Tuesday, June 10, 2014

John Weeks On "The Unpredictable Outcome Of A General Wage Increase"

John Weeks' book, Economics of the 1%: How Mainstream Economics Serves the Rich, Obscures Reality and Distorts Policy (Verso, 2014) is a popular, polemical work.

"...By what logic do econfakers conclude that wage increases reduce employment and why is it contradicted by reality? The logic, if one might call it such, is from the same full-employment fantasy world as 'supply and demand,' dissected in Chapter 4. As in that discussion, I have to begin with clear specification of the fakeconomics trade-off hypothesis. It does not assert that a wage increase in a specific company will reduce employment. The precise hypothesis is: 'From an initial position of full employment for an economy that produces only one commodity under conditions of perfect competition, an increase in the real wage will reduce employment.'

A rational person might ask: why on earth state a simple proposition (wage up, employment down) in such an absurdly complex manner? They do so because the proposition is not simple. It is valid only under extremely restricted conditions. The hypothesis begins with the economy as a whole, not individual companies or industries. This reason for this will soon be clear. The full-employment caveat is necessary in order to exclude the effect of the most important determinant of the level of employment and unemployment: the total expenditure, public and private, in the economy as a whole (aggregate demand).

As should be obvious, if the analysis begins in conditions of unemployment, an increase in real wages should contribute to an increase in employment by increasing consumer demand. The econfakers exclude this possibility by starting from full employment (maximum output), so any increase in demand could only cause inflation.

But starting at full employment means that the analysis cannot apply at the level of individual companies except as part of the economy as a whole. This implies that the trade-off hypothesis has no relevance to real-world decisions made in companies about employment levels.

Moving on to the next absurdity, allowing the economy only one output is an unavoidable technical requirement. With only one product, either there is no input or the input is the output itself (which is quite strange when you think about it). The following example reveals why the econfakers enter into such contorted illogic. In an economy with an output that has an input different from itself (e.g., wheat and fertilizer), the result of a wage increase in both industries cannot be predicted. A possible logical (and practical) sequence might be as follows: the higher wage prompts farmers to use more fertilizer to raise yields and make labor more productive. Employment in the production of fertilizer increases, with little change in labor used on farms, so total employment expands. In a real economy with thousands of products, the result of increases and decreases in wages can only be known after the event.

This is no abstract, arcane issue. The unpredictable outcome of a general wage increase can be easily demonstrated using what are call 'input-output' tables. These tables are available via the Internet for most countries of the world. They show the flow of inputs through the productive system, which eventually results in what are called 'final products' - those bought by households and governments, and businesses for investment.

Finally, the trade-off hypothesis requires a competitive economy in which no collusion exists among employers or employees. This condition ensures that the demand for labor varies independent of the supply..., which rules out a feedback from higher wages to employment.

What seemed so simple and obvious - lower wages, cheaper labor, more employment - proves impossible to establish as a general rule. 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." -- John F. Weeks (pages 36-38)

Can you see that the middle part of the above quotation is about the application of the Cambridge Capital Controversy to so-called labor markets?

3 comments:

Blissex said...

«the middle part of the above quotation is about the application of the Cambridge Capital Controversy»

That's based a bit on the confusion: the core of the Cambridge Capital Controversies is that time matters in economics, and one of the less interesting consequences of time is that the distribution of income is not uniquely, solely and perfectly determined by "productivity".

Sraffa's work was just an amusing special case, aimed at showing that even in a neoclassical model with multiple commodities the distribution of income is not determined uniquely, solely and perfectly by "productivity".

The piece you quote just lists some of the usual intellectual dishonesties buried by neoclassical economists in their assumptions, all of which are needed to prove that central truthiness of Economics, that except for government distortion the markets ensure that the income distribution is uniquely solely and perfectly determined by "productivity".

BTW I can't remember the technicalities but I think that the most recent assumptions for neoclassical models are still contradictory and still contain mathematical mistakes but are a bit more general that those reported above.

IIRC they can be "weakened" to infinite goods traded in infinite markets each with infinite identical sellers but with exactly one buyer (or even two) to be the same (the "representative agent") in all markets that extend across all time, plus several others.

It all seems a joke, but if an economist upholds by any means necessary the central truthy of Economics they have a chance at becoming seriously rich thanks to grateful sponsorships.

Powell's memo is not the first of the plans of those sponsors.

Robert Vienneau said...

That is a reference to the Lewis Powell memo of 1971.

Here is a review in Jacobin of Philip Mirowski's book, Never Let A Serious Crisis Go To Waste: How Neoliberalism Survived the Financial Meltdown.

Anonymous said...

American engineer argues there has never been a sound theory of economics: http://www.reddit.com/r/economy/comments/283c5m/economics_unmasked/ critique welcome