Someone mentioned the dual nature of “labor” in neoclassical welfare economics the other day. It’s something I find interesting, as well. Maybe I can say a few more words about that this week? If you’re keeping track and amused by it, we’re back in the core of the onion of bad economics: funny bits of neoclassical welfare economics itself that may lead some people to bad economics in the conservative style.
In neoclassical welfare economics, “labor” can refer to both an input or factor of production, on par with capital, for a mental picture let’s say like a wrench, but also often people, the locus of the “utility” about which the theory is ostensibly about, unlike a wrench. Where this dual nature of labor tends to cause problems is in the context of policies designed to change the distribution of economic power, not as in the Fairy Land of Economic Theory by changing the “initial endowment” of economic power, but in reality.
In a perfectly competitive market, the price of a wrench, as a productive input, should tend to whatever it adds in value (money) during the production process under some pattern of demand based on the distribution of economic power, its “productivity.” If one pays more for a wrench than it adds in monetary value during the production process (setting aside other potential sources of value), one is wasting money, not getting as much from one’s productive resources as one might, not expressing production efficiency. The price of the productive input of labor, the wage, is subject to the same market forces and presumably also tends in perfectly competitive markets to whatever value it adds under some pattern of demand based on the distribution of economic power. The price of labor or wrenches may be less than the marginal product if the labor or owners of wrenches are desperate, need money, competing to get it. And if one productive input is paid less than its productivity, another may be paid more. But let’s keep it simple, shall we? Let’s just suppose all productive inputs are paid according to their productivity.
You see where I’m going with this, right? Ready for the inevitable train wreck? You’ve seen it all before? Well, if something is worth saying once, it’s worth saying a thousand times. That’s my motto. Or one of my several mottos, anyway.
Let’s add an example to keep things simple. Let’s say some laborer, Tom, doesn’t really add much monetary value for one reason or another. Doesn’t matter why. Again, let’s keep it simple and say he’s just not the sharpest tool in the shed. His “productivity” is low. His wage is low. He’s barely scraping by. Let’s say someone else, Jeremy, has some ethical beliefs about the distribution of economic power and supports non-market mechanisms to increase Tom’s economic power, subsidized wages, unions, minimum wage laws, regulations, whatever. Why? Doesn’t matter here. Maybe Jeremy thinks Tom is giving his best effort and defines “merit” in terms of hard work or trying hard. Maybe Tom is suffering from want and Jeremy takes a utilitarian interest in his welfare. Maybe Jeremy thinks Tom has certain rights. Whatever. What does neoclassical welfare economics say about it? Nothing. Because we’re talking about people, and the funny thing about people in modern neoclassical welfare economics is we can’t resolve interpersonal conflict on the basis of “utility.”
If one forgets the person and thinks only of productive inputs, one might suppose neoclassical welfare economics suggests taking manipulation of wages off the table as far as addressing ethical concerns about the distribution of economic power, allowing only so-called direct transfers. That’s meant to ensure the productive input is not misallocated in the production process, that it continues to be paid its marginal product even as the pattern of demand changes with the change in the distribution of economic power. That’s an expression of what I call fake distributional indifference. Mechanisms to manipulate or revise wages may be more feasible, practical, possible, than direct transfers. Neoclassical welfare economics doesn’t limit distributional indifference in that way. Neoclassical welfare economics doesn’t demand first best solutions when addressing distributional ethics. It doesn’t require people to jump through hoops, find the mythical Chimera, perform amazing feats, do the politically or practically impossible.
Does manipulating wages lead to an “economically inefficient” allocation of the productive input of labor relative to the pattern of demand generated by the current distribution of economic power? Doesn’t really matter under the normative argument presented in neoclassical welfare economics. There is no “equity” versus “efficient” tradeoff in neoclassical welfare economics. Did I mention? If one is discussing “economic efficiency” defined in terms of “utility,” and “equity,” normative beliefs relating to ethically optimal outcomes, also defined in terms of “utility,” the fact one doesn’t know what happens to “utility” if one changes the distribution of economic power cannot correctly be described as a “tradeoff.” As I’ve discussed many times now, the notion of an “efficiency equity tradeoff” is false and misleading because it presents “efficiency” as a normative value endogenous to neoclassical welfare economic and “equity” as exogenous, which presents the theory as not being indifferent to outcomes to which it actually is indifferent based on “utility.”
Might the change also affect “production efficiency” defined in terms of money or goods? Might we have a tradeoff between “equity” and total output? Sure. However, that’s normatively irrelevant in neoclassical welfare economics because it doesn’t say anything about what happens to “utility.” Also, it’s empirically dodgy, given potentially more robust demand. Incidentally, changing the distribution of economic power using direct transfers also changes incentives on the labor market. Do you really suppose Tom is going to risk his life for pennies to make you lunch during a pandemic unless he feels financial distress? Just saying.
Yes. We’re talking about conflation again, in this case “utility” with money or output, “labor” as a factor of production with people, “wages” as a means to distribute economic power with a means to allocate a productive input. And, yes, as I hinted at earlier, the same issues really apply to wrenches, which are productive inputs as well as assets owned by people, with a price featuring in both the allocation of that input and the distribution of economic power. That is to say, one can conceive of labor not as people, as I just did, but as a productive resource, like a wrench, owned by laborers in the same way a wrench is owned by others. But wasn’t it easier, at least initially, to show the issue with “labor” as the people themselves? Shouldn’t I really try to simplify the presentation when I can?
Given the ubiquitous conflation of positive and normative issues in economics, we should probably say a few words about the ethical theory that proposes we distribute economic power according to one’s productivity, the value one adds. The marginal productivity theory of distributional ethics has nothing to do with the normative argument in neoclassical welfare economics about “utility.” Like all other such ethical theories, it’s exogenous to neoclassical welfare economics. It has no significance in the Fairy Land of Economic Theory. But we can say a few words about it. Why not?
As an ethical theory about the distribution of economic power, it seems to be a form of fairness argument, if one adds X amount of value, it’s fair and ethically appropriate one should get X amount of economic power back in return. But, of course, there are a few issues. Potentially relevant issues include why some workers have higher productivity than others, how productivity relates to merit, effort, hard work, trying hard, things under one’s control and not, etc. Basically, ethical considerations relating to fairness, but otherwise conceived. Other potential issues might involve utilitarian concerns about whether we’re getting the most from our limited resources in terms of human happiness or satisfaction, fulling human wants and needs, etc. Yet other issues may involve “rights” of one sort or another, various religious precepts, etc. And what about the ethical beliefs relating to the distribution of economic power as it applies to owners of capital? Oh come on. Yes, there are issues there as well, some the same, some a bit different. Life is a rich tapestry, but I’m already running a bit over this week.
I have ethical beliefs like anyone else, and I’m willing to argue those and sometimes do. All I’m really suggesting here is people refrain from pretending things are part of neoclassical welfare economics when they’re not. It’s bad economics and creates confusion and conflict. Want some hints on overcoming the tricksy rhetoric of bad economics in the conservative style? Be rigorous about words, terms, concepts. Keep firmly in mind what you’re talking about. Talk about one thing at a time. Distinguish normative from positive. Slow down. Simplify.
