By Arjun Jayadev,Associate Professor, University of Massachusetts, Boston. Originally published at the Institute for New Economic Thinking website
At some point during their undergraduate education, economists will encounter an apparently innocuous equation that will forever change their way of thinking: MPL=w denotes that a worker’s remuneration is equal to his or her marginal product in a competitive labor market. In other words, your wage is determined by what you contribute to output.
This equation forms the benchmark assumption of the labor market (from which later deviations are allowed), and underpins the standard defense of income inequality. If a worker is paid according to her marginal product then her wage is ‘just’ and deserved, because that is what she contributed to social output. The theory that the distribution of income and wages reflects the marginal contribution of different individuals to output is the theoretical foundation in economics for what is known as ‘just deserts’, and has been used to justify growing social inequality, notably in the recent argument by Greg Mankiw in defense of the wealthiest 1 percent. Its thinking reinforces the idea that economics assumes a just world.
In a new paper, MacArthur award winner and Professor Emerita Nancy Folbre systematically and thoroughly dismantles the notion of just deserts. She argues that, for a wide range of reasons — including the fact that markets that are not competitive, a lack of appropriate governance, opportunistic manipulation of markets by powerful groups, collective action and similar real world factors — there can be a very large gap between contribution to social output and wage outcomes. She examines a wide range of situations in which outcomes deviate considerably from the textbook ideal of the normal functioning of competitive markets. Her evidence suggests the need for serious re-examination of the just-world assumption, and invites instead a focus on the factors that shape vastly different economic situations for different individuals.
Folbre has spent a lifetime working and understanding phenomena outside the remit of competitive labor markets, most recently in understanding the crucial importance of the care economy and reciprocity for the sustenance of society — the subject of a wide-ranging interview with Folbre conducted by the Institute.
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Yves here. A section of the INET summary of the Folbre interview, to give you a taste of her observations:
Some 26 million people provide unpaid health care services in households. Commercial care is increasing, in part because of the aging of the population and the increased participation of women in the labor market. Children, the sick and the elderly still need to be looked after, and there are fewer people at home to look after them. Conditions of work in the care industries are poor, with low pay and little training; fewer than half of all child-care workers receive full health insurance, for themselves or their own children. The quality of care is also often poor; some 40 percent of nursing homes repeatedly fail health and safety inspections.
But care is significantly undervalued, particularly in an economic sense, Folbre argues, in both the household and in the labor market. In order to prosper, a society requires a continuing flow of individuals, knowledge and dispositions (such as reliability or inventiveness or trust). These resources can be thought of as flowing from a stock. But the stock is itself produced in large part by care. The measurement of gross domestic product involves a heroic effort to impute a value to the services provided by the stock of owner-occupied houses, as Folbre points out; no such effort is made to impute a value to ”happy, healthy and successful children.” It is something that does not readily lend itself to an array of mathematical economic models.
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The equation looks right, except for the fact that unless we’re all in goods production jobs, it’s impossible to define marginal product. Lots of economics ideas were conceived in 18th/19th century, when production of goods (industrial and agricultural) was most of the economy. It’s not now, but economics didn’t seem to catch up to the fact.
Services have always been most of the economy or trade. It was even less acknowledged then than it is now.
I thought the “Cambridge Controversy” debate put an end to the neoliberal fantasy of wages being equal to Marginal Productivity way back in the 1960’s?
Only for those paying attention, which doesn’t include neo-neoclassical economists.
Yes,
But part of the Samuelson consensus was to say yes, so what? And ignore this outcome.
Ricardo “legislated” the iron “law” of wages by claiming that labor “is” a commodity, then “ratified” this “law” through unchallenged repetition…the iron “law” of population was “legislated” by a reverend, by extrapolating from dubious and unreliable “data”, then “ratified” this “law” through unchallenged repetition…to this day many psittacists consider these “laws” as irrefutable…
Unchallenged AND in tandem, these “laws” have the effect of embedding the “mind-fukkery” conclusion that poverty “is” ineradicable.
Learned a new word today – thanks Alejandro!
Psittacism: (spellcheck doesn’t recognize it, hmm) speaking in a mechanical manner; as a parrot speaking words without regard to meaning.
excellent, excellent point.
http://www.nakedcapitalism.com/2016/01/are-economists-in-denial-about-whats-driving-the-inequality-trainwreck.html
http://www.nakedcapitalism.com/2016/07/the-cambridge-capital-controversy-or-why-microeconomics-is-all-wet.html
Thank you for these links.
I think that is “desserts”, not those sandy places where it never rains
My income is just deserts.
See here
One of the biggest Freudian slips I’ve seen on the Intertubez. I like it.
That’s a common misconception. Your deserts are what you “deserve”. It has nothing to do with “desserts”. But you’re not as wrong as you would have been 20 years ago (-:
Quite so.
desert, noun.
3. That which is deserved; a due reward or recompense, whether good or evil. Often in phr. to get, have, meet with one’s deserts.
OED
hey i’d be satisfied with just appetizers. crackers, even. breadcrumbs is my line in the sand.
Learn something new every day! Or even the day after…poor English…so few words, so many meanings. Just kidding, of course, but we were examining all the meanings of “crib” the other night. And how words like “gay” and “trump” change over time.
Wouldn’t you want pretzels?
Economics uses quite an impractical logic. Everything has to adjust to some imaginary situation which may not bear much resemblance with the actual.
Mankiws paper starts with the word “imagine”, then follows with the predictable potpourri of unchallenged presuppositions…the word “imagine” has the (intended?) effect of disarming the skeptics…ponder Steve Jobs or anybody else as the sole “developer” of “the” ipod—absurd, innit?
Really the entire field seems based on confusing the map for the territory.
“Crafting the Narrative” requires suspending critical thinking, too do so requires befuddling the audiences mind with key mental anchoring points premised on some suggestive belief[s…..
Once these are installed into the audiences minds the narrator can then use them to weave the desired narrative i.e. gold is – real – money…. – natural – order…. or any other ex nihilo axiom comported to law… et al…
Dishevled Marsupial…. this is the terrain of Theoclassical economics….
I have been poor as an adult, and now I am at or near the 1%. I have not become smarter, I am probably less hard working, and I have not learned new skills, obtained new qualifications, or become more moral in that time.
“I returned, and saw under the sun, that the race is not to the swift, nor the battle to the strong, neither yet bread to the wise, nor yet riches to men of understanding, nor yet favour to men of skill; but time and chance happeneth to them all.”
It sounds like she’s trying to bridge from the fairly well-developed critique of the undervaluation of women’s work to wage labor in general. Bravo.
Not to reduce or dismiss her argument, but I’d think that Marx’s basic point about capitalism, that the wage labor system was more successful at hiding exploitation than the raw forms of the domination of labor common to feudalism, is relevant here. You can certainly argue with Marx’s labor theory of value, but the idea that power determines one’s share of social production is beyond argument.
MPL equaling wage is transparently wrong. i even told my econ prof this in college and he agreed. its the derivative of the production function with repect to labor, but any basic production function has both L and K. With any real gains its always impossible to tell if it was “due to labor” or “due to kapital.”
its also ironic that the production function uses Marx’s spelling with the K
Are children marginal products? If they are what does it say about them that the “compensation” for raising them is expected to be zero in terms of capital and actually diminishes your value to our economic market model(enter the argument that women are paid less because they leave the workplace to have and raise children?)
It’s actually kind of interesting because you often hear the excuses made for paying entry level workers less is they should go to school if they want to be paid more and find different jobs as if intelligence is the only character trait of value……values like honesty, compassion, diligence, and the much touted loyalty all businesses complain about not getting don’t appear to be things that many think should be rewarded at all.
Is it any wonder things are getting crappified if all we are teaching our kids is that education is the only means to improve their economic situation and jobs should be treated as nothing more than another step on a rung?
To me the money economy seems a bit like an outgrowth of a spoils system where men go to compete for status — no wonder women were mostly excluded. Gatekeeping important resources with money was never fair to women or anyone who lacked a male breadwinner, but it became less and less workable as capitalist markets worked their hooks into more parts of the economy. If you look at markets they do less than half the things you actually need to sustain human life or civilization. Bearing and raising children, caring for relatives, community ties, the simple socialism of life within the home, all these things are invisible to the market’s holy eye. And therefore valued at $0.00.
Yves has repeatedly pointed out the societal value granted by janitors is vastly higher than what they’re paid, especially compared to socially useless, economically destructive bankers. But if the market is mainly a status engine, these outcomes start to make more sense. And they render arguments like “marginal contribution” ridiculous.
There’s something inherently absurd about even attempting to reduce a part of human interaction to a simple equation.
@sid_finster:
“the race is not to the swift” And Dartmouth or Dannemora happeneth to them all – the ancients fully understood human society and status does not operate on a meritocratic model.
Turning the aphorism on its head: If you’re not so smart, how come you’re rich?
Greg Mankwi and his economics that MP in a competitive labor market represents the ideal wage is nonsense. Wealth comes from nature and from the collective contributions
of all who contributed to our culture in the past and those who are contributing now. Any one person’s contribution is no more than a drop of water in the ocean. Folbre makes an argument that would be obvious to Mankwi were he not a draft horse for the rich and harnessed with blinders as he pulls his load. The high wages in our economy are rentier incomes from fictitious capital. Michael Hudson’s has written about this on Naked Capitalism. Mankwi will never see this. He has a job to do.
Got a link to the Folbre argument?
“In other words, your wage is determined by what you contribute to output.”
I have to lol aloud at this nonsense, as a member of the skilled building trades in New York City.
You’re paid according to your clout.