Missing: the strange disappearance of S. J. Chapman’s theory of the hours of labour (2)

Now you see it: Chapman's theory of hours

It wasn't as if Chapman's theory was eccentric or Chapman himself was a radical fringe figure. Chapman's theory built on Stanley Jevons's well-established analysis of individual labour supply, supplemented by an accumulation of statistical and experimental evidence. Chapman had been Marshall's star pupil at Cambridge for three years before moving on to Manchester where he completed a prize-winning study of the Lancashire cotton industry (Tribe, 2004). He rapidly rose to a professorship of political economy at Manchester's Owens College (which in 1904 became Victoria University) and was appointed dean of the newly established faculty of commerce and administration there. In that role, from 1904 to 1917, he pioneered an exemplary teaching and research program.

At the start of the first world war, Chapman was asked by the British government to direct research into wartime production. By 1918, he had become a full-time civil servant. The following year he was appointed joint permanent secretary of the Board of Trade and subsequently served seven years as permanent secretary. In 1920, he was knighted for his contribution to the war effort. In 1927, Sir Sydney Chapman was appointed chief economic advisor to the British government, a post he held until 1932.

Before chronicling the eclipse of Chapman's theory, it would be appropriate to present a brief summary of it. Chapman argued that the importance of leisure, both to industrial productivity and to individual well-being, must rise along with technical progress. As industrial processes became more intensive and specialized, the faster pace of working and the mental concentration demanded from workers would accelerate fatigue and thus would make it less productive to continue working longer hours. The optimal length of the working day would thus decline. At the same time, increased incomes from higher output would also make leisure time more attractive and affordable to workers. Those changes in both the optimal length of the working day and the value of leisure to workers would lead to demands for corresponding reductions in the actual length of the working day: "agitation for shorter hours will be constantly breaking out anew" (Chapman, 1909, p. 358).

Chapman arrived at this conclusion after reviewing a mass of evidence from the 19th century that reductions in the hours of work had not led to proportionate declines in output. From that evidence, he inferred that workers required more leisure time to fully recover from the fatigue of work as industrial methods became progressively more intensive. Thus when the hours of labour were reduced, the better-rested workers were often able to produce as much or more in the shorter hours than they had previously in longer hours.

Most importantly, Chapman's analysis also suggested that competition between employers would make it unlikely that a working day of optimal length could be established solely through the working of a free market. The reason for this was that the long-term maintenance of a working day of optimal length for output would require employers to exercise short-term restraint. Such restraint, however, could be undermined because competing firms could always offer higher wages to poach well-rested employees from a firm that did exercise such restraint. The enlightened firm would thus be making a sort of investment without equity in the workers' well-being. For this reason, the length of working day sought by employers under competitive conditions would tend to be longer than would be optimal for output. A working day of optimal length could only be maintained if all employers acted together in enlightened accord.

The length of day that would be best for workers' welfare would be shorter than that which could produce the greatest total output. But workers, too, would tend to disregard the long-term effects of working time on fatigue, productivity and ultimately on wage levels. In forming their preferences for income and leisure, they would be predominantly influenced by current wage levels. This would result in workers seeking a working day longer than would be prudent in the long run, although still shorter than that sought by employers acting competitively. The prevailing concern of both employers and workers for immediate self-interest would bias the preferences of each toward a longer than optimal length of the working day.

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Abstract: Sidney Chapman's theory of the hours of labour, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The Sandwichman is serializing "Missing: the strange disappearance of S. J. Chapman's theory of the hours of labour" on EconoSpeak in celebration of the centenary of publication of Chapman's theory. (To download the entire article in a pdf file, click on the article title.)

A Beautiful Mind in Splendid Isolation

Sometimes I forget how much pure enjoyment one can get from the economics literature. Consider this:

"The Optimal Jury Size When Jury Deliberation Follows a Random Walk"

Public Choice, Vol. 134, No. 3-4, 2008
Robert Day School of Economics and Finance Research Paper No. 2008-3

ERIC HELLAND, Claremont McKenna College - Robert Day School of Economics and Finance, RAND
Email: ehelland@cmc.edu
YARON RAVIV, Claremont McKenna College - Robert Day School of Economics and Finance
Email: yraviv@cmc.edu

The existing literature does not agree on the optimal jury size. We demonstrate that the probability of type I and type II errors is not sensitive to the number of jurors under the following three conditions: jurors received independent signals about a defendant's guilt during the evidence stage of the trial; the jurors truthfully reveal their signal before deliberations in the first ballot via their vote; and the jury deliberation can be modeled as a random walk. Since the opportunity cost of jury service is positive, this implies the optimal number of jurors is one.

And why do we need coauthors?

Missing: the strange disappearance of S. J. Chapman’s theory of the hours of labour (1)

The days are gone when it was necessary to combat the naïve assumption that the connection between hours and output is one of direct variation, that it is necessarily true that a lengthening of the working day increases output and a curtailment diminishes it. – Lionel Robbins

On August 26, 1909, Sydney J. Chapman unveiled his economic theory of the hours of labour in his presidential address to the Economics and Statistics Section of the British Association for the Advancement of Science meeting in Winnipeg, Manitoba. The theory was subsequently published in The Economic Journal (Chapman 1909). Chapman's analysis arrived at several remarkable and far-reaching conclusions. First, the length of working day that would be best for workers’ welfare is shorter than the length that would produce the largest output. Second, the play of competition would tend to make the working day too long, even from the standpoint of production. Third, improved methods of production would lead to a progressive reduction of the optimal length for the working day. As a consequence, renewed conflict over the length of the working day would break out from time to time.

Not only were those conclusions novel from the point of view of conventional economic theory, they also had important practical implications for public policy regulating the hours of work. If the hours of work established by the market were likely to be too long, even from the perspective of total output, then legal limitation of the working day could aid not only equity but also economic efficiency. This possibility challenges the popular myth – often presented as an economic truism – that there is a "trade-off" between equity and efficiency goals and, furthermore, that economic efficiency is best served through the workings of a competitive market. Chapman’s theory calls both of those suppositions into question. It does so from within the tradition of neoclassical economics, using the approved tools and standard assumptions.

The leading economists of the day acclaimed Chapman's theory. Alfred Marshall (1961) cited Chapman's theory as authoritative. So did Marshall's successor at Cambridge, A.C. Pigou (1920), who based his own discussion of working time in The Economics of Welfare on Chapman’s theory. Lionel Robbins (1929) referred to Chapman's article as having effectively dealt with "one of the chief problems of the analysis of economic equilibrium" (p. 25) – i.e., the determination of the hours of work in industrial civilization. John Hicks (1932), called the theory the "classical statement of the theory of 'hours' in a free market" (p. 102n), and presented a meticulous six-page précis of it.

Twenty-four years after Hicks had proclaimed Chapman's theory authoritative, H. Gregg Lewis (1956) referred to something completely different as the "orthodox approach" to analyzing the individual supply of labour time. According to the newly-crowned orthodoxy, individuals choose how many hours they want to work based on their relative preferences for income and leisure. In the income-leisure choice model, leisure is viewed as a normal consumer good – no different from shoes, cabbages or sealing wax. Between the earlier classical statement of the theory of hours and the later orthodoxy lay a gulf and an enigma. In his history of worktime thought, Chris Nyland (1986) described the unchronicled transition as a matter of "now you see it, now you don’t" (p. 32).

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Abstract: Sidney Chapman's theory of the hours of labour, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth. Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. The Sandwichman is serializing "Missing: the strange disappearance of S. J. Chapman's theory of the hours of labour" on EconoSpeak in celebration of the centenary of publication of Chapman's theory. (To download the entire article in a pdf file, click on the article title.)

The Euro-Economy's Trouble Ahead

Perhaps one of the biggest achilles heel of the Euro-economies at present is their close ties with the 'emerging-market' economies. Europe's faltering trade partners to the East purchase approximately one-third of Europe's exports. The currencies of the former are sliding and their banks are weakening. Middle Eastern nations are suffering from a dramatic plunge in oil prices [1] with Kuwait bailing out its largest banks. The IMF will lend the Ukraine $US16.5 billion with a large package also for Hungary a nation where the currency has fallen 16% since the end of August this year and "foreign- currency loans make up 62 percent of all household debt...up from 33 percent three years ago." "Plunging domestic currencies mean higher monthly payments for businesses and households repaying foreign-denominated loans, forcing them to scale back spending." [2] Other 'emerging-economies' are hit with precipative falls in commodity prices [3]to levels regarded by some in the industry as unsustainable in the longer term. [4]

The dozen mostly Eastern European nations which joined the broader European Union since 2004 account for 15.3% of the Euro area's foreign demand, up a third since the start of the decade, according the the ECB. The contributions of China and Russia have almost doubled. By contrast, the US and UK portions have each dropped about 4% to 11.9% and 14.5% respectively. European banks lent $US 3.5 trillion to emerging market economies and are already retrenching staff as they try to cover $US 221.8 billion in losses and write-downs. Those banks in Austria and Spain were particularly exposed. [US banks lent $500 billion and Japan $US 200 billion.] [5]


In the UK the economy shrank in the 2nd quarter this year, the nation's biggest bank needs to raise $Au$8 billion of capital (of which 3/5 is likely to be equity). House prices have dropped there by 7.3%over the last 12 months.

This does not strike me as an opportune time for our global media magnate, Rupert Murdoch, to be lecturing us all on how to reach the "golden age" of prosperity and freedom" by scaling back Government and embracing the free market. He did just that this week in his Australian Boyer lectures [6].

[1] Oil is $US25 per barrel lower than the 2008 June year average.

[2] `Panic' Strikes East Europe Borrowers as Banks Cut Franc Loans By Ben Holland, Laura Cochrane and Balazs Penz. Bloomberg. 31st October 2008
http://www.bloomberg.com/apps/news?pid=20601109&sid=awd1vGnyyBJQ&refer=home

[3] Copper is down 40.1% in the last 12 months whilst zinc prices fell 55.7% and Nickel 60%.

[4] In Australia the Kagara executive chairman Kim Robinson stated in late October 2008: "Management does not believe that these low metal prices can be sustained in the longer term as the majority of mines worldwide are cash-flow negative and a continuation of current prices would result in wholesale mine closures." [From 'Cost focus as mine futures up in the air' by Michael Vaughan, Australian Financial Review. Page 50. 31st October 2008]

[5] 'Emerging markets become a problem'. Simon Kennedy, Australian Financial Review, page 17. 29th October 2008

[6] Rupert Murdoch's challenge to Australia in Boyer Lectures", Roger Coombs
November 02, 2008 12:00am. Herald Sun.
http://www.news.com.au/heraldsun/story/0,21985,24590176-662,00.html

Upcoming on EconoSpeak

by the Sandwichman

Starting this coming Monday, November 3, Sandwichman will be posting a 14-part serialization of "Missing: the strange dissappearance of S. J. Chapman's theory of the hours of labour" to celebrate the upcoming centenary of that penetrating but neglected contribution to neoclassical economic analysis.

Chapman's theory, published in 1909 in The Economic Journal, was acknowledged as authoritative by the leading economists of the day. It provided important insights into the prospects for market rationality with respect to work-time arrangements and hinted at a profound immanent critique of economists' excessive concern with external wealth.

Chapman's theory was consigned to obscurity by mathematical analyses that reverted heedlessly to outdated and naïve assumptions about the connection between hours and output. You can also download the full article in PDF format.

GM and Chrysler - another bailout?

Cerberus Capital Management is the parent company of General Motors and Chrysler. It's a private equity group. GM and Chrysler are suffering from a precipitative decline in US auto demand. The sales are the lowest in 15 years. At the same time GM's debt is $US 43 billion and Chrysler's is $US 9 billion. Their debts have been cut another grade toward junk status by Moodys.[*} Concurrently there are hundreds of billions of dollars of notional insurance on GM debt through the credit default swap market. The US government is expected by some observers to intervene because of a possible domino effect on the wider economy but the bailing- out of a private equity concern is not going to going to go down very well with those that have studied this financial model's nature and behaviour over the last 30 years or so.



* From 'GM and Chrysler downgraded as demand drops'. Australian Financial Review, 29th October 2008.

Holtz-Eakin on the Latest GDP News Release

BEA released its advance estimate of how real GDP fared during the third quarter of 2008 and it would seem real GDP fell a bit:

The decrease in real GDP in the third quarter primarily reflected negative contributions from personal consumption expenditures (PCE), residential fixed investment, and equipment and software that were largely offset by positive contributions from federal government spending, exports, private inventory investment, nonresidential structures, and state and local government spending. Imports, which are a subtraction in the calculation of GDP, decreased.

In short, consumption and investment fell but the blow to aggregate demand was tempered by increases in government purchases and net exports.

Douglas Holtz-Eakin took the liberty of issuing this BS:

Today's announcement that third quarter GDP fell at a 0.3 percent rate confirms what Americans already knew: the economy is shrinking. Barack Obama would accelerate this dangerous course. According to the independent Center for Data Analysis, Barack Obama's new policies will destroy nearly 6 million jobs over the next decade. Barack Obama's ideologically-driven plans to redistribute income will impose higher taxes on families, small businesses, and investors; expensive, rigid, job-killing health mandates on employers; energy policies that fail to promote domestic oil, natural gas, and coal, and will impose a massive Washington-driven regulation of everything from home furnaces to factories; isolationist trade policies that endanger one out of every five jobs; and massive new spending plans that that will burden the economy and saddle our children with debt. Barack Obama is change Americans cannot afford.

Shifting the tax burden away from the middle class and working poor and towards high income individuals may actually reverse some of the decline in consumption. As far as trade policies – McCain wants a stronger dollar which will reduce net exports. Holtz-Eakin also repeats McCain’s assertion that he would lower government spending. The notion that reducing government spending is a cure for a recession must have Lord Keynes rolling over in his grave.

Economic and Social Importance of the Eight-Hour Movement

by the Sandwichman

The serialization on EconoSpeak of the analytical portion of George Gunton's 1889 pamphlet, "The Economic and Social Importance of the Eight-Hour Movement," is now complete. Below the jump is a point-form summary of the argument with each point linked to an expanded excerpt from the pamphlet.

Also categorized under the economic and social importance of the eight-hour movement label are:

1. A post on the place of this eight-hour theory in American labor history and it's aptness to the depression.

2. Another post relating the theory to the present credit crisis.

3. Some thoughts on the treatment of eight-hour theory in economics textbook lore and

4. a brief annotated bibliography.

I conceive of the composite of these posts as a kind of serialized hypertext and will be reviewing and adding further links to related material on, for example, Sydney Chapman's "Hours of Labour," Ira Steward's 1865 pamphlet, "A Reduction of Hours, An Increase in Wages" and Charles Wentworth Dilke's 1821 pamphlet, "The Source and Remedy of the National Difficulties Deduced from Principles of Political Economy in A Letter to Lord John Russell." I will also be serializing point-form summaries of Dilke's pamphlet and Chapman's article.

My guiding hypothesis is that the common thread that runs through all these documents -- about the centrality of reduction of working time to social progress -- has been excised alike from trade unionist thought, neo-classical economics and traditional Marxism. It's too much to be a coincidence. It's too vast to be a covert conspiracy. It may be more usefully thought of as the elephant in the room that we silently agree not to speak about. Why? Because the "civilization" we know is dying and it is very difficult for us to name that death. Denial.

There is nothing new or novel in the proposition for a general reduction of the hours of labor. [more…]

The opposition of the employing class to this measure has not risen so much from an aversion to improving the laborer's condition as from a misconception of their economic relation to the community, and especially to the laboring classes.... For nearly a century the colleges have taught, and the employing classes have believed, that an increase of wages always means a decrease of profits-that their income moves inversely with that of the laborer's, or, in the language of the economic instructors, that "profits rise as wages fall, and fall as wages rise. [more…]

That the labor movement is a natural phase of modern society is too obvious for any careful observer of social phenomena and student of economic history to question. [more…]

The end and object of production is consumption. Nothing but the desire for a commodity and a willingness to give an equivalent for it will cause it to be produced. [more…]

Capital is not an original but an auxiliary force in production. Capital being merely an implement in the hands of man he will only use it when he can obtain his end better with than without it. [more…]

Capital can yield increasing returns – i.e., become a cheaper productive force than labor – only when it can produce on an extensive scale. Since the laboring classes constitute seven or eight-tenths of the community, it is upon increasing their consumption-which means raising the social life and wages of the laborer-that the market for capitalistic productions finally depends. [more…]

While no proposition for industrial reform can produce any real improvement in the laborer's condition which does not promote the advance of real wages, even that can only be economic and wise when it takes place without permanently increasing prices or reducing profits. [more…]

The price of labor (wages), like that of everything else subject to the conditions of exchange, constantly tends toward the cost of its production. [more…]

The general rate of wages, in any given class, group or industry, is determined by the standard of living of the most expensive families furnishing the necessary part of the supply of labor in that country, class, group or industry. [more…]

The standard of living in any community is always high or low, according as the social life of the masses is simple or complex; that is to say, as the number of the habitual daily wants of the people is large or small. [more…]

The wants of mankind are everywhere simple or complex according to the quality of the habits and Customs of the society in which he moves. Habit not only governs our social wants, but it exercises an important influence over our physical wants also. [more…]

Frequent contact with enjoyable conditions creates desire for them, and by repeated satisfaction the desire grows into a taste, and tastes into absolute wants, which ultimately become a part of the habits and fixed character, or second nature. [more…]

The first condition for social opportunity which consists of frequent contact with an increasing variety of social influences is LEISURE. So long as one's time is all occupied in the mere getting of a living, the chance for social influences to operate upon him, which creates new desires, is impossible. [more…]

The adoption of an eight-hour system would tend to increase wages in two ways: first, by reducing enforced idleness; second, by creating new wants, and raising the standard of living. [more…]

Whatever tends to raise wages through increasing the aggregate consumption of wealth, necessarily tends to reduce the cost of production and lower prices. [more…]

By the increased aggregate production, the laborer can get more wealth through his higher wages, the general consumer can obtain more through lower prices, and the manufacturer while receiving a smaller per cent. of the total products actually obtains a greater quantity of wealth through the larger productions and extended business. [more…]

We are therefore warranted in saying that the economic effects of a general reduction of the hours of labor would be to raise the standard of living and increase real wages; promote the concentration of capital; and the use of improved machinery; will cheapen production, lower prices, and while diminishing the rate, will increase the aggregate amounts of profits. Obviously, therefore, it would tend to improve the economic and social condition of the laborer and the consumer without injuring that of any other class.

President Bush Demands Banks Stop Hoarding Money

And I thought George W. Bush was a free market kind of guy:

An impatient White House prodded banks and other financial companies Tuesday to quit hoarding billions of dollars flowing into their vaults from Washington and start making more loans ... "What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said. While there are limits to Washington's power to affect banks' behavior, the White House decided it was time to use its bully pulpit.

So what does the evidence show? David Beckworth has some insights:

When thinking about the credit crisis question, I think it is useful to look at the money multiplier for the monetary base. The monetary base is a measure of money that includes currency in circulation and bank reserves. It is also a measure of money that the Fed controls and uses to alter liquidity in the banking system. In normal times, the Fed can increase the monetary base by injecting reserves into the banking system. Banks, in turn, lend out a portion of these reserves to borrowers who then spend the funds ... Banks' balance sheets are hemorrhaging and the economy is in a recession. Banks are not eager to make loans in this environment and are more likely to sit on the new reserves coming from the Fed. This development means less credit and if pronounced enough a credit crunch. One implication is that if, in fact, there is a credit crunch then the money multiplier should be sharply falling. Thus, it makes sense to look at the money multiplier. The figure below provides the money multiplier using MZM as the broad measure of money and the St. Louis Fed's monetary base measure ... This figure shows the money multiplier peaked the week of 6/4/08 and begin a sharp descent in late August. Compared to the credit crisis of 1990-1991, Y2K, and 911, this drop is huge.

It does seem that there is an increase in excess reserve demand. Why banks desire to hold more reserves might be an interesting question but I seriously doubt that this Administration are about to mandate maximum reserve holdings.

Economic and Social Importance of the Eight-Hour Movement

"By the increased aggregate production, the laborer can get more wealth through his higher wages, the general consumer can obtain more through lower prices, and the manufacturer while receiving a smaller per cent. of the total products actually obtains a greater quantity of wealth through the larger productions and extended business."

The idea that an increase of wages involves a diminution of profits is a part of the same heresy which teaches that a fall of wages produces a rise of prices. To begin with, the capitalist is not concerned so much about the rate as he is the aggregate amount of profits he will receive. What he really wants is not so much a large proportion as a large actual amount of wealth; nor has the laborer, or the community so much interest in reducing the actual income of the manufacturer as they have in increasing their own. This can only be economically accomplished by increasing the aggregate consumption. Low wages make small consumption and a limited use of capital with slow methods of production inevitable, which, even at a high rate of profits, makes a large aggregate income impossible. For example: Suppose a manufacturer of shoes in order to live according to the accepted standard of his class was forced to charge a profit of ten cents a pair; and if by investing a large amount of capital and using improved machinery he could make the same shoes for one-third less, and be able to sell twice as many, he could reduce the price of the shoes to the consumer, and increase the wages of the laborer, and actually obtain more wealth per day for himself at five cents a pair than he has previously done With his small production at a profit of ten cents a pair. This, however, can only be possible when the aggregate demand for the shoes is increased. That is why the cotton manufacturer of today is actually richer with a profit of two cents a pound on cotton cloth than he was fifty years ago with a profit of more Than double that amount. Thus it is that the large production consequent upon the increased consumption of wealth by the masses makes all classes actually richer. By the increased aggregate production, the laborer can get more wealth through his higher wages, the general consumer can obtain more through lower prices, and the manufacturer while receiving a smaller per cent. of the total products actually obtains a greater quantity of wealth through the larger productions and extended business. This is exactly what has taken place throughout all the stages of industrial progress. It is a natural result of all the influences which tend to increase the market for products and make the concentration of capital in production possible.

We are therefore warranted in saying that the economic effects of a general reduction of the hours of labor would be to raise the standard of living and increase real wages; promote the concentration of capital; and the use of improved machinery; will cheapen production, lower prices, and while diminishing the rate, will increase the aggregate amounts of profits. Obviously, therefore, it would tend to improve the economic and social condition of the laborer and the consumer without injuring that of any other class.

Obama at JMU in Harrisonburg, Virginia!

Almost an hour ago I just finished watching live on the internet Barack Obama speaking at the Convocation Center at James Madison University here in Harrisonburg, Virginia, in the heart of the "red" Republican Shenandoah Valley, although Harrisonburg tracks the state as a whole pretty accurately, meaning Obama is currently leading in the city as in the state as a whole. Many continue to say that Virginia is the marginal state, the one more than any other that will determine the final outcome, and Harrisonburg tracks it. So, he may be the first major party presidential candidate to visit here since Douglas in 1860. His speech was mostly standard stump, with some soaring rhetoric at the end, but the crowd was enthusiastic and way over the 7500 capacity in the center. It started at 5:15, but one of my colleagues gave up trying to get in after getting in line at 12:30!

Obama has gone to Norfolk in the Tidewater for a speech later this evening. This is the region that may really explain Obama's apparent lead in Virginia. Of course, population increases in "unreal" Northern Virginia is part of the pattern, but the ironic key according to Bob Roberts, a poli sci prof at JMU who is a frequent commentator on local TV is that McCain is not very far ahead in the Tidewater. The irony here is that this is the area that is most chock full of military, with Hampton Roads being the world's largest naval base. According to Roberts, McCain does lead among the military themselves, but their families have turned against him, sick of the long Iraq war. So, if McCain loses Virginia, and thus the election, it may be the ultimate blowback from his support of the awful Iraq war, finally coming home to roost.

Economic and Social Importance of the Eight-Hour Movement

"Whatever tends to raise wages through increasing the aggregate consumption of wealth, necessarily tends to reduce the cost of production and lower prices."

It is commonly assumed that every increase of wages must be accompanied by a rise, of prices. This is a fundamental mistake that is demonstrated by all the facts of industrial history. The last fifty years which have witnessed a greater rise of wages than all the rest of the world's history have shown, has also seen the greatest fall of prices ever known. Whether a rise of wages will involve an increase of prices depends entirely upon how the advance of wages is brought about. If wages were arbitrarily increased without any change in the standard of the laborer's living, and the consequent increase in his general consumption, of course an advance of wages would increase the cost of what he produced. But this is entirely different when the rise of wages comes from the natural consequence of a higher standard of living, and a larger general consumption. The larger the market the lower the price, is one of the best established principles in political economy as well as one of the best attested facts in industrial history.

The successful use of improved machinery, which is the only means of permanently reducing the cost of production and lowering prices, is impossible without the use of large capital and extensive production. It is equally true that the concentration of capital and extensive production are compatible only with large aggregate consumption of wealth, which nothing but a high standard of living can sustain. Therefore, whatever tends to raise wages through increasing the aggregate consumption of wealth, necessarily tends to reduce the cost of production and lower prices. This explains why the comfort and luxuries of life are cheaper in England now, with labor at five shillings a day, than they were in the middle ages with labor at less than six pence a day, and why wealth can be produced cheaper in America at two dollars a day than in China at ten cents.

Fudging Data to Prove Markets Are Fair

In The Confiscation of American Prosperity, I looked at the career of Martin Feldstein, until recently longtime director of the National Bureau of Economic Research, chief economic advisor during the Reagan administration, and inveterate foe of Social Security.

In the recent issue of the NBER digest, you can read a short discussion of Martin Feldstein's "proof" that wages have kept pace with productivity.

http://www.nber.org/digest/oct08/w13953.html

In case you do not want to purchase the article, you can read an earlier version here

http://www.aeaweb.org/annual_mtg_papers/2008/2008_111.pdf

The result is a display of incredible virtuosity. By selecting the appropriate deflators [a measure of inflation], including benefits as part of wages, and comparing wages with National Income rather than the Gross Domestic Product, voila, Feldstein manages to get a relatively constant wage share of national income.




Using a different deflator is a common tactic for arguing that wages have kept pace with productivity. At the same time, many fees that ordinary people face are not included in any of the deflators. Also keep in mind that wages include multimillion dollar executive salaries as well as those of minimum-wage workers.

National Income differs from Gross Domestic Product because it includes the depreciation. By subtracting depreciation, the wage share increases.

The nature of depreciation is changed greatly over the. The Feldstein covers, 1970-2006. During this period, the nature of investment changed, with less long-term investment in fixed capital goods at the same time that software, which has a very rapid depreciation, became counted as part of capital expenditure. If a $1000 were invested in a factory building in 1970 and an equivalent thousand dollars were invested software in 2006, a relatively small part of the 1970s investment would be counted as depreciation. In contrast, a large part of the 2006 investment would represent depreciation. So, between 1970, depreciation rose from about 10% of GDP to 13%. Since National Income rose more slowly, that kept the wage share from declining as much.

In so far as benefits are concerned, the two most important are pensions and medical care. Since medical care has experienced rapid inflation over the period covered, a careful study would deflate medical care costs to account for inflation -- especially in a paper that is supposedly paying special attention to the appropriate way to account for inflation. In other words, the value of a dollar's worth of medical care in 2006 was much less than comparable expenditure in 1970.

So, by carefully selecting measures of production, inflation, and wages, Feldstein made the case that wages have kept up with productivity and growth of income. This exercise shows more about the degree to which committed ideologues will go to prove that markets are both efficient and just.

Ben Stein on the Financial Crisis: Liquidity v. Solvency

Dean Baker has one problem with the latest from Ben Stein:

Ben Stein is back, telling people that it is important to save money in order to protect themselves against the sort of downturn that the economy is now seeing. While few would argue with the view that people should try to put some money aside, most people get paid less than Mr. Stein and do much better work.

Imagine that – during a period where the concern is a lack of aggregate demand, Ben Stein advocates that we consume less!

I have another problem with Stein’s musings:

Months ago, one of the greatest of American economists, Anna Jacobson Schwartz, who was co-author with the late Milton Friedman of “A Monetary History of the United States,” accurately said that American banks did not face a liquidity crisis, but that they might soon urgently face a solvency crisis. In other words, banks would have ample reserves to lend but might lack assurances that they could meet all their financial obligations if those loans went bad. She was right. In fact, bankers have had so many losses and faced so much uncertainty that they dared not lend, for fear of killing their banks with bad loans — so we have actually had a solvency crisis.

Time to turn the microphone over to Brad DeLong:

So she has become a Mellonist. Back in her (and Milton Friedman's) Monetary History of the United States, she argued that Treasury Secretary Andrew Mellon and company were wrong when they told Hoover, as Hoover put it, to liquidate the economy: “The 'leave-it-alone liquidationists' headed by Secretary of the Treasury Mellon felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula: 'Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate'. He held that even panic was not altogether a bad thing. He said: 'It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people'...” But today she says that Andrew Mellon's policy is the right one.

Stein continues:

The solvency crisis exploded when, in mid-September, Mr. Paulson allowed Lehman Brothers to die a sudden death. I would never have believed that it could happen, which shows one of my many limitations as an economist and a human being. I assume that the future will be much like the past, but sometimes it isn’t. After Lehman, I felt sure that the government would realize its mistake and issue blanket solvency guarantees to banks.

Huh? The Mellonist policy that Stein and Schwartz advocates was to let Lehman Brothers fail. We did and that started the crisis? So Stein recommends we continue with this policy? Ben Stein – Confused R Us!

Update: Felix Salmon notes that Ben Stein does not even understand the concept of insolvency!

Economic and Social Importance of the Eight-Hour Movement

The adoption of an eight-hour system would tend to increase wages in two ways: first, by reducing enforced idleness; second, by creating new wants, and raising the standard of living.

The adoption of an eight-hour system would tend to increase wages in two ways: first, by reducing enforced idleness; second, by creating new wants, and raising the standard of living. The immediate effect of the general adoption of an eight-hour work day would be to reduce the working time of over eight million adult laborers about two hours a day. This would withdraw about sixteen million hours labor a day from the market without discharging a single laborer. The industrial vacuum thus created would be equal to increasing the present demand for labor nearly twenty per cent. In other words, without increasing either our home or foreign market, but simply to supply the present normal consumption, it would create employment for two million laborers, which is nearly equal to seventy per cent, of the total number of able-bodied paupers and unemployed laborers in America, England, France and Germany. In thus eliminating enforced idleness it would remove the first great Obstacle to industrial reform and social progress

Again, the employment of two million of new laborers would necessarily tend to increase the number of consumers, and thereby enlarge the market for commodities to that extent. That such a result would tend to increase wages is very clear. Although wages would not necessarily rise in the same proportion that enforced idleness is reduced, all the influences would be in that direction. It is a law in all nature that the power of primary forces increases directly as the opposing forces are reduced. Since enforced idleness is the most powerful obstruction to a rise of wages by removing the unemployed, the direct influence of the social forces which tend to promote the rise of real wages would be increased.

Manifestly, therefore, the immediate effect of the adoption of this measure would be to remove the greatest obstacle to industrial peace and progress, and prepare the way for increasing the natural influences which tend to enlarge the general consumption of wealth and raise wages.

The second effect, which would be more gradual, permanent and far-reaching in its nature than the first, would be the result of the increased leisure and social opportunity upon the social character and consumption of the masses. With the removal of enforced idleness, and its degrading influences, over eight million laborers would leave their work each day less exhausted, mentally and physically, and have two hours more leisure. This would mean so much positive opportunity for family life and for general social intercourse, and in a much fresher and more cheerful mood. With increased leisure and less exhaustion, the laborer will be continually forced or attracted into new and more complex social relations, which is the first step toward education and culture in the broadest and deepest sense of the term. In short, it means his gradual introduction into a new social environment, the unconscious influence of which would necessarily awaken and develop new tastes and desires for more social comforts. He would naturally begin to desire more wholesome and better appointed homes, more literature, entertainment, and a greater amount of general social intercourse, not to speak of the intellectual, moral and social improvement that would necessarily result from such conditions. The purely economic effect of this would be little short of revolution. In proportion to the frequency and extent with which the new desires were gratified, the development of which no power on earth could prevent, would they crystallize into urgent wants and necessities. The satisfaction of these would soon become an essential part of the standard of living demanded by the social character and habits of the people, and therefore would make a general rise of real wages inevitable. In fact, these are the only kind of influences which ever did, or ever can, permanently increase the general rate of real wages. This increased consumption and rise of wages means enlargement of the home market, and thereby making a greater concentration of capital and the use of wealth-cheapening machinery possible.