But that wasn't the issue in this protest - this was a protest of Wal-Marts wage levels independent of any legislative action (indeed, it spanned 15 cities so it was obviously much more than just the D.C. minimum wage issues).
It's very bizarre and illiberal, I think, to browbeat low-income workers simply for wanting to enjoy some of the surplus they produce above their reservation wage the way Don did. Not everyone is a marginal worker. I'm not even an especially pro-union guy, but I'm not going to write a letter to the editor and get mad about someone else's pay negotiations.
So I commented on the post with this quote from Adam Smith:
"Our merchants and master-manufacturers complain much of the bad effects of high wages in raising the price, and thereby lessening the sale of their goods both at home and abroad. They say nothing concerning the bad effects of high profits. They are silent with regard to the pernicious effects of their own gains. They complain only of those of other people."Don responded with a common misperception that I thought I'd address. He wrote:
"Daniel: You do realize, I trust, that Smith was there complaining about the monopoly privileges granted by government to domestic suppliers - privileges justified by mercantilist principles."This is actually not true. This comes from chapter 9 of Wealth of Nations, in the section of the book where he's talking about factor income and price theory. This is in Book I - you don't get the discussion of the problems with mercantilist privileges until Book IV. So what is Smith complaining about?
His view of profits is a little unusual to the modern reader because he subscribed to the wage fund doctrine. He didn't think of "capital" in the same way we do today - capital included both "circulating" and "fixed" capital (this goes back to the Physiocrats although Adam Smith developed the idea much more carefully). Fixed capital is basically what we think of today as capital. Circulating capital is the stock advanced to workers to pay their wages while they worked. So according to Smith, capitalists expected not just a return on their fixed capital but the entire wage bill as well - the circulating capital. Think of the modern budget constraint facing the firm:
BC: wL + rK
The Smithian budget constraint (forgetting rent for a second), was:
Smithian BC: wL + rwL + rK = (1+r)wL + rK
Where the capitalist earned r(wL+rK)
Now Smith didn't have a marginal productivity theory of factor income - instead the division between wages and profits was determined by bargaining (and a few other rules), which was influenced by market power as well as how desperate workers and capitalists were. Of course capitalists had more market power (there were fewer of them) and they could outlast workers in negotiations, which gave them the upper hand completely independent of any kind of government privileges. Smith notes in an earlier chapter from the passage quoted above that this is why everyone is aware of (and complains about the fact that) workers organize to get higher wages, but nobody pays attention to the capitalist's efforts to do the opposite. The capitalists can just wait them out, and because of his wages fund view, the capitalists are earning a higher return than even we consider appropriate today.
In chapter 9 (where the quote is from), he raises another concern about profits that is quite relevant to Austrians who think in terms of the structure of production, actually. Smith notes that when production is (what we would call today) vertically disintegrated - when it's carried out by a number of different firms, profit grows in a compounded way because all of the stock bought from an earlier production stage is bought with more capital laid out by the capitalist. They expect to earn profit on that capital, which is assessed on top of earlier profits earned on both fixed and circulating capital. This is not the case for a worker's wages. So as the division of labor proceeds, a capitalist's income growth is compounded. And this bothered Smith because it only exacerbates the social inequities he raised earlier.
Now Don is right that Smith also thinks that capitalists will bend public legislation to their purposes. This is true. But it's not true that that's the foundation of his concern about capitalists. Even if we take that out of the picture, assume no abuse of the political process, Smith still has a lot of concerns about capitalists even in the case of a normally functioning market.
More importantly in the context of Don's original post, he is highly suspicious of people who balk at workers arguing for higher wages but never seem to complain about capitalists earning higher profits.
"
ReplyDeleteNow Don is right that Smith also thinks that capitalists will bend public legislation to their purposes. This is true. But it's not true that that's the foundation of his concern about capitalists. Even if we take that out of the picture, assume no abuse of the political process, Smith still has a lot of concerns about capitalists even in the case of a normally functioning market.
More importantly in the context of Don's original post, he is highly suspicious of people who balk at workers arguing for higher wages but never seem to complain about capitalists earning higher profits."
Something tells me that J.M. Keynes and Adam Smith would agree on a lot of things. I wonder if Adam Smith would agree with the arguments J.M. Keynes wrote in Chapter 19 of The General Theory on nominal wage rigidity...
For more information on Smith and Keynes, please see the following links.
http://adamsmithslostlegacy.blogspot.com/2011/10/adam-smith-jeremy-bentham-and-keynes.html
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1728225
Don is asking why the protesters are complaining about Walmart specifically when they're only one company among many earning high profits. It makes not sense to single them out. All the logic you describe applies to other companies too.
ReplyDelete"BC: wL + rK
The Smithian budget constraint (forgetting rent for a second), was:
Smithian BC: wL + rwL + rK = (1+r)wL + rK"
I've always assumed that K is the first equation means capital in the general sense, *including* circulating stock. That's how capital is accounted for within companies. In that case Smith's view is litte different to the modern one. If it doesn't mean that then mainstream economics is wierder than I thought.
I'm not so bothered about exactly what Smith thought, though I'm sure there's a lot to be said about that.
If we define it that way that's fine - but I think we usually think of it as a factor of production. I agree for accounting purposes the fixed wage fund view may be dated, but the wage fund doctrine in general is stronger.
DeleteI'm not sure that I understand your reply.
DeleteThe distribution equation wL+rK is abstract. Capital means all capital, including circulating stock. Profits means all profits including those that owner-operators of small businesses pay themselves as wages and excluding the surplus that offsets depreciation. In GDP calculations things may be calculated differently, but that's a practical matter. I don't think neoclassical economists actually think about this problem in that much of a different way to Smith. I think you're confusing the simplifications that mainstream economist make in order to have tractable models with what they really think.
The first principle of the wage-fund doctrine is that wages must always be paid from capital, that's true. But, in the short term, it doesn't lead to a strong conclusion about proportionality, because there are so many other factors. In the long term it's certainly true, but not very useful.
My point is that I don't think anyone thinks that K includes circulating stock. If that were the case then corporate finance is entering production functions in very strange ways.
DeleteI'm agreeing with you that if we were to bother modeling corporate finance, then the wage fund doctrine isn't all that odd if you simply take it to mean that the money to pay workers usually comes from somewhere besides the revenue from the production that the wages are being paid for.
"My point is that I don't think anyone thinks that K includes circulating stock."
DeleteI find that odd. Missing it out doesn't make sense to me. It may make certain models "strange" but how can that be avoided.
I agree with you about the wage fund.
I think Current is saying that instead of wL+rwL+rK you can have wL+rK(circ)+rK(fix) and we're back to modern theory. I don't know enough about the wage fund idea to know why and when K(circ)=wL, though that seems more like the Marxist idea of "variable capital". But I'm really out of my depth here so...
ReplyDeleteI've also seen "circulating capital" characterized as capital with a depreciation rate of 100% over the relevant period, but that may have been some sloppiness or departure from how classical economists thought of "circulating capital". It's the difference between "corn seed" and "corn combine".
Anyway, I don't think your general point is affected by which BC you use - the key to the result is not what the appropriate definition of capital is, but whether marginal income distribution theory holds. There is an implicit presumption in the kind of argument like Don's that workers ... "pressuring" for higher wages is a departure from MPL=w & MPK=r, but the existence of higher profits is simply MPK going up (unless it's an instance of "mercantilism"). If it's about bargaining than that doesn't hold.
Just to go back to the original point of Don's post....
ReplyDeleteThe lab I work in is in a bit of a mess. Lot's of the equipment and components are stacked hap-hazardly in a storeroom. Nobody ever tidies anything up because nobody has time and nobody is responsible for it. Some of my colleagues actively make a mess of the place. I have suggested to my boss that he employ a lab technician to sort it out and do other simple jobs. My boss is having none of it, he's a enamoured by the efficiency wage argument (though he wouldn't call it that). He won't employ anyone at a low rate of pay, and by that I mean he won't employ anyone for less than ~25K euro/yr. Now, the funny thing is that people are protesting about Walmart and not about my boss and my company.
There are thousands (probably tens of thousands) of firms that could employ more low skilled workers and could pay low skilled workers more. There are probably thousands that don't employ anyone at anything close to minimum wage, but could if they wanted to. Peculiarly these firms don't get into trouble, instead they get praised for paying high wages. Walmart do get into trouble because they already employ so many people at low wage rates.
It seems as though people think that employers have a feudal responsibility. So, if an employer takes on a person then they have to pay good wages because that employee somehow becomes part of their fief. So, many employers evade social blame by simply not employing as many people as they could and building only a small fief. (I'm not saying employers take this policy to evade blame, that's a side effect.)
This seems similar to the way banks are treated. Recently there was an opinion poll in Ireland that showed bankers to be the second least trusted group, behind only politicians. Landlords were nowhere close. Also, banks are in trouble with the public for evicting people who haven't paid their mortgages. Landlords regularly evict people who haven't paid their rent and nobody says a word about it. It seems that charging a permanent fee for use of capital is treated very differently to charging a regular fee that eventually leads to ownership of capital. Lending is seen as a much dirtier business. I suppose the difference is that lenders offer the opportunity to own capital, while landlords don't. Most people who take up that opportunity from lenders succeed but lenders catch flak for those that fail even though they have little responsibility for that failure. Landlords stay above the fray by offering no chance of failure but also no chance of success. In this sense landlords are similar to the company I work for and lenders are similar to Walmart.
Notice, I'm not saying that banks are blameless. Blaming them for being wreckless is a completely separate argument and a much stronger argument against banks. Pointing at Banking's dubious links with government is an even stronger argument. But it seems that the arguments I'm seeing against banks recently aren't making either of those cases. I'm also not saying that banks haven't made irresponsible loans. I agree that giving home loans to illiterate immigrant orange-pickers in Florida, for example, was reprehensible. Lastly, I'm not saying that landlords are somehow special and earn income that's somehow illegitimate, I'm not a Georgist. It just seems to me that the massive social upside of having lenders is forgotten about. The problems landlord produce are smaller and the benefits they produce are smaller, but because of the former they're more respected than lenders.
Right, I don't think anyone is disagreeing with Don that there's a point where workers aren't worth the money or that it's not good that low income workers have jobs. I don't get your "feudal responsibility" point. The thing is, workers and employers bargain over this sort of thing and because of the position of employers in society workers often get a bad rep when they bargain. Don seemed to be contributing to that needlessly by being oddly opinionated about someone else's wage bargaining.
DeleteBut, this "protest" isn't being phased as wage bargaining. It's often being spoken off as a moral issue.
DeleteI agree that low-income workers and their unions have as much right as anyone else to argue for their own interest.
Daniel,
ReplyDeleteI like how you always approach other people's prejudices with a certain kind of polite wonderment. I bet you make an absolutely perfect dinner host. I'm myself blunt as a spoon and rather misanthropic, so I admire your skills.
That said, Don is a rightist who hates the underclasses. There were millions of such people in the past, and there will be millions of such people in the future. Such is a (darker) nature of man.
re: "I like how you always approach other people's prejudices with a certain kind of polite wonderment. I bet you make an absolutely perfect dinner host."
DeleteI cook pretty well and I like to think I have good taste in wine, which also helps.
I think in many cases (I really can't get as specific as talking directly about Don here - I couldn't know) people are simply dedicated to an ideological position that is appealing to them for whatever reason, and then they try to maintain the disposition of someone who holds that ideology. To do that, they shoe-horn a bunch of other stuff in.
DeleteTake this case. There's no particular reason not to sympathize with people who get paid like crap and just want to agitate a little for higher wages. But I think Don might associate Wal-Mart criticism SO STRONGLY with his ideological opposites that his brain immediately goes in the other direction. We all do this on some points, I'm sure. I think it's much less "hating the underclass". I think the share of people that genuinely "hate the underclass" is quite small.
What I don't understand, is why people think this is something more than a normal strike. It's normal group interest politics, and it can't be elevated to anything more than that. It's also very unlikely to work since Walmart can easily employ new staff. I don't think there's anything wrong with Don's post.
DeleteI don't know about that, Daniel. I mean, we could make a case that if some paleocon proclames that he dislikes minorities, he might be actually a very tolerant person who just likes laissez-faire crowd, but this logic seems rather strained to me. Our beliefs are certainly not independent of each other and form complex belief systems - or, to borrow from the stillborn science of memetics, 'memeplexes' - but I think that we hold them because, not against of, our fundamental personalities. For example, you are a young American liberal. Almost certainly you are pro-welfare state, pro-gay rights, agree with anthropogenic climate change and would like to limit the access to firearms. But is it because of some isolated accident, say you really liking Keynesianism, or because of your core ability to be empathetic?
DeleteWe all have the ability to dehumanize and hate, some are just more likely to do it than others. What seems to you like an unreasonable callousness to 'people who get paid like crap and just want to agitate a little for higher wages' just reflects a common human trait to fear and dislike the people different from yourself. I'm not ideal in that regard either: I usually don't like to extend to people the benefit of the doubt, but for fairness's sake I agree that I might be wrong about Don Boudreaux.