Monday, 8 June 2015

“Real wages are, virtually to their full extent, the product of past labour”

Folks, let’s do an experiment. Australian economist Steve Kates posted this on Friday, and he reckoned few Australian readers grasped the point. An important point.  I reckoned NZ readers would be much smarter. See if you can prove me right in the comments …

Folks, I know no modern economist would think this way, but what worries me more is that I doubt they would even know what he is saying. This is from the great F.W. Taussig in his 1896 Wages and Capital: an Examination of the Wages Fund Doctrine. Moreover, it is from pages 26-27 of a 325-page book where he seeks to dispose of one matter right from the start before getting into any of the more difficult questions. This is mere trivia:

We are now in a position to give an answer to one part of the question with which this chapter opened; whether wages are or are not paid from present or current product. . . . Wages are certainly not paid from the product of present labor; they are paid from the product of past labor. . . . Real wages are, virtually to their full extent, the product of past labor. At this moment, or within a few days, the last touches toward completion have indeed been given to the commodities now being enjoyed. But the great bulk of the labor whose product all of us, whether laborers or idlers, now enjoy, was done in the past.

Our ability to produce is based on our capital base. If we fritter it away on the various value-losing activities that the Australian Labor Government had been indulging in, falling living standards is what you must expect. Labor had been progressively lowering our living standards by allowing our capital base to erode. This from today’s Australian indicates this is still misunderstood: ‘Joe Hockey’s sales pitch fails to reach the retail counter.’

The worst retail sales report in ­almost a year and the biggest foreign trade deficit on record have signalled that Australia’s superior economic performance may be short-lived.

Retail comes at the end of a very long process that modern economic theory not just ignores but virtually denies in everything it preaches. I’m afraid that economic theory will have to go back to the nineteenth century to pick up the lost threads that Keynesian economics has trampled on.

So, what’s his point?


  1. Productivity, and hence wages, are not increased by working harder but by capital. The man making widgets does not increase his real productivity by longer hours, but by more efficient machinery and better processes, both, of which, require capital expenditure. This capital is funded by previous production, not by central bankers printing money. If you use fiat money for capital expenditure, you devalue money at, or very near, the rate of improvement in wages, meaning fiat money cannot produce a rise in REAL wages.

    This seems innately obvious. Is there some arcane economic principle I am missing here?

  2. An increase in productivity increasing wages is a nice thought but I'm not sure that is what consistently happens in a global economy. Production just chases the cheapest source and that means jobs move location as we have seen. The US has recovered lots of manufacturing jobs because of cheap energy and Europe has recovered some jobs from China because of quality control problems - these offset wage costs although the wages now paid in the west may not be that flash. A German friend who made kitchens gave it away and moved to NZ as the EU open borders saw production, in Germany, by immigrants who were cheaper than native Gerrmans because they lived a cheaper lifestyle than Germans. Theory is a nice thing to contemplate but global warming is a theory and look at the shit arising from that. Reality is a much harder task master - you cannot grow for ever and there will always be winners and losers.

  3. @MacDoctor: Worry not. You're already better than most modern economists.

  4. Hold interest rates low and guess what, people do not invest in productive assets instead they speculate. Why not when money is cheap and easy. Cycle will not end until the fiat currency system first ends.


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