Monday, July 27, 2015

Labor Reversing Without Capital: An Example

Figure 1: Skilled Labor Hired by Firms per Unit Output

1.0 Introduction

This example is from Opocher and Steedman (2015). They present many examples in which the reader is expected to work them out, as illustrated in this post.

This is an example in which cost-minimizing firms desire to hire more labor (of a specific type) for an increased wage, around a specific wage. This example is of a firm producing a single commodity from inputs of specific types of land and specific types of labor. No produced capital goods exist in this example, and the interest rate is assumed to be zero. Yet perverse behavior arises on the demand side of markets for factors of production anyway - where results are called perverse merely if they violate neoclassical intuitions shown to be mistaken half a century ago. The most complicated aspect of this example is that some techniques of production are specific to specific types of land.

2.0 Indirect Average Cost Functions

Consider a firm that produces widgets from inputs of skilled labor, unskilled labor, and land of one of two types. Suppose the price of widgets is unity. Define:

  • pα is the rent for alpha-type land.
  • pβ is the rent for beta-type land.
  • w1 is the wage for unskilled labor.
  • w2 is the wage for skilled labor.

The indirect average cost function for widgets produced on land of type alpha is:

cα(pα, w1, w2) = (1/2)[(w1 pα)1/2 + (w1 w2)1/2
+ (w2 pα)1/2]

The indirect average cost function for widgets produced on land of type beta is:

cβ(pβ, w1, w2) = (3/5)(w1 pα)1/2 + (3/10)(w1 w2)1/2
+ (11/20)(w2 pα)1/2

The indirect average cost function shows the average cost of producing each widget, when each firm in the industry is producing the cost-minimizing quantity. That is, each firm is producing at the point where the marginal cost and average cost of production of a widget is the same. Assume all firms face the same indirect average cost function. If a positive rate of (accounting) profit was being earned by any firm, the rate of profit would show up in the arguments of the indirect average cost function for that firm.

These indirect average cost functions are homogeneous of the first degree. For the indirect average cost function for land of type alpha, this property is expressed as:

cα(apα, aw1, aw2) = a cα(pα, w1, w2)

This a traditional assumption for cost functions.

Consider the indirect average cost function for a specific type of land. That type of land, unskilled labor, and skilled labor are substitutes. No inputs are complements in this example. In other words, the off-diagonal elements of the Hessian matrices formed from each indirect average cost function are all positive. The elements along the principal diagonal of each Hessian matrix are negative.

3.0 The Wage-Wage Frontier

Consider a long run equilibrium of the firms in which pure economic profits have been competed away and no firm is making a loss. Perhaps, the prospect of firms entering or exiting the industry has caused this situation to arise. Furthermore, suppose rents for both types of land happen to be unity. (Without this assumption, this example would have two more degrees of freedom.) If firms are producing on a given type of land, the indirect average cost function for that type of land will be equal to unity. For alpha type land, one has:

1 = cα(1, w1, w2)


w1, α = [(2 - w21/2)/(1 + w21/2)]2

As shown in Figure 2, given the type of land employed, the wage for unskilled labor is a declining function of the wage for skilled labor. The maximum wage for unskilled labor, 4 widgets per person-year, corresponds to skilled labor working for free. Symmetrically, the maximum wage for skilled labor likewise corresponds to unskilled labor working for free.

Equating the indirect average cost function for production on land of type beta yields another trade-off in long run equilibrium between the wages of unskilled and skilled labor.

w1, β = [(20 - 11 w21/2)/(12 + 6 w21/2)]2

When land of type beta is used, the maximum wage for unskilled labor is 2 7/9. The maximum wage for skilled labor is 3 37/121.

Figure 2: Wage-Wage Curves and the Frontier

For some combination of wages of skilled and unskilled labor, firms will be indifferent between producing widgets with land of type alpha and type beta. The cost-minimizing technique at these wages, on each type of land, is equally cheap. These combinations can be found by equating the wages of unskilled labor for the expressions above. After some manipulation, one obtains the equation:

5 w2 - 9 w21/2 + 4 = 0

This equation can be factored:

(w21/2 - 1)(5 w21/2 - 4) = 0

Firms will thus be indifferent to the type of land used in production for ordered pairs of wages of unskilled and skilled labor, (w1, w2), of (1/4, 1) and (4/9, 16/25).

Firms produce widgets on land of type alpha for wages for skilled labor between zero and 16/25, and for wages of skilled labor between one and four. For wages for skilled labor between 16/25 and four, firms produce widgets on land of type beta. The outer frontier allows one to determine the wage of unskilled labor for any feasible wage for skilled labor, given the model assumptions. As well soon be apparent, this is not an example of reswitching. The overall indirect average cost function is almost always differentiable. It is not differentiable only at the two points found by the construction of the outer frontier.

4.0 Land and Labor

We have seen that when rents are unity, long run equilibrium of the firm necessitates that the wages of unskilled labor is a declining function of the wages of skilled labor. Shepherd's lemma can be used to find the coefficients of production for each feasible combination of wages of unskilled and skilled labor. The quantity of each input the firm wants to hire per unit output is the derivative of the indirect average cost function with respect to the price of that input. Thus, when land of type alpha is used, the number of acres of land employed per unit output of widgets is:

tα(w1, w2) = (1/4)(w11/2 + w21/2)

The number of acres of land of type beta per unit output of widgets, when land of that type is used, is:

tβ(w1, w2) = (1/40)(12 w11/2 + 11 w21/2)

In what I hope is obvious notation, person-years of unskilled labor employed per unit output of widgets is, depending on the type of land used:

l1, α(w1, w2) = (1/4)(1 + w21/2)/(w11/2)
l1, β(w1, w2) = (3/20)(2 + w21/2)/(w11/2)

Finally, person-years of skilled labor employed per unit output of widgets is given by one of the following two functions of wages:

l2, α(w1, w2) = (1/4)(1 + w11/2)/(w21/2)
l2, β(w1, w2) = (1/40)(6 w11/2 + 11)/(w21/2)
5.0 Bringing it all Together

The above algebra can be used to generate various graphs. Figure 1 shows person-years of skilled labor firms desire to hire per unit output. As one moves to the right in the figure, the wage of skilled labor rises and the wage of unskilled labor falls. But at every point in the figure, the wages of the two types of labor are such as to maintain wages as on the outer frontier in Figure 2. That is, firms are minimizing costs, and the output price and input prices are such as to enforce the equilibrium condition that no pure economic profits are available in this industry.

Figure 3 shows the analogous graph for unskilled labor. The point for wages of 4/9 widgets per person-years and 16/25 widgets per person-year for unskilled and skilled labor, respectively, is emphasized. At any point to the left, wages for unskilled labor are higher, and wages for skilled labor are lower. And an infinitesimal variation around this point is associated with firms wanting to employ unskilled labor more intensively when their wage is relatively higher.

Figure 3: Unskilled Labor Hired by Firms per Unit Output

Reswitching of techniques arises when one technique of production is cost-minimizing at, say, a high and low wage but not at an intermediate wage. A technique of production is specified by four coefficients of production in this example. The amount of skilled labor and unskilled labor hired per unit output are two of these coefficients. The acres of land of each type rented per unit output are the other two. The latter two coefficients of production obviously vary, depending on which type of land can be used in a cost-minimizing technique. In fact, the coefficients of production for the type of land not employed is zero. As can be seen in Figures 1 and 3, the coefficient of productions for the two types of labor vary monotonically with relative wages, given the type of land employed.

At one of the two switch points highlighted in Figure 2, two techniques of production are cost-minimizing. (This is the definition of a switch point.) In one technique, one type of land is used. And in the other, the other type of land is used. But a different pair of techniques of production is cost-minimizing at the other switch point. The coefficients of production vary among, for example, the cost-minimizing techniques in which alpha-type land is used at a switch point. Hence, as noted, no reswitching of techniques exists in this example.

6.0 Conclusion

This example has cost-minimizing firms in equilibrium in a single industry. Price and quantity relationships among factors of production have been analyzed, where factors of production consist of land of two types and labor of two types. Quantity relationships have been presented in terms of inputs per unit output for a firm. For simplicity, only the case in which the interest rate is zero and rents of land per acre are unity has been considered. When beta type land is adopted, more acres are cultivated for alpha-type land, for the same level of output. Thus, land has a higher proportion of total unit cost when beta-type land is used. Both skilled and unskilled labor are a lower proportion of total unit cost (as seen in Figures 1 and 3) than they would be if alpha type land was employed. A wage has been found for unskilled labor in which a higher relative wage for unskilled labor is associated with firms desiring to hire more unskilled labor per unit output. And a different relative wage for skilled labor has been found with the analogous property.

I wonder whether an example can be found with a continuum of types of land in which the analog of Figures 1 and 2 come out as continuous U-shaped curves.

So much for explaining wages and employment by well-behaved supply and demand curves in competitive labor markets.

  • Opocher, Arrigo and Ian Steedman (2015). Full Industry Equilibrium: A Theory of the Industrial Long Run, Cambridge University Press

Wednesday, July 15, 2015

Locke's Caveats To His Labor Theory Of Property

1.0 Introduction

A couple of months ago, I read John Locke's Second Treatise of Government. He has a caveat on his theory of property I did not expect, as well as one I did. The caveat I did not expect involves the unjustness of acquiring more than you can use and wasting it. But Locke thought it allowable to have more than you can use, as long as you did not waste it. Ultimately, he justifies such superfluous property by claiming it will lead to economic development and benefit the community as a whole.

I suppose one can read Locke as a defense of British and American conquest of the autochthonous peoples in the Americas. They held the land in common, but were not using it well, as least from a bourgeois perspective.

I prefer to draw an analogy to socialism. Property in possessions more than used in everyday living is justified by thinking of that property as held for the benefit of the commonwealth, so to speak. (For the purpose of this post, I put aside any qualms I have about Robinsonades.)

2.0 The Labor Theory of Property

I suppose this is the most famous statement of justification of ownership on the basis of a right to the fruits of one's labor:

Sect 27. Though the earth, and all inferior creatures, be common to all men, yet every man has a property in his own person: this no body has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his. Whatsoever then he removes out of the state that nature hath provided, and left it in, he hath mixed his labour with, and joined to it something that is his own, and thereby makes it his property.

Locke begins talking about the ownership of food gained through hunting and gathering. Land is held in common. "Thus in the beginning all the world was America" (Sect. 49). Locke then transitions to ownership of land. He argues that in such a more complex society, one can trace back commodities to dated labor embodied over many activities in the past. The labor embodied in bread includes the labor of the baker, the miller, the farmer, the manufacturer of tools for the use of the farmer, etc. This view of embodied labor (in Sections 42 and 43) was later echoed in the labor theory of value.

3.0 First Caveat: "Enough, and as Good Left"

From secondary literature, I knew that Locke justified the enclosure of common lands into private property only if what was left still was as good as before:

Sect. 33. Nor was this appropriation of any parcel of land, by improving it, any prejudice to any other man, since there was still enough, and as good left; and more than the yet unprovided could use. So that, in effect, there was never the less left for others because of his enclosure for himself.

He writes about, for example, the unjustness of denying somebody a drink from a river when the river would still flow on undiminished.

4.0 Second Caveat: No Waste of Superfluity

I was not previously aware that, in justifying private property, Locke condemned wasting more than your share:

Sect. 31. It will perhaps be objected to this, that if gathering the acorns, or other fruits of the earth, &tc. makes a right to them, then any one may ingross as much as he will. To which I answer, Not so. The same law of nature, that does by this means give us property, does also bound that property too. God has given all things richly, 1 Tim. vi. 12. is the voice of reason confirmed by inspiration. But how far has he given it us? To enjoy as much as any one can make use of to any advantage of life before it spoils, so much he may by his labour fix a property in: whatever is beyond this, is more than his share and belongs to others. Nothing was made by God for man to spoil or destroy.

And again:

Sect. 37. ...Before the appropriation of land, he who gathered as much as the wild fruit, killed, caught, or tamed, as many of the beasts, as he could; he that so imployed his pains about any of the spontaneous products of nature, as any way to alter them from the state which nature put them in, by placing any of his labour on them, did thereby acquire a property in them: but if they perished, in his possession, without their due use; if the fruits rotted, or the venison putrified, before he could spend it, he offend against the common law of nature, and was liable to be punished; he invaded his neighbor's share, for he had no right, farther than his use called for any of them, and they might serve to afford him conveniences of life.

This is obviously not a position to end at if you are justifying property rights in the rising bourgeois society. Locke caveats his caveat by arguing that you are not wasting more than your share if you hold the extra in goods that do not waste away quickly, whether they be useful or pretty baubles:

Sect. 46. ...He was only to look, that he used them before they spoiled, else he took more than his share, and robbed others. And indeed it was a foolish thing, as well as dishonest, to hoard up more than he could make use of. If he gave away a part to any body else, so that it perished not uselessly in his possession, these also he made use of. And if he also bartered away plums, that would have rotted in a week, for nuts that would last good for his eating a whole year, he did not injury; he wasted not the common stock; destroyed no part of the portion of goods that belonged to others, so long as nothing perished uselessly in his hands. Again, if he would give his nuts for a piece of metal, pleased with its colour; or exchange his sheep for shells, or wool for a sparkling pebble or a diamond, and keep those by him all his life he invaded not the right of others, he might heap up as much of these durable things as he pleased; the exceeding of the bounds of his just property not lying in the largeness of his possession, but the perishing of any thing uselessly in at it.

Locke argues that the ability to accumulate money through commerce leads to owners developing their property:

Sect. 48. And as different degrees of industry were apt to give men possessions in different proportions, so this invention of money gave them the opportunity to continue and enlarge them: for supposing an island, separate from all possible commerce with the rest of the world, wherein there were but an hundred families, but there were sheep, horses and cows, with other useful animals, wholesome fruits, and land enough for corn for a hundred thousand times as many, but nothing in the island, either because of its commonness or perishableness, fit to supply the place of money; what reason could any one there to enlarge his possessions beyond the use of his family, and a plentiful supply to its consumption, either in what their own industry produced, or they could barter for the perishable, useful commodities, with others? Where there is not some thing, both lasting and scarce, and so valuable to be hoarded up, there men will not be apt to enlarge their possessions of land, were it never so rich, never so free for them to take: for I ask, what would a man value ten thousand, or an hundred thousand acres of excellent land, ready cultivated, and well stocked too with cattle, in the middle of the inland parts of America, where he had no hopes of commerce with other parts of the world, to draw money to him by the sale of the product?

Locke's defense of private property reminds me of Jesus's parable of the talents (Matthew 25). You should use your property for the benefit of humankind:

Sect. 37. ...To which let me add, that he who appropriates land to himself by his labour, does not lessen, but increase the common stock of mankind: for the provisions serving to the support of human life, produced by one acre of increased and cultivated land, are (to speak much within compass) ten times more than those which are yielded by an acre of land of an equal richness lying waste in common. And therefore he that incloses land, and has a greater plenty of the conveniences of life from ten acres, than he could have from an hundred left to nature, may truly be said to give ninety acres to mankind: for his labour now supplies him with provisions out of ten acres, which were but the product of an hundred lying in common...
5.0 Other Subjects in Locke's Tract

All of the above quotes are from Chapter 5 of Locke's Second Treatise. This book contains nineteen chapters, and treats many other topics. These include a recap of the first treatise, which presumably refutes the claims of Sir Robert Filmer that:

  • God gave Adam property in all the earth.
  • And current monarchs own their countries through their descent from Adam.

Locke praises William III, the victor of the Glorious Revolution. He also treats of the state of nature, in which humans are free. And they give up that freedom in a social contract so as to end the war of all against all. But, if rulers:

become destructive of these ends, it is the Right of the People to alter or to abolish [the government], and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. (America's Declaration of Independence)

I find the start of Chapter 13, as well as other passages (e.g., Sect. 225) echoed in the declaration. Other topics include natural rights, war, slavery, and parental rights.

  • John Locke, Second Treatise of Government (1690).