Marginal product of labor is the hero in the story of capitalism

Below is a nice piece. To translate a little, where you see Marginal product insert productivity. The point is incomes have increased mostly because of improved and increased product by worker due to better training, technology and so. Unions and like do raise some wages, but generally reduce opportunities for those outside the union.

Unions may have played a more important role in collective action to promote things like Social Security.

When you ask the average person why wages are so much higher today than the were 100 years ago, or why they are so much higher in developed countries than in developing ones, marginal product of labor is woefully neglected, and unions, regulations, and society’s general beneficence are woefully exaggerated.

Some people think that the subtler truth is that unions have had more of a positive impact on wages than the average economically literate person, and economists in general, believes. Thus despite marginal product of labor being the massively unsung hero of the story with respect to what the average person thinks, they feel it necessary to emphasize the larger role they think their minor hero deserves. But when you’re offering a quote to a journalist, or writing for public consumption, you educate readers far more if you emphasize the role of marginal product.

This is why, despite being unable to answer the question “who am I to lecture David Autor?”, I have to say he is negligent in his duties in what he appears to have said to this New York Times article about rising Chinese wages:

“This is the way capitalism is supposed to work,” said David Autor, an economist at the Massachusetts Institute of Technology. “As nations develop, wages rise and life theoretically gets better for everyone.”

“But in China, for that change to be permanent, consumers have to be willing to bear the consequences. When people read about bad Chinese factories in the paper, they might have a moment of outrage. But then they go to Amazon and are as ruthless as ever about paying the lowest prices.”

Here it is consumers’ generous willingness to bear higher prices that is the hero. But is the story of economic development really one of consumers bearing higher prices which allows wages to rise? Or is it about increased marginal productivity of labor that generates higher wages for workers without necessarily leading to higher consumer prices whatsoever?

The way capitalism is supposed to work is not consumer generosity leading to higher wages, but instead more productivity doing so. After all, consumers can’t tolerate higher prices for everything they buy without buying less of some things, which means some laborer somewhere producing less.

Marginal product of labor, not consumer beneficence, is the hero of this story.

 Modeled Behavior

via Marginal product of labor is the hero in the story of capitalism.


One response to “Marginal product of labor is the hero in the story of capitalism

  1. Unions and like do raise some wages, but generally reduce opportunities for those outside the union.

    Excellent point! Without a doubt an employee in a union will do “better” than if he was not in the union. Except for the young, innovator. He may get fired first or not promoted first due to seniority.

    Modeled Behavior

    All of this talk of politics and economics has energized me. While work is going good, great even, I have been investigating the possibility of taking some college courses to help formalize my thinking. I bumped into the PPE program at the University of North Carolina. Karl Smith, one of the authors of Modeled Behavior teaches there.

    Small world.

    Great post!

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