends, 'the volume of employed resources is duly determined, according to the classical theory, by the two postulates [which Keynes has named]. The first gives us the demand schedule for employment; the second gives us the the supply schedule; and the amount of employment is fixed at the point where the utility of the marginal product balances the disutility of the marginal employment' (p. 6).
Is this indeed the 'classical' theory of employment? The first postulate - that 'the wage is equal to the marginal product of labor' - does not merely give us the 'demand schedule' for labor; it tells us the point of intersection of both the 'demand schedule' and the 'supply schedule.' The demand schedule for workers is the wage-rate that employers are willing to offer for workers.”
In neoclassical theory, this schedule “is the wage-rate that employers are willing to offer workers” at each level of employment within the possible range of levels. The ‘first postulate’ can, at best, determine the schedule, but not the location at which the labor market is in equilibrium.
”The 'supply schedule' of workers is fixed by the wage-rate that workers are willing to take. This is not determined, for the individual worker, by the 'disutility' of the employment - at least not if 'disutility' is used in its common-sense meaning. Many an individual unemployed worker would be more than willing to take a job at a rate below a given union scale if the union members would let him, or if the union leader would consent to reduce the scale." -- Henry Hazlitt, The Failure of the "New Economics": An Analysis of the Keynesian Fallacies, D. Van Nostrand Company, 1959.
Hazlitt just does not understand the theory he wants to defend.
As far as I am concerned, Hazlitt’s entire book attacking Keynes is as incompetent as the above. It might take me some time to further document this claim, if anybody wants me to, since my local library has apparently disposed of the above quoted book. (I copied from an old Usenet post of mine to create this post.)