Saturday, March 10, 2012

A surprisingly good read

The other day I was reading Walter Block's chapter on marginal productivity in the Elgar Companion to Austrian Economics. I don't usually expect to agree with Block, but I thought it was excellent. He talked mostly about how a lot of economists don't think about the present discounted value of the marginal product of labor when talking about wages. This has been a concern of mine for a while - I had no idea it was something Austrians were concerned about too. I spend a lot of time thinking about both human capital investment and job flows/worker flows (separation and hiring, job duration, etc.) - although much less of the latter recently. Both of those things make it very natural for me to cringe at the typical spot-market type thinking about labor market equilibrium.

There is something to be said for the traditional way of thinking about labor equilibrium. First, unlike an investment you are paying out costs continuously, not up front, which is a closer approximation to repeated spot transactions. Second, a worker can quit while a machine can't - again making this more like a repeated bargaining game (which economists do use to think about labor contracts). So I don't think it's quite the indictment that Block makes it out to be, but I do agree with the thrust of the piece. I am particularly concerned with thinking about labor as an investment when it comes to macro theory, and thinking about the marginal efficiency of labor in the same way that we think about the marginal efficiency of capital compared to the interest rate. You could even say that hiring temp or part time workers is analagous to keeping liquid assets.

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