Crowding Out and the Social Overhead Costs of Labor

Another strange twist in the convoluted lump-of-labor saga. Chartist leader Feargus O'Connor refuted the "Treasury View" -- aka "crowding out" -- in 1844. O'Connor's tract is long-winded and sentimentalized an idyllic past but it also contains some cogent analysis of why workers were (and should still be) wary of the exploitative use of technology by capitalist firms.

O'Connor's critique took the form of a dialogue, which parodied and refuted an earlier dialogue, "The Employer and Employed," that had been published in Chambers's Miscellany of Useful and Entertaining Tracts. In the Chambers dialogue, the mill owner, Mr. Smith explains to a worker, Mr. Jackson, how the immutable laws of economics harmonize their interests. Smith's elaboration of the doctrine of wages was described elsewhere as "right orthodox, and admirably clear too." I will return to O'Connor's rebuttal in more detail later, but first I would like to set the stage by briefly reviewing the contemporary relevance and the historical background of the central argument in the two dialogues.

The hypothesis of crowding out is one of the prime rationales for government austerity. "Before Keynes," explained Alan Blinder and Robert Solow in a 1973 paper:

...it was commonplace that government spending and taxation were powerless to affect the aggregate levels of spending and employment in the economy – they could only redirect resources from the private to the public sectors. This, of course, is an immediate corollary of Say's Law.

In an earlier paper, Roger Spencer and William Yohe had elaborated on this connection between so-called Say's Law and crowding out:

The most elementary case for crowding out may be examined in a “Say’s Law” framework. Say’s Law is widely known as “supply creates its own demand.” More specifically, if output (supply of goods and services) is determined by the behavior of profit maximizing producers, competitive labor markets, the existing stock of capital goods, and the state of technology, then relative prices will tend automatically to adjust so as to eliminate a deficiency or excess of demand. In an economy in which Say’s Law is operative, attempts by the Government to increase total spending, by raising Government expenditures and financing the increasing budget by either borrowing from the public or taxation, merely induce changes in relative prices so as to reallocate the same level of real output.

Crowding out was a new label for what Keynes had referred to as the Treasury View, which Winston Churchill elaborated in 1929:

The orthodox Treasury view, and after all British finance has long been regarded as a model to many countries, is that when the Government borrow[s] in the money market it becomes a new competitor with industry and engrosses to itself resources which would otherwise have been employed by private enterprise, and in the process raises the rent of money to all who have need of it.

Joan Robinson offered a more succinct summation of the [in]famous Treasury View: "there is a certain amount of saving at any moment, available to finance investment, and if the government borrows a part, there will be so much the less for industry." And here is where the "isn't that a lump-of-labor/capital/savings?" question comes in. Yes, Virginia, the Treasury View/crowding out are overt avowals of a belief in a fixed amount of [wages to pay for] work to be done. It is not "trade unions" or "workers" who expressed these beliefs but orthodox laissez faire economic conservatives.

For twenty years I have hunted for evidence of the supposedly widespread belief in a fixed amount of work among workers, trade unionists and populists but I have found no direct statements of the belief by the usual suspects. At best, there are only citations of statements that could be construed as indicating such a belief. I have, however, found direct statements by reputable political economists and journalists, mostly from the 19th century, some sympathetic to and others hostile toward trade unions.

A pre-industrial revolution argument by John Graunt may have provided the rhetorical template for the phrasing: "…if there be but a certain proportion of work to be done; and that the same be already done by the not-Beggars; then to employ the Beggars about it, will but transfer the want from one hand to another…" This wasn't yet about machinery, trade unions and strikes or rioting but there is some evidence that the argument resonated long past its 1662 publication. In 1702, Thomas Cooke objected to Graunt's argument, saying that Graunt was mistaken in "limiting Men's Labour to one particular imploy."

Seventy-eight years after Cooke, Samuel Johnson defended Graunt's crowding out argument by reversing the usual assumption and instead questioning the "supposition that there is a certain portion of work left undone for want of persons to do it." In the same year, 1780, Dorning Rasbotham chided those who claim there is "a certain quantity of labour to be performed." Note the subtle shift from a certain proportion or portion of work to be done to a certain quantity. The soundness of Rasbotham's opinion was lauded in 1827 by John Ramsey McCulloch, who added, "There is, in fact, no idea so groundless and absurd, as that which supposes that an increased facility of production can under any circumstances be injurious to the labourers."

A year earlier, political economist Thomas Chalmers defended the proposition that at the local level of the parish, "there is a certain quantity of work to be done, and a certain number of labourers would suffice for the doing of it." In 1820, Chalmers had employed similar wording, arguing that "...there is a certain quantity of work to be done; and this quantity, generally speaking, does not admit of being much extended, merely on the temptation of labour being offered at a cheaper rate..."

An 1835 pamphlet by Frederick Chaplin defending the New Poor Law maintained, "there is a certain quantity of work to be done, and the question is who ought to do it -- those who live by their labour, and their labour only, or those who have thrown themselves on public charity." In 1846, William Thornton wrote, possibly paraphrasing the Chalmers argument, "In every place there is only a certain amount of work to be done, and only a certain amount of capital to pay for it; and, if the number of workmen be more than proportionate to the work, employment can only be given to those who want it by taking it from those who have it." Henry Mayhew cited Thornton's premise, with full attribution, in London Labour and the London Poor, published in 1851.

A certain quantity or amount of work to be done was thus becoming a commonplace expression by 1844 when Chambers's Miscellany of Useful and Entertaining Tracts published a fictional dialogue between "The Employer and Employed." There is one other crucial piece of context. The repeal of the Combination Acts in 1824 technically legalized trade unions in Great Britain but hostility remained rife toward unions from factory owners, political economists and government officials.

In 1830, Lord Melbourne, the British Home Secretary, commissioned a report on combinations from political economist Nassau Senior in which Senior recommended measures for suppressing unions by means of harsh interpretation of the common law rather than designated legislation. Assistant poor law commissioner Edward Carleton Tufnell's anonymously published 1834 tract, Character, Object, and Effects of Trades' Unions defined a trade union as  "a Society whose constitution is the worst of democracies — whose power is based on outrage — whose practice is tyranny — and whose end is self destruction." The pamphlet received glowing reviews in  the Monthly Review, Gentleman's Magazine, the Edinburgh Review, the Times of London, the Chronicle, Blackwood's and the British Magazine notwithstanding that this avalanche of accolades may well have been puffery paid for by Tufnell's sponsors, likely the Whig government.

The context for "The Employer and Employed" thus combined a new-found enthusiasm for popular expositions of the professed laws of political economy with middle-class suspicion of the aims and methods of trade unions. "The Employer and Employed" struck a somewhat conciliatory pose, advocating tolerance of the workers' right to associate along with patronizing instruction about the futility of trying to tamper with the supposedly immutable laws of supply and demand that determined wages. The decisive passage in the dialogue presents the mill owner Smith's answer to Jackson's question about what regulates wages:

The thing which governs them is the general supply of hands—the supply according to the demand. There is a certain quantity of work to be done here and elsewhere, and a certain quantity of hands to do it. If there be much work, and comparatively few hands, wages will rise; if little work, and an excess of hands, wages will fall. Without any mutual arrangement, the manufacturers come to a uniformity of wages. Indeed, it is not the masters, but the labourers, who settle the rate of wages. They settle it by competing against each other. In the same way that manufacturers compete against one another, so do the labouring classes compete against one another. All find it necessary to work, in order to live; and to get work, they accept of what wages are to be had. If they, however, hear that higher wages are going elsewhere, they carry their labour thither. They there compete with those who are already settled, and perhaps bring down wages to a lower level. Thus, without any mutual understanding among either masters or men, but just by a universal competition, wages get settled down at particular rates.

This passage, which appeared on page eight of the 32-page dialogue, was cited in full in O'Connor's rebuttal. What followed, in the original dialogue, was an extended discourse disputing Jackson's objection that Smith was "forgetting the power of combination among workmen to keep up or to raise wages."

"The history of every trades' union." Smith replies, "is a history of folly, ending in repentance or misery." What followed could well have been a paraphrase of Tufnell's definition of a trade union. "Got up, for the most part, by a few designing individuals, they are a vain effort to browbeat employers into the terms which they dictate, and, in doing so, tyrannise over the multitudes who would willingly take the current rate of wages." The final 24 pages of dialogue was devoted to documenting the folly of strikes.

An 1851 article in Sharpe's London Journal made the point more succinctly by inserting the claim of the self-evident futility of combinations and strikes immediately after a virtually word-for-word transcription of Smith's certain-quantity-of-work lecture:

The price of labour is governed by the same law which regulates the price of all other commodities,— the proportion which the supply bears to the demand. There is a certain quantity of work to be done, and a certain number of hands to do it; if there be much work and comparatively few hands, wages will rise; if little work and an excess of hands, wages will fall. It is self-evident that combinations and strikes cannot alter this law. They can neither increase capital, nor diminish population; and, therefore, it is utterly impossible, in the very nature of things, that thy ever can procure a permanent rise of wages. Not only so, as their tendency is to diminish rather than to increase the wealth or capital of the country.

A certain quantity of work... a certain amount of capital... a certain number of hands...

And yet it wasn't any of those assertions of certainty that Feargus O'Connor refuted in his rejoinder to "The Employer and Employed." Instead, O'Connor had his Jackson character concede Smith's premise with the caveat that what Smith had characterized as the causes of injustice -- "'improvidence,' 'dissipation' and 'viciousness' of the working classes themselves" -- Jackson categorized as the effects of the unscrupulous use of machinery by employers.

O'Connor presented what can now be recognized as a rudimentary analysis of cost-shifting, anticipating the much latter analysis of social costs by A.C. Pigou, J. M. Clark and K. W. Kapp:

Jackson.—Very well, sir,  I understand you perfectly. Your proposition involves three distinct considerations; namely, the governing power that you ascribe to machinery; the means of correcting the evil effects that you admit; and the result which must naturally flow from that correction.  You must admit, sir, that when the population of a whole country becomes deficient in those moral excellencies which all nations, under good laws and fostering government, are capable of attaining, and when immorality becomes the rule, instead of the exception, of the national character (for you have been unreserved and sweeping in your strictures upon the working classes), I say in such case you must admit that there is a deep-seated evil resting somewhere; an evil which has originated with machinery, grown with its growth, and strengthened with its strength. 

Smith.—Well but, Jackson, this is all assertion.  

Jackson.—It may be so, sir, but it is assertion founded upon your own admissions, and, as I shall prove, upon an incontrovertible basis. When you admit that masters’ profits, and their protection against fluctuations in trade, are made up by reductions in wages, and when machinery alone enables them to take this undue advantage of their hands, what other conclusion can be come to, than that the working classes should consider this governing power as their greatest enemy ? And what more legitimate than that they should seek, by combination or otherwise, to destroy its effects; and what more natural than to seek another channel for their industry, over which the same anomalous power can have no control?   

Jackson's reply to Smith is "all assertion" but it is assertion founded upon Smith's own premises. It is no more and no less than a challenge to Smith to play by his own discursive rules. It is not "self-evident" that combinations and strikes cannot alter that law whose proclamation can now be seen as nothing but a self-serving pretext for its spurious invincibility. The significance of the law was always more the claim that "nothing can be done" than an objective analysis that supply and demand govern the price of labor.

Although they are unintended outcomes, fluctuation in trade -- booms and slumps -- are the consequences of investment decisions. During slumps, employers are able to avoid bearing the full cost of those consequences by shifting a considerable portion to workers through layoffs and wage reductions. During booms, employers can "make up" for their previous losses by holding out against wage increases for as long as possible. O'Connor's economic analysis was more advanced than the Chambers's "right orthodox and admirably clear" recital of conventional doctrine.

Reading O'Connor's "The Employer and Employed: Refuted" today, it is easy to perceive that his romanticism and bombastic flourish may well have concealed the subtleties of his argument from all but the faithful -- and probably from many of those.

The contemporary relevance of this excursion into the archives is that economic policy and economic thought walks on two legs. Conservative economists hypocritically but strategically embrace both the crowding out arguments for austerity and the projected lump-of-labor fallacy claims against pensions and shorter working time. They are for a "fixed amount" assumption when it suits their objectives and against it when it doesn't. There is ideological method to their methodological madness. That consistency resolves itself into the "self-evidence" that nothing can be done.

There is no excuse for liberal Keynesians who parrot the reactionary lump-of-labor fallacy claim or who tolerate such nonsense from their colleagues. Propagating the fallacy claim is a bulwark of austerity economics. What this ideological inconsistency amounts to is ignoring and/or discounting the power imbalances and cost-shifting that lead to economic instability and then trying to ameliorate the symptoms with ineffectual policies that don't work because they are not embedded in a coherent framework of action.

A coherent framework would be one that explicitly accounts for social and environmental overhead costs rather than tacking them on as "externality" afterthoughts. These uncompensated overhead costs are not external to the profit-pursuing decision processes of firms, as Robert Prasch pointed out not too long ago:

For a profit-maximizing firm pursuing a reduction in its costs, it is equally “efficient” to (1) develop a process that will economize on the quality or quantity of inputs necessary to produce a given level of output; (2) purchase the same quality and quantity of inputs at a reduced price; or (3) adopt a new process that shifts a portion of the firm’s production costs to some other person or entity or the environment. 

When economists speak of “technical change,” the first of these approaches is almost always implied. The second is, to a degree, covered when the analysis of “factor markets” is covered. The third option, cost shifting, is almost always downplayed or neglected. Despite its neglect by professional economists, cost-conscious firms have been most attentive to the possibilities of cost shifting. It follows that economists’ tendency to neglect this variety of cost savings is unwarranted.

Ignoring or neglecting the profitable aspect of cost-shifting invites policy responses that perversely subsidize and thus promote environmental and social harm -- a moral hazard. Under such a policy regime, predatory and parasitical cost-shifting advances by crowding out investment in socially beneficial and environmentally sustainable innovation.