Sunday, July 13, 2008

Ricardo And The Iron Law Of Wages

1.0 Introduction
The interpretation of classical economists by historians of economic thought is an area of intense debate that Sraffians have contributed to. Sraffians claim that Classical economics has a distinct and coherent approach to economics. And that the theory of value and distribution within this theory has a different structure and role than within so-called neoclassical theory. I want to focus here particularly on the interaction of the Classical theory of wages and the theory of value. I think Ricardo's treatment of wages is a particularly controversial topic in this interpretation. This post notes a couple of difficulties for understanding Ricardo on wages. I developed it in response to an essay on the iron law of wages that the author e-mailed me.

2.0 Contending Interpretations of Classical Political Economy
As usual, I deny much, if any, originality. But I am going to be vague on references. As I understand it, Sraffa and Dobb's introduction in Sraffa (1951) was not initially perceived as offering a novel interpretation of Ricardo. Bharadway (1989) and Garegnani (1984) offer other statements of the Sraffian interpretation. Stirati (1994) focuses specifically on the theory of wages.

Samuel Hollander, I think, has the highest stature of those today arguing, pace Sraffa, for the continuous evolution of Classical economics into Neoclassical economics. I take Hollander to be continuing the line of argument to be found in Appendix I of Alfred Marshall's Principles of Economics. Despite my respect for Hollander, I have yet to thoroughly read any of his massive tomes of scholarship (e.g., Hollander 1979). My acquaintance with Hollander's primary work is mainly in the journal literature, such as his tournament with Giancarlo de Vivo in the mid 1980s and later Cambridge Journal of Economics over de Vivo's discovery in Robert Torrens of something much like Sraffa's standard commodity.

Others have entered into this controversy, while taking positions that I think differ from both Sraffian positions and Hollander's. I mention Carvale and Tosato (1980), which, as I recall, contains dynamic models which formalize an interpretation of Ricardo's views on wages. I also like Peach (1993), which surveys other interpretations and offers Peach's own reading of Ricardo.

2.0 Sraffian Interpretation
The givens in Ricardo's theory of value include, the level of effective demand for the output of each industry and the technique in use. From these givens, the capital equipment that must be advanced in each industry is also known. The level of wages is also among the givens of the theory of value. The rate of profit then is roughly the ratio of the surplus to the advances, including wages.

A problem arises here. The surplus output of the economy, the commodities on which wages are spent, and the capital equipment are each heterogeneous collections. How can these quantities be treated as commensurate? Ricardo's corn-ratio model, the labor theory of value, and Sraffa's standard commodity are all approaches to address this issue.

So the Sraffians claim that the Classical theory of value makes sense, at least formally if the natural rate of wages is exogenous to the theory of value, albeit still to be explained within Political Economy. This is not a novel position:
"Therefore the foundation of modern political economy, whose business is the analysis of capitalist production, is the conception of the value of labour-power as something fixed, as a given magnitude-as indeed it is practice in each particular case. The minimum of wages therefore correctly forms the pivotal point of Physiocratic theory. They were able to establish this although they had not yet recognised the nature of value itself, because this value of labour-power is manifested in the price of the necessary means of subsistence, hence in a sum of definite use-values. Consequently, without being in any way clear as to the nature of value, they could conceive the value of labour-power, so far as it was necessary to their inquiry, as a definite magnitude. If moreover they made the mistake of conceiving this minimum as an unchangeable magnitude-which in their view is determined entirely by nature, and not by the stage of historical development, which is itself a magnitude subject to fluctuations-this in no way affects the abstract correctness of their conclusions, since the difference between the value of labour-power and the value it creates does not at all depend on whether the value is assumed to be great or small." -- Karl Marx (1963) p. 45

4.0 The Natural Wage Outside The Stationary State
I have pointed to a theory of the natural level of prices above, where the natural level of prices is to be contrasted with market prices. Adam Smith uses the metaphor of centers of gravitation for the natural levels. They attract market prices. Ricardo focuses his analysis on natural levels. One might think the given wage in Ricardo's theory of value and distribution must be the natural rate of wages.

This quote seems to say that the natural rate of wages is defined to be the wage that prevails in the stationary state:
"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 increased capital gives 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." -- David Ricardo (p. 94-95 in Sraffa 1951)
And Ricardo says that the stationary state is far distant:
"But if our progress should become more slow; if we should attain the stationary state, from which I which I trust we are far distant, then will the pernicious nature of these [Poor] laws become more manifest and alarming; and then, too, will their removal be obstructed by many additional difficulties." -- David Ricardo (p. 109 in Sraffa 1951)
So Ricardo seems to be inconsistent. He thinks that the system of natural prices and wages is explanatory for empirical tendencies at any moment, that the stationary state is far distant, and the natural rate of wages is defined only for the stationary state. Maybe he has different theories for the long run and the intermediate run, so to speak.

5.0 The Iron Law of Wages and Ricardo
As I understand it, the iron law of wages is that wages tend towards the natural rate of wages, defined as physiological subsistence. Outdated teaching in the history of economic thought is that Ricardo held to this iron law.

Ricardo clearly states that natural rate of wages is not defined solely by physiological requirements. It includes habits and social norms:
"It is not to be understood that the natural price of labour, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country, and very materially differs in different countries. It essentially depends on the habits and customs of the people. An English labourer would consider his wages under their natural rate, and too scanty to support a family, if they enabled him to purchase no other food than potatoes, and to live in no better habitation than a mud cabin; yet these moderate demands of nature are often deemed sufficient in countries where 'man's life is cheap', and his wants are easily satisfied. Many of the conveniences now enjoyed in an English cottage, would have been thought luxuries in an earlier period of our history." -- David Ricardo (p. 96-67 in Sraffa 1951)
Hystersis arises in this approach. If the market rate is above the natural wage for a long time, the norms and habits embodied in workers' consumption can change. In a sense, the natural level of wages moves towards the market wage, as well as vice-versa. Ricardo draws on this idea for some policy ideas:
"The friends of humanity cannot but wish that in all countries the labouring classes should have a taste for comforts and enjoyments, and that they should be stimulated by all legal means in their exertions to procure them. There cannot be a better security against a superabundant population. In those countries, where the labouring classes have the fewest wants, and are contented with the cheapest food, the people are exposed to the greatest vicissutudes and miseries. They have no place of refuge from calamity; they cannot seek safety in a lower station; they are already so low, that they can fall no lower..." -- David Ricardo (p. 100-101 in Sraffa 1951)
You can see the same idea later in John Stuart Mill:
"It would, however, be of little avail that either or both these measures of relief [emigration for colonization and something like homesteading] should be adopted, unless on such a scale as would enable the whole body of hired labourers remaining on the soil to obtain not merely employment, but a large addition to the present wages - such an addition as would enable them to live and bring up their children in a degree of comfort and independence to which they have hitherto been strangers. When the object is to raise the permanent condition of a people, small means do not merely produce small effects, they produce no effect at all. Unless comfort can be made as habitual to a whole generation as indigence is now, nothing is accomplished..." J. S. Mill (1848, Book II, Chapter XIII)
How can Ricardo's words be reconciled with the claim that Ricardo held the iron law? My preferred approach is to reject the claim. Ricardo did not endorse the iron law of wages.

This raises the question of who came up with the iron law of wages, if it was not Ricardo. Apparently the "Iron Law" was named by Ferdinand Lassalle. Stirati (1994) reads Marx as here saying that Malthus was the law's creator:
"It is well known that nothing of the 'iron law of wages' is Lassalle's except the word 'iron' borrowed from Goethe's 'great, eternal iron laws'. The word 'iron' is a label by which the true believers recognize one another. But if I take the law with Lassalle's stamp on it, and consequently in his sense, then I must also take it with his substantiation for it. And what is that? As Lange already showed, shortly after Lassalle's death, it is the Malthusian theory of population (preached by Lange himself). But if this theory is correct, then again I cannot abolish the law even if I abolish wage labor a hundred times over, because the law then governs not only the system of wage labor but every social system. Basing themselves directly on this, the economists have been proving for 50 years and more that socialism cannot abolish poverty, which has its basis in nature, but can only make it general, distribute it simultaneously over the whole surface of society!" - Karl Marx (1875)

As I understand it, the formal mathematics of the theory of value merely requires the wage to be given. But, as my email correspondent points out, if the wage is above subsistence, workers can save and class structure of capitalism will not be reproduced.

As I understand it, in the formal mathematics of the theory of value, the wage, for example, is taken as given. The formalism does not require the wage to be any particular value between zero and some maximum. But, as my email correspondent points out, if the wage is appreciably is above subsistence, workers can accumulate capital before retirement age and the class structure of capitalism will not be reproduced.

Updated 19 July 2008

  • Krishna Bharadwaj (1989) Themes in Value and Distribution: Classical Theory Reappraised, Unwin Hyman
  • Giovanni A. Caravale and Domenico A. Tosato (1980) Ricardo and the Theory of Value, Distribution and Growth, Routledge & Kegan Paul
  • P. Garegnani (1984) "Value and Distribution in the Classical Economists and Marx", Oxford Economic Papers, V. LXXIII: 291-325
  • Samuel Hollander (1979) The Economics of David Ricardo, Toronto: University Press
  • Karl Marx (1875) Critique of the Gotha Program
  • Karl Marx (1963) Theories of Surplus Value, Part I (Trans. by E. Burns), Progress Publishers
  • John Stuart Mill (1848) Principles of Political Economy
  • Terry Peach (1993) Interpreting Ricardo, Cambridge University Press
  • Piero Sraffa (editor) (1951) The Works and Correspondence of David Ricardo: Volume I: On the Principles of Political Economy and Taxation, Cambridge University Press
  • Antonella Stirati (1994). The Theory of Wages in Classical Economics: A Study of Adam Smith, David Ricardo and Their Contemporaries (trans. by Joan Hall), Edward Elgar

1 comment:

Simon J. Cook said...

iron law of wages:

for what it is worth, Marshall insisted that Ricardo never subscribed to an iron law of wages. Marshall attributed its modern formulation to Lassalle, but explained that Lassalle was drawing upon Malthus, not Ricardo. But Marshall further insisted that Malthus as well as Ricardo knew that wages was fixed at a minimum level by habits and customs rather than subsistence, and that the real originators of the idea that wages tend naturally to a subsistence level were the physiocrats.

The above, or most of it, can be found in the introduction to the theory of distribution in Book VI of Marshall's Principles of Economics.