Preliminary survey of distribution, continued

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).


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.

Author: David Zetland

I'm a political-economist from California who now lives in Amsterdam.

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