« On "mainstream" economics | Main | Neither inequality nor poverty »

April 16, 2017

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

Luis Enrique

Marginal products are usually beyond the individual's control. Production functions usually have other inputs than labour, which affect the MPL and aren't controlled by the worker.

IMO you just have to see marginal product theory for what it is: a convenient simplification. It should not be 'abandoned' but used when appropriate.

The question "how much 'output' - whatever that may be - will be added by the addition of this worker, is always a sensible place to start, even if one needs to introduce things like indivisibilities or O-rings or whatever to do full justice to certain cases.

Seeing things in terms of bargaining over a surplus doesn't do away with that question, it has merely been recast as: " how much surplus does this match create?" - which really is not so very different to asking about the marginal product.

Of course I agree that the best idea of bargaining over a surplus is much more useful when it comes to thinking about CEO pay, for example. But it too is a simplification you could find 'flaws' in.


Jonathon Hazell

Chris,

I think you'll enjoy this paper, which formalises and expands on your insights.

http://www.aalto-econ.fi/tervio/DifferenceThatCEOsMake2007.pdf

Kevin Carson

The real problem with marginal product is that it's circular, and always secondary to power and institutional considerations. If marginal productity is what your "services" add to the price of the final product, then by definition anything anyone can charge a price for has "marginal productivity" -- including hiring out the services of one's slaves, allowing use of one's "intellectual property," or simply charging a toll for not obstructing production. Marginalism takes all "property rights" in the power to impede production, whether artificial or not, at face value.

Blissex

«Marginalism takes all "property rights" in the power to impede production, whether artificial or not, at face value.»

Indeed, and I shall expand this statement:

* The central truthiness of Economics is that absent government intervention the distribution of income is optimally unequal and perfectly fair; only theories that are validated by that truthiness are acceptable in Economics.

* Therefore JB Clark expunged "land" as a "factor of production" from marginalist theories because the existence of "rent" is not very compatible with the central truthiness of Economics.

M Gaffney, a georgist marginalist, has extensively documented and argued against that clever elimination of "land" from marginalist theories:

http://www.masongaffney.org/publications/K1Neo-classical_Stratagem.CV.pdf
https://www.researchgate.net/profile/Mason_Gaffney/publication/229809320_Keeping_Land_in_Capital_Theory_Ricardo_Faustmann_Wicksell_and_George/links/55818ea008ae12bde6e4a74b.pdf
http://www.cooperative-individualism.org/gaffney-mason_donald-stabile-on-henry-george-and-john-bates-clark-1995.htm
http://www.wealthandwant.com/docs/Gaffney_Intro_TCOE.html
http://www.eurotrib.com/story/2009/3/9/14049/58398
https://www.amazon.co.uk/Corruption-Economics-Georgist-Paradigm/dp/0856832448
http://www.emeraldinsight.com/doi/abs/10.1108/03068290910947949

aragon

Via CapX.co

Prioritizing Economics is Crippling the U.S. Economy

https://medium.com/@jamesallworth/the-slow-decay-of-americas-entrepreneurial-society-f9aeb6145891

"It seems counter-intuitive that the best way to keep an economy healthy is to deprioritize the economy. But that’s exactly what needs to happen. So much of what is going wrong right now in America’s economy can be traced to the priorities being all wrong."

Unlearning Economics is right it is the social consequences that matter in politics.

Automation will exasperate the balance in favour of capital and resources (rents) to an intolerable degree.

nicholas

I have to side with Luis on this one; on reflection I think Chris is in danger of generalising from 'the special case'.
CEO's and Premier League Footballers are a very small minority of 'workers'. In particular, CEO's pay may not reflect their marginal product because of market failure: remuneration committees may not actually strive to minimise CEO's pay because they are packed with insiders. The majority of workers probably do earn much close to their marginal product.
Instead of CEO's and Harry Kane, consider instead Harry the Window Cleaner. He is self employed, and charges as much as he can to clean people's windows. Clearly, Harry the WC earns exactly his marginal product. Now consider the workers for a competing window cleaning company. They cannot earn much different from Harry WC. Similarly Harry the Self Employed Motor Mechanic and so on. There are millions of these self employed and competing with other self employed Harrys.
Chris's analysis only applies when markets are not competitive, and Harry has some sort of advantage due to restrictive practices: eg Harry the CEO, Harry the Lawyer, Harry the hospital consultant, Harry the Investment Banker etc.

aragon

All cases are special cases at least when it come to monopolies and competition (except at Harry the window cleaner).

Microsoft, Google, Amazon, Wallmart (ASDA) all markets are dominated bay a small group of companies from Banks (Barcleys, Lloyds etc) to Cars (VW Group), to Supermarkets (Tesco etc), to Power companies, to Railways etc.

Via exponent.fm

https://www.theatlantic.com/politics/archive/2016/10/how-democrats-killed-their-populist-soul/504710/

"By 2008, the ideas that took hold in the 1970s had been Democratic orthodoxy for two generations. "Left-wing" meant opposing war, supporting social tolerance, advocating environmentalism, and accepting corporatism and big finance while also seeking redistribution via taxes."

[...]

"Financial crises are a regular feature of the U.S. banking system, and prices for essential goods and services reflect monopoly power rather than free citizens buying and selling to each other. Americans, sullen and unmoored from community structures, are turning to rage, apathy, protest, and tribalism, like white supremacy."

Anti-monopoly seems to be the issue of the day...

Blissex

«consider instead Harry the Window Cleaner. He is self employed, and charges as much as he can to clean people's windows. Clearly, Harry the WC earns exactly his marginal product. Now consider the workers for a competing window cleaning company. They cannot earn much different from Harry WC.»

Someone fairly recently wrote a thesis and a per on this, taking advantage of a "natural experiment, and this was discussed a year ago in this same blog:

http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2016/04/limits-of-marginal-productivity-theory-.html

The problem with that paper and the "Harry the Window Cleaner" argument is that the claim of income and marginal productivity is about the marginal contribution *to the utility of the whole economy*, not to the employer money revenue, which is a rather different concept.

Clearly few employers are going to pay someone more money than they money revenue that they expect to gain by hiring them, but that is quite unrelated as to whether the new hire's contribution to total utility corresponds to the utility of the wage they earn, it takes pretty extreme assumptions to bridge that gap. Even in small businesses where the owner can more easily determine the money revenue that the new hire can generate.

The general difficulty is that the utility of a worker's activity depends critically on that of complementary capital, and to investigate that requires a theory of capital and profit, while marginalists in general and especially JB Clark with his elimination of "land" have only handwaving instead of a theory.

The comments to this entry are closed.

blogs I like

Why S&M?

Blog powered by Typepad