Why Freud's wrong

As Lord Freud's more illustrious ancestor pointed out, our unguarded comments can sometimes reveal our true sentiments. It's for this reason that his claim that some disabled people are "not worth the full [minimum] wage" has outraged so many.

At best, the statement is careless. Sam is entirely correct to say that there is a huge distinction between people's moral worth and the value of their labour; the existence of bankers suffices to prove this.

There are, though, two issues here.

First, some of our language and hence thought blurs what should be a considerable distinction. When we speak of wages as "earnings" we are importing a notion of moral worth into what is in fact an amoral exchange. Similarly the common but cringeworthy talk of a man being "worth" £x million equates wealth with moral standing. As Adam Smith said in his better book, we have a "disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition." (Theory of Moral Sentiments, I.III.28).

Secondly let's give Freud the benefit of the doubt, and assume that he meant that the labour of some disabled people is worth less than the minimum wage. (Giving him this benefit might be an example of what Smith meant, but let that pass.) Is he right? Should we relax the minimum wage to price them into work?

Such a view makes some sense if you think in terms of simple marginal productivity; there are some severely disabled people who can't do much. In the real world, however, the applicablity of marginal product theory is, ahem, dubious. As Lars Syll says (pdf):

Wealth and income distribution, both individual and functional, in a market society is to an overwhelmingly high degree influenced by institutionalized political and economic norms and power relations, things that have relatively little to do with marginal productivity in complete and profit-maximizing competitive market models – not to mention how extremely difficult, if not outright impossible it is to empirically disentangle and measure different individuals’ contributions in the typical team work production that characterize modern societies...Remunerations, a fortiori, do not necessarily correspond to any marginal product of different factors of production.

The key phrase there is "power relations." Years ago, I had a summer job cleaning in a bakery. Two of my colleagues were what were euphemistically called "a bit simple." But they were actually good workers - not least because, unlike we students, they didn't think hard graft was beneath them. If Freud had his way, people like them would be badly paid not because they can't work, but because they lack the bargaining power to demand their economic worth. In this sense, the call to scrap minimum wage laws is - in practice - a green light for the exploitation of the most vulnerable. Better ways of helping the disabled would be ways of improving their bargaining power: stronger trades unions, full employment, a citizens' basic income.

It is for this reason - rather than any mis-speaking - that Freud should be condemned. Either he is too stupid to see that labour markets are saturated with inequalities of power, or he doesn't care. Whichever it is, his position as a minister merely vindicates Adam Smith:

In the drawing-rooms of the great, where success and preferment depend, not upon the esteem of intelligent and well-informed equals, but upon the fanciful and foolish favour of ignorant, presumptuous, and proud superiors; flattery and falsehood too often prevail over merit and abilities.

Comments

[Jackart]

Wasn't he arguing that the state should make up the difference, something charities (and in the past, the labour party) have been calling for, and is in fact policy in a number of European welfare states?

[shinsei67]

But Freud isn't arguing that your "bit simple" bakery cleaners shouldn't be paid less than the NMW because they are clearly capable of doing the job well.

Isn't Freud trying to find a solution for those people who would have difficulty being able to clean a bakery and therefore never get employed in the first place ?

[Rob]

Freud has certainly screwed up by speaking in the way that he did. He's a smart enough person to know that "value" has multiple meanings and he fully deserves the consequence of people assuming that he meant "value" in the broad sense, not just labour value.

However, he has also let the cat out of the bag: not everyone can satisfy their needs and wants by trading in a free market. If he's right, then there are people who cannot achieve poverty-line levels of income through employment. This is a very strong argument in favour of something like basic income, which is currently being resisted by people who like to pretend that the problem is a combination of businesses being stingy (and thus they should be forced to hire people) and people being workshy ( and thus they should be forced to work for the former).

I'm sure he didn't mean to, but he's actually done a great service in puncturing the myth that the economy can automatically provide a living for everyone. For that, he has earned the simultaneous condemnation of David Cameron and Ed Miliband, who would both dearly like to harass more people into non-existent work, or find some way of "incentivising" (read: subsidising) businesses to hire them even when it makes no economic sense.

[Luis Enrique]

Chris, you don't happen to have a quote from Smith to hand in which he says the division of labour is soul destroying?

[James]

What are your thoughts on scrapping the minimum wage but introducing a generous minimum income? The income can be set at say 30000 pounds real a year. That would provide a sufficient incentive to keep wages high for all and minimise disincentives.

[Luke]

Shinsei 67

"But Freud isn't arguing that your "bit simple" bakery cleaners shouldn't be paid less than the NMW because they are clearly capable of doing the job well."

I think Chris's point is that without the protection of the minimum wage, those particular bakery workers would have been paid peanuts, *despite* the fact that they were capable of doing the job perfectly well.

[Nick Rowe]

So Chris, if you were hiring someone for a job, would you always hire the person who would work for the lowest wage? Or would you also consider their ability, as best you can judge it? Because if you consider both wage and ability in deciding who to hire, and if other people do the same, and if judgements of ability are correlated, then some people will only get hired if they have have lower wages than others.

"Two of my colleagues were what were euphemistically called "a bit simple." But they were actually good workers - not least because, unlike we students, they didn't think hard graft was beneath them."

Which means they had higher ability for that particular job than you students did.

[Luis Enrique]

Nick Rowe - right, but isn't Chris' point that despite their higher ability, they are not going to be paid more than the students, because wages are not just about productivity but also bargaining power.

imho, critics of marginal productivity explanations sometimes allow the obvious holes in the theory to blind them to its nature as very simple parable with some truth to it.

Firms are not going to hire you if they think you cost more than they contribute, even if what you contribute is hard to define. When it comes to senior execs, notions of what they contribute may largely be the fantasy of other senior execs. Firms will pay you less than you contribute if they can, which is where the bargaining power comes in [and is how modern labour economics approaches wages - bargaining over a surplus, which still embed the idea that productivity matters].

To what extent does competition ensures that workers get something close to what they contribute? My guess is that's very industry specific, with some industries featuring real competition for workers, most not.

[chris]

@ Jackart - yes, but there are questions here: should the state subsidize exploitation (in the sense of using people's weak bargaining power to pay them less than the marginal product)? Wouldn't such top-ups carry a stigma in the way that other alternatives might avoid?

[Botzarelli]

The story about your cleaning job is an interesting one for what it doesn't say. We don't know whether it happened before the NMW and whether the "simple" but effective workers were being paid more or less than the students. If it was in pre-NMW days it is unlikely that the employer would have paid existing reliable and effective permanent members of staff less than the bunch of shiftless temporary student workers unless he was actively trying to exploit them and didn't care about how good they were.

If it was after the introduction of the NMW, it is a story of workers unlike the very small category Freud was asked about - those who no employer would be able to justify employing at NMW but who wanted to work and for whom work would, even at less than NMW be personally rewarding. Those who are not only "simple" but also incapable of doing even as much as the shiftless student temps however hard they try (and trying hard is something they really want to do).

There is a real issue about making sure that a scheme to help potential workers of this sort get jobs doesn't turn into a system whereby employers refuse to employ any disabled people without a wage subsidy and take the view that all disabled people are incapable of doing work that merits the same pay as those without disability. But that is a practical issue about how you draw up a scheme under, eg http://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32014R0651&from=EN Articles 32-35 to subsidise the employment costs of disadvantaged workers. The existence of that exemption from the State Aid rules suggests that dealing with this issue isn't just an evil frolic of the minister's own devising.

[chris]

@ Botzarelli - it was before the NMW. The point of that story was to illustrate the practical issue you mention - of how to distinguish between people who really can't work much and those who can but risk being exploited without a NMW. This practical issue isn't some mere add-on, but the nub of the problem.

[greeneconomist]

Freud made a key assumption in his statement that he failed to state explicitly, and that is that the disability lowers the person's marginal product. If one accepts that assumption, then what he said could be considered (economically if not morally) correct.

However, that assumption does not really hold, as a person's marginal product is not wholly dependent on whether they have a disability. There is no reason, for example, why someone who cannot walk cannot provide the same, or greater, marginal product in an office job than someone who can. This also hints at something else Freud didn't mention: some able-bodied people might not be worth the minimum wage either, using his argument (which as others have highlighted, is flawed on so many other levels too). The fact that he failed to mention this is what makes his statement offensive, as it highlights his prejudice.

[Ralph Musgrave]

Freud is right. He simply said that some people are not worth very much. That is undeniably true. But it's not PC to say as much.

Those who are severely mentally retarded and physically disabled are worth NOTHING! But we mustn't say so because the politically correct don't care for reality, the truth or anything of that nature.

[Martin S]

"If Freud had his way, people like them would be badly paid not because they can't work, but because they lack the bargaining power to demand their economic worth."

Freud is assuming pay is about productivity. The workers who were a "bit simple" had higher productivity than the flighty students. Therefore wouldn't the former be better paid, "if Freud had his way"?

(Or is the "if Freud had his way" bit just there for rhetorical effect?)

1. Isn't marginal product theory part of mainstream economics? It seems a bit rough to condemn Freud as a bit thick when he thinks like every other non-Marxist economist. (How many economics textbooks include the phrase "power relations"?)

2. Can't marginal productivity and power relations both be part of the explanation? In different times and places, different assumptions apply. Where workers have no bargaining power, wouldn't we expect a labour market to work like it does in the textbooks?

3. Freud is expressing something that is mainstream among our political class but this is condemned as a gaffe. It's no different from Brown subsidising low-value work through tax credits. (And someone like Sam Bowman would use this as an argument for a citizens basic income.) Isn't the important thing here that politicians can't be honest in public about difficult subjects? (And doesn’t that chime with the kind of stuff you usually say about the Overton Window?)

[Dave Timoney]

Surely the substantive point in all this is Freud's willingness to consider a public subsidy for business at a time when public subsidies for the disabled are being cut?

[Luis Enrique]

"It seems a bit rough to condemn Freud as a bit thick when he thinks like every other non-Marxist economist"

why write things about what economists think, when you evidently have no idea. Shall I write it in capitals? MAINSTREAM LABOUR ECONOMICS SAYS WAGES ARE DETERMINED BY BARGAINING OVER THE SURPLUS CREATED BY THE MATCH BETWEEN WORKER AND FIRM

see for example the 2010 nobel

[Luis Enrique]

this was the first hit I got from google

"Wage Determination and the Sources of Bargaining
Power"

http://www.st-andrews.ac.uk/~pm210/wagedet.pdf

but of course economists don't mention power

[Deviation From The Mean]

“Those who are severely mentally retarded and physically disabled are worth NOTHING!”

I presume you mean worth nothing economically, because outside the fascist circles you inhabit, where disabled people are only useful for experimentation, these people are very much valued by their loved ones. (You could also argue that disabled people present humanity with the need for problem solving and in solving problems around disability great advances are made that are then applicable to many others).

From an economic point of view I guess there are 2 options, let the market decide everything and get rid of ALL government intervention or get rid of the market and let humans decide what their needs are.

There was a previous thread talking about being out of touch, where the distinction was made between what people want and they others think they want. I would argue that the market is an example of such an ‘other’, and if we went to a socialist economy based on human need what got produced would look different to what the market delivered.

But if we are judging people on economic worth alone then there would be millions of able bodied people who would be deemed worthless, and lots of those folks would be earning shit loads of money. Again this points to market failure.

[Icarus Green]

Good to see a former investment banker pontificating about outrageous pay levels for people in society. Glad someone finally had the balls to sock it to the down syndrome vultures that have continually raided the public purse. Disabled people are number one on my enemies list. Frankly I think £2 per hour is way over the odds. They should be made to work or be put down. Because after all, if the glorious market deems them invalid, then they have no purpose. The amount of times the disabled have brought the world economy to its knees in their blind pursuit of gold and power is amazing.

[George Carty]

I'm hoping that was satire, Icarus Green...

[Martin S]

@Luis Enrique

I'm sure you know more about what economists think than I do. (I shouldn't have said "like every other non-Marxist economist".)

I said that Freud seemed to be expressing the orthodox view. And so it was a bit unfair of Chris to condemn him for it.

I didn't say "economists don't mention power". I said it doesn't figure in (undergraduate) textbooks. Is that wrong?

PS Try to be less rude. It's nice to be nice.

[Luis Enrique]

Martin

I apologise. I am driven to distraction by the endless stream of I'll informed slurs on economists.

You are right power doesn't feature much, at least not in introductory texts

[theOnlySanePersonOnPlanetEarth]

All economists are propagandising twats.

[Luis Enrique]

I hope you are 17 years old

[theOnlySanePersonOnPlanetEarth]

I hope you are 71, then we won't have much longer to put up with you and your earnest disapproval. As well as your bullshit ideas.

[Luis Enrique]

Nice come back kid