[Eugen von Böhm-Bawerk was the student of Carl Menger and the teacher of
Ludwig von Mises. Like Menger, he rejected the contention of the Historical
School that there were no universally valid laws of economics. In this
incisive essay, first published a few months after his passing, in December
1914, he criticizes the claim that the state has the ability to secure a prosperous
economy in sovereign disregard of economic laws.]
I - The Scientific Foundation of a Rational Economic
Policy
Economic theory, from its very beginnings, has endeavored to discover and
formulate the laws governing economic behavior. In the early period, which
was under the influence of Rousseau and his doctrines of the laws of nature,
it was customary to apply to these economic laws the name and character of physical
laws. In a literal sense, this characterization was, of course, open to
objection, but possibly the term "physical" or "natural"
laws was intended merely to give expression to the fact that, just as natural
phenomena are governed by immutable eternal laws, quite independent of human
will and human laws, so in the sphere of economics there exist certain laws
against which the will of man, and even the powerful will of the state,
remain impotent; and that the flow of economic forces cannot, by artificial
interference of societal control, be driven out of certain channels into
which it is inevitably pressed by the force of economic laws.
Such a law, among others, was considered to be that of supply and
demand, which again and again had been observed to triumph over the
attempts of powerful governments to render bread cheap in lean years by means
of "unnatural" price regulations, or to confer upon bad money the
purchasing power of good money. And inasmuch as in the last analysis, the
remuneration of the great factors of production — land, labor, and capital —
in other words, the distribution of wealth among the various classes of
society, represents merely one case, although the most important practical
case of the general laws of price, the entire all-important problem of
distribution of wealth became dependent upon the question of whether it was
regulated and dominated by natural economic laws, or by the arbitrary
influence of social control.
The early economists did not hesitate to decide this question with
fearless consistency in favor of the exclusive predominance of "natural
laws." The most famous, or rather notorious, illustration of this
interpretation was the "wage-fund theory" of the classic and
postclassic school of economists, according to which the amount of wages was
determined by a natural relationship of almost mathematical accuracy thought
to exist between the amount of capital available in a country for the payment
of wages, the so-called "wage fund," and the number of workers. All
workers jointly were considered incapable of ever receiving more than the
existing "wage fund," and the average was thought to result with
mathematical accuracy from the division of the wage fund by the number of
workers. No artificial outside interference, including strikes, could change
the operation of this law. For if, through a successful strike, the wages of
one group of workers were to have been raised artificially, a correspondingly
smaller portion of the wage fund would be available for the remaining
workers, whose wages would then have to come down accordingly. A general or
average increase of wages above the total of the "wage fund" was
held to be out of the question.
Later generations have adopted a different view of this matter and of
economic "laws" in general, and have developed different new
formulas in accordance with their changed views. Following the example of
Rodbertus and Adolf Wagner, a distinction was drawn between "purely
economic categories" and "historic legal categories." The
former were to include all that was permanent, generally valid, and recurrent
in economic phenomena under any conceivable social order; the latter were to
represent the historically varying types, brought about by changed legal
systems, laws, or social institutions. Henceforth, a determining, or at any
rate far-reaching influence upon the laws of distribution was ascribed to
this latter or "social" category, a term used frequently ever
since, especially by Stolzmann.[1]
This may have been right or wrong, but it was certainly not without some
justification. But how far-reaching was the influence of control to be, and
how and where was it to be delimited against the influences emanating from
the other "categories"? These questions were not, and have never
been, definitely settled to this day. A few years ago, at another occasion, I
wrote, "Nowadays it would be idiotic to try to deny the influence of
institutions and regulations of social origin on the distribution of
goods."
It is obvious that distribution under a communistic order would have to be
materially different from that in an individualistic society, based on the
principle of private property. Nor could any sensible person deny that the
existence of labor organizations with their weapon of strikes has been of
pronounced influence on the fixation of wages of labor. But, on the other
hand, no intelligent person would claim social "price regulation"
as being omnipotent and decisive in itself alone.
Often enough one has seen governmental price regulations to be incapable
of providing cheap bread in lean years. Every day we may see strikes failing,
when they are directed towards the attainment of wages "not justified in
the economic situation," as it is commonly expressed. The question,
therefore, is not whether the "natural" or "purely
economic" categories on the one hand, and the "social"
categories on the other, do exert any appreciable influence on the terms of
distribution; that both do, no intelligent person will deny.
The sole question is this: how much influence do they exert? Or,
as I have expressed myself several years ago, in reviewing an older work by
Stolzmann entitled "Die Soziale Kategorie,"
The great problem, not adequately settled so far, is to determine the
exact extent and nature of the influence of both factors, to show how much
one factor may accomplish apart from, or perhaps in opposition to, the other.
This chapter of economic theory has not yet been written satisfactorily.
I should like to go almost so far as to say that, until quite recently,
not even a serious attempt has been made to elaborate this problem by either
one of the two great schools that compete with each other in the perfecting
of our science: the theoretical school, represented primarily by the
well-known "marginal-utility theory," and the historic or
sociological school, which, in its struggle against both the old classicists
and the modern marginal-value theorists, likes to place the influence of
control (Macht) into the very heart of its theory of distribution.
The "marginal-value" school has not ignored the problem
confronting us here, but so far, it has not elaborated it extensively; it has
conducted its investigations up to the confines of the whole problem, so to
speak, but so far, has stopped at these confines. So far, it has principally
occupied itself with the developing of the laws of distribution under the
assumption of free and perfect competition, perfect both in theory and in
practice, thus precluding the predominance of one party, as would be implied
in the term "influence of control."
Under this, and the other modifying assumption of the exclusive prevalence
of purely economic motives, the marginal-value theory has come to the
conclusion that, in the process of distribution, each separate factor of
production receives approximately that amount in payment for its contribution
to the total production that, according to the rules of imputation, is due to
its cooperation in the process of production. The shortest formulation of
this idea is contained in the familiar concept of the "marginal
productivity" of each factor.
But in making this contribution, the marginal-value school had furnished
only an incomplete skeleton of the theory of distribution as a whole, and it
was well aware of this shortcoming. It never pretended to have fully covered
the complex reality with that concept; on the contrary, it never failed to
emphasize, again and again, that its past findings had to be supplemented by
a second series of investigations, whose task it would be to inquire into the
changes that would be produced in this fundamental concept by the advent of
changed conditions, particularly those of "social" origin.[2]
The reason why the marginal-value school took up that part of its
investigation first was only that it seemed to require priority in methodical
treatment, that primarily one should know and understand how the process of
distribution, or more generally, that of price formation took place in the
absence of all outside social interference.[3]
First of all, a starting point, or point of comparison, had to be reached
from which the changes might be measured that would be produced by the advent
of special outside factors of a "social" origin. The marginal-value
theory, thus, as a whole, first laid down a general theoretical frame for the
problem in formulating its general value and price theories, and, within that
frame, it elaborated in detail only the theory of free competition, while
until now it had left a gap where the influence of social "control"
should have been studied and described.
This imperfection has always been felt as such; with every new decade it
is being sensed more because in our modern economic progress, the
intervention of social means of control is continuously gaining in
importance. Everywhere trusts, pools, and monopolies of all kinds interfere
with the fixation of prices and with distribution. On the other hand, there
are the labor organizations with their strikes and boycotts, not to mention
the equally rapid growth of artificial interference emanating from the economic
policies of governments. In the eyes of the classical economists, the theory
of free competition could claim to be the systematic foundation of the entire
problem, as well as the theory of the most important normal case. But at
present, the number and importance of those phenomena that no longer find an
adequate explanation in the theory of free competition probably already
exceed the number of those cases that may still be explained by that one
formula.
Nor has this gap left open by the marginal-value theory ever been filled
by that other school of economists, those who place the influence of the
"social" category in the foreground.[4] The reason for this is that they again overestimated
the explanatory power of their favorite formulas. When, with an air of
conviction, they proclaimed that under this or that condition, for instance,
in the fixation of wages, it was "power" that ultimately decided
matters, they thought to have given a content to their explanation, which, if
applying at all, was to supplant or exclude explanations on purely economic
grounds. Where power or "control" entered into the price, there was
no economic law, they thought, and thus the mere mention of
"control" was both the beginning and the end of the explanation to
be given. It was accompanied more often by a fierce denunciation of the
"economic laws" developed by other theoretical schools, than by a
careful investigation of the question of where and how the two
"categories" relate to each other. Moreover, the term "two
categories" was merely a phrase of a rather vague and ill-defined
meaning, and thus by no means very suitable to the conducting of clear and
penetrating investigations.
At the present time it is probably Stolzmann who may be considered as the
typical representative of that school of thought. Other authors of a similar
type, like Stammler or Simmel, may have become more widely known and
influential, but Stolzmann has the merit of having tried to follow up, one by
one, and to elaborate systematically the suggestions made by older
economists, since Rodbertus and Wagner, and then he has the additional asset
of having shown himself more familiar with economic theory than many authors
starting from different approaches. He is thus, I think, the one representative
of his school best qualified to discuss these basic principles.
Now, Stolzmann declares as the fundamental idea in his theory of
distribution that it is not, as taught by the marginal-utility theory, the
purely economic conditions of imputation, i.e., not the contribution of each
factor of production to the total, that determine the distribution of the
produce among landowner, capitalist, and laborer, but rather that it is
social control. It is "power alone that determines the size of each factor's
share."
What determines its distribution is not "what each factor of
production contributes to the total produce, but what the men standing behind
the factors of production are able, by virtue of their control, to command
for themselves as remuneration according to the social power exerted by each.
These and similar statements are coupled with an incessant attack on the
marginal-value theory based on this very same consideration, that in its
theory of distribution it had failed to give any place to the decisive factor
of "power," and instead had reversed into the old
"naturalistic" interpretation, the theory of the eternal and
unchanging laws of nature.
But obviously this was not a correct method of penetrating into the
intricacies of the problem before us. To have "power" alone
determine the manner of distribution was just as one-sided. It was all too
obvious that power could not determine everything in distribution, and that
the purely economic factors meant something too. Nor could this dilemma be solved
by a compromise in assigning determining and decisive influence to control,
and only a vague and restricted influence to natural forces. A true solution,
it seems to me, is still to be sought, in spite of Stolzmann's 800 pages, and
by other means than evasive dialectics.
Let us then first state what is really before us in this controversy much
neglected in economic science: neither more nor less than the scientific
foundation of a rational economic policy. For it is obvious that any
artificial outside interference in the economic sphere will be without sense,
unless the preliminary question of whether anything can be
accomplished through the influence of "power" in opposition to the
"natural economic laws" can be answered in the affirmative. The
problem is to gain a clear and correct insight into the extent and nature of
the influence of "control" against the natural course of economic
phenomena. This is what we must see, or we shall grope in
the dark! I do not think that this seeing can be facilitated or replaced by
simply interchanging two terms for the different causal influences, or by
ascribing a merely conditional influence to the former and a determining one
to the other.
In the following I shall therefore try to raise a few questions and
suggest their answers through which I think the way to understanding must
lead. What I am offering here are nothing but humble suggestions, for I am
well aware of the fact that a full systematic treatment would require much
more than what is presented here. And moreover, in making the suggestions, I
shall have to mention things most of which have not the least claim to
novelty or originality. For the most part, I shall have to start with
self-evident trivialities that are close at hand. I shall merely present them
in a certain connection and lead them into certain conclusions, equally so
manifest that they merely need to be formulated with full clarity and
purpose.
II - Conformity or Contradiction?
As I do not wish to repeat obvious things, I do not stop to inquire whether
"control" is an influential factor in the determination of prices,
generally speaking, and more particularly in distribution. This I consider to
be an accepted fact, settled long ago among all modern economists. My first
question, therefore, is whether this influence of control asserts itself in
conformity with, or in contradiction to, the economic laws of price, or
whether it counteracts and invalidates the theoretical laws of price, or
whether it harmonizes with these.
This question is analogous to one that had to be asked, once upon a time,
in the field of production of economic goods:
Is the admitted ability of man artificially to increase the production of
goods a power that asserts itself apart from and in contradiction to the
natural laws, or something that can take effect only within and in compliance
with the natural laws of production?
As is known, everybody agrees, in regard to this question, that the
"power of man over nature" can be exerted only in harmony with the
laws of nature and in strict conformity to them. And I am convinced that once
the question before us is explicitly and clearly stated, an analogous
consensus of opinion will be easily arrived at: namely, in the problems of
price and distribution, "power" (Macht) is evidently not asserted
apart from or in contradiction to but within and in conformity with the
economic laws of price. Let us first elucidate this with a few familiar
illustrations in which the element of power is particularly patent.
There is first the case of usury: What is it that gives to the
usurer that "control" over his victims which is at the bottom of
the familiar "extortionate" usury prices? Nothing else than those
very same factors which the allegedly "pure economic" theory of marginal
utility furnishes us in its price formula: it is the urgent want of the
borrower, which, but for the usurer, would go unsatisfied; it is the
satisfaction of the most pressing wants that depend on the services obtained
from the usurer.
As a result of this, moreover, the subjective value, determined by the
corresponding utility, and therewith the upper limits of the possible prices,
are being moved up. And since the borrower finds no aid from any competition
among the suppliers of money who would have to underbid each other, there are
equally absent all those more subtle price-restricting elements which, in the
case of free competition, determine the valuation of the competitors to be
contended with on the supply side.[5]
The usurer, through his inflexibility, thus obtains the power to raise his
price to almost the extreme upper limit, which corresponds to the high
subjective valuation of the hard-pressed borrower.
Or there is the typical case of monopolies. Each owner of a complete
monopoly has the "power" to fix the price of his product at any
point he pleases. He again owes that "power" to the existence of
certain classes of demand of the highest intensity on the part of people
whose urgent wants and high purchasing power combine toward creating a
correspondingly high intensity of demand, together with the factor just
explained, that the absence of competitors does not establish any lower
limits likely to interfere with their taking advantage of the most intense
demand among the buyers.
But the fact that the monopolist's "power" is rooted in these
very economic factors will also determine certain familiar and oft-explained
limitations: the monopolist can, after all, never fix the price at a point
higher than that close to the valuation of the highest, most intense class of
demand, and, moreover, what is still more important, he must always reckon
with the restriction of the quantity that can be sold at the higher price. He
can, in other words, never escape the economic law according to which the
price is fixed at the intersection of supply and demand, at that, point where
equal quantities are offered and taken. Since he can arbitrarily determine
amount and intensity of the supply which he may wish to offer, he may select
that point of intersection at a low or at a high point on the scale of
possible prices; but the higher that point is, the smaller will become the
number of those remaining on the demand side, and the smaller will be the
quantity to be disposed of at that point.
The monopolist thus never has unlimited control; he merely has the choice
within the laws of price of different "economically possible" price
levels. He can select that price at which the combination of profit for each
article, and the number of articles to be sold at that price, are likely to
promise the greatest total profit, but he cannot exert his "power"
in any other way than in conformity with the laws of price, for it is his
behavior that establishes the "price law," namely the conditions of
the amount offered at a given price level, but never can he counteract the
laws of price.
The same as shown in these typical illustrations will probably always be
true, whenever any kind of so-called "economic power" is applied,
for it is this kind of power only that concerns our problem, not physical
force or direct compulsion. Highway-robbery or extortion, force of arms or
enslavement would, of course, belong to an entirely different category. But
the exertion of economic control never introduces any new element into the
determination of price that had not previously found a place in the purely
theoretical laws of prices.
What conclusions are to be drawn from these facts in regard to our
problem, I shall discuss later. For the present, let me refer to an important
distinction that should be made in this connection between the influence of
economic "control" and "non-economic motives."
For, while the effects of the latter may be contrary to, or conflicting
with, the economic laws of price, the exertion of control must always be in
conformity with them. Where non-economic motives, such as generosity,
philanthropy, class or race-hatred, national sympathies and antipathies,
vanity, pride, and so forth play their part in the fixing of prices and
distribution, they may lead to prices at variance with, or contradictory to
those to be expected according to the price-law formula. Whoever is moved by
non-economic, outside considerations like friendship or humanitarian impulses
to make a gift to the other party of the bargain, may as a buyer consent to a
price that will exceed his subjective valuation and as a seller be content
with a price far below his own valuation of the goods; or who, from
patriotism or national prejudice, wishes to buy only from his compatriots,
may consent to prices higher than those offered by their competitors in
foreign countries.
This disturbing effect of noneconomic motives conflicting with the price
laws is based on the familiar fact that the economic laws of price apply and
claim validity only so long as the conditions on which they are based really
prevail by themselves alone, without outside interference; analogous to the
physical law of gravitation which holds true only under the assumption of the
exclusive effect of gravitation, as exists for instance in a vacuum, while
any interfering disturbances, such as friction or buoyancy as exercised by a
balloon loaded with gas, would cause phenomena of motion contradictory to the
law of gravitation. As distinct from that, the price-determining influences
emanating from economic "control," or preponderance of
"power," always remain within and in conformity with the formula
laid down by economic theory: they never form an exception to, but always an
application of the economic law of price.
From this there follow two things that are of significance to our problem:
first that we neither should nor even can make any reservation as to the
validity of the economic laws of price and distribution, when the influence
of power comes into play. We need not, in regard to them or the non-economic
motives, resign ourselves to the view that out economic laws are valid only
so long as no such influence intervenes, as in the case of non-economic
motives, that they hold good only in an imaginary world in which such
influences are absent, but not in the world of realities in which social
power plays a role more pronounced day by day. Nor should we take that
resigned view, which would greatly diminish the usefulness of our theoretical
laws and reduce their general validity, that our economic laws need not explain
this or that case at all.
And then, this leads to the second conclusion: whoever wishes adequately
to set forth the influences of social control in the explanation of price
determination should not case aside those laws operating with so-called
"purely economic" factors, but he should accept and develop them.
He must not accuse them, as does Stolzmann in regard to the laws of price and
distribution developed by the marginal-utility theory, of considering the
effects of "natural factors" only, so that these theories would
have to be discarded or rejected before one could adequately present the
effects of social influences; no, indeed not; we should accept these laws and
develop them through a careful analysis in those directions in which social
forces actually become operative, when we try to formulate their effects on
price fixation and distribution. Our task is not to discard but to develop
these allegedly "purely economic" laws of distribution. The fact
that economic control cannot affect the conditions of distribution in any
other way than through the medium of the categories of "marginal
utility" and "subjective value" is indeed not a remote
conclusion, and has been explicitly stated here and there in the past, thus
for instance, not so long ago by Schumpeter, who attacked a vague statement
by Professor Lexis in his theory of distribution, referring to the influence
of power, with these words:
The reference to the relative strength of economic power in itself does
not explain anything. For if one asks what constitutes economic power the
answer can only be: the control over certain goods. And it is only from the
economic function of these goods and the subsequent formation of value that a
real explanation can be derived.[6]
Is this not just as if somebody were to argue that the speed of a
steamship depends not upon the power of her engines in relation to the
resistance to be overcome, or the weight to be propelled, etc., but on the
number of rotations of the propellers, which, in turn, of course, depends
exclusively upon the power of the engines?
Nor does that explanation do justice to what Stolzmann has stated at
several other places in his writings to be the relation between the natural
and the social "category"; namely, that natural factors operate as
"conditions" or "premises," merely determining the
possible limits, whereas within these limits and premises it is the social
factors that really "determine" and "decide" matters.
Now it is quite true that, at first, the effect of economic factors is
essentially that of delimiting the margins of the price; the subjective
valuations of buyers and sellers merely determine the upper and lower price
limit. But even this "setting" of "limits" may stiffen
into actual "fixing" of prices, whenever and wherever the limits
from above and below become so numerous and so closely placed that they
reduce the interval to a small zone or even to one distinct point, as is
generally the case with intense and at the same time perfect competition among
many individuals. Nor does "control," on the other hand, ever
"determine" anything. It can at best exercise a
"constraining" influence, where economic delimitations establish
the margin.
He who deals with a needy purchaser, in the absence of competition, has
the "power" to fix the price at any point of the probably wide
range located between the value of the urgently needed goods to the anxious
buyer as the upper limit, and the value of the same article to the
not-anxious seller as the lower limit. But at what exact point of this
extensive range the price will ultimately be fixed is not determined by the
relative "power" alone, for with equal "power" the
philanthropist will make an entirely different price to the poor man than
with the usurer. Or there may be different degrees of skill in bargaining, or
in sizing up the position of the other side, of perseverance, of patience, of
disregard for public opinion, of defiance or fear, even in case of equal
objective "power," which will move the price to a very different
point of the scale.
But when the "relative power" of the two parties seems to fix
the price at a quite definite point of the scale, it certainly has again been
nothing else than the coincidence of a majority of "restrictive
influences" that narrow down the limits from both sides to such an
extent that the price level itself appears to be "determined"
thereby. Nor is any other outcome to be expected, for since, as shown before,
"economic power" can become effective only through the intermediary
determinants of the theoretical price formula, and since these determinants
can again fix the price only through a consecutive delimitation, it
is obvious that "power" can equally determine prices in no other
way than through the fixation of limits; it does not possess any independent
"price-fixing capacity," as distinct from this
"restricting" or "limiting" ability.
From this it will become clear why, in the discussion of these questions,
the old terms of "purely economic" or "legal-historic"
categories, as Rodbertus called them, or of "natural" and
"social" categories, as applied by Stolzmann, are not sufficient.
These terms may have served a purpose in their time. At least they have,
roughly speaking, indicated certain distinctions which should also be kept in
mind, and they have been particularly helpful, towards the elimination of the
old, one-sided view that there are only "natural laws" operative in
our economic life. But in the theoretical explanation of the phenomena of
price and distribution they do not play that role which their authors ascribe
to them.
They fail to draw a straight and clear line of demarcation between social
phenomena, because these are always permeated by both factors. A certain
amount of the "historical-legal" or "social" element is
sure to be present in all economic phenomena. There is no room left for an
opposite, "purely natural" category. There literally exists no
price nor any form of "distribution" (except perhaps
highway-robbery and the like) without containing at least some
legalistic-historical aspect. For, in every civilized community, there must
always exist some social order that will apply when two members of that
society get into contact with each other, and thus determine the nature of
that contact. It is, therefore, either saying too little or too much, when
anyone claims the phenomena of distribution for the "social," as
distinct from the "natural," category; or it is but an empty
truism, which, in its very concept, applies to every singly economic or
social phenomenon, for obviously a Robinson Crusoe could not even so much as
"barter" with himself.
One member of a society can only trade with another if both can acquire
ownership of the goods to be exchanged under the existing social order. Any
statement attempting to express more than that truism is too far-reaching.
Thus Rodbertus shoots way beyond the mark, when with that peculiar emphasis
he defines interest on capital as being the typical fruit of the existing
social order, and denies its "purely economic" justification. And
Stolzmann equally shoots beyond the mark, when he holds that the "social
category" alone "determines" distribution, and when he falsely
accuses our theory of distribution of teaching purely natural laws of
distribution, because it also does justice to the economic foundations of
social power. A closer analysis of social power, however, must inevitably
lead straight across the line of demarcation between the "social"
and "natural" categories; power is present on both sides of the
line.
Social "control" is not an abstraction or a distilled product in
which the influence of the purely social category is reflected as such. Nor
are the explanations given by the marginal-value theory — which Stolzmann
calls extremely "naturalistic" — an unmixed distillation of only
the natural and purely economic influences. Instead they always take into
consideration certain characteristics of the existing, or an assumed,
economic order. With proper elaboration they will be found capable of
expressing the entire influence of social power, but even so, it remains true
that prices are determined more or less accurately by the subjective
valuations based on the marginal utility. And it remains equally true that
the value of productive goods depends on nothing else but the value of the
products to be obtained from them. In the last analysis, therefore, the value
of the factors of production depends on the share of the product attributable
to each factor in the productive process.
"Social control" and "social category" are thus not
synonymous. The latter term, like its antithesis "natural" or
"purely economic" category, has been so confused and misconstrued
that I would prefer to dispense with its use altogether in the interest of a
clear presentation. Where I did use these terms in this or in previous
writings, I did so, not because they form part of my own vocabulary, but
rather because I could not well avoid altogether the use of a generally
accepted term. In order to make myself understood, I had above all to use the
language of those whose opinion I was discussing. Nor have I failed at
earlier occasions to make reservations in this respect.
And now I shall try to submit a few thoughts concerning the direction in
which the old economic theory will have to be developed so as to embrace
systematically in its teachings the influence of "control" (Macht,
or "outside power").
III - The Example of the Strike
What I have to say may, I think, best be developed by looking at a typical
instance that illustrates price determination through social control in a
particularly noticeable manner: the case of the settlement of wage disputes
by means of a strike.
According to the accepted formula of modern wage theory, based on the
marginal-utility theory, the amount of wages in case of free and perfect
competition would be determined by the "marginal productivity of
labor," i.e., by the value of the product that the last, most easily
dispensable laborer of a particular type produces for his employer. His wages
cannot go higher, for if they did, his employer would no longer gain any
advantage from employing this "last" laborer; he would lose, and
consequently would prefer to reduce the number of his workers by one; nor
could the wages be substantially lower, in the case of effective competition
on both sides, because the employment of the last worker would still produce
a substantial surplus gain. As long as this is true, there would be an
incentive to the further expansion of the enterprise, and to the employment
of still more workers. Under an effective competition among employers this
incentive would obviously be acted upon, and could not fail to eliminate the
existing margin between the value of the marginal product and the wages in
two ways: by the rise of wages, caused by the demand for more
workers; and by a slight diminution of the value of the additional produce,
due to the increased supply of goods. If these two factors are allowed to
operate without outside interference, they would not only delimit wages, but
actually fix them at a definite point, owing to the nearness of these limits,
let us say for instance at $5.50 for a day's labor.
But let us now assume competition to be not quite free on both sides, but
that it be restricted, or eliminated, on the side of the employers; either
because there exists only one enterprise of that particular branch of
industry over a large territory, thus giving it natural monopoly over the
workers seeking employment, or because there is a coalition of entrepreneurs
within that industry, who mutually agree not to pay their workers a wage
higher than, let us say, $4.50. In either case, this coming into play of
"control," a superior power of the employers, will certainly
suffice to lead the wages to be fixed at a point below $5.50, say at $4.50,
other conditions remaining equal.
How would this correspond with the standard explanation offered by the
marginal-value theory? The answer is not difficult. In fact, the solution has
been repeatedly stated in the fairly well developed theory of monopoly
prices. I shall merely try to restate the familiar arguments in a clear and
systematic manner.
We have before us a case of "buyers' monopoly." The widest
margin within which the monopoly price can be fixed is limited, from above,
by the value of the labor to be purchased by the entrepreneur exercising that
monopoly, and from below, by the value of unsold labor to the laborer
himself. The upper limit is determined by the value of the produce of the last
worker, for the reason that the entrepreneur will not assume any loss from
the last worker he employs and that the same amount of labor cannot be paid
for in unequal amounts. This upper limit of the possible wage would, in our
illustration, be $5.50.
More is to be said in regard to the lower limit. The very lowest limit is
determined by the utility that would be left to the worker if he were not to
sell his labor at all. It is thus, primarily, the use-value to the worker of
his own labor, provided he can make some use of his labor for himself alone.
In thinly populated new countries, with an abundance of unoccupied land,
where everybody may become a farmer at will, this labor-value might represent
quite a considerable amount. In the densely populated "old"
countries, however, this limit is extremely low, because most of the workers
lack capital, and can hardly ever profitably utilize their own labor as
independent producers.
A worker who has accumulated some savings may find some compensation for
not selling his labor in the escape from discomfort and hard work, or in the
enjoyment of rest and leisure. Those who have any such means of subsistence
will figure out just what minimum of wages would compensate them for the
effort of working. To those who have nothing to fall back on, the marginal
utility of a money income to be gained by working is so extremely high that
even a very low wage will be preferred over the enjoyment of leisure.
In order to illustrate this with actual sums of money, let us assume this
lowest limit, the use-value of labor and the enjoyment of leisure, to be very
low, say $1.50. This amount may be even far below the minimum of subsistence,
which, for well-known reasons, determines the lower limit of the possible permanent
wages without, of course, determining temporary wages or those of each
individual case.
But there may also arise other intermediate wage levels. In the foregoing
illustration we have excluded all competition among the employers in that one
particular branch of industry. If such competition were existing, it would
inevitably force up the wages to the upper limit of $5.50; but even in its
absence, there would still remain a certain amount of outside competition,
namely with employers in all the other branches of industry. This means that
the worker in our particular industry still has the alternative of escaping
the very low wage offered to him in his own line, by switching over into
other branches of production, although a number of circumstances may greatly
reduce the gains to be expected from this expedient. To change from one
occupation, for which one has been trained and adapted, into another, is
likely to result in less productivity, and the maximum wage level attainable
in the new occupation will be likely to remain far below $5.50.
The curtailment in wages will vary for each worker entering into a new
branch of production according to his adaptability, or his ability to perform
a different kind of skilled labor. The most painful cuts in wages will be
suffered by that probably largest portion of the workers, who are not
adequately trained to perform any other kind of skilled labor, and who will
have to switch over from "skilled" into "unskilled"
trades, and accept a poorer position in some type of common labor. Still
another slight lowering of the wage level may result from the fact that the
influx of new workers into that occupation may force down slightly the
marginal productivity of the last worker, and thus lower the wage level for
all.
Under the influence of all these circumstances we would now have to assume
that the various workers set for themselves a series of individual minimum
limits, below which no one would allow his wages to be reduced by the
monopolistic pressure of the entrepreneurs. To illustrate these various
gradations of minimum wages, let us assume the minimum of existence to be
$3.00, which, as has been said, would represent not the temporary, but the
permanently possible lowest wage level. The wages obtained by the most common
type of labor would thus be very near to $3, say $3.10. A smaller and smaller
number of workers could find employment in other occupations, as the wage
rate increased in the following ascending sequence: $3.50, $3.80, $4, $4.20,
$4.50, $4.80, $5. Note, however, that the upper limit of this wage scale
would still remain below the marginal product of the original occupation,
thus below $5.50.
What effects and limitations will result from this state of affairs in
regard to the monopolistic fixation of wages within the original widest zone
of $1.50 to $5.50?
Let us assume, to begin with, that the monopolistic entrepreneurs use
their power in an unrestricted, purely selfish policy, unaffected by any
considerations of altruism, or consideration of public opinion, uninfluenced
by any apprehension that the workers might fight back through means of a labor
union or strike, and convinced that they are absolutely assured of an
atomized, effective competition among the individual workers. Under such
premises, the rate of wages would be fixed according to the general formula
applying to a purely selfish monopoly, already mentioned before in another
connection: they would be fixed at that point which promises the largest
returns, after a careful consideration of all circumstances, and with due
regard to the inevitable fact that with changing prices, the amount of goods
to be disposed of profitably will change, only that in the case of a buyers'
monopoly the results are exactly opposite to that of a sellers' monopoly. Or
stated concretely: the lower is the wage rate fixed by the
monopolist, the smaller will be the number of workers available, and from a
correspondingly smaller number of workers will the entrepreneurs be able to
collect that increased return which might accrue from pushing the wage scale
down below the value of the product of the marginal laborer, i.e., below
$5.50; in fact, this value might even increase through a reduction in the
output, which would cause a rise in the price of the finished goods.
Of course, there may again enter certain counteracting tendencies, such as
increasing costs, with the restricted expansion of the enterprise, the growth
of overhead expenses, etc. With an increase in wages (which, however, we
always assume to remain below the marginal product of $5.50) the gain per
laborer would decrease; but, to offset this, the number of workers from which
that gain can be made will increase, or even be brought back to normal. From
these considerations, it would be most unlikely that the monopolists could
fix the wage rate at $1.80 or $2.00 or at any point below the minimum of
existence of $3, both because this rate would not be likely to remain in
force, and because it would be lower than the wage paid outside for common
labor, and therefore would at once cause the majority of the workers to
withdraw into those unskilled occupations which, in our illustration, receive
$3.10. This danger will diminish gradually with each increase in the wage
rate, and disappear almost entirely at some point, say at $4.50, at which
only a few exceptional workers might find it possible to obtain higher wages in
other skilled occupations, if such be open to them at all. Under the assumed
circumstances, the danger of men withdrawing would have almost disappeared,
and a successful attempt might be made by the monopolistic employers to fix
the rate of wages at this point, without running the risk of any considerable
restriction of output caused through a shortage of workers.
Two other considerations might influence an intelligent monopolist to
exercise his power "with restraint." First, a wage rate remaining
far below that of other skilled occupations may, if only in the long run,
lead to a shortage of workers, for while the laborers accustomed to their
occupation might hesitate to change their job owing to the difficulties of
transition, the new supply would fall off. Secondly, too high a rate of
profit per worker would exert too powerful a strain on the employers' union,
and is likely to lead to a dissolution of the coalition by those members
wishing to expand their business, or to the formation of new enterprises outside
of the coalition, thus creating new competition, likely to cut down prices
and to raise wages. Generally speaking, the fear of outside competition forms
perhaps the greatest safeguard against too unscrupulous a use of monopolies
preying on the general public.
I hardly need to re-emphasize the fact that if, under such conditions,
through the "control" of the monopolists the wage level were to be
reduced from $5.50 to $4.50, this would, from first to last, happen by virtue
of and in conformity with the elements of the price-law, as formulated by the
marginal-value theory. It is in consideration of these elements that both
contending parties would fix the price at that level, by
"delimiting" it from above and from below. By such action, no "fixed"
price would be determined, but merely a wider price-range, as distinct from
the case of perfect competition on both sides. The monopolists might just as
well decide upon $4.20 or $4.80 than upon $4.50. This situation is explained
by the fact that several factors entering into the calculation, such as the
number of workers likely to drop out at a certain wage level, or the
probability of outside competition, are not definitely known, but only to be
conjectured. The monopolists would naturally try to select the most favorable
point of the wage scale; but, owing to the uncertainty of so many elements
entering into the fixation of this optimum point, there results a certain
more or less elastic zone for its approximate location, just as in ordinary
market competition for prices, when negotiations are carried on with covered
cards, traders less experienced or less shrewd commit errors in sizing up
inside marked situations, so that actual prices are caused to fluctuate over
a wide range around the "ideal" market price.
Let us now turn to the other case, equally interesting and complicated,
the influence of "control" exerted by labor unions, through the use
of their instrument of power, the strike. Let us retain all previous
assumptions with the same figures as above: $5.50 for the value of the
product of the "last" worker, $1.50 as the personal valuation to
the workingman of his unsold labor, $3 as the minimum of existence, etc., and
introduce into our assumed case only one novel element, namely that the
workers of the industry under discussion do not compete against each other,
but that they be unionized, and thus be in a position to enforce their joint
demand for higher wages by means of a strike.
Now I do not for a moment deny that this coming into play of
"power" on the part of the workers may profoundly influence the
price of labor. It might even raise it not only above the level of $4.50,
reached in the case of reduced competition among the monopolists, but even
beyond the level of $5.50, which would have been attainable under perfect
competition. This last fact is particularly noteworthy and striking, for
hitherto we had regarded the value of the marginal product of labor, precisely
that $5.50, as the upper limit of the economically possible wage, and at
first sight it might look as if "power" could actually accomplish
something in contradiction to the price formula of the marginal-value theory,
something that did not conform to this law, but disproved it.
Here now enters into our explanation the distinction between marginal
utility and total utility, i.e., the fact that the value of a total aggregate
of goods is higher than the marginal utility of each unit, multiplied by the
number of units contained in the total. The fundamental question in the
evaluation of a commodity or an aggregate of goods is always how much utility
may be derived from the command over the good to be valued. Under the
assumption of competition among all the workers, the thing to be evaluated by
the employer is always the labor-unit of each worker. If the employer had in
his employ, for instance, 100 workers, his negotiations with each one of the
100 workers over his wages would merely hinge upon the question of how much
additional profits the employers would make by employing that one additional
worker, or how much he would lose by not employing this one last worker. In
that case we were fully justified in arriving at the marginal utility of each
unit of labor, that is, the increase in output which the labor of the last
one of the 100 workers adds to the total output of the enterprise, or $5.50.
But now this is different: in the case of a joint strike of all the 100
workers, the point in question for the employer is no longer whether he is
going to run his enterprise with 100 or 99 workers, which to him would mean a
difference in the output of $5.50, but whether he is to keep his enterprise
going with 100 workers, or not at all. On this depends not 100 times $5.50,
but obviously much more than that, if for no other reason than that labor is
what is called a "complementary" good, a good which cannot be
utilized by itself alone, without the necessary other
"complementary" goods, such as raw materials, equipment, machinery,
etc. If only one man out of a hundred withdraws from the enterprise, the
utilization of the complementary factors will, as a rule, be little
disturbed. One single operation — the one which can be dispensed with most
easily — will be omitted, or replaced, as far as possible, through a slight
change in the division of labor, so that with the deduction of one
man, not more is lost than the marginal product of one day's labor, namely
$5.50.
The withdrawal of ten men would cause a more serious disturbance. But a
changed disposition in the use of the remaining ninety workers would probably
make it possible to find some way for at least the most important functions
to continue unhampered, and the loss again to be shifted to that place where
it is least felt. A continued depletion of the complementary good,
"labor," would make itself felt more and more severely. While the
withdrawal of the first worker would have caused a decrease in the daily production
of only $5.50, that of the second might amount to a diminution of the output
by $5.55, that of the third by $5.60, and that of the tenth by as much as $6.
If, as would be the case in a strike, all the 100 men walked out, there would
be caused a loss, not only of the specific labor product of those 100 men,
but additional productive goods would cease to be utilized. The machinery
would have to stand still, the raw materials would lie idle and depreciate,
etc. The loss in the value of the product would increase out of all
proportion, far beyond a hundred times the last laborer's marginal product.
The loss, of course, would be subject to great modifications, according to
the actual conditions existing in each case. If the idle machinery and
capital do not suffer any other damage by being idle, the additional loss
would merely consist in a postponement of the completion of the respective
products from the capital goods, temporarily not utilized on account of the
lack of the complementary factor of labor. Their produce will be obtained in
an undiminished amount only at a later period, after the resumption of
production. This loss must at least equal the interest on the dead capital
for the period of idleness. It may amount to more, if the delay should involve
added losses, such as the inability to take advantage of favorable business
opportunities, whereby indirect depreciations may be incurred.
But the damage would be still further increased if the specific character
of the idle capital goods should not only cause a temporary delay, but a
definite curtailment in the profits, as for example in the case of perishable
raw materials, such as beets in an idle sugar refinery, or agricultural
products that cannot be harvested owing to the worker's strike, unused animal
power, such as horses, or the water power of an electric power plant. The
enforced shutdown may also threaten the fixed capital investments, as in
mines, where ventilation and water pumps must not stop, lest the entire plant
be destroyed.
How does all this affect the fixation of wages in the case of a strike?
Let us realize, first of all, that although the wage disputes are formally
concerned with the per capita wages for each individual worker,
to the manufacturer it is always a question of obtaining, or not obtaining,
the total labor of these 100 workers. He will either get all of the
workers, or none, according to whether the negotiations lead to an agreement,
or to a break. The decision as to how much wages he can pay at most will thus
hinge on the value that the hundred workers represent to him jointly. The per
capita wage is a secondary item, and is determined by dividing the total
value by the number of workers. To him, this quota represents only an
arithmetical concept, not a value; to him it does not represent the value of
a unit of labor.
But how high is the total value? This is explained by the theory
of imputation. The value of that aggregate of labor is derived from the value
of that amount of products which may be ascribed to the availability of that
particular total of labor, and this again is identical with the amount of the
product of labor.
Here comes into play a remarkable phase of the theory of imputation, which
I recently had to defend in detail against differing opinions.[7] For if the withdrawal of that
amount of labor, whose value we are trying to ascertain, not only prevented
the use of that labor itself, but also stopped the use of other,
complementary goods, the utility of these goods would have to be added to
that of labor, regardless of the fact that under certain circumstances the
use of labor might have to be imputed to its corresponding complementary
good, without which the products could not be obtained.
I shall merely recapitulate here without detailed discussion the various
steps of the argument leading to this conclusion. Fundamentally, the total
value of a whole group of complementary goods is dependent upon the amount of
the (marginal) utility which they possess jointly, and thus, in case of complementary
productive goods, upon the value of their common product.[8]
The distribution of this total value among the various units of the
complementary group may take different directions, according to the different
causation. If none of the units admits of any other use than joint use, and
if, at the same time, no one member contributing toward the joint use is
replaceable, then every single member has the full total value of the entire
group, while the other members are valueless. Each complementary unit is
equally capable of holding either one of the two valuations, and it is solely
the outside circumstances that determine which one of them shall be worth
"everything," by being absolutely essential in the ultimate
completion of the group, or which one is worth "nothing" through
its isolation.
In our case of an impending strike of all the hundred workers, the
employer is threatened with the total loss of the joint gain arising from the
use of the two complementary groups, labor and capital, to the extent stated
above, and this is why in that case he would have to attribute to labor that total
joint utility, including that part which under other conditions might have to
be attributed to the complementary capital goods. His subjective valuation of
labor must be based upon all these things.[9]
Consequently, the upper limit for the highest rate of wages will advance.
For all the hundred workers jointly it will rise beyond the hundred-fold
amount of the single value of each day's labor, that is, beyond 100 times
$5.50, at least by the amount of the interest of the capital left idle and
perhaps even above this, by the amount of the actual loss from perishing or
deteriorating complementary capital goods. Thus, for instance, in case there
be merely a postponement or loss of interest, it would rise above $550, up
to, say, $700 for each day; in case of a direct loss in the utilization of
the complementary goods, it would rise in proportion to the extent to which an
actual loss takes place, perhaps to $1000, perhaps even to $2000 per day. And
the maximum of the economically possible wage level for each individual
worker would thereby rise from $5.50 to $7 or even to $10 or $20. This means
that with any wage level remaining below this maximum, the entrepreneur
would, at least for the time being, fare better than if he were to cease
employing all the hundred men.
This "faring better" need, however, not imply actual profits to
the entrepreneur, but merely a smaller loss than he would incur in the other
alternative — the "lesser evil," which is, of course, to be
preferred to the greater one. This rise of the last possible per capita wage
to $7 or to $20, on the other hand, does not represent the
subjective valuation of one day's labor to the entrepreneur. This has already
been stated in the foregoing and it can hardly be sufficiently emphasized.
The employer would never pay that wage, if it were a question of employing one
laborer only. It represents the hundredth part of the total value of 100
laborers, which is a very different unit from the individual value of each
unit of labor.
In the wage negotiations between an employer and a labor union the range
would thus be limited by the value to the laborer of his unsold labor (i.e.,
the amount of $1.50 as his lowest limit), and by the per capita quota of the
total value of all 100 laborers at the rate of $10 as upper limit, to take
one of the three figures as an illustration.
In our imagined case, direct competition being absent on both sides,
entrepreneur and workers would meet each other within their limits on similar
grounds, just as the two parties of buyers and sellers meet in the case of
isolated exchange.[10]
In theory, it would not be unthinkable nor impossible for the rates to be
fixed at any single point within the wide range between $1.50 and $10. We
have, of course, come to know some circumstances that make it appear rather
unlikely, though not altogether economically impossible, that the wages be
fixed within the lowest section of the zone lying between the absolutely
lowest limit and the minimum of existence of unskilled labor; and for reasons
of similar nature, it is not very likely that the wage rate would be raised
up to a point near the upper limit of $10. That it could not be kept at such
a point for any length of time I shall try to demonstrate in a future
investigation which I consider of special theoretical import. But not even
temporarily will it readily be pushed so high. For any wage level
substantially exceeding the output of the "last worker" would meet
with a strong and increasing opposition on the part of the employers as
involving a loss to them. Before granting such a wage rate, they would probably
prefer to risk the decision of the supreme trial, consisting in fighting
matters out in a lockout or strike; although an intermediate wage,
approximating the actual service of the last worker, might conceivably be
granted by the employers, anxious to avoid the risk of the certain losses
involved in a strike, and the added uncertainty of its outcome. Nor would
workers find it to their advantage to push the wages up to level actually
causing losses to the entrepreneur, for this again might threaten them with a
restriction, or suspension, of work, and force them out of their jobs. Thus
there enters the question about the permanency of wages, which will be
investigated later.
On the other hand, the workers' difficulties will become all the greater
by the strike, the more excessive wage demands they make. The threat from
strike breakers or "scabs" from other branches of industry will
increase with the more favorable terms which the entrepreneur can still grant
below the refused rate of wages. If the striking workers should insist on a
wage rate of $9, a wage of $7 may perhaps already contain a very tempting
premium to scabs and substitutes, who in other occupations requiring similar
qualifications may obtain only a wage of $5.50, corresponding to the output
of the last worker. And once substitutes are employed, the cause of the
strike is usually lost, whereas, in the other alternative, the outcome is by
no means certain.
In a strike, that party wins, as a rule, which, popularly speaking, can
"hold its breath" for the longest time. To the worker, the strike
means unemployment. For the time being the worker may meet this loss by means
of savings accumulated for this purpose, by subventions from strike funds, by
consuming his property, by selling or pawning dispensable goods, or by
incurring debts as far as his credit will permit. With the longer duration of
the strike, these savings will become smaller and smaller until they are used
up. During the period of gradual diminution of savings, the marginal utility
of the rapidly decreasing means of subsistence goes up, more and more of
essential wants go unsatisfied, and more and more of the vital necessities
are neglected, with the increasing shortage of funds.
Finally the point is reached at which the very maintenance of life depends
on a renewal of income through work, if only at a modest wage: at this point
even the most obstinate resistance of the strikers is broken — provided, of
course, that the resistance of the opposite party, the employer, is not
crushed beforehand.
In the ranks of the employers there are the same phenomena. With the
increasing duration of the strike, the desire for a settlement becomes more
and more intense. The idle plant produces no income. Some of the costs of
production and at least the personal living expenses of the manufacturer
continue, and have to be met. If the entrepreneur has a large fortune, these
expenses may be covered from that. If not, then the pressure of the strike
will be felt much more rapidly and intensely. In any case, there are here two
very distinct phases of the effects of the strikes that should be
distinguished. The successive and increasing lack in the means of subsistence
may first threaten the business of the entrepreneur, and then, if there are
no funds left for the most urgent living expenses, his personal existence.
This latter, more intense effect of strikes, will normally arise only in
the most exceptional cases. Nor is it likely, for these and similar reasons
stated before, that in a strike wages will be fixed at the most extreme —
neither at the very lowest nor at the very highest — marginal regions of the
wide range "economically possible," at least for the time being. In
our illustration this zone was assumed to extend from $1.50 to $10, and a wage
rate below $3 would be just as unlikely as one above $8, although, as I want
specially to emphasize, such extreme wage rates are not unthinkable, nor
altogether economically out of question for a short period of time.
Most of what has been said so far is based on obvious and almost trivial
facts and observations which have become sufficiently familiar through common
experiences with strikes. I have merely restated these matters, so to speak,
in the terms of the marginal-utility theory, in order to make plain the essential
point of the theoretical principle under discussion, namely, that the
"influence of power" in the case of strikes, so familiar to all
engaged in industry, is not altogether distinct from, or opposed to, the
forces and laws of the marginal utility theory, but wholly in conformity
and in harmony with these, and that every deeper analysis of the
question, through what intermediate agencies and to what marginal points
"power" may control the course of events at all, must lead into the
more specific exposition of marginal utility, in the theory of imputation,
where the ultimate explanation is to be sought and found.[11]
There is another far more interesting question: When will the terms of
distribution, obtained through means of power, be of lasting effect?
This question is all the more interesting, in that it is by far the most
important one. Even the most ephemeral fixation of prices or wages may have
considerable importance to that group of individuals or for that short span
of time that happens to be affected by it. On the other hand, these temporary
fixations mean little or nothing for the permanent economic welfare of the
various social classes; just as the classical economists have held long-trend
prices to be far more important and challenging than momentary fluctuations;
thus Ricardo hardly touched upon the latter, and found it worthwhile only to
elaborate the theory of long-trend prices. Similarly, in the theory of
distribution, paramount importance is attached to the permanent trends
according to which the shares of the various factors of production tend to be
distributed as distinct from all ephemeral and temporary fluctuations. Even
the most ephemeral phenomena must also be understood and explained, if for no
other reason than that the laws controlling them are, in the last resort, not
different from those determining their permanent effects; but it goes without
saying, that that phase of our theory which covers those cases outlasting the
others in time and space will be far more important to us than the
explanation of rapidly passing exceptions.
But there is a second reason why it seems to me that the consideration of
the influences of "power" deserves greater attention from the
viewpoint of their permanency, for, as far as my knowledge of economic
literature goes, this most important phase of the subject has never been
investigated.
While the problem of the influence of power on prices as such has hitherto
been only scantily treated, and never in a systematic manner, in economic
theory, fundamental investigations into the permanent effects of such
influences of power seem to be totally lacking, so that here we enter, in a
certain sense, upon literary virgin land.
IV - The Various Alternatives
Let me again start from our concrete illustration, and discuss, one by
one, the various alternatives. What is typical and generally true in each
individual case will thus easily become clear, and, moreover, specially
stressed and summarized at the end.
Temporarily, as we have seen in our assumed conflict between the power of
entrepreneurs and workers, any wage rate between $1.50 and $10 was
economically possible, although it was not likely to be fixed, not even for a
short period, near the extreme upper of lower limit possible, but rather
somewhere near the middle of the total range of wages. In order to make our
discussion theoretically exhaustive, we shall have to consider both extremes,
as well as each one of the possible rate levels within the total range of
wages.
1. I
need not waste any words about the fact that a wage rate below the
minimum of existence — thus in our example below $3 — cannot
possibly be permanent. This follows from the familiar reasons stated often
and in detail elsewhere, pointing to the diminution of the labor supply as
the inevitable consequence of a wage level no longer sufficient for the
support of the workers' families, and to the subsequent increase of wages,
necessitated by the law of supply and demand — allowing, of course, for
familiar exceptions in favor, or rather in disfavor, of those exceptional
types of occupations which are being followed merely as a sideline by people
who draw their real means of subsistence from other sources.
2. Nor
can wages be fixed permanently below the rate of the most common type of
labor, in our illustration, below $3.10. This hardly needs any
further explanation, for the reason that all the causes applying to point 3
which follows, will evidently apply here too, even to a greater degree. The
exceptions, familiar since Adam Smith, for occupations connected with special
attractiveness or privileges and in which, therefore, many people are
satisfied with a smaller remuneration than that available in other less
attractive or less honorable occupations, will, of course, also apply here,
without, however, affecting the general theory of distribution.
3. Wages
higher than those of common labor, but below the "marginal product
of the last laborer" (in our illustration, wages between $3.10
and $5.50), will hardly be able to remain in force, if imposed through
temporary preponderance of power, certainly not when the use of that power
was limited to one particular group, such as to the workers of a single
factory, or to a single branch of production, while in other occupations,
requiring the same or a similar amount of skill, wages prevail commensurate
with the natural amount of the marginal product (in our case, of $5.50). For
although the personal discomfort connected with a change of occupation may
prevent a large-scale exodus of an entire generation of skilled workers from
a less remunerative branch of production into other, better-paid occupations,
the gradual effect upon the selection of occupation among the younger
generation of workers will be all the greater. They will naturally seek the
better-paid occupations, and shun those with exceptionally poor wages. Normal
deficiencies in the original stock of workers will no longer be met, and the
gradual depletion of employees will ultimately force the employers to offer
their workers a wage rate equal to that obtainable in other industries of a
similar type.
A more complex analysis would have to be made
in the case of a universal reduction of wages through artificial forces
affecting all lines of production. Such a contingency is, however, far less
likely ever to occur, for the reason that a universal coalition of
entrepreneurs of all branches of industry which alone could exert such
control would be extremely hard to organize, and still harder to hold together.
But let us assume such a case, at least for a certain period of time, for our
theoretical analysis. Obviously, the worker would then no longer find it
possible to escape into another, more remunerative branch of production, and
thus there would cease to exist that most influential factor, which, in the
case of a partial reduction of wages, would sooner or later ensure the
restoration of the original wage rate.
Instead, there would now appear some new,
although slow-working, factors within the ranks of the entrepreneurs. A wage
level fixed below the marginal productivity of labor results in a special
gain that goes to the employer, first, in the form of an increased profit,
which, however, in case of a prolonged continuance of this condition, will
have to be surrendered in part to the capitalist in the form of higher
interest, for the reason that pending on and owing to this condition other
equally profitable types of investment will be open to capital. The very fact
of an increased entrepreneur's profit will in itself alone work as an
incentive to the expansion of existing enterprises (this incentive might
perhaps be temporarily curbed by binding the old entrepreneurs to coalition
agreements) and also to the formation of new enterprises founded by outsiders,
not belonging to the coalition, who, of course, can attract the needed number
of workers only by offering somewhat higher wages. The increased interest
rate, moreover, will shift the margin of profits among the various more or
less capitalistic methods of production toward those with more machinery,
labor-saving devices, and so forth.
An increased interest on capital and a cheaper
supply of labor will transform the smaller profits into losses among those
producers near the margin of profitability, especially in these enterprises
where a low rate of interest prevails coupled with higher wages, so that
where previously a slight advantage had been found to exist in a more
capitalistic method of production, it now becomes more profitable to reverse
the methods of production through increase in the use of manpower, and a less
intense use of capital equipment.[12]
Naturally, this incentive will not lead to quick results. Capital invested in
such a manner in instruments of production will not suddenly be abandoned,
but rather tend to be used up first, or at least not be replaced, because
human labor, having become cheaper, will be preferred in its place. This
again will lead to an increased demand for labor which can only be met by granting
somewhat higher wages. These, of course, must not completely neutralize the
advantages of the less capitalistic method of production. This motive may be
operative both within and without the employers' coalition, and to a very
different degree among the various types of producers. It will be hardly at
all operative among those who had employed very little fixed capital and much
physical labor; very little among those with whom capital predominates to
such great technical advantage that even considerable changes in the level of
wages or interest will not bring about any transition towards a less
capitalistic method; but far more among a third group of producers, whose
technical equipment is such as to divide their methods of production just
equally between machinery and labor. These great individual differences will
not remain without profound influence on the probable course of events.
Industrial coalitions comprising the producers
of one and the same line of industry, or of similar industries will as a rule
be based on a harmony of interest, sufficient to favor a continuation of the
coalition that benefits all members equally. But if the coalition should
include certain groups whose interest makes them disagree in regard to the
desirability of a continuance of the coalition, then in all human experience,
harmony cannot be maintained, particularly not when the inevitable appearance
of outsiders pierces a hole through the victorious phalanx of entrepreneurs.
All employers, of course, stand to gain to some extent by keeping the wages
down, but these gains will differ widely in the various industries, according
to the physical distribution of capital and labor. In those branches of
production in which this gain is comparatively small, it may be neutralized by
the enforced inability to expand or to introduce more profitable methods of
production. Now, if an industrialist sees that the benefits he has sacrificed
in favor of the coalition are unscrupulously reaped by outsiders and feels
their competition more and more keenly, then the psychological moment has
come for his withdrawal from the ranks of the coalition; for those
industrialists whose particular situation would enable them to profit most
from an expansion and a change in their methods, in violation of the rules of
the coalition, will prefer to reap these advantages for themselves, before
their last chance has been destroyed by outsiders. And that is the beginning
of the end of the coalition: the reappearance of a steadily widening stream
of competitors with the final effect that the wage level will again be raised
from that dictated by superior control to the level of free competition,
i.e., to the level of the marginal product!
This kind of deductive reasoning may perhaps be
found to be convincing only in part. But it should be remembered that in
problems of this nature there are no other than deductive methods at our
disposal. We shall never be so fortunate as to assemble reliable direct
observations, or to make experimental tests. The assumed employers' coalition
embracing all industries has never actually existed, and if it should ever
come into being, it would soon disappear again, like all social groupings,
and it could not even be considered as an empirical proof of my deductions.
The question might still be, whether its dissolution was caused by the
factors cited in my deduction, or by some other, new factors. The reasons
given in my argument can, by their very nature, operate gradually only. And
conditions would hardly remain unchanged for so long a period as might be
necessary to produce these effects.
One would never be able to determine beyond a
question through purely empirical methods, whether the ultimate result was
due to the gradual undermining influence brought about by these alone within
the original state of affairs, or whether, and to what extent, it might be
ascribed to the advent of new factors. But precisely because we are dependent
in these questions upon deduction as the sole source of our knowledge, and
because they cannot be verified through direct observation, as is possible in
other cases, we have no choice other than to elaborate such deductions; and
these, of course, must be made on the basis and according to the methods of
economic theory, which alone after all, as we have seen, will explain the
influences of outside power. At the same time, we must observe that supreme
caution and precaution which the use of the deductive method always requires,
particularly where the lines of deductive reasoning are long and complex, and
where it is not possible to check them up, step by step, through empirical
observations.[13]
It is from these considerations that I wish to
submit here and in the following pages a few suggestions which, I realize,
constitute only a rough, unfinished sketch of such deductive thoughts as may
lead to a more detailed investigation later on, and in a general way at
least, may indicate the direction in which, in my opinion, the attainable
amount of knowledge and understanding may be found.
Let us then continue our inquiry into the wage
rates located above the level of the marginal product (within the range of
possible wages), and beginning from above, start with the highest conceivable
rates.
4. It
is obvious without any further discussion that such extremely high wages
cannot endure, because they would cause such great capital losses to the
entrepreneur that their perpetuation would lead to bankruptcy, although
temporarily they might represent the minor evil as against a prolonged
shutdown. (See above.)
5. Nor
can the wage level following next, as is equally obvious, remain in force
permanently because, though not threatening the entrepreneur with immediate
financial ruin, it would still cause him actual losses, although of a smaller
extent. If continued over a long period of time, even small losses must also
lead ultimately to financial ruin, so that case 5 would flow over into case
4; and without doubt, in such cases the entrepreneurs would prefer to
liquidate their unprofitable business, or at least give up the unprofitable
branches.
6. The
greatest theoretical interest attaches to the next-following level of wages:
can that wage rate endure which, though not causing any actual loss of
capital to the entrepreneur, absorbs or reduces the interest on his capital
investment?
Let us first answer a preliminary question.
Would it be possible for the entrepreneur's profits proper to disappear or to
be permanently reduced, while in other branches of business, such as in the
loan market or unproductive investments like real estate (apartment houses),
the rate of interest remained unchanged?
The answer is emphatically, No! Entrepreneurs
working with borrowed capital would suffer an actual loss from the difference
between the higher rates of interest that they would have to pay to their
creditors, and the lower rate which that capital would bring them in their
business, and thus the matter would lead back into the situation presented
under point 5 above.
Nor would those entrepreneurs who work wholly
or in part with their own capital be able to stay in business under such a
state of affairs. Once capital is invested in an enterprise, it may have to
content itself with a lower rate of interest, when and because its withdrawal
would not be feasible nor possible without a great depreciation of the
capital stock itself. There would be little inducement to replace used-up
capital funds, if the investment should promise a smaller return to its
owners than the same capital could produce in other kinds of investments,
such as in real estate or in the loan market. And the familiar and
often-discussed causes which, generally speaking, tend to equalize the
interest rate in the various markets of capital (not artificially isolated)
would surely also tend to prevent a one-sided diminution or elimination of
the entrepreneur's original capital gains. Their reduction would thus either
have to extend all over the other fields of capital employment, or they could
not occur at all.
The question under investigation thus assumes
the following form: "Can that wage rate remain in force permanently
which, though not affecting the entrepreneurs' capital stock, takes away
capital interest from business, or at least reduces the 'natural' rate of
interest prevailing under free competition?" In other words, can a wage
increase obtained by the use of power permanently absorb interest on capital,
or reduce it below its natural level?
The rather difficult answer to this question
will be somewhat facilitated if we investigate separately the two stages involved,
namely, the total and the partial absorption of interest on
capital.
I consider it impossible that interest could
disappear completely from a nation's economic life, with the exception of the
almost unthinkable case, hardly applying here, of capital accumulation far
exceeding all demand. The disappearance of the "incentive to
thrift," contained in interest, would eliminate that most important
portion of capital, which is formed through savings made only for the sake of
interest. It might happen, of course, that that other type of savings,
intended as a "rainy-day penny," might then be somewhat increased,
if people were to provide for their future by accumulating capital alone,
without the support of interest. But it is generally believed that on the
whole there would result a substantial diminution of capital stock, and the
subsequent shortage of capital supply would probably exert a strong pressure
in the opposite direction, i.e., in the direction of a renewed increase,
rather than in that of a permanent disappearance of interest.
But even though the supply of capital were to
be reduced, the thing that would be of decisive importance is the demand side
of capital. Let us assume for a moment that interest had actually disappeared
from economic life, i.e., that present and future goods could be exchanged
for each other on the same level without discount, and that loans could be
obtained without interest. The inevitable consequence of this would be an
increase exceeding all bounds in the demand for present goods. The empirical
law of the larger productivity of time-consuming, more highly capitalistic,
roundabout methods of production, could not fail to make itself felt, in the
sense that industrialists would compete with each other in lengthening the periods
of production, and would adapt their enterprises to the technically most
economical, but at the same time, most extended and time-consuming methods of
production.
The automatic check that counteracts such
tremendous lengthening of the productive process at present would have ceased
to exist; that check is the interest payment that automatically places a
progressive tax on lengthened methods of production. But once the lengthened
method of production were freed from the burden of interest, and did not cost
more than the shorter one, and at the same time, produced more than the
latter, a general incentive to an enormous prolongation of the productive
process would be called forth. It would, however, find its physical
limitation in the diminished subsistence fund of the workers during the
increased period of waiting, imposed by the lengthened period of production.
From the existing, and possibly reduced, subsistence fund, it would be
impossible to support the same number of workers for an indefinitely prolonged
period of waiting.
Instead, the trend of wages will necessarily be
held down from two sides within the margins of the possible price range.[14] First, the duration of the
periods of production, although somewhat longer, will be restricted to the
shortest possible time through a process of selection which will be made
under free competition in favor of the most profitable among the various
possible extensions of the productive process; and as this selection can only
be effected in regard to the most effective part of demand by granting higher
prices, which means, in this case, by granting a correspondingly higher
premium on the demanded subsistence fund, then, at least in regard to this
phase of the inevitable development, interest will be restored to business —
as I have described more fully in my Positive Theory of Capital.[15]
But at the same time something else will
happen. The just-described process of selection leads to a restoration of
interest and the periods of production will no longer be indefinitely
lengthened, although they will still continue to be somewhat longer. The
entrepreneurs, who profit by paying the highest premium on present goods,
will under normal circumstances be forced to resort to longer periods of
production than they employed originally. For while before the advent of wage
increases, the permanency of which we are investigating, they had to pay only
as much for interest and wages jointly as they now have to pay for the increased
wages alone, now, moreover, they have to pay for the restored interest. This
condition can only be met through larger profits than before, and these
increased profits can be made only through a corresponding lengthening of the
period of production, unless we should invoke the advent of new inventions
with a subsequent increase in the output, like a deus ex machina,
instead of concluding our argument by sticking to the original assumptions.
But then it would be impossible for the same number of workers as before to
be provided for throughout this extended period of production out of the
existing reduced, rather than increased, subsistence fund. There must
therefore be a limitation in another direction, a restriction in the number
of employed workers, in approximately the same proportion in which the
subsistence fund has been extended. This physical necessity will be met
economically through the motive of self-interest, with high wages and a low
interest rate under a more capitalistic method of production; that is, the
employment of fewer workers in lengthened periods of production is more
profitable.[16]
As long, therefore, as the enforced wages
prevail at that high level, there will come about a provisional state of
equilibrium of approximately this description: The general adoption of the
lengthened period of production will tend to increase the workers' per capita
output. The "marginal product of labor" will thus be increased, as
also by a reduction in the number of workers, and it will now correspond with
the enforced higher wage level that had risen beyond the "marginal
product" of the previous stage. Interest on capital that has been
restored is now lower than previously. The entrepreneurs manage to survive because,
with the increased "marginal productivity of labor," even the last
worker in their employment will still produce to them the higher wage to be
paid, and also because the surplus productivity of the entire lengthened
process of production will leave them a sufficient amount above the wage
increase to compensate them for the interest on capital. But this new
equilibrium is possible only at the expense of employing a smaller number of
workers. And it is for this reason that, in all probability this temporary equilibrium
will again be disturbed.
For now, the labor union will be split in two,
one group employed at a high wage, and another group not employed at all. The
greater an increase in wages has been enforced and the more the new methods
of production are protracted, the bigger will be the number of unemployed.
Two developments are possible. Both groups of workers may stay together
within the union, which implies that the unemployed members would have to be
supported by contributions from their employed fellow workers. If these
contributions are large, they will absorb the surplus accruing to the workers
from the wage increase, for it should not be overlooked that the total output
that can be produced by a reduced number of workers with the same capital,
must, even with improved methods of production, remain below that obtainable
from a full employment of capital and labor. Thus, nobody would be benefited
from the new artificially created order of things; as against the previous
"natural" order; many would indeed be at a disadvantage, which fact
would again be distinctly unfavorable to the prolonged maintenance of a
situation created through a strong combined pressure of power. But if the
standard of living of the unemployed workers were to be substantially reduced,
these latter again would not allow such a condition to persist; there would
be discontent, discord, and ultimately dissolution of the union. The
malcontents would sooner or later become outsiders, and compete by offering
their services to the entrepreneurs; the revived competition, with its
underselling, would put an end to the monopolistic dictation of wages back to
the level economically justified under the full employment of all workers,
i.e., to the "marginal product" of the last worker employed in an
again reduced period of production.[17]
If, ultimately the employed workers should fail to provide for their
unemployed fellow workers, then the same process would take place, even more
rapidly. The mass of the unemployed would enter into competition and even
more violently underbid wages.
One might perhaps think of an alternative in
another direction; namely, that the unionized workers might enforce not only
higher wages, but also the full employment of all workers at that higher wage
rate. But even though the workers might have the power temporarily to enforce
these conditions, they could not be permanent. For this would necessarily
lead over into one of the two alternatives considered above, under numbers 4
and 5. By being forced to pay the workers not only a wage that in itself is
higher than the entire amount of the original interest on capital, and in
addition to this a restored interest on capital (although somewhat smaller in
the aggregate), the entrepreneur will find that his costs have increased, and
he will suffer losses and sooner or later abandon the enterprise, or go into
bankruptcy.
Moreover, it is almost unthinkable that any
employer could ever be compelled to employ all workers available at a given
time. At best, the labor union may, through violence, prevent dismissals from
the former stock of workers. But any attempt to enforce the employment of
additional workers, in proportion to the natural deficiencies in their ranks,
or even that of an increasing number of workers, corresponding to the natural
growth of population, would be well-nigh impossible.
From all these considerations, which could and
probably ought to be elaborated in far more detail, I believe that a complete
absorption of interest and capital through artificial, enforced wage
increases is out of the question in the economic life of a nation. But would,
perhaps, even the partial elimination of natural interest on capital be
permanently possible?
I do not see any reason for assuming a course
of events differing from the one assumed above. A smaller increase in wages
at the expense of interest on capital will cause exactly the same reactions
and effects, only in a correspondingly smaller degree. A mere reduction in
the interest rate will at first not destroy the premium for saving contained
in interest, but merely diminish it; the effect of this on the amount of
future savings cannot be predicted with certainty.[18]
Possibly the amount of savings would decrease,
and possibly not. But this would not alter the general trend of events, as
shown in the preceding chapter of this inquiry, where I have purposely
mentioned incidentally only, the probable reduction in the supply of capital,
without ascribing to it any decisive influence. The determining factor is to
be found in the demand for capital, and in this phase of the problem it is
inevitable that each increase in wages beyond the actual marginal product,
followed by a reduction in the interest-rate, will tend to cause a
lengthening of the methods of production and thus a diminution in the number
of workers. If the entrepreneur is not to suffer any actual loss, which he
could not take for any length of time, the wage increase must be covered by
an increased marginal productivity of labor, which can best be brought about
through an extension of time for the various stages of production. This
again, under otherwise equal circumstances, can be accomplished only by a
simultaneous reduction in the number of workers, unless improvements through
inventions, etc., should happen to be introduced, or other developments of an
accidental nature should take place, contingencies which can be left out of
account.
Enforced unemployment of a portion of the
workers would also tend to lead toward the dissolution of the labor union,
only in a less intense degree, in accordance with the smaller extent of wage
increases attained by the labor union, under this assumption. The weakening
of the forces counteracting the continuance of such a temporary condition
does not mean a different result, but merely the postponement of effect. It
cannot mean that an adjustment exceeding the natural limits, if only by very
little, could last, nor can it mean that the suspension of a smaller number
of workers would not cause them to compete for employment. But it does
mean that such a condition will continue to exist for a longer period against
the pressure of minor influences, so that, for instance, trifling losses
caused by this temporary situation could be borne for a considerably longer
time by the employers, before they would go into bankruptcy or go out of
business; or else a small number of the unemployed might be supported from
union funds for a longer period, or, through moral pressure, be prevented
from underbidding the union members.
And this again may imply something else. As I
have already shown above, protracted periods of time are likely to bring in
their wake changes in other directions. If a process of economic change is
spread over a certain length of time, its general progress will, in most
cases, be affected by other incidental or independent outside causes, which
almost spontaneously will affect the general situation. Over a period of
several years, methods of production, or the business cycle, never remain
unchanged. The latter may move up or down, the former will most likely
progress, and if the interval is very long, there may even occur considerable
changes in the general economic structure, such as the number of population,
and their relation to the capital stock.
Besides this, another alternative is possible.
Those very impulses, whose normal effects I am trying to observe and
investigate, may themselves contain certain additional, almost accidental
effects on other external factors. For example, they need not necessarily,
but may, affect the technique of production. These chances should thus not be
left altogether out of consideration, but should not be inserted as a factor
in the series of deductions, as they cannot be foretold with absolute
certainty. In our case, for instance, the entrepreneurs may find themselves
pressed by the enforced wage increase, and this may form a powerful and
effective incentive for the adoption of technical improvements in the methods
of production, just as free competition is generally credited with forming a
powerful incentive to industrial progress. Or it may happen that the
permanent improvement in the standard of living attained by the workers by
way of an enforced wage increase may retard the growth of population, as is
commonly the case among wealthier classes, etc. Now, should some accidental
or incidental development occur that would directly or indirectly increase
the marginal productivity of labor, then it may also happen that the initial
wage increase, exceeding that marginal productivity, might subsequently
counterbalance the unexpected increase in the marginal productivity, and thus
remain in force permanently. This would be all the more frequent, the less
excessive the original enforced wage increase had been, i.e., the less it had
gone beyond the marginal productivity of labor existing at that time. But of
course, in the case of small wage increases, it is impossible to expect this
with any degree of certainty, because such accidental events as these may
fail to take place, or even have opposite effects. Business cycles may show a
downward trend, population may increase more rapidly than capital supply,
etc., in which case wages would be reduced all the more rapidly.
Those cases, however, in which a subsequent
change of economic environment may render permanent an originally excessive
wage increase obtained through force, might tend to confuse the theoretical
analysis. They appear to give empirical proof of the fact that, through the
dictate of power, wages can be raised above the limits laid down by marginal
productivity, not only for the time being, but with a lasting effect. On
close observation, however, they do not furnish this proof. The original wage
increase was the effect of a dictate of power. Its permanent duration,
however, is not the result of power, but of outside influences of a third order,
which have increased the marginal productivity of labor, and with that
increased the possible permanent higher wage level, quite independently from
the dictate of power, or at least without necessary connection with it. I
shall have to return to this point further on, in summarizing the results of
this investigation.
Before that, however, for the sake of
completeness, I shall have to consider a seventh possibility, so small,
however, in practical importance, as to be out of all proportion to its
theoretical complexity.
7. In
the scale of the possible wage rates, there enters, between that wage
that already absorbs a part of the interest and that wage level which
coincides with the marginal product of labor, another rate of wages which,
though exceeding the marginal productivity of labor, does not cut into the
reward of capital with this excess amount, but remains within the total
produce of labor. For when an increasing number of workers cooperate with a
given stock, each additional worker entering the field will contribute only a
decreasing addition to the joint product.[19] The last worker employed at a given time adds the
"marginal product"; each one previously hired adds a little more to
the total product. That is why the entrepreneur gains nothing from the last
worker employed — provided his wages just equal the marginal product, and
successively more and more from each previous worker, leaving out of
consideration the share to be attributed to the contribution of capital. Now,
if the wages increase above the marginal product, the entrepreneur will
suffer a loss from the employment of the last worker, or workers. This loss
may, however, be offset to some extent by the gain from the workers employed
previously. So long as this is the case, so long as the total amount of wages
does not consume more than is covered by the joint output of all workers
together, the share of capital need not be reduced.[20] The share of wages exceeding the marginal product
will then be paid at the expense of the real, pure profits which previously
had gone to the entrepreneur.
For the purposes of this investigation we must
now ask whether such a wage increase, affecting or absorbing, as it would,
only the entrepreneur's profits, if achieved temporarily through a dictate of
power, could possibly remain in force permanently. This question is, it
seems, even harder to answer through methods of deductive reasoning than was
the case in previous parts of this inquiry, and it is altogether unsuited for
an empirical test. There would be no lack of forces counteracting the
continuance of the new wage level, but they would be weak, and only gradual.
The entrepreneurs suffering losses from the
last worker employed will endeavor to reorganize their enterprise at an early
opportunity, so as to reduce the number of workers by eliminating those
causing losses. There may be some opposition made to such a reorganization on
the part of the workers who will not tolerate any dismissals; this may postpone
the elimination of the excessive number, until natural vacancies occur that
are no longer filled. Moreover, the best possible organization of the
enterprise with a reduced number of workers will require a change in
technical equipment. If extra losses through the sudden elimination of
capital equipment are to be avoided, this can also be effected only
gradually, by using up the old equipment.
During these protracted periods, however, which
thus would counteract the effectiveness of the other influences, weak in
themselves, all sorts of changes in the general situation may arise that will
affect the upward and downward trend of wages far more violently, or
counteract them altogether; the small waves emanating from these influences
will melt away unnoticed and imperceptible under the much higher wave of new
economic factors. To test this in practice would be practically impossible;
all the more since changes in wages affecting merely profits, without
affecting the other factors of production, must of necessity be of very
limited nature. A general wage increase enforced over the entire nation would
affect both great and small, strong and weak enterprises, and a wage increase
that is to be fully met out of the net profits of entrepreneurs, even in the
weakest types of enterprises with the lowest profits, can hardly extend very
far. For as soon as it became appreciable, it would cut into the capital gain
of at least some of the entrepreneurs, or into capital itself, whereby the
matter would lead over into one of the cases discussed above. A conclusive
theoretical investigation, therefore, should not pass by this seventh case
without at least an attempt at a more detailed investigation, which would
meet even greater difficulties then those indicated here. However, the
greatest practical and theoretical interest does not attach to this, but to
the previous case, number six, which is concerned with the
question as to whether any artificial influence of power may or may
not be able permanently to increase the share of labor at the expense of
that capital.
As the reader has seen, I was not able to answer this question
affirmatively. I know quite well that this part of my belief will probably
meet with very strong opposition, and that I will be accused of relapsing
into the old, outgrown theory of "pure natural laws" in economics.
I also know that many will find a strong empirical contradiction of my views
in the undeniable fact that during the last decades countless strikes have
led to an improvement in the workers' economic status never abrogated
afterwards, and that almost universally and everywhere the standard of living
of organized labor, which is able to apply the lever of power, is higher than
that of unorganized workers.
But I believe I am able to meet both these objections. It would certainly
never occur to me to attempt a revival of the old concept of "pure
natural laws" in our economic science and therewith to oppose the belief
in the effectiveness of the influence of control. On the contrary, I do
believe in the effectiveness, in fact in a considerable and far-reaching
effectiveness, of power, but I do not believe in its omnipotence;
and since a careful analysis has shown me that these economic influences of
power are in themselves based on motives of economic self-interest, I cannot
close my eyes to the fact that any situation brought about by means of
"power" may in itself again bring into play motives of
self-interest, tending to oppose its continuance.
If an entrepreneur is induced, through the motive of self-interest, to
select the "minor evil," and permits a wage increase exacted from
him, then an analogous motive of self-interest will urge him to reorganize
the various factors of production by means of which he produces his goods. If
the factor of production called "labor" has become more expensive
than before, in comparison with the other factors of production, through an
extorted wage increase, then it is almost unthinkable that the same relative
apportionment of the various factors of production would remain the most
rational in an economic sense.
If the entrepreneur finds his hands tied by the price of labor, but not in
regard to the physical equipment of his factory, and he desires to adopt the
presently cheapest combination of factors of production, he will prefer a
combination different from the one used before, one that will enable him to
make savings in the now more costly factor of labor, just as, for example, an
increase in the cost of land may cause the transition from extensive to
intensive methods of cultivation. If, ultimately, this saving in the now more
expensive factor of labor continues to lead to the reduction in the demand
for labor described before, which will ultimately render the enforced wage
rate untenable, then it is no longer nature that has won a victory over
power, but it is merely a new motive of self-interest, produced by changed
conditions, that has prevailed over another motive of self-interest operative
at another, no longer existing condition; or, stated more correctly, the same
motive of self-interest that has led to the selection of the relatively most
favorable combination of means of production will, under changed conditions,
have made itself felt in a different direction.
This is not a belief in "natural economic laws," but merely the
rebuttal of the shortsighted idea that if, after a profound change in the
costs of the various factors of production, the trend of economic
self-interest continued to work in the same direction as before, that therefore,
one had to submit to the dictates of power as if they were imposed by
providence, and to cease to defend one's self-interest. I emphatically repeat
that I do recognize the effectiveness of the influence of outside
power in distribution, both in theory and, to a considerable extent, in
practice. And I might also mention the fact that it makes no difference
whether these artificial influences of outside control emanate from monopoly,
such as employers' coalitions of labor unions, or from a direct intervention
by government authority. The reason why I have not specially mentioned or
discussed this latter case is merely that it seems to me to differ in motive
rather than in method of application from the far more frequent case of
control exerted by contending parties. I believe, for instance, that the
legal fixation of a minimum wage will have to be interpreted in its effects
in the same way as the dictate of wages by a well-organized labor union.
But in order not to leave any room for misunderstandings, I shall once
more summarize the results of my investigation: Temporarily at least, the
influence of outside control may produce intense and far-reaching, in fact
very profound, effects. Under certain conditions these effects may become
permanent, particularly when they are merely applied to neutralize an
opposite influence of control that previously had deflected the dividing line
away from its natural position. Thus, for instance, a strike may achieve an
increase of wages up to the point of the marginal product, whenever the
entrepreneurs had previously held the wages down below the product
by force of their monopoly power. Furthermore, when a subsequent
economic development suddenly transforms the original, artificial dividing
line into a natural one, then the advent of power simply means a temporary
anticipation of a development that would equally have taken place without
such intervention, only later. Finally, control may temporarily be equally
successful when it leads to certain lasting effects, and to efforts among the
defeated party to improve its economic status, so that this improved
condition may again become the "natural" condition. This
contingency, however, will always occur only as an exception to the general
rule, and can never be expected with certainty to take place, but it does
represent the most favorable and outstanding combination for effective
dictates of power: For in this case, and probably in this case alone, can we
claim with a certain amount of justification that not only the advent, but
also the continuance of a rate of distribution elevated beyond the natural
rate has, even though only indirectly, been caused through the influence of
power.
But apart from these special cases stated before, there is, in my opinion,
not a single instance when the influence of control could be lasting as
against the gently and slowly, but incessantly and therefore successfully,
working counterinfluences of a "purely economic" order, called
forth through that artificial interference and the new situation created
thereby.
And, I hope to have made clear, there is one more thing that not even the
most imposing dictate of power will accomplish: It can never effect
anything in contradiction to the economic laws of value, price, and
distribution; it must always be in conformity with these; it cannot
invalidate them; it can merely confirm and fulfill them. And this, I
think, is the most important, and the most certain, conclusion of the
foregoing industry.
But how about the second objection I anticipate, namely the alleged
empirical counterproof that the practical experiences with strikes and wage
struggles seem to have supplied during the past generations?
Well, if these are interpreted correctly, they do not supply such a
counterproof. For whenever a strike has led to an enduring success, there
always appears to have prevailed one or the other additional circumstance by
which, in my opinion, the permanency of this result can be explained. In most
of these successful cases, the labor organizations have very generally found
a condition favorable to their efforts, because competition among the
entrepreneurs to the detriment of the workers had been absent. Under such
conditions, when employer organizations enjoy a great advantage over the
unorganized workers through their monopoly or quasimonopoly, the influence of
power is applied, in the sense of our theoretical assumption, merely to
neutralize and eliminate for all time an opposed influence of power. This is
probably at least a plausible explanation for the actually improved condition
of organized labor over unorganized labor.
A second reason for this may be found in the fact that, wherever an
increase of wages in the economic world is about to take place, organized
labor may accelerate its advent by using their power, and thus always keep a
step ahead of unorganized labor. And, finally, one should not overlook the
fact that sometimes it only appears as if conditions among organized labor
had been improved. For as the skillful or more highly qualified types of
workers are more often and more generally in the advantageous position of
organizing than are the common or unskilled workers, the contrast between
organized and unorganized labor may often coincide with that between skilled
and unskilled labor. The former, by virtue of general economic laws, have in
themselves a claim to higher wages than the common workers. The higher wage
level of labor unions as compared to unorganized labor must not, or at least
must not unreservedly and exclusively, be ascribed to the influence of power
exerted by their unions.
Moreover, our generation has passed, and is passing, through a period
when, omitting ephemeral fluctuations, the general trend of economic progress
was and is continuously highly favorable to a wage increase. Therefore, it
has never been really possible to test by way of experiment or actual
observation whether an enforced increase in wages, achieved by means of a
strike, might not perhaps have been gradually demolished again by those
gently and slowly working counterforces, the undermining effects of which I
have referred to above. In every case there always is a great amount of
counteracting and modifying outside influences which, in the majority of
cases, in their net results were favorable to the elevation of the
productivity of labor and the increase of its marginal product, which alone
ultimately determines the wage rate.
And thus the great part of the considerable and lasting wage increases of
the past generation may easily be explained by the combined factors referred
to in my analysis: At first, these wage increases were caused by the labor
unions and strikes. But the reason why they could be maintained without being
rescinded was that the stupendous progress of our times continuously produced
such great technical improvements, improved methods of utilizing human labor,
and coincided with a substantial increase of population, and an even larger
increase of capital. But we have no way of showing how things would have
turned out, or what they would be at present, if those successful strikes had
led into a period of depression, or of moderate, slow progress, instead of coinciding
with a period of the most stupendous progress, so impetuous that many a blind
enthusiast has seriously begun to question the iron foundations of Malthus's
"law of population."
And finally there is here too a sense in which merely the impression of a
lasting wage increase is being created, where in reality no increase has
taken place at all. Many a wage increase obtained through strikes has been
neutralized, not through any formal wage reduction, but through the increase
in the cost of living. To what extent a subsequent rise in prices of certain
important means of subsistence, together with a general indirect increase in
the cost of living through depreciation of money, has deprived wage increases
of their reality and transformed them into quite immaterial nominal money
increases at best, is a much contested question. Personally I do not by any
means agree with the contention often made by socialists that the wage
increases obtained during the past prewar decade have altogether disappeared
in this manner. I rather believe that a considerable part of them have been
genuine and permanent in character; but this is true only in part, and as
regards the other part, that process of absorption through quiet and
imperceptible counterforces, to which I have referred already, has actually
taken place; it is the same story in a different form.
It may be that my analysis, which I personally do not consider exhaustive
by any means, may have to be amplified, elaborated, and corrected in many
points. To me, the essential thing is that in the problems discussed here we
need, in any event, a new method of approach, free from the preconceived
notion that this entire question has been decided long ago. The struggle
between the natural and the social categories has been fought over twice
already in economic science, and in both instances decided by an error of
judgment: the first time by the classicists in a one-sided manner in favor of
the natural laws; the second time in the modern theories of social
distribution, with a similar partiality in favor of social control. What is
needed is to institute the whole procedure again, and to finish it, without
prejudice, on the basis of the trivial truth, not sufficiently acknowledged
so far, that the influence of social control does and must harmonize with the
formulas and laws of pure economic theory.
In order finally to avoid new misunderstandings, let me add a last word
that should not remain unsaid at this place. John Bates Clark, whom I had to
oppose polemically on several occasions on important questions, and whom I
look upon as one of the most original and deepest authorities of our science,
has, on a certain occasion, set up a very important and distinctive line of
demarcation, with the felicitous and characteristic terms of
"functional" and "personal" distribution.[21]
"Functional" distribution determines the rate according to which
the individual factors of production are to be recompensed for their share in
production, irrespective of the person who has made that contribution, and
without regard to the question of whether any single person has contributed
much or little. Functional distribution thus explains the division of the
total national dividend into the great categories of wages, rent, capital,
and profits.
"Personal" distribution, however, explains the size of the share
that each individual obtains for himself from the national dividend without
regard to the function from which he obtains it, and particularly regardless
of whether he receive his share for one single, or for several, functions
contributed simultaneously.
A supplement to Capital
and Interest, this book is indispensible for understanding both the
theory and the mind of the economist who was the teacher of Ludwig von Mises
and the master of the theory of interest
Functional distribution explains high and low wages, high and low rates of
interest, etc.; personal distribution explains large and small incomes,
indicating how one and the same income of $100,000 may just as well result from
wages of a well-paid bank president, or from rent, or from high or low
interest, or from a mixture of several functional types of income, or how a
modest income of $1000 may just as well be that of a worker without capital
or that of a small capitalist or landowner.
Functional distribution explains relatively few and simple facts of a
general nature; personal distribution gives us highly colored, mosaic-like
pictures, resulting from the application of those simple and general laws of
distribution to a vast variety of data, and explains the function, amounts,
and qualities that have been contributed by each individual to the total
production. The primary object of all scientific theory of distribution, and
thus also the object around which have centered the old disputes referred to
above, is functional distribution.[22]
These statements I have made regarding the limitations of outside control
of distribution apply only to functional distribution. As to the influence of
control on personal distribution, the limits are infinitely more elastic,
both as to intensity and as to the lasting effectiveness of that influence.
Since outside control may also permanently change the other factors to which
the laws of functional distribution apply, it may happen that certain effects
in the sphere of personal distribution may be brought about without temporal
limitation. When the government of a country turns proletarians into
landlords through distribution of land, they and their descendants may, for
all time, find their income increased by rent from land, quite regardless of
how the line of division between rent from land and wages of labor may be
drawn in functional distribution. And if a socialist state should introduce
common ownership of all means of production and transform all capital and all
land into social property, in the produce of which each member of society
share in one way or the other, then for all future, or at least as long as
such socialistic order may continue, all personal shares would, in the same
or similar way, be composed of the produce of each one's own labor, and an
equal contribution from the produce of the social property, in a manner
widely and permanently differing from our present system of personal
distribution.
Notes
[1] "Die Soziale
Kategorie in der Volkswirtschaftslehre," Berlin 1896; "Der Zweck in
der Volkswirtschaft," Berlin 1909.
[2] I may refer, for instance,
to my statement in regard to two complementary parts of the price theory,
published as early as 1886.
See my "Foundations of the Theory of Economic Value," in
Conrad's Jahrbuecher, N.F. 1886, Bd. XIII, pp. 486; and my Positive
Theory of Capital, Chap. IV.
[3] Of course, there must
always exist a certain minimum of outside interference, as shown in detail
further on, because there always must exist a social order of some kind.
[4] A few gratifying attempts
to fill this gap have begun to appear in recent English and American
literature, particularly in the form of a careful study of the theory of
monopoly prices. But these attempts do not suffice to render superfluous the
presentation offered in these pages.
[5] See Positive Theory,
3d Ed. Chapter IV.
[6] Review in Vol. 21 of
Zeitschrift für Volkswirtschaft, Sozialpolitik und Verwaltung, 1912, p. 284;
similarly also Oswald versus Liefmann in Zeitschrift für Sozialwissenschaften,
N.F.
[7] Positive Theory of
Capital, Book III, Chapter IX on the Theory of Value of Complementary
Goods (Theory of Imputation).
[8] Positive Theory,
Book III, Chapter IX
[9] Naturally, I cannot, in
passing, review the entire difficult and complicated theory of distribution
with all its details, and have to ask the readers who are interested in the
complete discussion of the foregoing conclusions to read the fuller
explanation given in my Positive Theory of Capital.
[10] Positive Theory,
Book IV, Chapter II.
[11] I need not call the
attention of those familiar with the theory to the fact that all of what I
have said here is absolutely in conformity with the so-called "theory of
marginal utility," even in parts where I had to deal with the concept of
total utility. For this is merely a term introduced into the modern theory of
value, chiefly by the Austrian School, as one of its particularly
characteristic traits. This same theory, of course, covers and explains those
cases in which valuation is based on total utility as well as those far more
frequent cases in which valuation takes place literally from a "marginal
utility." (See my Positive Theory of Capital, Book III).
[12] That, and how low
interest and high wages tend to make for the lengthening, and high interest
and low wages for a shortening, of the average period of production, I have
shown in my Positive Theory of Capital, Book VI, Chapter X.
[13] See preface to my Positive
Theory of Capital.
[14] I do not wish to take
into account that the assumed increase in wages would also increase the
standard of living at which the workers would have to be maintained; this,
however, may be offset by the lower rate of interest with which the
"propertied classes" would have to content themselves after the
elimination of interest on capital.
[15] Book VII, Chapter III.
[16] On this subject, see my
detailed discussion in Positive Theory of Capital, particularly the
comparison on the table of p. 451, to which I merely wish to add that the
assumption of a totally perfect competition has in this case been eliminated
by our present assumption, at least on the side of the workers who have
eliminated underbidding by strictly cooperating with each other.
[17] I fully realize that a
lengthening and shortening of the process of production cannot be carried out
at a moment's notice, without trouble, in that it always affects the entire
structure of fixed capital. But, on the other hand, it is hardly probable
that the pendulum would swing to the full extreme of a complete disappearance
of interest and back toward the original starting point. It would be far more
likely for those economic forces that swing the pendulum back from the
extreme towards the starting point to intervene long before that point had
been reached, and to keep the swing of the pendulum within much narrower
limits, thus restricting the technical changes in production necessary in
adaptation to the respective prices of the factors of production. But as I
did not wish to make any omission in the method of presentation, I was
anxious to consider also the extreme cases, with their countereffects, just
as if they actually occurred in practical life.
[18] Compare this problem
with the interesting discussion in Cassel's "Nature and Necessity of
Interest," pp. 144 ff.
[19] According to a not
entirely uncontested variation of the law of "diminishing returns."
[20] I wish to state that,
in reasoning thus, I purposely omit all such losses as may be caused by the
partial elimination of workers through interference with the existing
organization. I assume, as it were, an enterprise that can be reorganized
without difficulty, as indicated above, when I said that the capital employed
was to be constant in its amount, although not in its physical composition.
[21] Distribution of
Wealth, p. 5.
[22] "The science of
distribution does not directly determine what each person shall get. Personal
sharing results from another kind of sharing; only the resolving of the total
income of society into wages, interest, and profits, as distinct kinds of
income, falls directly and entirely within the field of economics."
Clark, Distribution of Wealth, p. 5.
