A post on issues caused by the conservative tendency to discuss people as “productive resources” rather than as people, per se, reminded me I haven’t discussed the dual role of labor (and capital) in neoclassical welfare economics lately. Maybe we can do that this week?
In neoclassical welfare economics, “labor” may refer to both an input or factor of production, on par with capital, for a mental picture let’s say a wrench, and people, the locus of preference ranks (called as “utility”), which the theory is ostensibly about. Where this dual nature of labor tends to cause problems is in the context of the role of equity considerations, the ethical issues related to resolving interpersonal conflicts of preferences, which are famously exogenous to neoclassical welfare economics. In the perfectly competitive market model, 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 to 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. The price of the productive input labor, the wage, works the same way and thus also tends in perfectly competitive market models to whatever value it adds under some pattern of demand based on the distribution of economic power. In reality, 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?
You see where I’m going with this, right? Ready for the inevitable train wreck? You’ve seen it all before? Let’s do an example to keep things simple. Let’s say some laborer, L, 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, S, has certain interpersonal ethical beliefs and supports non-market mechanisms to increase L’s ability to express his preferences and thus obtain scarce resources such as subsidized wages, minimum wage laws, regulations, whatever. Why? Doesn’t matter here. Maybe S thinks L is making a good effort and defines “merit” in terms of hard work or effort or reliability. Maybe L is suffering from relative want and S takes a utilitarian interest in his welfare. Maybe S thinks L has certain rights. Maybe S thinks it fair or just. 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 conflicts of preferences on the basis of “utility.”
If one forgets the person and thinks only of 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 an expression of 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. Those are illegitimate roadblock arguments. Thus, for example, the normative argument in neoclassical welfare economics does not oppose labor unions, which involve equity issues acknowledged to have standing in that theory but not addressed, exogenous in that sense, but not in a more general sense. It evinces indifference. Wait. Did I just find a new equivocation? Nice. “Exogenous” in the sense of accepted as relevant in a theory but not discussed, which leads to certain conclusions within that theory, to “exogenous” in the sense of rejected, found irrelevant, in a theory, which leads to different conclusions?
Say what now? Labor isn’t people? It’s something people own and may supply to others for money? The same issues apply to capital, productive inputs as well as income-producing assets owned by people, with a price featuring in both the allocation of that input and the distribution of economic power.
