Common Pools and Wage Funds -- A Reply to Simon Wren-Lewis

Simon Wren-Lewis raises an extremely important issue regarding Inequality and the common pool problem: "there is a clear connection between the rise in incomes at the very top and lower real wages for everyone else."

Wren-Lewis explains the common-pool problem as being "about how the impact of just one fisherman extracting more fish on the amount of fish in the lake is small, but if there are lots of fishermen doing the same we have a problem." This needs a bit more explanation. The problem has to do with the difficulty of excluding fishermen (or limiting the catch of any particular fisherman) and with the limitation on the amount of fish in the lake. The essential reference on this is Elinor Ostrom's discussion of common-pool resources.

Two caveats: difficult does not mean impossible and limited doesn't mean non-renewable or fixed in quantity.

When it comes to income, it is easy to get lost in a money illusion. Yes, incomes are measured and paid in money amounts. But what they provide are rights of access to material things -- goods and services, "the power of purchasing; a certain command over all the labour, or over all the produce of labour, which is then in the market" (Smith).

Nominally, the amount of income can increase without limit. But in real terms, increases in income are constrained by the amount of goods and services available in the market. That last qualification, the amount of goods and services available in the market, has led to a prodigious amount of confusion in economic thought. The classical wages-fund doctrine assumed that the amount of wage goods available at any given time was fixed. Accordingly, if one group of workers formed a union to enforce a wage increase, their gain would be at the expense of other workers.

The amount of goods and services in the market at any given time is not fixed. But the key to the confusion is not the stipulated quantity but the imaginary temporal dimension of a "given time." Zeno's paradox of the arrow involves the same logical conundrum of dividing time into points.

In 1869, W. T. Thornton argued persuasively that the wages-fund doctrine was erroneous and John Stuart Mill concurred and "recanted" the wages-fund doctrine. Exactly what Mill recanted may be in dispute but that is beside the point -- the classical doctrine was consigned to the dustbin of history of political economy. Or so we are told...

By virtue of one of the most miraculous metamorphoses imaginable, the old wages-fund doctrine, used by polemicists as a club against unions demanding higher wages was transformed into the theory of the lump-of-labor, allegedly assumed by trade unionists, whose fallacy was used by economists as a club against unions demanding higher wages. "Heads I win" seamlessly became "tails you lose."

But, getting back to Wren-Lewis, isn't his contention that higher executive pay "has to come from somewhere [that is, from the other 99%]" a reversion to the wages-fund -- or lump of labor -- doctrine/fallacy? No, it isn't. But this requires more explanation. There are not one, but two illusions at work here. One is the money illusion. The other is the point-in-time illusion. Combined, these two illusions constitute a powerful temptation to cognitive dissonance.

To dispel those two illusions, let's first go back to Adam Smith's definition of wealth: "a certain command over all the labour, or over all the produce of labour, which is then in the market." 'Labor' appears to refer to a definite quantity and 'then' appears to refer to a definite point in time. Labor is not, however, a discrete distinction and a "point" in time is strictly conceptual. The amount of work to be done at any point in time is not only "not fixed" it is also not "an amount."

Just as with Zeno's arrow, no labor is performed in a "point in time." Labor can only be performed over a duration, be it an hour, a day, a week, a year or a lifetime. Furthermore, the amount of labor performed by one person during any interval of time is variable. It is not infinitely variable but it is flexible within certain definite limits. The expression labor-power indicates this characteristic of labor as potentially equivalent to a given quantity of production.

So, we can now amend Smith's definition as follows: income represents command over a portion of the labor-power in the market during a given extension of time. This definition could be further refined but the point that I want to get to is that it is the labor-power that constitutes the common-pool resource. The amount of goods and services that corresponds to this amount of labor-power is not fixed -- but neither is it "infinitely" variable.

The extent to which real GDP may vary depends on people's capacity to work, on their motivation and on their opportunities for employment, all of which may be affected by the distribution of income. In other words, great inequalities of income may well diminish the common pool of goods and services -- and ultimately of labor-power itself -- from which incomes are derived.

That is, executive pay may be taking a bigger slice of a pie that is smaller than it would be if executives weren't taking such a big slice of it. Or to put it bluntly, they may be being richly rewarded for a negative contribution to social production that results from their excessive incomes!

There is much more that can said (and has been said) about both the implications and the background of the analysis of labor-power as a common-pool resource. I will pause for now to see how the conversation unfolds.