Month: December 2020

Book 6, Chapter 2

§1. Labor earnings are not — as some assert — only a function of the “value” of production. They depend on the supply of labor relative to demand for labor.

§2. Workers, like machines, need time to recover from work. The first hours of work are easier than the last hours but wages are paid at the margin (i.e., to motivate those last hours of work), which implies that workers gain much more surplus from their earlier hours of work. That said, some workers (“from Southern climes”) may see higher wages as an incentive to stop working earlier, since they more quickly hit their “earnings target.”

§3. The supply of labor should increase with wages, assuming higher wages increase productivity-enhancing (e.g., good food or entertainment) rather than productivity-weakening (e.g., alcohol and gambling) consumption.

[D]emand and supply exert coordinate influences on wages; neither has a claim to predominance; any more than has either blade of a pair of scissors, or either pier of an arch. Wages tend to equal the net product of labour; its marginal productivity rules the demand-price for it; and, on the other side, wages tend to retain a close though indirect and intricate relation with the cost of rearing, training and sustaining the energy of efficient labour. The various elements of the problem mutually determine (in the sense of governing) one another; and incidentally this secures that supply-price and demand-price tend to equality: wages are not governed by demand-price nor by supply-price, but by the whole set of causes which govern demand and supply (p 442).

§4.

We have seen that the accumulation of wealth is governed by a great variety of causes: by custom, by habits of self-control and of realizing the future, and above all by the power of family affection: security is a necessary condition for it, and the progress of knowledge and intelligence furthers it in many ways. But though saving in general is affected by many causes other than the rate of interest: and though the saving of many people is but little affected by the rate of interest; while a few, who have determined to secure an income of a certain fixed amount for themselves or their family, will save less with a high rate than with a low rate of interest: yet a strong balance of evidence seems to rest with the opinion that a rise in the rate of interest, or demand-price for saving, tends to increase the volume of saving.

…that said, higher interest only gradually attracts more capital since it takes time to reallocate capital from existing investments.

§5. Increases in the supply and productivity of labor and capital (and thus returns to either) lead to increases in national income, for the benefit of all. Land is different because it is fixed in quantity, which means that increased land use by one user leaves less land for others.

§6. Increases in national income benefits factors in proportion to demand for each of those factors. Higher returns to a factor dampen demand for it as cheaper alternatives are investigated, with a long-run result of factor prices tracking their “real” contribution to productivity.

§7. An increase in the supply of a factor will lower returns to that factor and benefit other factors that that combine with that input without lowering their returns. In general, factors will be able to buy as much as their productivity (=wages) implies, with more productive or scarce factors having more “buying power” than less productive or abundant factors.

§8. Do not assume “perfect information” of any factors but labor and capital are always looking for opportunities.

§9. Since capital can also be understood as the embodiment of past labor, it is better to see capital-labor competition as past vs present labor. Greater savings (or patience) will increase the stock of capital, which can increase labor productivity but also displace demand for labor!

§10. Although labor contributes to finishing products on behalf of capital, most wages to labor are advanced by capitalists planning to repay those advances by selling consumption goods and using (new) capital goods.

Capital in general and labour in general co-operate in the production of the national dividend, and draw from it their earnings in the measure of their respective (marginal) efficiencies. Their mutual dependence is of the closest; capital without labour is dead; the labourer without the aid of his own or someone else’s capital would not long be alive. Where labour is energetic, capital reaps a high reward and grows apace; and, thanks to capital and knowledge, the ordinary labourer in the western world is in many respects better fed, clothed and even housed than were princes in earlier times (p 452).

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Book 6, Chapter 1

§1. Marshall’s thoughts on national income are too good to summarise (p 418):

The keynote of this Book is in the fact that free human beings are not brought up to their work on the same principles as a machine, a horse, or a slave. If they were, there would be very little difference between the distribution and the exchange side of value; for every agent of production would reap a return adequate to cover its own expenses of production with wear-and-tear, etc… But as it is, our growing power over nature makes her yield an ever larger surplus above necessaries; and this is not absorbed by an unlimited increase of the population. There remain therefore the questions: What are the general causes which govern the distribution of this surplus among the people? What part is played by conventional necessaries, i.e. the Standard of Comfort? What by the influence which methods of consumption and of living generally exert on efficiency; by wants and activities, i.e. by the Standard of Life? What by the many-sided action of the principle of substitution, and by the struggle for survival between hand-workers and brain-workers of different classes and grades? What by the power which the use of capital gives to those in whose hands it is? What share of the general flow is turned to remunerate those who work (including here the undertaking of ventures) and “wait,” as contrasted with those who work and consume at once the fruits of their endeavours?

Recall that Marshall is writing in 1920, whereas GDP was “invented” in 1934. His points above were (and are) often forgotten by people focussing on the size, rather than the distribution, of GDP.

§2. Marshall delves into historic thinking about labor and capital. He summarises the views of France’s 17th century physiocrats and Malthus as variations on “iron laws” in which capital comes and goes as taxes fall and rise, and labor supply rises and falls as food is plentiful or scarce, respectively. From these views came the idea of “laisser faire, laisser passer“, which advises the King to raise revenues by taxing landowners’ surplus rents (capital and labor having no surplus in equilibrium) while leaving everyone else to do what they like (laissez faire is the expression we’re more familiar with). Adam Smith, David Ricardo, et al. did not agree with these “laws;” instead, they focussed on incentives, e.g., higher wages lead to greater effort, not more children. These thoughts had evolved by Marshall’s time into an empirical investigation of how higher productivity could cause (permanently) higher wages, thereby introducing questions of distribution among “rich” and “poor” labor.

§3. To explain distribution, Marshall begins with an imaginary world in which capital and resources are “free,” and everyone can do any job. In this world, wages and prices are directly proportional to effort (labor theory of value), and increases in labor productivity make everyone better off, i.e., consuming more goods for the same labor input.

§4. Specialisation does not change these relations, since anyone can change trades (with some time), but it does increase the diversity of goods/services on offer.

§5. Population growth brings an increase in demand and diminishing returns on land-based food production. With higher prices for food, land “rents” will grow faster than returns to labor or capital.

§6. By adding back obvious factors affecting labor (mobility, tradition, law and morality), Marshall approaches realism, and unequal returns to labor emerge.

§7. Marshall adds realistic assumptions on capital, i.e., that capital is limited and “lumpy” (not matching each unit of labor). Now managers must match labor and capital “on the margin,” in two ways. First, each labourer’s additional production must exceed their wages. Second, management should decide based on marginal rather than average values. Although economists had been advocating “marginal thinking” for several decades before Marshall’s Principles, he still played an important role in explaining how such thinking was useful for making business decisions.

§8. Interest rates push capital from wasteful to useful investments, since (in)efficient investments (lose) make money.

§9. In sum, “every agent of production, land, machinery, skilled labour, unskilled labour, etc., tends to be applied in production as far as it profitably can be. If employers, and other business men, think that they can get a better result by using a little more of any one agent they will do so” p 432.

§10. The “net” in national income reflects replacement of worn machines plus a fraction of the enduring contribution of new machines, but excludes “income’ (benefits) derived from common practices of individuals, i.e.,

Thus, unless anything is said to the contrary, the services which a person renders to himself, and those which he renders gratuitously to members of his family or friends; the benefits which he derives from using his own personal goods, or public property such as toll-free bridges, are not reckoned as parts of the national dividend, but are left to be accounted for separately (p 434).

This last statement will be familiar to anyone critical of the exclusion of “self-production” or “a mother’s work” from GDP statistics. It’s also unusual (relative to GDP discussions) in calling for those factors to be accounted for separately.

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics from institutional induction to mathematical deduction.

Book 5, Chapter 15

§1. Supply and demand are most likely to change when considering spacial and temporal elements. In the short run, supply capacities are fixed such that an increase in demand means higher prices. In the longer run, capacities can adjust to meet demand.

§2. The demands for complementary goods and production inputs are interdependent.

§3. Producers with access to “the gifts of nature” can earn exceptional rents from their cost advantage. On the other hand, inefficiently employed land or labor will mean less-than-normal profits.

§4. An increase in output in the short run generally leads to higher unit prices, but an increase over the long run might result in lower prices, due to the possibility of changing production technology. For dominant producers (with some measure of monopoly power), an increase in supply might lead to lower prices, which they will want to avoid.

§5. When seeking to promote “maximum satisfaction” (optimal social welfare), it is important to increase (decrease) supply where increasing (decreasing) returns to scale are present. Monopolists should therefore be encouraged (constrained) in their production choices.

When defining “value,” Ricardo has been twice misinterpreted. Some claim his cursory review of demand was dismissive when Ricardo thought demand’s importance too obvious to discuss. Second, Marx assumed Ricardo was only concerned with the quantity of labor used in production when Ricardo included labor quality, capital and timing in understanding the supply side of value.

This post is part of a series in the Marshall 2020 Project, i.e., an excuse for me to read Alfred Marshall’s Principles of Economics (1890 first edition/1920 eighth edition), which dominated economic thinking until Van Neumann and Morgenstern’s Theory of Games and Economic Behaviour (1944) and Samuelson’s Foundations of Economic Analysis (1946) pivoted economics away from institutional induction and towards mathematical deduction.