Iron law of wages

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The iron law of wages is a proposed law of

Goethe's "great, eternal iron laws" in Das Göttliche.[1][2][3]

It was coined in reference to the views of

Thomas Malthus. It held that the market price of labor (which tends toward the minimum required for the subsistence of the laborers) would always, or almost always, reduce as the working population increased and vice versa. Ricardo believed that this happened only under particular conditions.[4]

Lassalle

According to Alexander Gray,[5] Ferdinand Lassalle "gets the credit of having invented" the phrase the "iron law of wages", as Lassalle wrote about "das eiserne und grausame Gesetz" (the iron and cruel law).[6]

According to Lassalle, wages cannot fall below subsistence wage level because without subsistence, laborers will be unable to work. However, competition among laborers for employment will drive wages down to this minimal level. This follows from

Malthus' demographic theory, according to which population rises when wages are above the "subsistence wage" and falls when wages are below subsistence. Assuming the demand for labor to be a given monotonically decreasing function
of the real wage rate, the theory then predicted that, in the long-run equilibrium of the system, labor supply (i.e. population) will rise or fall to the number of workers needed at the subsistence wage.

The justification for this was that when wages are higher, the supply of labor will increase relative to demand, creating an excess supply and thus depressing market real wages; when wages are lower, labor supply will fall, increasing market real wages. This would create a dynamic convergence towards a subsistence-wage equilibrium with constant population, in accordance with supply and demand theory.

As Ricardo noticed, this prediction would not come true as long as new investment, technology, or some other factor causes the demand for labor to increase faster than population: in that case, both real wages and population would increase over time. The demographic transition (a transition from high birth and death rates to low birth and death rates as a country industrializes) changed this dynamic in most of the developed world, leading to wages much higher than the subsistence wage. Even in countries which still have rapidly expanding populations, the need for skilled labor in certain occupations causes some wages to rise much faster than in others.

To answer the question of why wages might fall towards a subsistence level, Ricardo put forth the law of rent. Ricardo and Malthus debated this concept in a lengthy personal correspondence.[7]

Ricardo

The content of the iron law of wages has been attributed to economists writing earlier than Lassalle. For example, Antonella Stirati

market price
. For Ricardo, the natural price of labor was the cost of maintaining the laborer. However, Ricardo believed that the market price of labor or the actual wages paid could exceed the natural wage level indefinitely due to countervailing economic tendencies:

Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse, which an increased capital gives to a new demand for labor, be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labor may give a continued stimulus to an increase of people...[13]

Ricardo also claimed that the natural wage was not necessarily what was needed to physically sustain the laborer, but could be much higher depending on the "habits and customs" of a nation. He wrote:

An English laborer would consider his wages under their natural rate, and too scanty to support a family, if they enabled him to purchase no other food than potatoes, and to live in no better habitation than a mud cabin; yet these moderate demands of nature are often deemed sufficient in countries where 'man's life is cheap', and his wants easily satisfied.[13]

Criticism

Socialist critics of Lassalle and of the alleged iron law of wages, such as

Physiocrats.[15]

References

  1. ^ Critique of the Gotha Programme, Karl Marx, Chapter 2, footnote 1, (1875)
  2. ^ "Letters: Marx-Engels Correspondence 1875". Marxists.org. Retrieved October 13, 2010.
  3. JSTOR 1816859
    .
  4. ^ "The Project Gutenberg eBook of Letters of Ricardo to Malthus, by James Bonar".
  5. ^ Gray, Alexander (1946, 1947) The Socialist Tradition: Moses to Lenin, Longmans, Green and Co., p. 336
  6. ^ Lassalle, Ferdinand (1863) Offenes Antwortschreiben, http://www.marxists.org/deutsch/referenz/lassalle/1863/03/antwortschreiben.htm
  7. ^ David Ricardo, The Works and Correspondence of David Ricardo, ed. Piero Sraffa with the Collaboration of M.H. Dobb (Indianapolis: Liberty Fund, 2005), 11 vols. http://oll.libertyfund.org/title/159
  8. ^ Stirati, Antonella (1994) The Theory of Wages in Classical Economics: A study of Adam Smith, David Ricardo and Their Contemporaries, Edward Elgar, p. 43
  9. ^ Galbraith, John Kenneth (1987) Economics in Perspective: A Critical History, Houghton Mifflin, p. 84
  10. ^ Peach, Terry (1993) Interpreting Ricardo, Cambridge University Press, pp. 9–10
  11. .
  12. ^ George, Henry (1920). Progress and Poverty Book III, Chapter 2 "Rent and the Law of Rent"
  13. ^ a b Ricardo, David (1821). "Chapter 5, On Wages". On the Principles of Political Economy and Taxation. John Murray.
  14. Capital, Volume 1
    , Chapter XXV: "The General Law of Capitalist Accumulation", Progress Publishers
  15. ^ Marx, Karl (1963, 1969) Theories of Surplus Value, Part I, Chapter II, Progress Publishers