Note: I want you all to be highly critical of my posts on factor shares – and where you can throw literature at me. I wrote a bunch of posts in a single day based on one book (and some prior knowledge), I have no appeal to authority here and would love to have your ideas thrown in there 🙂
Last time out we discussed some points on classical factor shares. The next essay in this book is on Marx’s theory of income distribution – so what are some of the points here.
We start with a classical distinction, but it is broken down into “value of labour power” and “surplus value”. The value of labour power is defined to be the value of all wage goods when wages are at their subsistence level (note, remember subsistence is “normal” in this lingo). Surplus value is the remainder – so it includes not only profit, but rent and interest as well.
As previously stated, the classical view of the economy was a model created with a focus on dynamic processes – as compared to the later emphasis on comparative static models. While our previous discussion focused on an “income” factor of GDP (rent, profit, interest, wages) we can also think in terms of “expenditure” factors of GDP (namely, consumption and investment). Marx’s focus was on net product, so the process of capital accumulation that would occur given this expenditure distinction – and the recognition that some of the current capital stock would depreciate.
Sidenote: Like most economists, Marx tends to view profits as heading into investment and wage income as heading directly into consumption – this is due to the idealised characterisation of “types” we use to articulate these issues. In truth, real life individuals are made up of “types” – they are part landowner, part capitalist, part wage earner. Furthermore, the way we measure these things is “fundamentally biased” as a result.
Wage setting behaviour and the labour share
As a result, in this analysis we need an idea of wage setting behaviour. Again Marx leans on classical theory and takes the real wage to be given. Given this, changes in the distribution of income are inherently seen as changing the relative rate of return for investment in different industries – essentially an increase in the share going to wages (given the class view of factor incomes) is seen as increasing demand for “necessities” and lowering demand for “luxuries”, leading to a change in investment patterns. In this way, increases in the money wage can lead to a long term increase in the real wage once the process of changing the allocation of investment is finished.
However, some points that do not get mentioned in the essay is that we will get lower aggregate investment levels – or the inconsistentcy that exists in assuming that “all profits go to investment” followed by “capitalists purchase luxury goods”.
The idea of income transfers working by changing investment patterns is sensible, I believe I’ve seen this pointed out before 😉 . But to analyse this we require a better idea of how investment patterns change than the classical analysis of factor shares can give us!
Starting at a point where productivity is fixed and technologically determined, but where the capital stock is growing, Marx (like Smith) states that employment grows at the same rate as the capital stock (namely the capital-labour ratio is a constant). For the classical and Marxist economists, capital accumulation in this environment leads to higher wages – of course this in turn will lower the rate of capital accumulation by lowering profits. Unsurprisingly, this starts to sound like there will be a steady-state where net capital accumulation and population grow at the same rate 😉
An interesting point here is that, once we start discussing wage determination in this way, we start moving away from the idea of subsistence and instead implies that “the wage is determined by an independently given long-term rate of accumulation”. However, it is important to note that Marx often does not assume this – and does leave real wages fixed.
This does not sound very Marxist – however, there are assumptions we can loosen here, primarily that labour productivity is given. Here we get the idea of rising capital intensity and labour saving technology. In this context, investment in labour saving technology REVERSES the impact on labour demand from capital accumulation, thereby reducing wages.
Note: As we will see later, this is an issue that is easier to think about once we have a marginalist framework on hand.
However, the wage result is not so much part of Marx’s thinking – instead the drop in labour demand creates a pool of surplus labour with wages (the price) fixed. In this environment, and including fixed real wages and fixed output per worker (but rising capital per worker), profitability falls – and capitalism is inherently unstable. These assumptions are not necessarily consistent.
If we move past the political polemic about Marx, his work on distribution sits neatly within the economic discipline. In fact, I would argue that his work can most profitably be read as trying to extend the understanding of the determination of subsistence/natural wages in the face of social/cultural constraints and the relationship with other factors of production. His language about the “wage bargain” is a common part of macroeconomic analysis today.
If anything this essay reinforced a salient point about Marx’s writing to me – he was trying to add flavour to a system that is determined “simultaneously” by holding different things constant than other authors had. In that environment, his theories often will be contradictory, but the nature of the analysis is useful for creating knowledge.
The essay concludes by discussing the “three stages” of an economy: a poor stage with low levels of capital, where the wage bargain helps to determine the return to labour strongly, and factor shares are indicative. A developing stage where capital accumulation and productivity growth rates are rapid, here wages are driven by productivity and factor shares are relatively unimportant. A developed stage where we are back to factor shares mattering. I don’t necessarily agree with this – in essence what matters is an estimate of the “marginal effects”, in all circumstances the use of factor shares betrays that point. However, it does echo a lot of the discussion from economists of all stripes about distribution, growth, and policy.
Next time, we meet the neo-classical and Austrian economists and discuss marginalism.