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The Real Wage And The Marginal Product of Labor

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  • Tracy Mott

Abstract

As I see it, the errors in Keynes's analysis in Chapter Two of the General Theorv were his acceptance of diminishing returns in the short-period relation between output and labor employed and of perfect competition in the product market. These "errors," however, are easily corrected and do not alter Keynes's basic and correct ideas--that employment is determined by aggregate demand, that real wages are determined by aggregate demand given the degree of competition and the level of capital utilization and other determinants of the productivity of labor, and that the supply of labor, at least below full employment, has no effect on either employment or real wages. I would like to reiterate that the formulation we have established here is "Ricardian" rather than neoclassical. Basically all we have said is that the mark-up represents a deduction from the product of labor and that since the mark-up is certainly not procyclical and productivity probably is procyclical, as the "margin" of production is extended, real wages rise. Sraffa (1960, pp. v-vi) has argued that such a use of the term "marginal" is spurious, since the true application of the term "requires attention to be focused on change," while this use of the term, as in Ricardo's discussion of the margin of cultivation, need only be a matter of differences in quality among existing productive facilities rather than changes in scale or in input proportions. We have come a long way from the neoclassical idea of a marginal product of labor, but this should not make either us or Keynes embarrassed about Chapter Two of the General Theory, one of the most interesting and important chapters in the book. Lawlor, Darity, and Horn (1987) noted that Sraffa (1926) had pointed out that the determination of prices and quantities by the interaction of supply and demand necessitates an independence between supply and demand which does not obtain except under very restrictive conditions. Sraffa (1960) extends this argument by showing that scarcity, as in scarce factors of production, is not necessary to determine value and in fact cannot determine value independently of income distribution. Keynes's and Kalecki's work shows that when we take effective demand into account, output is determined solely by demand and distribution by the conditions of competition. Kalecki's and Keynes's work can thus be taken as an Hegelian "supersession" of classical and neoclassical economics when we realize that workers cannot bargain in terms of a real wage and that output not saleable will soon no longer be produced.

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  • Tracy Mott, 1988. "The Real Wage And The Marginal Product of Labor," Economics Working Paper Archive wp_12, Levy Economics Institute.
  • Handle: RePEc:lev:wrkpap:wp_12
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    References listed on IDEAS

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    1. Fay, Jon A & Medoff, James L, 1985. "Labor and Output over the Business Cycle: Some Direct Evidence," American Economic Review, American Economic Association, vol. 75(4), pages 638-655, September.
    2. G. C. Harcourt, 1981. "Marshall, Sraffa and Keynes: Incompatible Bedfellows," Eastern Economic Journal, Eastern Economic Association, vol. 7(1), pages 39-50, Jan-Mar.
    3. Barro, Robert J & Grossman, Herschel I, 1971. "A General Disequilibrium Model of Income and Employment," American Economic Review, American Economic Association, vol. 61(1), pages 82-93, March.
    4. Bils, Mark J, 1985. "Real Wages over the Business Cycle: Evidence from Panel Data," Journal of Political Economy, University of Chicago Press, vol. 93(4), pages 666-689, August.
    5. Paul Davidson, 1978. "Money and the Real World," Palgrave Macmillan Books, Palgrave Macmillan, edition 0, number 978-1-349-15865-2, December.
    6. Michael S. Lawlor & William A. Darity & Bobbie L. Horn, 1987. "Was Keynes a Chapter Two Keynesian?," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 9(4), pages 516-528, July.
    7. Edward J. McKenna & Diane C. Zannoni, 1987. "On the Nature and Use of the Concept of the Marginal Physical Product in Post Keynesian Economics," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 9(4), pages 483-489, July.
    8. J. A. Kregel, 1987. "Keynes’s Given Degree of Competition: Comment on McKenna and Zannoni," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 9(4), pages 490-495, July.
    9. Robert E. Hall, 1986. "Market Structure and Macroeconomic Fluctuations," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 17(2), pages 285-338.
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