Friday, January 6, 2012

Transplanting Ricardo's result on rent to worker's wages

Having been introduced to the philosophical interest of classical economics through Robert Paul Wolff's Understanding Marx and his tutorial on Ricardo, I was prompted me to think a little deeper about Ricardo's results, in particular a very striking one about how rent paid for land plays no part in determining the price of agricultural goods. I've been trying to determine whether the result applies to worker's wages (and their conditions more widely), and if so, how. If it does, then that would mean the wages paid to the workers, the costs to maintain working conditions, and other expenditures paid to the benefit of workers is not factored directly into the cost of production, but is a dividend paid to the workers out of the profits, just the way renting land is under Ricardo's theorem. I am at the moment uncertain about whether this is misguided, or whether it's in fact something that is acknowledged in Ricardo and Marx, and how best to understand it.

As a bit of throat-clearing, it's worthwhile to sketch out the terms of Ricardo's theorem. When cultivating agriculture, we can simplify the actual state of affairs to the point where there are two things you as someone in the market for land are looking for: how productive the land is (that is, how much of value can be raised on it) and the cost of renting it. You make a profit by making use of a productive process on a piece of land so that the value of what is sold on the market is higher than the costs that went into running that process and the cost of renting the land. However, the price corn is the price of corn, no matter where it is grown, and similarly for every product (milk, eggs, bananas, foie gras, whatever). There is a wrinkle here, that many things are considered better if they come from a particular area or are produced in a certain way - sparkling wines from Champagne, for instance. But the price of that good - sparkling wines from Champagne of such-and-such quality - is constant, no matter the cost any individual farmer might incur to produce it. So, since manipulating the price is out of the reach of all but the largest producers (who we aren't considering in this simplified case), what the producer has to work with to try and wrangle a profit is by trying to rent as productive land as possible for as little as possible. The first ones to try and rent the most productive land can do so for a song, since in the absence of other demand the marginal price they offer is still better for the land owner than earning nothing. As more and more producers go for the most productive land, the price of rent increases, until it reaches the point where the renting the second most productive land instead becomes worthwhile, because its lower output is more than compensated by cheaper rent. Then, as more producers stream to the second most productive land, it's price rises, and people start renting the third most productive land instead, and so on. Provided there is always cheaper land available somewhere, no matter how unproductive, the price of renting the next acre of land tends towards zero. But the price of corn, or eggs, or sparling wine form Champagne of such-and-such quality, remains the same, and that price is one which is profitable even on the least productive land. Since the cost of renting that land tends towards zero, so does its contribution to the price of corn. But only the cost of the least productive land plays a part in setting the price of the product, so the contribution of the cost of rent on the price of the product tends to zero. Thus, rent plays no part in the price of the product, under our simplifying assumptions. Any money paid to the landowners is like a dividend, a piece of the profits which are gifted to them because of their privileged position.
Now to get to the real action. It's clear that there are strong analogues between the land-rent and the employment-cost cases. Just as with land, we can distinguish between workers based on their productivity, and like some land is cheaper to rent than others there is a grading of workers based on the cost of employing them - globalisation, if nothing else, has seen to that. Also, the price of the goods the workers manufacture is constant no matter how costly the production is. Once again there is the issue of higher-quality (and correspondingly more expensive to produce) goods fetching higher prices, but like with fine wines we can account for that by pointing out that goods of such-and-such quality fetches a certain price on the market, irrespective of the particular manner of production. We thus get a similar slide down the grades of workers - a producer figures out that there is more money to be made by paying slightly less productive workers significantly less to do the same work, and so on to the bottom of the pay scale. So far, this is just like the land-rent case.

The only salient difference I can see is that the cost of employment doesn't bottom out at zero, unlike land-rent, because if nothing else the workers need to have the means for subsistence. Then, the impact of the cost of employment on the price of a product wouldn't tend to zero, but instead to whatever the minimal cost of living is for whatever period of time the employee is hired for. This, as far as I understand it, is Marx's own view, which leads him into his discussion of the customary cost of living. I think the most pointed response to this is to point out that while workers need to eat, it is by no means a necessary truth that their employers will be the ones to foot the bill. If they can pass that burden on to someone else, the productive process would continue unabated, and their profits would be larger. This happens in actuality - consider for instance the use of prison labour, which is often unpaid and rarely at market rates, or the pernicious tendency to make more and more use of unpaid interns in what would otherwise be relatively well-paid entry-level professional roles. These people with zero or marginal income from their work are a very small proportion of the workforce, so their impact on the labour market is minimal given that there are very few producers who have the opportunity to exploit their existence. The point, however, is that this shows that in principle workers on zero or marginal incomes are possible. Since there would have to be a lot of shuffling of our social order in order to turn this from a rarity to something commonplace, that possibility might not be very immediate, but it is chilling. And, no matter the actualities of what people get paid for their work, it shows that, in principle, the economic arrangement of capitalism is not geared in order to provide in any way at all for the sustenance of workers. The race to the bottom of working conditions we are now living through should be an object lesson in the same.

How does this fit into the classical economics of Ricardo and Marx? In one way, very nicely: it seems to put even more of a point on something classical economics makes quite clear already - that the interests of the owners of the means of production and of the workers are directly opposed. They are competing in a zero-sum game of who gets what proportion of the profits of the productive processes, and the cutting-up of the pie has nothing to do with what went into baking it. But in another manner this result, if it holds, is at odds with some of the views of especially Marx. If I understand the result correctly, it would mean that labour can't really be a commodity, and employing a worker isn't like buying their alienated labour. I myself have never been exactly happy with those terms of Marx's analysis (though his point is clear enough) since I rank as very literal-minded even among analytic philosophers and I cannot take him at his word about the commodification of labour. The price of labour under Marx is the cost of sustenance for the individuals providing the labour, but I do not see why that cost is supposed to be inherent to the wages they received. Certainly their employers aren't buying their food and houses for them, and work done for free has all of the creative power that Marx identifies for labour. Correspondingly, there seems to me a mismatch between the costs Marx identifies for labour and what employers pay for. Marx is right that at the very minimum of justice employers will pay enough for people to live off, and live off at at least their customary standard. But I do not see why justice is inherent in the production process, in the same way fuel and tools are. That seems very optimistic.

Instead, payment for labour is a dividend given to people in a position with the sufficient privilege to demand it (where small privileges lead to small dividends). I understand how the terms of classical economics, from Adam Smith through to Marx, shows labour's place in the lattice of goods along with grain, iron, and all of the rest. But instead of seeing human labour as one commodity among others, I think it is more perspicacious to see the economy as a shared human product, with each person drawing from it the dividend that society has allotted them. This would, for instance, make very good sense of the increasing tendency of the very highest earners in our society to not be owners of enterprises, but ostensibly get their wealth as payment for services rendered (people like hedge fund managers, who are as a class second to none regarding wealth), and how often people who do much of the most undesirable work are frequently badly paid - cleaners, garbage men, sewerworkers, and so on. If I am right about the above result, that the cost of no good depends in principle on the cost of employing labour, that seems to be the only analysis available.

I am perhaps getting ahead of myself, heading into territory of trying to interpret formal results mapped onto decidedly unsimplified realities, but these are the directions issues like those I raise above guide us into.