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Table of contents :
Preface
The real problem is…
Central feature of the surplus approach
Interdependencies and basic questions
The marginalist treatment of “collective actions”
Introduction: why and how do “collective actions” come about?
Problem: “free” individual choices vs marginalist notion of “free competition”
Marginalist line of reasoning; Böhm–Bawerk and Marshall’s thesis on dissolution of “combinations”
Universal coalitions assumed
First stage of Böhm–Bawerk’s analysis; all possible alternatives; w–r curve
Entrepreneurs and capitalists
Mobility of capital and labour (see Ch. IV)
Notional possibilities vs real possibilities
“Free–competition” equilibrium as real possibility
Second stage of Böhm–Bawerk’s analysis; employers’ reaction to increased wage; a particular assumption (see Ch. III)
Change in the “cheapest combination of factors” (see Ch. III); effect on employment
Third stage of Böhm–Bawerk’s analysis; unemployment and underbidding: another particular assumption (see Ch. III); a requirement for validity (see Ch. III)
Böhm–Bawerk’s general conclusion: theorem is demonstrated; an answer to the problem of § ii: temporary vs long–run individual choices
How Böhm-Bawerk explains persistent “combinations”
Marshall on persistent “combinations”; the “fear of spoiling the market”
Marshall and Smith on competition (see Ch. IV)
Some issues on collective actions
Difficulty as to a requirement for validity (see § II.xii): in general, “demand for labour” may be inelastic
Meaning and implication of difficulty
Marshall on elasticity of “demand for labour” and hours of labour
Marshall on wages and exportation of capital
Summing up and following points; three elements providing the grounds for the marginalist general method of constructing particular analyses (see §§ II.x–xiii)
First element: relation between rate of profits and “capital”/labour ratio: a critique
An implication of the critique: “counteracting forces” tending to dissolve any “combination” not always possible
Further implication of the critique: cases in which persistent “combinations” are even necessary; second element (indefinite underbidding by unemployed workers) shown illogical; marginalist claim (see § II.xiii) contradicted
Remarks on unemployed workers’ behaviour; why the “free” individual may arrive to, and persist in, choosing a course of action quite different from underbidding
“Freedom” and rules
Critique of third element: employers’ “free” reaction to enforced wage; an example of capitalists’ behaviour contradicting the marginalist assumption; institutions and methods of production
Workers’ collective action influencing methods of production
A comprehensive assessment of the marginalist analysis: “labour demand curve” dissolved; “free competition” as contradiction in terms
Edgeworth on “combinations” and “art of bargaining”
Stigler on competition and social/juridical norms
From “combinations” to social classes: changes in class relations and changes in distribution and employment
Particular “combinations” and class “combinations” in Smith
Mobility of capital, land, and labour; why it may induce solidarity within a class “combination”
Why the above mobility is not a “natural” outcome of “liberty”
Smithian “competition”, class relations, and the institutional arrangements of society
A wide range of phenomena should be taken into account
How to organize their treatment; a hint from Engels; why necessary, univocal, irreversible “laws” are excluded
The surplus approach treatment of changes in class relations, distribution, and employment; the range of real possibilities; plausible scenarios
References
Citation preview
Marco Piccioni Production, Value, Distribution and Employment Prelude to an Analysis of Changes in Class Relations
Copyright © MMXIV ARACNE editrice int.le S.r.l. www.aracneeditrice.it [email protected] via Raffaele Garofalo, /A–B Roma ()
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No part of this book may be reproduced by print, photoprint, microfilm, microfiche, or any other means, without publisher’s authorization. Ith edition: December
Nicht den Zeitgenossen, nicht den Landsgenossen. . . Arthur Schopenhauer
Contents
Preface
Chapter I The real problem is. . . . Central feature of the surplus approach, – . Interdependencies and basic questions, .
Chapter II The marginalist treatment of “collective actions” . Introduction: why and how do “collective actions” come about?, – . Problem: “free” individual choices vs marginalist notion of “free competition”, – . Marginalist line of reasoning; Böhm–Bawerk and Marshall’s thesis on dissolution of “combinations”, – . Universal coalitions assumed, – . First stage of Böhm–Bawerk’s analysis; all possible alternatives; w–r curve, – . Entrepreneurs and capitalists, – . Mobility of capital and labour (see Ch. IV), – . Notional possibilities vs real possibilities, – . “Free–competition” equilibrium as real possibility, – . Second stage of Böhm–Bawerk’s analysis; employers’ reaction to increased wage; a particular assumption (see Ch. III), – . Change in the “cheapest combination of factors” (see Ch. III); effect on employment, – . Third stage of Böhm–Bawerk’s analysis; unemployment and underbidding: another particular assumption (see Ch. III); a requirement for validity (see Ch. III), – . Böhm–Bawerk’s general conclusion: theorem is demonstrated; an answer to the problem of § ii: temporary vs long–run individual choices, – . How Böhm-Bawerk explains persistent “combinations”, – . Marshall on persistent “combinations”; the “fear of spoiling the market”, – . Marshall and Smith on competition (see Ch. IV), .
Chapter III Some issues on collective actions . Difficulty as to a requirement for validity (see § II.): in general, “demand for labour” may be inelastic, – . Meaning and implication
Contents
of difficulty, – . Marshall on elasticity of “demand for labour” and hours of labour, – . Marshall on wages and exportation of capital, – . Summing up and following points; three elements providing the grounds for the marginalist general method of constructing particular analyses (see §§ II.–), – . First element: relation between rate of profits and “capital”/labour ratio: a critique, – . An implication of the critique: “counteracting forces” tending to dissolve any “combination” not always possible, – . Further implication of the critique: cases in which persistent “combinations” are even necessary; second element (indefinite underbidding by unemployed workers) shown illogical; marginalist claim (see § II.xiii) contradicted, – . Remarks on unemployed workers’ behaviour; why the “free” individual may arrive to, and persist in, choosing a course of action quite different from underbidding, – . “Freedom” and rules, – . Critique of third element: employers’ “free” reaction to enforced wage; an example of capitalists’ behaviour contradicting the marginalist assumption; institutions and methods of production, – . Workers’ collective action influencing methods of production, – . A comprehensive assessment of the marginalist analysis: “labour demand curve” dissolved; “free competition” as contradiction in terms, – . Edgeworth on “combinations” and “art of bargaining”, – . Stigler on competition and social/juridical norms, .
Chapter IV From “combinations” to social classes: changes in class relations and changes in distribution and employment . Particular “combinations” and class “combinations” in Smith, – . Mobility of capital, land, and labour; why it may induce solidarity within a class “combination”, – . Why the above mobility is not a “natural” outcome of “liberty”, – . Smithian “competition”, class relations, and the institutional arrangements of society, – . A wide range of phenomena should be taken into account, – . How to organize their treatment; a hint from Engels; why necessary, univocal, irreversible “laws” are excluded, – . The surplus approach treatment of changes in class relations, distribution, and employment; the range of real possibilities; plausible scenarios, .
References
Preface This work is to be considered as a tentative first step into a vast and complex field of research — “per sassi acuti, ed alta rena”. The author will try to develop in the future the remarks presented here. I am indebted to Antonia Campus for constant encouragement and many stimulating conversations. M P Università di Napoli “Federico II” Dipartimento di Economia, Management, Istituzioni
Chapter I
The real problem is. . .
I.
Central feature of the surplus approach
The attempt that shall be made in this work consists in using Sraffa’s Production of Commodities by Means of Commodities as a fundamental starting point for the analysis of changes in class relations. In this half century since its publication, Sraffa’s book has been praised or criticized by a vast number of commentators, who have contributed a large and expanding literature. As some understanding of the book has been progressing (even though rival interpretations continue to dispute the ground), an awareness has also been growing that some steps forward can be taken as to using Sraffa’s analytical tools — above all the wage–rate–of–profits curve — in order to develop, along surplus–approach lines, analyses of distribution, growth, technical change, and institutional transformation . We can begin to see what this complex research program implies, if we reflect on the “central feature” of the surplus approach, i.e. «the kind of explanation given for the division of the product between wages and profits» — an explanation “in which institutional and customary elements play a central role”, because they are intertwined with the «bargaining position of the groups involved» . Now, although it is reasonable to treat the matter by relying not only on abstract arguments but also on history and statistics, however, . Among the modern analyses that have been attempted along the lines pointed out above, we can cite Garegnani’s remarks on wages (disseminated over several articles; see for instance: b, §§ –), and Pivetti’s essay on distribution (). Several other studies on the mentioned issues have claimed some connection with Sraffa’s work, but it would take a long discussion to assess whether we can really trace in each of them connections with Production of Commodities, or, more generally, with the surplus approach. . G (b), p. . . G (b), p. .
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it seems difficult to carry out applied research on the issue without an adequate theoretical examination of “bargaining power” and “social classes”. II.
Interdependencies and basic questions
As a first step, we can note that the notion of social class is better understood when we look at the relations between classes, and these relations, in their turn, are better understood when we look at their changes, and consider how economic and social phenomena interact with them. These changes in class relations are interdipendently linked with changes in how the surplus is produced, distributed, and utilized. Thus, just to provide a quick overview, we should to consider: how changes in wages, profits and rents are linked by a necessary relation springing from the technical conditions of production; how each class may react to changes in its share of social net product; how these reactions may influence changes in consumption and investments; how these may bring about further effects on technical conditions of production; the consequent possible changes in employment; the possible feed– back effects that may react on wages and/or profits and/or rents (through effects on power relations and/or technical conditions); the institutional transformations that may be intertwined with all these changes. Dealing with this network of relations also involves such basic questions as: Are the different relations of the same nature? Is it possible, and in which sense, that some of those relations be shaped by the “collective action” of any social class? How are we going to study those relations and collective actions? The reader should not expect the present work to solve all, or any, of those problems. We shall rather limit ourselves to submitting some hints on how we can address at least some aspects of those issues by using Production of Commodities.
Chapter II
The marginalist treatment of “collective actions”
I.
Introduction: why and how do “collective actions” come about?
The first question that arises, when dealing with the problems we have indicated above, is: why and how does a collective action come about, be it carried out by workers or by capitalists? Here, although we are mainly interested in developing the surplus approach, it will be useful to start by considering how marginalist authors would treat this issue; and a discussion of the fundamental features of their analysis will provide some hints on why and how we should proceed to the construction of an alternative treatment. This being the angle from which we shall look at marginalism, we shall refrain from entering into the technicalities that abound in modern literature, and shall rather be interested in some basic notions and analyses we can find in the founding fathers of this approach — those basic ideas that still continue to underlie modern mainstream policy recommendations. As for rigour and impact of their ideas, few marginalist authors can rival Eugen von Böhm–Bawerk and Alfred Marshall; thus, we shall single them out for our purposes.
II.
Problem: “free” individual choices vs marginalist notion of “free competition”
One is struck by the fact that authors strongly committed to defending the relevance of their notion of “competition”, immediately acknowledge that concerted actions are largely diffused in real societies. Marshall begins his Principles remarking that, although «the fundamental characteristics of modern industrial life [. . . ] may and often
Production, Value, Distribution and Employment
do cause people to compete with one another», however «they may tend, and just now indeed they are tending, in the direction of co– operation and combination of all kinds good or evil»; and he adds that «these tendencies towards collective ownership and collective action [. . . ] are the result [. . . ] of free choice by each individual» . Later on, when speaking «of trade combinations and of alliances and counter– alliances among employers and employed, as well as among traders and manufacturers», he admits that «their importance is certainly great and grows rapidly [. . . ] on a larger and more imposing scale in this modern age than before», so much so that they «seem to indicate a coming change of our social arrangements» . And when a struggle develops between “combinations”, for instance in the labour market, he also notes that «the issue of any particular struggle [. . . ] depends on the relative strength of the competing parties» . Similarly, Böhm–Bawerk acknowledges that in our modern economic progress, the intervention of social means of control is continuously gaining in importance. Everywhere trusts, pools, and monopolies of all kinds interfere with the fixation of prices and with distribution. On the other hand, there are the labour organizations with their strikes and boycottes.
He also notes, speaking of “employers’ coalitions” assembled against workers, that they are generally based on “mutual agreement”, and on the fact that «all employers, of course, stand to gain to some extent by keeping the wages down» . These sentences already elicit some comments. First, we can note that these authors conceive of social classes (“alliances and counter– alliances among employers and employed”) as something similar to monopolies; they indicate both the former and the latter by the same terms (“combinations” or “coalitions”), and attribute similar strategies to both (about “fixation of prices”) . We shall examine later what . M (), bk. i, ch. i, § . . Ibid., bk. vi, ch. viii, § . . Ibid., app. j, § . . B–B (), § i, p. . . Ibid., § iii, p. ; and § iv, p. . . This is made particularly explicit in B–B (), § ii, p. : after having illustrated the “case of monopolies”, he remarks: «The same as shown in these typical
. The marginalist treatment of “collective actions”
are, on the contrary, some fundamental differences between the two notions. Second, we have seen that the force of commonly observed facts compels even marginalist authors to consider “collective actions” as the plausible and reasonable starting point for any analysis of a real society. But when they try to analyze their origin and development, these authors run into a difficulty: how can they see these “combinations” as “the result of free choice by each individual”, and at the same time conceive of “combinations” as “restrictions” on the individuals’ “free” choices ? In other words, the above statements by Marshall and Böhm–Bawerk imply a problem for their own approach: that of explaining how (and whether) their notion of “free competition” — and the supply and demand curves built on that basis — could be compatible with the acknowledged fact that “free” individuals generally choose not to compete .
III.
Marginalist line of reasoning; Böhm–Bawerk and Marshall’s thesis on dissolution of “combinations”
The line of reasoning that marginalist authors generally follow when trying to answer the above question, is well known; but certain elements underlying the contentions they often make are perhaps less known, and we shall see that, on a closer scrutiny, some interesting points emerge. Although “combinations” and “the influence of power” — Böhm– Bawerk explains — «may have considerable importance [. . . ] for a short span of time», what is «by far the most important question» is whether and when their action will be of “lasting effect” . He also specifies that by “lasting” he means something similar to the “long trends” of Ricardo’s analysis of prices — trends that are «far more illustrations will probably always be true, whenever any kind of so–called “economic power” is applied». . See for instance B–B (), § iii, p. . . Marshall is not unaware of the problem, for instance when he asks: «how far does economic freedom tend of its own action to build up combinations and monopolies, and what are their effects?» (, bk. i, ch. iv, § ). . B–B (), § iii, p. .
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important than momentary fluctuations» . And when we consider long–run tendencies, we can see — Marshall discloses beforehand — that many combinations «are little more than eddies, such as have always fluttered over the surface of progress», while «the main body of movement depends on the deep silent strong stream of the tendencies of normal distribution and exchange» . More precisely, this is what both Böhm–Bawerk and Marshall wish to demonstrate: if any “combination” tries to impose an arbitrary deviation from a “free–competition” equilibrium, “counteracting forces” will appear that gradually tend to “dissolve” the combination itself in the long period, with the result that “free competition” will be “inevitably” restored and the “artificially” altered variable brought back to its original “natural” level . Here, we shall follow the clear–cut exposition in Böhm–Bawerk (), where the case is examined of opposed “coalitions” of “employers” and workers trying to influence the rate of real wages.
IV.
Universal coalitions assumed
The fundamental case to be analyzed is that in which the “coalitions” include, respectively, every “employer” and every worker, so that we can discuss general social classes and general changes of wages and profits . This implies that we can immediately discard the possibility that any “coalition” be dissolved because of outsiders competing with insiders. In this context, outsiders do not exist and any “coalition” can only be dissolved by the action of internal forces . . Ibid. . M (), bk. vi, ch. viii, § . . See B–B (), pp. , , , , . The above thesis is put forward under the qualification that no “incidental or independent outside causes” occur that may bring about changes in the “free–competition” equilibrium itself (pp. –). . See B–B (), pp. (“universal reduction of wages”; “universal coalition of entrepreneurs”), – (“reduction of capital gains over all the fields of capital employment”), – (labour unions including both employed and unemployed workers). . Arguments based on “counteractions” by outsiders can only be applied when sectorial or partial “coalitions” are considered. Occasionally, both Böhm–Bawerk and Marshall mistakenly refer to outsiders even when they are assuming “universal coalitions” (see for instance B–B, , p. ).
. The marginalist treatment of “collective actions” V.
First stage of Böhm–Bawerk’s analysis; all possible alternatives; w–r curve
These internal forces and their “counteractions” are the focus of Böhm–Bawerk’s analysis, where we can distinguish three successive steps. In the first stage, he identifies the set of all the possible alternative outcomes of the struggle between the two opposed “coalitions” . Each alternative is represented by a distributive configuration, where any change in the rate of real wages (w) is linked to the corresponding change of opposite sign in the rate of profits (r) ; thus, a decreasing w–r curve emerges (even if Böhm–Bawerk does not explicitly speak of it). This curve — as a formal tool — is present both in the marginalist and in the surplus approach, and we shall see throughout the rest of this work what are the different meanings and utilizations of the curve in the two approaches. At this point, we can use the curve to describe Böhm–Bawerk’s various alternatives by means of the following Fig. .1, where his two main cases are represented, together with the “perfect–competition” equilibrium.
Figure .1
. B–B (), § iv. . Are they entrepreneurs’ profits or capitalists’ profits, or both? See below, § vi.
Production, Value, Distribution and Employment
In the diagram, we measure wages in terms of the basket of necessaries, taken as numeraire; the represented curve is the upper envelopment of the relations corresponding to all the available systems of production. In Böhm Bawerk’s “case ”, it is assumed that the higher strength of the “employers’ coalition” reduces wages below the “perfect–competition” equilibrium level (but above the subsistence level). In “case ”, the higher strength of the “workers’ coalition” raises wages above the “perfect–competition” equilibrium level (but without implying negative profits) .
VI.
Entrepreneurs and capitalists
It is when constructing this array of possible alternatives (i.e. when constructing the points of the w–r curve) that emerges the problem, in Böhm–Bawerk’s analysis, of how to conceive of the “coalition” opposing workers. In the ideal marginalist picture, the worker and the capitalist are seen as owners of different “factors of production” that, as such, have no direct relation with each other : the two “factors” are both hired by a third subject, the “entrepreneur”, and it is assumed that, in a competitive economy, any agent can play this role; so that the owners of the two “factors” appear in symmetrical positions vis–à–vis the entrepreneur. But when we speak of “coalitions” the situation is inevitably different: the very notion of coalition implies some kind of barrier that excludes non–members, and when an “employers’ coalition” is introduced, this cannot but imply some form of discrimination between those agents that do play the role of entrepreneur and the other agents that are excluded from it . Thus, the question . “Case ” (wages below subsistence) and “cases –” (negative profits and bankruptcy) would also elicit interesting remarks, but they will not be discussed here; “case ” and “case ” lead to conclusions respectively similar to “case ” and “case ” (see B–B, , § iv). . Here, for simplicity’s sake, we shall not discuss the influence of land and landowners, even if it is far from negligible in real societies (see P and R, . In this Chapter, we shall assume that land is overabundant and no landowners’ “coalition” is formed. . For some general reflections on the role of the exclusion (and selective co–optation) mechanisms in the formation of any “combination” see § III.x.
. The marginalist treatment of “collective actions”
arises whether this is compatible with the entrepreneur remaining in a neutral position between the two “factors”. Even though Böhm–Bawerk is silent on this discrimination (implicit in his own assumptions), its presence and role emerge when he analyzes how the remunerations of “factors of production” are affected by any change in the relative strength of the “coalitions”. To begin with, when “employers” are stronger (case above), they do not use their “power” to reap advantages at the expense of both “factors of production”: their internal “mutual agreement” is exclusively aimed at imposing a reduction in wages . On the other hand, the “employers” do not appropriate all the resulting gains: in the long run, the gains «will have to be surrendered in part to the capitalist» . And when increases in wages are discussed (case above), Böhm–Bawerk adds that “entrepreneurs’ profits” can only be reduced together with the “interest on capital” . Thus, we can see that Böhm–Bawerk’s statements on what aims and actions of the so–called “employers” characterize the various alternatives (points on the w–r curve) imply an exclusive and tight alliance between “employers” and “capitalists” . If we wish to achieve a better understanding of how, as a matter of fact, entrepreneurs “combine” with capitalists, we can think, for instance, that the two groups (where some individuals may possibly be included in both) may tacitly or explicitly agree upon the following terms. On the one hand, capitalists provide barriers that generally preclude workers from playing the role of entrepreneurs (in the form of limitations to the access to means of production); on the other hand, entrepreneurs manage the more direct aspects of the bargaining power the alliance acquires in the contractual relation with workers. As a consequence, the picture of what are the contractual relations at the basis of the production process is fundamentally altered: the party facing the worker in the labour contract can no longer be seen . B–B (), § iii, p. . . Ibid., § iv, p. (where it is not clear how total gains should be partitioned between entrepreneurs and capitalists); emphasis added. . Ibid., pp. –. . Edgeworth writes that «[the capitalist and the entrepreneur] are both easily distinguished from the salaried manager in that he is at the littoral, in that respect like the common workman, while they are both above that line» (, p. ).
Production, Value, Distribution and Employment
as a pure entrepreneur, but is inevitably to be considered as a member of the entrepreneurs–and–capitalists’ alliance; and this is why the point at stake, when Böhm–Bawerk discusses “any artificial influence of power”, is the direct distributive conflict between the “share of labour” and “that of capital” . A more complete analysis of how marginalist authors conceive of the link between “entrepreneurs” and “capitalists”, and where they draw the dividing line between the two roles, would lead us too far from our main object of investigation . Here, we only note that it is the reflection on the construction of the w–r curve that has clarified some necessary aspects of the entrepreneurs–and–capitalists’ alliance in Böhm–Bawerk’s analysis. VII.
Mobility of capital and labour (see Ch. IV)
A further problem consists in clarifying whether the assumed presence of “universal combinations” is compatible or incompatible with the mobility of capital and labour among different industries. Since Böhm– Bawerk wishes to discuss long–run tendencies to uniform rates of wages and profits, he assumes that inter–industry flows of capital and labour consistent with those tendencies do take place: he assumes that labour tends to flow towards “the better paid occupations”, and that capital similarly tends to be invested where the highest rate of profits can be gained (“the various markets of capital” are not “artificially isolated”) . The meaning and implications of this mobility of capital and labour will be better examined in Ch. IV; for the moment, we can note that that the assumed mobility does not imply, in itself, any necessary tendency to the dissolution of “coalitions”. . B–B (), p. . . Edgeworth adds to the passage quoted above that «to determine at what point the capitalist ends and the entrepreneur begins, appears to defy analysis» (, p. ); he sometimes seems to merge the two roles, and uses the expression “capitalist–entrepreneur” (ibid., p. ). In this Chapter, we shall retain Böhm–Bawerk’s term of “employers”, bearing in mind that it should be understood as meaning “employers–and–capitalists”. The term “profits” has already been used, and will be used throughout this work, to indicate the general normal gains of this class as a whole. . B–B (), and .
. The marginalist treatment of “collective actions”
On the one hand, the mobility of, say, capital among industries may imply some difficulty for the “employers’ coalition”: any sectoral advantage of the “employers” can be threatened by competition coming from other sectors, and this may make collective actions harder to organize. But, on the other hand, the same mobility may also bring about some diffusion of advantages (or, as the case may be, disadvantages) that will prompt each “employer” to support the actions of the “employers” of other industries ; there is thus an incentive to solidarity, which may lead to a more stable and tight “universal employers’ coalition”. VIII.
Notional possibilities vs real possibilities
We come now to the most general point — a point we shall take up again in Ch. IV (in order to clarify the fundamental difference between the marginalist and the surplus approaches) — namely: what does Böhm–Bawerk mean when he considers all the various alternatives (all the points on the w–r curve) as possible ? He explains that «in theory, it would not be unthinkable nor impossible for the rates [of wages] to be fixed at any single point» within “the total range of wages”; and he adds that even the “extreme” points, implying “capital losses” or wages below subsistence (his cases , , ), «are not unthinkable, nor altogether economically out of question» . All these points are “thinkable” in the sense that they are formally consistent with certain essential ideas and definitions; above all, these alternatives do not contradict the equalities between prices and “costs” (i.e. those conditions that Sraffa will more properly call “production equations”) . Thus, possible, in the context of this first stage of Böhm–Bawerk’s analysis, means notionally possible; and his thought exercise consists, in more formal terms, in selecting a sub–set of equations out of the general equilibrium system, and then using the resulting degree of freedom to construct the range of notional alternatives. . A simple example will illustrate the point in Ch. IV. . B–B (), pp. , , . . This is true also of the “extreme” points, where “capital losses” or wages below subsistence remain formally consistent with those equations.
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This kind of study, based on notional possibilities, is often used in several disciplines. For instance, in optics, if we consider a ray of light propagating in a vacuum, and wish to determine the path it follows when light goes from one point to another, being reflected on the way by a flat surface, we first examine all the conceivable paths that light could notionally follow, and then conclude that only one path is physically possible — the one that takes least time (i.e. the one with equal angles of incidence and reflection). Max Planck remarks that this “principle of least time” would not make sense if we could not conceive of all those paths that are logically possible even if are not physically possible; and he underlies the profound difference existing between asserting a logical impossibility and asserting a physical impossibility . Thus, we see that (at least) two meanings of possible should be distinguished, and, turning back to our economic analysis, we may define as real possibility that alternative that not only is compatible with certain essential ideas and definitions, but is also compatible with real economic phenomena . Moreover, as we are mainly interested in a long–run analysis, we complete our definition adding that the real possibilities we are concerned with consist in scenarios compatible with real long–run tendencies. At this point, the problem arises whether all Böhm–Bawerk’s notional possibilities can also be considered as real possibilities. We can see Böhm–Bawerk’s second and third stage of analysis as an attempt to answer this question.
IX.
“Free–competition” equilibrium as real possibility
In the following analysis, Böhm–Bawerk gradually introduces all those general equilibrium relations that have been provisionally set aside in his thought exercise, with the particular aim of using those relations in order to see whether any notional alternative can really persist beyond a “short period of time”. . P (), pp. –. . Marshall vaguely hints at a distinction between what is “thinkable” and what is “attainable” ( [], p. ).
. The marginalist treatment of “collective actions”
First of all, it is important to underline that he considers the “perfect–competition” equilibrium as compatible with really possible long–run tendencies. He acknowledges that this theoretical position does not “fully cover the complex reality” , but, on the other hand, he believes that the “perfect–competition” equilibrium shows «how the process of distribution, or more generally, that of price formation takes place in the absence of all outside social interference» . Notice the logical priority: only if one could correctly confine the source of all “social factors” to some unspecified “outside” sphere, then one would be allowed to conclude that a situation, in which those factors are “absent”, can really “take place”. On the contrary, should we discover that there are “social factors” deriving from some general “inside” tendency, then we could no longer consider the “absence” of those social factors as really possible. In Ch. III we shall clarify the issue (linked to the particular assumption on individual behaviour that we shall see in the following § x).
X.
Second stage of Böhm–Bawerk’s analysis; employers’ reaction to increased wage; a particular assumption (see Ch. III)
Where “inside”, and disrupting, tendencies do appear in Böhm– Bawerk is in the treatment of the deviations from the “perfect–competition” equilibrium: above all in his analysis of cases and . We shall focus on case , the one that arouses in Böhm–Bawerk “the greatest theoretical interest” . This is the case in which, as we have seen above (§ v), the workers’ “coalition” succeeds (temporarily at least) in imposing a wage level higher than the “perfect–competition” level, with a conse. B–B (), p. . . B–B, p. (emphasis added); see also p. (competition can be «perfect both in theory and in practice»), and p. (the “laws of price” can “really prevail” in certain conditions, analogously «to the physical law of gravitation»). Böhm–Bawerk adds that «there must always exist a certain minimum of outside interference, [. . . ] because there always must exist a social order of some kind» (p. , note ). But this leads to further difficulties: where are we going to draw the dividing line between the necessary “minimum” and the “artificial interference”? and what kind of social order “must exist”? . B–B (), –. As for his case , he reaches conclusions simmetrical to those that we shall see for case .
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quent reduction in the rate of profits (but without implying “capital losses”). “Can this wage rate endure?” — Böhm–Bawerk asks . To answer the question, he studies the reaction of the “employers” to the reduction in the rate of profits — and with this we enter into the second stage of his analysis. Here, an argument is put forward that might astonish, I think, anyone not accustomed with marginalist thinking. In fact, it would seem reasonable, at this point, to look for the reaction of the “employers’ coalition”, in order to see whether and how they can organize some collective action with the aim of reversing the wage increase. But this is not the way followed by Böhm–Bawerk (and generally by marginalist authors). Reasoning about collective reactions on the part of the “employers” would bring in some “arbitrary” aspects, while he is searching for an argument that can lead to an “inevitable” conclusion, something «analogous to the physical law of gravitation» . In the words he uses when speaking of his theory of interest, he wishes to find a solution that “invents nothing and assumes nothing”, an analysis only made of deductions from «the simplest natural and psychological principles of our science» . He thinks he can find this simple and natural principle in the “motive of self–interest”: when its “exclusive prevalence” on the individual behaviour is granted, an “inevitable” “chain of deductions” flows from it. And the first deduction is that, in presence of an enforced higher rate of wages and a consequently lower rate of profits, the «motive of self–interest will urge [the individual entrepreneur] to reorganize the various factors of production», in order to «adopt the presently cheapest combination of factors». In this connection, before enquiring which “combination of factors” is the “cheapest”, we should clarify why the individual “employer” . Ibid., pp. –. . B–B (), p. . . B–B (), Conclusion (the same words are taken up again at the end of his work, bk. vii, ch. v). Significantly enough, analogies with physics often recur in Böhm–Bawerk: after that, seen above, with the “law of gravitation”, we find here the idea of “assuming nothing”, that obviously suggests a comparison with Newton’s famous sentence: “hypotheses non fingo” (Scholium generale, ). . B–B (), p. .
. The marginalist treatment of “collective actions”
— assumed “free” to pursue his self–interest — would “inevitably” tend to use that method of production which, on the one hand, is chosen among the initially available methods, and, on the other, is most profitable at the initially enforced wage level. What is relevant here is, not so much the “motive of self–interest” in itself, but rather the introduction in Böhm–Bawerk’s analysis of the further independent and particular assumption that «the entrepreneur finds his hands tied by the price of labour, but not in regard to the physical equipment of his factory» . This means assuming that the individual “employer” does not engage in any collective action in order to influence wages, and that workers do not engage in any collective action in order to influence the methods of production used — which implies assuming that individuals and “coalitions” are somehow restrained. We shall discuss the point in Ch. III.
XI.
Change in the “cheapest combination of factors” (see Ch. III); effect on employment
Now — Böhm–Bawerk continues — the most profitable “combination of factors”, corresponding to the enforced decrease in the rate of profits, consists in «a more capitalistic method of production», because this will imply «savings in the now more costly factor of labour» . This, together with the above mentioned assumption, means that the individual “employer” will tend to use, according to this analysis, the (allegedly) more “capital–intensive” method. (The general properties of the relation between the rate of profits and the most profitable method of production will be discussed in Ch. III.) . . B–B (), p. . . B–B (), pp. –. For some particular aspects of the treatment of capital in Böhm–Bawerk (his “average period of production”), see Garegnani (, chs. II.iv–v; a, sec. III). . We deliberately avoid using the expression “demand curve for capital”, since this expression would indicate that the curve can be used for the determination of a stable and plausible “equilibrium” (which is just the thing under discussion). Even Garegnani’s more neutral expression “capital employment curve” (a, § ), that he uses in the analysis of “free–competition” equilibria, would not be appropriate when “coalitions” are discussed.
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But then, the available “quantity of capital” being given , «it would be impossible for the same number of workers as before to be provided for», and «there must therefore be [. . . ] a restriction in the number of employed workers» . Notice that the “impossibility” Böhm–Bawerk is speaking of here does not refer to a logical necessity: we might conceive of a scenario in which employment does not decrease — but, in Böhm–Bawerk’s analysis, this would not be seen as a real possibility. In his view, a high–wage and high–employment long–run scenario could not be realized by any collective action on the part of workers, and this — it should be noted — is not presented as the result of an imposition by the “employers’ coalition” (that, as such, might be resisted). We are rather told that we must take into account something that is presented as having the nature of a “physical necessity” , namely, the entrepreneur’s behaviour based on the above assumption and on the properties attributed to the relation between wages and the “cheapest combination of factors”, according to which «it is inevitable that each increase in wages beyond the actual marginal product, followed by a reduction in the interest rate, will tend to cause [. . . ] a diminution in the number of workers» . Böhm–Bawerk concludes this second stage of his reasoning underlining that «as long as the enforced wages prevail at that high level, there will come about a provisional state of equilibrium», which «is possible only at the expense of employing a smaller number of workers» . But again, even this position is not a long–run real possibility, since «in all probability this temporary equilibrium will again be disturbed» . This Böhm–Bawerk will show in the next stage of his analysis.
. See B–B (), p. , note . . B–B (), p. ; emphasis added. . Ibid., p. . . Ibid., p. (by “actual marginal product” he seems to mean the level of the marginal product prevailing in the “perfect–competition” equilibrium); emphasis added. . Ibid., pp. –. . Ibid., p. .
. The marginalist treatment of “collective actions” XII.
Third stage of Böhm–Bawerk’s analysis; unemployment and underbidding: another particular assumption (see Ch. III); a requirement for validity (see Ch. III)
In the third stage of his treatment, Böhm–Bawerk argues that, as a consequence of what we have seen so far, «the labour union will be split in two, one group employed at a high wage, and another group not employed at all» . Here, “two developments are possible” . If employed workers «fail to provide for their unemployed fellow workers», then «the mass of the unemployed would enter into competition and [. . . ] underbid wages». This «would tend to lead toward the dissolution of the labour union», since «the revived competition, with its underselling, would put an end to the monopolistic dictation of wages back to the level economically justified under the full employment of all workers». In other words, the underbidding process will continue until wages are brought back to the “perfect–competition” equilibrium level. Notice that in this way Böhm–Bawerk is adding a further independent and particular assumption, i.e. he is assuming that unemployed workers always and indefinitely underbid wages so long as they remain unemployed. Even for this assumption, we postpone its discussion until Ch. III. The second possible development — Böhm–Bawerk continues — occurs when unemployed workers are adequately «supported by contributions from their employed fellow workers». In this case, these large contributions «will absorb the surplus accruing to the workers from the wage increase». Thus, «nobody would be benefited from the new artificially created order of things, as against the previous “natural” order; many would indeed be at a disadvantage, which fact would again be distinctly unfavourable to the prolonged maintanance of a situation created through a strong combined pressure of power»; and «the malcontents would sooner or later become outsiders, and compete by offering their services to the entrepreneurs». The same result — Böhm–Bawerk concludes — will follow: dissolution of the labour union and tendency of wages back to the “perfect–competition” equilibrium level. . Ibid., p. . . See ibid., pp. – for the following passages.
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Notice that this conclusion for the second development is only valid if aggregate wages (= rate of wages times number of employed workers) decrease. We shall return to this in Ch. III, and shall see there what Marshall remarks on the point.
XIII.
Böhm–Bawerk’s general conclusion: theorem is demonstrated; an answer to the problem of § ii: temporary vs long–run individual choices
Böhm–Bawerk’s general conclusion is that the theorem we have indicated above (§ iii) is demonstrated: when the “dictate of power” by any “combination” tries to impose an arbitrary deviation from the “free–competition” equilibrium, there is “not a single instance” in which the deviation «could be lasting as against the gently and slowly, but incessantly and therefore successfully, working counterinfluences of a “purely economic” order» (where, of course, the “purely economic influences” are those envisaged by his own theory) . Thus, as for long–run tendencies, only one real possibility remains: the “free– competition” equilibrium itself. If we go back to the w–r curve we have seen in § , Fig. .1, we can represent Böhm–Bawerk’s conclusion as asserting that every point on the curve alternative to the “free–competition” equilibrium cannot be considered as a real possibility. But in which sense does this conclusion answer the question we initially raised (§ )? We asked whether the marginalist notion of “free competition” — and the supply and demand curves built on that basis — could be compatible with the acknowledged fact that “free” inidividuals generally choose not to compete. We can now derive an answer from Böhm–Bawerk’s theorem in the following terms. Any individual may see an initial individual advantage in forming a “combination”; but, subsequently, the “free” pursuit of his self–interest will “inevitably” lead him to abandon the “combination” itself (e.g., when the individual worker finds himself un. Ibid., p. ; this is stated, as we have reminded in § iii, under the qualification that no “incidental or independent outside causes” occur that may bring about changes in the “free–competition” equilibrium itself (pp. –).
. The marginalist treatment of “collective actions”
employed, as the “inevitable” consequence of the workers’ collective action, he will always and indefinitely underbid the wage). Thus, the marginalist point seems to consist in contrasting the temporary, and therefore disappointing, nature of the individual advantage that may be achieved by the member of any “combination”, with the predominance and persistency of the tendency to dissolve the “combination” itself. And the supposed predominance of this tendency means that a long–run individual behaviour would tend to prevail, consisting in a long–run predominance of the individual “free” resistance against the disappointing temptation to form any “combination”. This fundamental claim will be closely examined in Ch. III.
XIV.
How Böhm-Bawerk explains persistent “combinations”
At this point, Böhm–Bawerk has still to answer the following objection: how could this analysis account for the initially acknowledged fact of the large and increasing diffusion of “combinations” (see § ii), or for the «undeniable fact that during the last decades countless strikes have led to an improvement in the workers’ economic status never abrogated afterwards»? In the light of what we have seen, when we observe that any “combination”, and the deviation it brings about away from the initial equilibrium, do persist, there is only one way Böhm–Bawerk can follow, if he wishes to reconcile this fact with his theory — namely, introducing the particular hypothesis that some “incidental or independent outside cause” is bringing about just that deviation in the long–run “free–competition” equilibrium itself. In this case, «the advent of power simply means a temporary anticipation of a development that would equally have taken place without such intervention, only later» . Thus, «whenever a strike has led to an enduring success, [. . . ] a reason for this may be found in the fact that, wherever an increase of wages in the economic world is about to take place [because of “technical improvements”» or «an increase of capital larger than the increase of population»], organized labour may accelerate . Ibid., p. . . Ibid., p. .
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its advent by using their power”; and this is presented as the only «reason why these wage increases could be maintained without being rescinded» . Notice that, even if the thesis of § xiii were valid, this answer to the objection would only mean that those facts are not necessarily incompatible with the theory, but would not mean that those facts do reconcile with the theory, since this would require ascertaining whether those facts actually include the presence of the particular “outside causes” Böhm–Bawerk assumes. In other words, assuming those particular outside causes restricts the set of events potentially compatible with the theory. Thus, even if the thesis of § xiii were valid, Böhm–Bawerk could not explain those facts by a general theory that “assumes nothing”.
XV.
Marshall on persistent “combinations”; the “fear of spoiling the market”
We can find a similar standpoint in Marshall, especially where he writes about the persistent “combinations” that may derive from the “fear of spoiling the market”. In the analysis of normal short–period prices, Marshall remarks that, even if “trade is slack”, the price will not just “cover the prime cost”, but will generally be «a good deal above this prime cost», since any “producer” «must as a rule take account of [. . . ] the effect that his action may have in spoiling the market» . The reason for this “rule” is that «each man [. . . ] is more or less in fear of incurring the resentment of other producers, should he sell needlessly at a price that spoils the common market for all» . Thus, a tendency prevails to a «formal or informal agreement with other producers», which is described in . Ibid., pp. –. Böhm–Bawerk concedes that the “influence of power” may have, even though “indirectly and not necessarily”, some enduring effect when «it leads [. . . ] to efforts among the defeated party to improve its economic status, so that this improved condition may again become the “natural” condition» (p. ). But, even in this case, the presence of some particular “outside cause” is anyway required. . M (), bk. v, ch. iv, § . . M (), bk. v, ch. v, § ; see also bk. v, ch. xii, § («fear of incurring odium from other producers»).
. The marginalist treatment of “collective actions”
these terms: [T]he chief motive of all open combinations and of all informal silent and “customary” understandings whether among employers or employed is the need for preventing individuals from spoiling the common market by action that may bring them immediate gains, but at the cost of a greater aggregate loss to the trade.
Marshall adds that general opinion is not altogether hostile to that code of trade morality which condemns the action of anyone who “spoils the market” by being too ready to accept a price that does little more than cover the prime cost of his goods, and allows but little on account of his general expenses.
Thus, the “general costs of the business”, that directly influence the normal long–run price, will also exert an “indirect influence” on the normal short–period price: [I]n this way a controlling influence over the relatively quick movements of supply price during short periods is exercised by causes in the background which range over a long period; and the fear of “spoiling the market” often makes those causes act more promptly than they otherwise would .
We can see that here, not differently from Böhm–Bawerk, there is the idea that the “combinations” that do not «carry in themselves the seeds of their ultimate defeat» are those that — far from imposing permanent deviations from the long–run “free–competition” equilibrium — favour instead an “acceleration” towards that equilibrium itself. . Ibid., bk. v, ch. xv, § . More properly, we should note that each “combination” is interested in the aggregate loss to the “combination” itself and not in that to the trade in general. . Ibid., bk. v, ch. v, § . . Ibid., bk. v, ch. v, § . . Ibid., appendix J, § .
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XVI.
Marshall and Smith on competition (see Ch. IV)
It is also interesting to note that certain features of Marshall’s analysis may seem, at first sight, analogous to some of Smith’s conceptions. For instance, the «fear of incurring the resentment of other producers» may remind us of Smith’s «reproach to a master among his neighbours and equals», while the “informal silent understandings” may seem to echo Smith’s “tacit combinations” ; and indeed these seeming analogies have induced some scholars to state that Marshall’s «treatment of competition was much closer to Adam Smith’s than to that of his contemporaries» . We shall see in Ch. IV whether this is really the case.
. S (), I.viii.. . S (), p. .
Chapter III
Some issues on collective actions
I.
Difficulty as to a requirement for validity (see § II.XII): in general, “demand for labour” may be inelastic
We shall now go deeper into some points that have emerged during the preceding discussion of the marginalist analysis of collective actions; and we shall derive from our study that we have reasons to criticize and abandon this approach, and to introduce an alternative treatment. First of all, let us examine a necessary requirement for the validity of Böhm–Bawerk’s reasoning. We have seen in § II.xii that Böhm– Bawerk, in the third stage of his analysis, has analized the consequence of the unemployment necessarily brought about, in his opinion, by an increase of the rate of wages above the “free–competition” equilibrium level. In this connection, he has argued that, even if unemployed workers are adequately «supported by contributions from their employed fellow workers», however, “malcontents” would anyway appear, while “nobody would be benefited”; this would set off an underbidding process, which would go on “incessantly” until the rate of wages is brought back to the “free–competition” equilibrium level, with the parallel dissolution of the workers’ “combination”. We have already noted that a necessary (but not sufficient) condition for the validity of this conclusion is that aggregate wages (= rate of wages times number of employed workers) decrease. This is not demonstrated by Böhm–Bawerk, and we shall now see why this is not generally true, even when we allow for several assumptions favourable to the marginalist theory. Consider an economy in which: a) corn is the only commodity produced and used; b) land is overabundant; c) each individual’s behaviour conforms to Böhm–Bawerk’s assumptions. In this case, we
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can construct the following curve of the (net) marginal product of labour, and we can consider it as representing the demand curve for labour (see Fig. .1) where: K* and L* are the available endowments of, respectively, corn–capital and labour; w* is the full–employment equilibrium rate of wages ; w’ is the “enforced” rate of wages. We can see that, when the full–employment equilibrium prevails, aggregate wages amount to area A + area B; while, when the “enforced” rate of wages prevails, aggregate wages amount to area A + area C. Now, it is evident that there is no necessary reason for claiming that the second amount is “inevitably” smaller than the first one. In gene-
Figure .1
. This would be called a “free–competition” equilibrium by Böhm–Bawerk; but see below for a critique of the notion of “free competition”.
. Some issues on collective actions
neral, area C may be larger than area B; or, in other words, the decrease in employment may be small in proportion to the increase in the rate of wages; for infinitesimal changes, this amounts to saying that the elasticity of the demand for labour may be less than unity. When this is the case, the higher rate of wages “enforced” by the workers’ “combination” will bring about an increase of aggregate wages. Here, Böhm–Bawerk’s remark that, when employment decreases, «total output [. . . ] must remain below that obtainable from a full employment of capital and labour» is irrelevant to the point. The reduction in (net) output (by the amount D + B) only means that the reduction in aggregate profits (by the amount C + D) is higher than the increase in aggregate wages (by the amount C - B). But this, of course, does not contradict the conclusion that, anyway, aggregate wages do increase in this case. (Also notice that, with the “enforced” rate of wages, profits (area E) remain positive.)
II.
Meaning and implication of difficulty
The simple remark above already implies a serious difficulty for Böhm– Bawerk’s reasoning. When the case just mentioned occurs, and the workers’ collective action brings about an increase both in the rate of wages and in aggregate wages, the workers’ “combination” can distribute these among its employed and unemployed members in such a way as to imply some advantage to each worker; so that no “malcontent” will necessarily appear, and no underbidding process will be necessarily set off. As a consequence, there is no necessary tendency to the dissolution of the workers’ “combination”, so that we cannot exclude from real possibilities that the workers’ collective action brings about an arbitrary and persistent increase in the rate of wages. Thus, Böhm–Bawerk cannot claim a general validity for his thesis (to say the least). This — the general validity of any proposition — is . B–B (), p. . . If Böhm–Bawerk’s reasoning does not hold, his “case ” and “case ” are to be considered as real possibilities, and these, as the reader will remind, are the cases in which wages may, respectively, decrease to whatever level is compatible with subsistence, or may rise to whatever level is compatible with non–negative profits — there are no other necessary limits.
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of crucial relevance in the study of economic phenomena, where it is often difficult to assess whether a theoretical assumption is compatible or not with any particular real situation. As Böhm–Bawerk himself notes, «we shall never be so fortunate as to assemble reliable direct observations, or to make experimental tests» , so that «in problems of this nature there are no other than deductive methods at our disposal» . And when, as in our case, we see that deductions do not achieve a conclusion of general validity, we are left without a definite answer on the persistence of a “combination–enforced” wage change in any particular real economy. The importance of the point is also shown by the efforts that Marshall, and several other marginalist authors , have devoted to trying to overcome the above difficulty. Let us examine some of these attempts (assuming for the moment that other difficulties are not present, as we have done in the above example of Fig. .1).
III.
Marshall on elasticity of “demand for labour” and hours of labour
Marshall discusses the elasticity of the demand for labour when commenting on the “common belief ” that workers «can raise wages by merely making labour scarce» (above all through a reduction in the “hours of labour”) . In this connection, he admits that such increases . Marshall similarly writes that «a direct appeal to experience is difficult», for «it may be as difficult to isolate [the phenomenon under investigation] as it is to isolate the effects on the waves of a noisy sea caused by throwing a stone among them» (, bk. vi, ch. xiii, § ). This reminds us that physics and other sciences are based not so much on empirical observations, but rather on controlled empirical observations — it is the laboratory, or conditions analogous to laboratory, that make the difference. Moreover, Niels Bohr has noted that in social sciences we cannot carry out one kind of experiment largely diffused in physics and chemistry, namely all those experiments where the “material” (that in our discipline would consist of human beings) is destructed during the test. . B–B (), p. . . See for instance P (). . M (), bk. vi, ch. xiii, §§ –. It is to be noted that, in Marshall, a reduction in hours might affect the wage per hour only through changes in the supply of labour (leaving aside possible effects on the “industrial efficiency”). This derives from the marginalist supply–and–demand explanation of distribution, but, within a different explanation of distribution, a change in hours can directly affect the wage per hour without
. Some issues on collective actions
in wages may be conceived, but excludes them from real possibilities, emphatically asserting that workers “cannot do so now”, since no “pressure of diminishing return” can be found in modern England. He argues: Of course the Englishman is not unaffected by the law of diminishing return: he cannot earn his food with as little labour as if he were near spacious virgin prairies. But its cost to him, being now governed mainly by the supplies which come from new countries, would not be greatly affected either by an increase or by a diminution in the population of this country. [. . . ] Thus a diminution by one–tenth of the number of workers, each doing as much work as before, would not materially raise wages; and therefore a diminution by one–tenth in the amount of work done by each, the number remaining unchanged, would lower wages in general by one–tenth.
In other words, Marshall is trying to convince the reader that the elasticity of the marginal–product–of–labour curve (which he considers as coinciding with the demand curve for labour) is not only greater than unity, but so high as to imply a quasi–horizontal demand curve for labour, so that any decrease in the supply of labour would leave the wage per hour almost unaltered. However, we can easily see that his argument is very weak. In order to prove his thesis, he should determine, not only the direction of change in the relevant variables, but also the amount of their changes. And, by merely relying on such vague words as “mainly” or “greatly”, we cannot ascertain what is the precise amount by which the marginal product of labour changes in correspondence to any change in the amount of labour employed. Moreover, even if “spacious vergin prairies” are available — and we again allow for the assumptions most favourable to the marginalist theory — a decrease in the supply of labour, with a given “quantity of capital”, implies a decrease in the labour/“capital” ratio, and therefore an increase in the marginal product of labour, where there is no general reason for which the marginal product curve should be characterized by high elasticity, as we have seen in the above example (§ , Fig. .1, where overabundant land was assumed). any necessary link with the supply of labour, or employment. . M (), bk. vi, ch. xiii, § (here “wage” obviously means “wage per worker”).
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IV.
Marshall on wages and exportation of capital
Marshall, perhaps aware of the above weakness in his analysis, also tries to prove his thesis by developing another line of reasoning, turning to the «effects on the supply of capital». He writes: If there were a general attempt by all of the working classes to obtain high wages by restricting the effective supply of their labour, a considerable part of the burden resulting from the shrinkage of the national dividend would doubtless be thrown on other classes of the nation, and especially on the capitalists, for a time: but only for a time. For a considerable diminution in the net return to investments of capital would speedily drive new supplies of it abroad. In regard to this danger it is indeed sometimes urged that the railways, and factories of the country cannot be exported. But nearly all of the materials, and a large part of the appliances of production are consumed, or worn out, or become obsolete every year; and they need to be replaced. And a reduction in the scale of this replacement, combined with the exportation of some of the capital thus set free, might probably so lessen the effective demand for labour in the country in a few years, that in the reaction wages generally would be reduced much below their present level.
We can again find several flaws even in this argument. The first weakness is immediately admitted by Marshall himself: «It is true also that a general rise in wages however attained, if spread over the whole world, could not cause capital to migrate from any one part of it to another» . This, it should be noted, is the main case to be considered, since the workers’ movement for shorter hours was, even at Marshall’s times, already spread over all the industrialized countries. Second, are the changes in the supply of “capital”, induced by the above assumed exportation, relevant for the determination of the long–run wage? or do they rather refer to “secular” tendencies? It is a fundamental assumption, both in Marshall’s and in Böhm– Bawerk’s determination of long–run equilibria, that the total «capital employed is to be constant in its amount, although not in its physical composition» . Marshall adds that the factors influencing long–run equilibria should be distinguished from those influencing the “very . Marshall (), bk. vi, ch. xiii, § . . Ibidem. . B–B (), p. , note .
. Some issues on collective actions
gradual or secular movements of normal price, caused by the gradual growth of knowledge, of population and of capital, and the changing conditions of demand and supply from one generation to another” . Now, the reduction in the total “quantity of capital” brought about by the above assumed exportation cannot but be very gradual. As Marshall himself writes, “factories cannot be exported”, and the exportation he assumes can only reduce the total “quantity of capital” by reducing its “replacement”, and this, for the main capital goods (machinery and plants), implies that only the small part of “capital” “set free” by amortization quotas can be exported. The effect that this has on the total “quantity of capital” should not be confused with the effects on the physical composition of “capital”, deriving from an “exportation” of “capital” from one sector to other sectors of the same economy (for instance, because of a temporary difference in sectorial profit rates). The latter phenomenon may imply relatively quick adjustments in the share of the total “quantity of capital” employed in any single sector, since: a) in the high–profit–rate sector, the “capital” increase derives from the amortization quotas of all the other sectors (to which net investments may be added); b) in a low–profit– rate sector, the reduction in the plant and machinery, allocated to that specific production, does not derive, as Marshall himself notes, only from “gradual decay”, but also, and possibly mainly, from “conversion to other uses” . The whole stock of machines allocated to the production of autos may be quickly brought down to zero by simply converting the same machines to the production, say, of trucks. That being obviously impossible for the total “quantity of capital”, this can only be reduced by its own “gradual decay”, i.e. that gradual change that Marshall himself relegates among the “secular” tendencies, and that is irrelevant for the determination of proper long–run equilibria .
. M (), bk. v, ch. v, § . . M (), bk. v, ch. v, § . . We can also note that Böhm–Bawerk, on the one hand, is dubious on what may happen to the supply of “capital” («possibly the amount of savings would decrease, and possibly not»); and on the other hand, does not “ascribe any decisive influence” to changes in the supply of “capital”: he rather thinks that «the determining factor is to be found in the demand for capital» (B–B, , p. ). This is what we shall examine presently (see § vi and ff ).
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Third, even if we wish to study these “secular” tendencies, we again find, in Marshall’s reasoning, such vague words (“speedily”, “nearly”, “large”, “some”) that no definite conclusion can be reached on the precise amount by which the demand for labour changes when wages change; and Marshall himself presents his final statement in a dubitative form (“might probably”). Fourth, there is one thing that can be stated with less doubts: the above assumed exportation of “capital” cannot reduce the rate of wages to its initial level (still less below that level). In Marshall’s analysis, the exportation of “capital” is prompted by the very wage increase, so that, if this increase disappears, also that exportation disappears. In other words — even conceding for the moment favourable hypotheses to marginalist analysis (like in § i, Fig. ) — we can note that, as the exportation of “capital” increases, the supply of “capital” in England decreases, but cannot decrease so much as to raise the labour/“capital” ratio to its initial level (in front of the assumed decrease in the supply of labour), otherwise the rate of profits would also be restored to its initial level, which would remove the inducement to export capital. Thus, the labour/“capital” ratio can only remain below its initial level, and the exportation of “capital” might limit the increase in the rate of wages, but this will anyway increase .
V.
Summing up and following points; three elements providing the grounds for the marginalist general method of constructing particular analyses (see §§ II.X–XIII)
So far, we have seen how the supply–and–demand apparatus has been used by marginalist authors in their strategy, and how this displays the following basic features. As a first step, marginalist authors cannot deny the possibility of some “combination” enforcing, by means of its bargaining power, an arbitrary increase or decrease in the wage rate. But, as for long–run tendencies, they do deny that this is anything more than a notional possibility, and they try to ground their claim on some “law” (presented as analogous to a “physical . A different analysis is to be provided, when the capitalist class deliberately uses the exportation of “capital” as a tool to influence power relations.
. Some issues on collective actions
necessity”) that allegedly excludes that wage change from real possibilities. As we have seen, the way in which they try to justify the introduction of such “laws” consists in repeatedly shifting the field of enquiry: if the excluding “law” cannot be found within the short period, these authors shift to long period analysis; if within the latter, some awareness emerges that the “law” has no general validity (and therefore is not a proper “law” and fails to be excluding), then the analysis is further shifted to “secular” movements; and when a closed economy is not sufficient to find the required “law”, the shift is to international trade relations. We have seen that this marginalist strategy has not been successful. Within the supply–and–demand apparatus, in spite of the repeated enlargements of the time and geographical horizon, no general (still less necessary) “law” can be found, by means of which any arbitrary, “combination–enforced”, wage change could be — before any examination of the particular real circumstances in which it occurs — excluded from persistent real possibilities. However, marginalist authors would argue that a workers’ “combination”, whatever its power in imposing a wage increase, would have anyway to face an unceasing potential threat. We have seen in the preceding chapter that this claim is based on three elements. First, it is assumed that the individual entrepreneur–capitalist — “free” to pursue his self–interest — “inevitably” tends to use that method of production which, on the one hand, is chosen among the initially available methods, and, on the other, is most profitable at the initially enforced wage level (see § II.x). This, as we have already noted, means assuming that the individual entrepreneur–capitalist does not engage in any collective action in order to influence wages, and that workers do not engage in any collective action in order to influence the methods of production used — which implies assuming that individuals and “coalitions” are somehow restrained. Second, it is argued that in correspondence to a reduction in the rate of profits, deriving from any increase in the rate of wages, the most profitable method of production, in any industry, would consist in a more “capital–intensive” method; so that, given the “quantity of capital” and the above assumption on capitalists’ behaviour, a decrease in labour employment would “inevitably” follow from the higher enforced wage (see § II.xi).
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Third, it is further assumed that the “free” reaction of each worker to unemployment always and automatically consists in underbidding wages. As a consequence of this assumption and of the above “inevitable” decrease in employment, a constant threat would hang over the internal cohesion of the workers’ “combination” (see § II.xii). Notice that this assumed workers’ automatic reaction may seem acceptable just because the labour/“capital” ratio is held to be increasing as wages are brought back to a lower level: because of this supposed property, that automatic reaction would bring about, in the absence of any “artificial” impediment, a tendency to a full–employment equilibrium wage; so that such automatic and indefinite underbidding seems compatible with an orderly functioning of the economic system. We have seen that the workers’ “combination” may sometimes resist the above threat by providing some support for their unemployed fellow workers, but the threat would anyway be always present and potentially operating. With the implication that the result of any collective action would anyway hinge on the supposed properties of the supposed “demand curve” for labour. Thus, marginalist authors would conclude that, even if they cannot achieve the desired aim of totally excluding the real possibility of arbitrary and persistent “combinations”, their approach would be anyway capable of indicating a general method of constructing particular analyses for the treatment of collective actions in any concrete situation. In fact, the study of any particular situation would start by considering the potential tendency to the dissolution of the “combination” under investigation as capturing the essential “laws” at the basis of the economic system — since the predominance of that tendency would be considered, on the basis of the three elements mentioned above, as always possible, and in some cases even inevitable (high elasticity of the “demand curve” for the “factor” in question). Then, the analysis of the particular situation would develop into an investigation on the particular levels of the parameters of the “factor demand curve”, in order to ascertain whether the “combination” in question may resist that “incessant” potential tendency in that particular situation — resistance which would be considered as never inevitable and only in some cases possible (low elasticity). We shall now examine the three mentioned elements that provide the grounds for these marginalist claims.
. Some issues on collective actions VI.
First element: relation between rate of profits and “capital”/labour ratio: a critique
Let us begin by studying the relation between the rate of profits and the “capital”/labour ratio. Half a century of capital–theory debates have demonstrated that the by now well–known phenomena of “reverse capital deepening” and “reswitching” seriously undermine the marginalist treatment of “capital”, both in its traditional version and in its modern intertemporal, or (more generally) short–period, versions . Even if debates are still going on , here we shall acknowledge the validity of this result without further discussion, and shall rather focus on its implications for the analysis of collective actions. But before proceeding to consider such implications, let us briefly see what is the difficulty that the marginalist theory encounters concerning the “quantity of capital”. The difficulty arises in connection with the marginalist attempt to put labour and “capital” on the same footing, and treat each of them as a “factor of production” that can be substituted for the other as the rates of remuneration change. It was thought that, by logical deductions alone , decreasing “demand functions” could be derived for these “factors” from such self–evident facts as the mere existence of alternative methods for the production of the same commodity, or the mere possibility of choosing between alternative commodities for consumers. Starting from this factual basis, if both factors could be measured in physical terms, marginalist authors would argue in the following way (as Garegnani synthesizes): If [two factors] x and y are measured in physical terms, a fall in the price px of the service of x relative to that of y will necessarily entail a cheapening of the productive processes which use x in a higher proportion. In fact, if pa is the “price” of a process of production a which requires quantities xa , ya of . See G (), (), (a), (), (); Symposium (; with contributions by Garegnani, Pasinetti, Samuelson, et al.). . See for instance the recent debate between Garegnani and Mandler (G, a, b; M, , ). . Remember Böhm–Bawerk’s insistence on an analysis only made of deductions (see §§ II.x and III.ii).
Production, Value, Distribution and Employment the factors, and pb is the analogous “price” of a process b, then: x a px +1 pa xa px + ya py ya y a py = = x p b x pb x b px + y b py + 1 yb y b py It is evident that if, say, process a uses x in a higher proportion, so that xa /ya > xb /yb , then pa /pb will have to fall as px /py falls. This cheapening of the x-intensive process a is what will set in motion both the technical substitution of x for y [. . . ], and the consumer substitution between the two factors [. . . ].
It is from this reasoning that Böhm–Bawerk derives his above mentioned conclusion that labour employment will “inevitably” fall as the rate of wages rises (see § II.xi). But when one of the two “factors” is the “quantity of capital” (a value magnitude) the above reasoning does not hold. As Garegnani remarks: The above argument clearly ceases to hold as soon as we interpret x in the above equation as the value of the capital goods required in the two processes. Then xa /ya and xb /yb will generally change merely as a result of the fall in px /py , and it is conceivable, e.g., that the relative value xa /xb of the two sets of capital goods required by processes a and b respectively, might rise, and rise in such a way as to make pa /pb rise rather than fall. Then the quantity of x employed with a given quantity of y would fall, and not rise, as px /py falls.
In this connection, it has been repeatedly shown that, in cases with “reverse capital deepening” and/or “reswitching”, it does occur that the labour/“capital” ratio increases as the rate of wages increases . What emerges here is a contradiction to the usual marginalist claim about the “substitution effect”, which is thus shown to have no general validity. This calls into question the possibility of using such increasing curve as a “demand curve” that, by its intersection with the supply curve, should determine the equilibrium wage and employment (see also below, § xiii). . G (a), § . . G (a), § (emphases of the author). . See for instance the examples in G (), Appendix; and (a), § . . For an ample discussion of the implications of this critique for the marginalist explanation of distribution see G (a), §§ –.
. Some issues on collective actions VII.
An implication of the critique: “counteracting forces” tending to dissolve any “combination” not always possible
The first implication of this result is that we can no longer consider the predominance of that tendency to the dissolution of any “combination”, that should operate through the mechanism envisaged by marginalist authors, as always possible. In cases where (because of “reverse capital deepening” and/or “reswitching”) the labour/“capital” ratio increases as the wage increases, the workers’ “combination”, by enforcing a higher wage, does not cause any labour unemployment; thus, in such cases, there is no possibility of those “counteracting forces” that Böhm–Bawerk envisages as working against the cohesion of the “combination” itself (see § II.xii). Those forces, far from being “incessantly” operating, can no longer be considered — to say the least — as a general or essential phenomenon. VIII.
Further implication of the critique: cases in which persistent “combinations” are even necessary; second element (indefinite underbidding by unemployed workers) shown illogical; marginalist claim (see § II.xiii) contradicted
The second, connected, implication is that, in such cases, some persistent “combination” (or some social/juridical norm with similar effects) is not only possible but even necessary. We can see this by means of the following reductio ad absurdum. Let us consider a case in which, because of “reverse capital deepening” and/or “reswitching”, the curve that marginalist authors interpret as the “demand curve” for labour is increasing, like that, for instance, of the figure .2 , where: D is the “demand curve” for labour, and S is the supply curve of labour (with supply assumed constant for simplicity’s sake). Let us then imagine that no “combinations” (and no social/juridical norms with similar effects) exist, so that each individual behaves as marginalist authors assume (see the two assumptions mentioned above, § v). In particular, we shall focus on the assumption that each . See G (a), §§ and .
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worker always and automatically bids down the wage so long as he is unemployed; and each entrepreneur–capitalist always and automatically bids up the wage so long as he is unable to hire the workers he demands. Now, if the wage happens to be initially below the full–employment level (w*), the above marginalist assumption on workers’ behaviour implies that the wage will have to decrease; but no resting point can be found between w* and zero, so that we are forced to conclude that the wage will have to fall to zero. If, on the other hand, the wage happens to be initially above w*, the symmetrical marginalist assumption on capitalists’ behaviour implies that the wage will have to increase to its maximum level (wmax ), where the rate of profits — we are forced to conclude — will be brought down to zero . At this point, it is important to carefully grasp the nature of these symmetrical extreme consequences deriving from the marginalist pre-
Figure .2
. See G, a, § ; at w = w* we evidently have an “unstable equilibrium”, which, as Pigou (, p. ) notes, “is no equilibrium at all”.
. Some issues on collective actions
mises. Garegnani has variously characterized them, and has sometimes remarked that these consequences are in contrast to «anything ever observed in the actual economy», and that they «reflect the absence of a factual basis for the theory» . While this is undoubtedly true and most relevant, however it does not seem sufficient to properly understand those extreme consequences. In fact, one may say, for instance, that a certain, very low but positive, level of the wage has never been “observed in the actual economy” — but things are radically different when we come to those extreme outcomes we have seen above. If, for a moment, we take seriously the fall of the wage to zero, we should observe, in such a situation, millions of workers starving to death together with their families, and the production system rapidly ceasing to exist. And we should observe something similar at the other extreme, where the rate of profits falls to zero: here, any inducement to invest would cease to exist ; demand for commodities and production would disappear; and starvation would again bring the economy to a complete and definitive destruction. These end– of–Atlantis scenarios are not simply something that has not been observed, but above all something that cannot be observed, if each individual is rational (as marginalist authors assume). We cannot even label this self–destruction of the economy as a collective suicide, since a suicide accomplishes his own plan, while here we should imagine individuals that do not wish to commit suicide, but, all the same, deliberately and knowledgeably choose that course of action that leads them to self–destruction. Garegnani, in other passages, seems to arrive to a more appropriate characterization of these extreme consequences when he describes them as “absurd conclusions”, in contradiction, not only “with experience”, but above all «with the possibility of survival of society itself» . . G, a, §§ and . . We are here assuming that investment decisions are taken by capitalists, i.e. by profit earners. No necessary influence on the inducement to invest would be implied if the disappearance of profits is connected to investment decisions being taken over by different subjects. . P, Timeo: «[. . . ] and the island of Atlantis in like manner disappeared in the depths of the sea [and became]... an impassable shoal of mud». . G (a), § (emphasis added); see also Garegnani (), § ; and (a),
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We have thus reached the conclusion of our reductio ad absurdum: in order to remove the absurd consequences (a fall to a zero wage or a fall to a zero rate of profits), we must remove the premise (no “combinations” exist). Therefore, when “reverse capital deepening” and/or “reswitching” lead to an increasing “demand curve for labour”, the existence of some persistent “combination” (or some social/juridical norm with similar effects) is, not only possible, but necessary (in order to check any tendency to absurd end–of–Atlantis scenarios). This also means that, in these cases, the marginalist assumption of indefinite and automatic underbidding by unemployed workers, and the symmetrical assumption for entrepreneurs–capitalists, are in logical contradiction of the individuals’ rationality. It is important to note that the above reasoning contradicts the marginalist claim we have seen in § II.xiii. While Böhm–Bawerk wished to demonstrate that the advantage that any individual may have in forming a “combination” is only temporary, and destined to vanish with the ultimate collapse of the “combination” itself, we have shown on the contrary that, in cases with an increasing “demand curve” for labour, it is the individual’s choice of not forming any “combination” or accepting any norm (i.e. indefinite underbidding) that, in the long run, reveals itself as disappointing and ultimately catastrophical. IX.
Remarks on unemployed workers’ behaviour; why the “free” individual may arrive to, and persist in, choosing a course of action quite different from underbidding
The rejection, just achieved on logical grounds, of the marginalist assumption on unemployed workers’ behaviour (and of the symmetrical assumption for the capitalists) may be perplexing, at first. After all — it may be objected — it can well be a rational behaviour for an unemployed worker to bid down the wage: he gains an individual benefit if, by accepting a lower wage, he succeeds in taking for himself the job of an employed worker . § .. More precisely, in the light of what we have seen, those extreme outcomes must be rigorously indicated as absurd in the proper sense of illogical or irrational; situations, therefore, that are not even notional possibilities . On the issue, see the brief but interesting exchange between P and G in Final Discussion ().
. Some issues on collective actions
In the first place, let us clarify what is rejected by the conclusion reached above. The argument we have seen does not lead to reject the (reasonable) assumption that some unemployed workers may, under some circumstances, accept a somewhat lower wage. We have rather focused on the marginalist assumption that each unemployed worker indefinitely underbids the wage whenever he bargains with any employer. Since that assumption is evidently incompatible, in presence of unemployment, with the existence of any persistent “combination” (or any social/juridical norm with similar effects), and since we have seen above that there are cases in which some persistent “combination” (or norm) is necessarily required to avoid absurd end– of–Atlantis scenarios, we have concluded that we cannot but reject that marginalist assumption on workers’ behaviour. At this point, let us try to better understand the individual worker’s (and the individual capitalist’s) behaviour. We can start by noting that underbidding is definitely not a rational behaviour when the unemployed worker, by accepting a lower wage, does not succeed in taking and retaining for himself the job of an employed worker. Now, this failure is exactly what would happen when there is a tendency to a zero wage, not checked by any “combination” (or norm). In this case, the underbidder would take for himself the job only temporarily; afterwards, the ensuing tendency to the end–of– Atlantis scenario would imply death by starvation for the underbidder as well, not differently from the worker whose job he initially took. Thus, any worker, employed or unemployed, who wishes to give a rational answer to such a gloomy outlook, will come to the conclusion that he has an interest — or, more precisely, a necessity — in common with all the other workers: that of forming some persistent “combination”, or agreeing on some persistent social/juridical norm, that could avoid that end–of–Atlantis outcome. Similarly, the entrepreneur–capitalist, who is unable to hire the workers he demands, will not find an individual persistent advantage in bidding up the wage, when he faces a tendency to zero profits: the temporary increase in the number of workers he may individually hire would soon be overwhelmed by a catastrophic fall to a zero production, both for his firm and the other firms from which he has initially taken those workers. We similarly conclude, that, in this case, any capitalist cannot but find it individually advantageous, and
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necessary, to form some persistent “combination”, or to agree on some persistent norm, that can avoid the above absurd outcome. Once the “combination”, or the norm, has been introduced, some individual may try to defect. Here, two developments are possibile. If the individual defection leads to the collapse of the “combination”, the individual will not be able to avoid the end–of–Atlantis outcome, and his defection results irrational. If the individual defection does not lead to the collapse of the “combination”, then the “combination” itself may be able (just because it is not collapsing) to sanction that individual’s infringement of its internal agreements (and similarly for the infringement of a social/juridical norm); so that, when the sanction is sufficiently heavy, the individual’s defection results again irrational. Also remember that we are considering (tacit or explicit) “combination” agreements that have been “freely” accepted by the individual (together with the possibile sanctions), when he has “freely” participated to the formation of the “combination” itself. Thus, while in § viii we have seen that there are cases in which the individual unemployed worker has the necessity to avoid an indefinite underbidding, here we have seen that there are cases in which the initially “free” individual unemployed worker may rationally consider advantageous, and persist in choosing, a course of action quite different from any underbidding. Of course, what we have seen so far does not provide, in itself, a complete explanation of why and how persistent “combinations” are formed. But it can provide a first step, by means of which we can begin to understand that — even if one wished to construct an analysis of the “free” and “rational” individual’s choices, in which the individual be seen as initially placed in a sort of hobbesian “state of nature”, where “combinations” or norms are initially absent — any analysis of the long–run individual’s behaviour cannot but be closely intertwined with the causes and effects of the formation of persistent “combinations” (or, better, as we shall see in Ch. IV, social classes and social/juridical norms).
. Some issues on collective actions X.
“Freedom” and rules
In the reflections made above, we have met with a particular variant of a more general problem: what does it mean to assume that the individual is “free”, and what implications can be derived as to the behaviour he will “freely” choose? We present here a few hints for discussion. First of all, let us try to clarify what marginalist authors generally mean by “freedom”. Their notion of “freedom” has several aspects, but, for our purposes, we can find its main features in statements like the following: Any individual is free to recontract with another independently of, without the consent being required of, any third party, e.g., there is among the [buyers] (and similarly among the [sellers]) no combination or precontract between two or more contractors that none of them will recontract without the consent of all. Any [buyer] then may accept the offer of any [seller] irrespectively of other [buyers].
It is immediately evident that the above statement implies, not the absence, but rather the presence of a fundamental restriction on the options open to each individual: he is only allowed to accept or to not accept any offer, but it is arbitrarily forbidden that he may participate in choosing and introducing any rule within the group of individuals with whom he shares common interests (what Edgeworth calls the possibility of a “precontract”). In this connection, we can note that, in general, the introduction of any rule may involve several aspects, that should be clarified. First, even when the rule derives from an imposition by some “outside” interference, it may not merely imply a restriction on the possible actions among which the individual can choose. This may be the case even if the rule is only targeted at a specific individual, since an excessively large field of possibilities may result chaotic and paralyzing for the individual . But the remark is above all relevant . E (), p. . . Think to the familiar case of Buridano’s donkey; but above all notice how poor and superficial it is to represent the individual decision processes as governed by one complete and well–behaved system of preferences. When, as artists and philosophers have repeatedly shown us through the centuries, “many souls” dwell in each individual, the introduction
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when the rule applies to each member within a certain group. If the rule aims at fostering the compactness and stability of the group, this may imply some advantages for the group as a whole and for each member, advantages that may not be achievable by the isolated action of any single member. When this is the case, we can see that the norm, far from being merely restrictive, enlarges the set of outcomes that the individual member of the group may achieve . This also implies that the introduction of rules does not necessarily derive from “outside” impositions: even if it might not be to the interest of any single member of a group that he personally, and only he, should refrain from certain actions — however, it may be to the interest of each member that all members of the group, including himself, should refrain from certain actions. Moreover, it seems difficult to relegate the relevance of these reflections to some only temporary individual motives — it seems difficult, in other words, to find any general reason for excluding the real possibility that the interest, that the individual may have in “freely” choosing or accepting any rule, be persistent. We have seen an instance of this real possibility in §§ viii–ix — where a particular rule or “combination” was “freely” chosen in order to achieve a particular persistent advantage (a persistent check to the tendency towards the end–of–Atlantis outcome) — and it is reasonable to think (or, at least, cannot be a priori excluded) that also in different situations other persistent rules or “combinations” may be “freely” chosen by any individual in order to achieve also other persistent advantages . of rules (or social conditioning) might be a way to make the individual capable at all of definite actions. . What do the group’s advantages consist in? They may be of a technical nature (a group of two persons can raise a large stone that cannot be raised by one single person); or of a social nature (a group can command more social power than one single person). We can plausibly assume that, as to the “combinations” we are discussing here (i.e. social classes), it is the second kind of collective advantages that is of special importance. Their peculiarity resides in this: they are advantages over other people; they thus require the presence of other people outside of, and excluded from, the group in question. Under this aspect, an individual would have no reason to participate in the formation of a group in which anyone may be included. The persistent rules and processes by which any group excludes certain individuals and selectively co–opts other individuals are essential in explaining the group’s formation and development. . It is difficult to imagine an initial situation in which no possible “combination” exists that may give some advantage to its members.
. Some issues on collective actions
An important consequence is that to assume the individual to be initially “free” from any restriction on the possible actions among which he can choose is compatible with a final situation in which some restriction is brought about by his own choices. On the contrary, it is generally contradictory to assume that the individual remains “free” from any restrictions both in his initial condition and in his final condition: the very “freedom” he initially has may generally lead him to choose or accept any rule that results suitable to his aims. In conclusion, if we wish to arrive at a coherent notion of “freedom”, we cannot but remove the arbitrary marginalist prohibition, forbidding that the individual may “freely” participate in choosing and introducing any rule within the group of individuals with whom he shares common interests.
XI.
Critique of third element: employers’ “free” reaction to enforced wage; an example of capitalists’ behaviour contradicting the marginalist assumption; institutions and methods of production
This conclusion also calls into question the third and last of those elements that, as we have noted in § v, provide the grounds of the marginalist claims we are discussing. We have seen that this element consists in assuming that each individual entrepreneur–capitalist — “free” to pursue his self–interest — “inevitably” tends to use that method of production which, on the one hand, is chosen among the initially available methods, and, on the other, is most profitable at the initially prevailing wage level. Now, in the light of what we have seen above, we are led to ask: have we any grounds for a priori excluding that the individual capitalist may gain advantages from engaging with his fellow capitalists in some collective action in order to influence wages? And if these potential advantages do exist, why should the individual capitalist refrain from pursuing them? We are forced to admit that — just because he is initially “free” to seek his self–interest — we cannot a priori exclude that the individual capitalist will “freely” choose to engage in those collective actions. And we can add that, in general, we have no grounds
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for a priori excluding that this collective capitalists’ action may also influence the methods of production used. The following example can clarify how the very “motive of self– interest” may prompt the initially “free” individual entrepreneur– capitalist to a choice of methods of production in contrast to the above marginalist assumption. Let us consider an economy in which only two systems of production are technically available (system α and system β), where the two systems only differ for the method used in the production of one commodity; and let us assume that the respective wage–rate–of–profits curves are as in Fig. .3. Now, if some workers’ “combination” initially enforces the wage level wα , which method of production will be chosen by the “free” entrepreneur–capitalist? On the basis of the above marginalist assumption, the “free” capitalist should “inevitably” choose method α, where the rate of profit is maximized, given w = wα . But is this answer correct? First, we have to consider that, in order to avoid the contradiction indicated in § , we cannot but remove the arbitrary marginalist prohibition, forbidding the “free” individual capitalist from making “precontracts” with other fellow capitalists — a restriction which is always incongruous, but especially when the individual capitalist faces the workers’ collective action.
Figure .3
. Some issues on collective actions
Second, we have to consider whether the individual capitalist will “freely” participate in forming any “combination”, and, in this event, what collective actions will be decided by the “combination” itself. In this connection, we have also to consider that the relative bargaining power of the opposed “combinations” may be influenced by the methods of production employed. For instance, assume that, while method α employs large plants that favour the organization of workers’ strikes, method β, on the contrary, employs small plants that obstacle workers’ organization. In this case, a notional and real possibility is that the capitalists’ “combination” may succeed in spreading the employment of method β (for instance, through an appropriate selection of investment projects by the banking system). As a consequence, the capitalists’ “combination” may achieve a greater bargaining power, so that it can enforce a decrease of the wage — say, to level wβ — and gain a higher rate of profits (rβ > rα ). Here, we therefore find the real possibility of a scenario contradicting the above marginalist answer. But why, in this scenario, does the individual capitalist — assumed initially “free” to seek his “self–interest” — refrain from using method α, that, at any given wage level, is more profitable than method β? We should remind, in the light of what we have seen in §§ -, that the individual capitalist has to make two kinds of choices: not only which method he personally should use, but also whether any norm should be introduced regulating the methods used by all capitalists. And in the above scenario — while it would not be to the interest of the individual capitalist that he personally, and only he, should refrain from using method α — it is to the interest of each individual capitalist that all capitalists, including himself, should refrain from using method α, and it may also be to the interest of each individual capitalist that sanctions be introduced for any infringement of this norm. On the other hand, we can also note that this scenario does not contradict the profit–maximizing behaviour of the individual capitalist. In the above case, each individual capitalist does choose the profit–maximizing method, but not among the technically available methods; he rather makes his choice among a more limited, institutionally determined, set of methods (that in our example excludes method α); and the individual choice is made not at the initial wage
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level, but at the “combination–enforced” wage level (in our example, at w = wβ ).
XII.
Workers’ collective action influencing methods of production
Interestingly enough, Böhm–Bawerk does consider the possibility that “combinations” may have some influence on the methods of production used, but this possible influence is attributed by him only to the action of the workers’ “combination”, that may try to enforce certain methods of production in order to keep up employment . It should be noted that Böhm–Bawerk does not explain why we should a priori exclude that also the capitalists’ “combination” may try to influence the methods used, as we have seen above. Moreover, he adds that even though the workers might have the power temporarily to enforce these conditions, they could not be permanent. For this... [will imply that] the entrepreneur will suffer losses and sooner or later abandon the enterprise, or go into bankruptcy.
But we can note that this conclusion has no general validity: it is possible that the methods enforced by workers imply a higher w–r curve ; and even when the workers’ imposition does imply a lower w–r curve, this does not necessarily imply a negative rate of profits. Thus, we can see that the initial set of available methods can be persistently modified both by the workers’ and by the capitalists’ “combination”. These opposing efforts will result in an institutionally determined set of available methods, that will be interdipendently linked to changes in the bargaining power of the two parties. As a consequence, the same given technology may be compatible (in a real and not only notional sense) with a range of possible alternative “institutional” sets of available methods. . See B–B (), : «the unionized workers might enforce not only higher wages, but also the full employment of all workers at that higher wage rate». . Ibid. . In the example of the above Fig. .3, method α may produce given outputs by means of more labour than the method chosen by capitalists (β).
. Some issues on collective actions XIII.
A comprehensive assessment of the marginalist analysis: “labour demand curve” dissolved; “free competition” as contradiction in terms
At this point, we can arrive at a more comprehensive assessment of the marginalist arguments we have presented in Ch. II. We have seen in this Chapter that, as to all the critical points we have indicated in Ch. II, several difficulties and contradictions leave the marginalist claims with no grounds at all. First, in the light of what resulted above — even if we wish to assume (initially) “free” workers and entrepreneurs–capitalists — we cannot but admit that the persistent long–run real possibilities open to them consist in a far larger set than that envisaged by the supposed marginalist “laws”. We have already noted in § v, that, within the marginalist approach, no general (still less necessary) “law” can be found, by means of which any arbitrary, “combination–enforced”, wage change could be — before any examination of the particular real circumstances in which it occurs — excluded from persistent real possibilities. Now we can add that — even after having examined any particular real situation in which any wage change occurs — we can find no particular configuration of the parameters of the so–called “labour demand curve” that could exclude any arbitrary, “combination–enforced”, wage change from persistent real possibilities. This derives from the fact that, as shown above, no logical grounds exist that may lead to consider the supposed “labour demand curve” as the necessary, “inevitable”, representation of the economic behaviour of the relevant agents. In particular, we have seen that: a) the so–called “labour demand curve” may be increasing, so that its interception with the supply curve does not indicate a stable equilibrium, but a mere watershed between the region of the tendency to zero wages and the region of the tendency to zero profits, where the absurdity of both these tendencies also implies the rejection of the indefinite underbidding assumption; b) even when the so–called “labour demand curve” is decreasing, it does not generally represent the choice of the (initially)
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“free” entrepreneur–capitalist, since this will generally choose to form some persistent “combination”, and this may imply an institutional influence on the methods of production available and used. As a consequence, “combinations” can be considered, not only generally persistent, but also an object of investigation that simply does not require any mention to any supposed “labour demand curve”. Second, we can also derive from what we have said that the notion of “free competition” is generally a contradiction in terms: just because any individual is initially “free”, he will generally and persistently wish to avoid competition. Thus, we arrive to a complete inversion of Böhm–Bawerk’s thesis: the only alternative, among those that he considers, that is to be generally excluded from real, and also from notional, possibilities, is the “free competition” equilibrium. In other words, we cannot exclude that the formation of “combinations” derives, as we have seen above, not from supposed “outside” interferences (cf. § II.ix), but rather from the “inside” of the very forces supposed to determine the equilibrium itself, since persistent “combinations” may generally derive just from the individuals’ “free” maximizing choices.
XIV.
Edgeworth on “combinations” and “art of bargaining”
It would be interesting to enquire whether we can find in some marginalist authors traces of at least a partial awareness of the difficulties and contradictions we have been examining. Here, we shall only give a brief look in that direction, starting from some interesting remarks by Edgeworth. Edgeworth notes that «those who form themselves into compact bodies by combination do not tend to lose, but stand to gain»; and he adds that If this view be correct, it would seem as if, in the matter of unionism, as well as in that of the predeterminate wage–fund, the “untutored mind” of the
. Some issues on collective actions
workman had gone more straight to the point than economic intelligence misled by a bad method.
In his analysis of the causes and effects of “combinations” he states that «the tendency of combinations is not only to make contract more beneficial to unionists, but also to make it indeterminate» ; in the sense that There is no determinate, and very generally unique, arrangement towards which the system tends under the operation of, may we say, a law of Nature [. . . ]; but there are an indefinite number of arrangements a priori possible [i.e. the points on what he calls the “contract curve”], towards one of which the system is urged not by the concurrence of innumerable (as it were) neuter atoms eliminating chance, but (abstraction being made of custom) by what has been called the Art of Bargaining — higgling dodges and designing obstinacy, and other incalculable and often disreputable accidents.
What he means by “obstinacy” may be clarified by referring to another passage in which he speaks about a case in which [the capitalists’ “combination”] defers making an agreement for strategic reasons, because, being better supplied for a siege, so to speak, than the other party, they hope to reduce them in case of a strike to submission.
It is also particularly significant that — in striking contrast to Böhm– Bawerk and Marshall — Edgeworth does not conceive all this as «irregularities [which], though existent in fact, do not exist in tendency, tend to disappear and therefore may be neglected by abstract science»; he rather submits that The imperfections which it has been in these pages attempted to point out in the case of cooperative association and to trace in the case of trades– unionism, do not tend to disappear, but rather to increase, in the proximate future at least. . . . . .
E (), pp. –. Ibid., app. vii, p. . Ibid., p. . E (), p. , note . E (), p. .
Production, Value, Distribution and Employment
These considerations by Edgeworth, intriguing as they are, would call for a more complete examination than that we can devote to them here. We shall limit ourselves to indicating some points of interest. First of all, Edgeworh seems to be aware that the (initially) “free” individuals will generally try to “combine”, since “combiners stand to gain”, and the gain “does not tend to disappear”. He also seems aware that the tendency to persistent “combinations” implies that the set of long–run real possibilities is not restricted to a “unique arrangement” determined by supposed “laws of Nature”. But, on the other hand, he does restrict the possible “final settlements” (as he calls them) to the points of a “contract curve”, derived from the marginalist usual condition of “utility maximization”. In this connection, a question arises that can be put in the following terms. Once Edgeworth has acknowledged that, in presence of persistent “combinations”, his theoretical relations cannot determine a unique equilibrium, but only a “contract curve”, he must allow, at this point, for some other factor (“obstinacy”, i.e. bargaining power) in order to explain the actual long–run position of any real economy; but, on the other hand, if this factor is introduced, what can guarantee that it will be compatible with the “contract curve” itself ? In other words, are we sure that the “obstinacy” of one party in a contractual relation and the resistance to “submission” of the other party will always “urge” the system towards one point on the “contract curve”? We leave the answer to future research.
XV.
Stigler on competition and social/juridical norms
In commenting Edgeworth, Stigler notes that the assumption of «individual traders free to act independently» does not imply a tendency to “competition”, since «Edgeworth shows that combinations reduce the effective number of traders and that “combiners stand to gain”»; thus, one «must assume that the individual trader not only is free to act independently but will in fact do so» . Here, it is not clear whether Stigler realizes that the latter assumption is self–contradictory, and for the very reason that “combiners stand . S (), p. .
. Some issues on collective actions
to gain”: as we have seen above, the initially “free” individual — just because “free” — will generally tend to form persistent “combinations”. Stigler seems to come nearer to admitting the contradiction in terms of the notion of “free competition” when he states that — as a requirement for “competition” — «it seems essential to assume the absence of collusion as a supplement to the presence of large numbers: one of the assumptions of perfect competition is the existence of a Sherman Act» . In other words, only the existence of some social or juridical norm can guarantee the prevalence of “competition”: individuals “compete” so far as they are compelled to do so. On the other hand, this leads to asking: where do social/juridical norms come from? We should explain how a Sherman Act is introduced, which presupposes the intervention of the State, and therefore we should also explain how any State is formed, which in its turn presupposes, in a sense, some sort of “general collusion”, involving the fundamental institutional arrangements of the whole society. But if some form of “general collusion” is required, how should we characterize the resulting “competition”? We can no longer describe it, in the words of Edgeworth (see above § x), as absence of any “combinations or precontracts”, since we have just seen that it requires some form of “general precontract”, otherwise we would lack a social order capable of introducing and enforcing a Sherman Act. Moreover, are we sure that the “general combination”, or social order, that introduces a Sherman Act will be neutral or impartial? As is well known, this Act, as a matter of fact, was initially applied mainly against Trade Unions . Thus, the very introduction of the social/juridical norms that “competition” require, also involves the introduction of power relations. We can see that, step by step, we are approaching to an analysis that calls into question what we can more properly characterize as the formation of “social classes”, and its interdependent relations with the formation of the State. . Ibid., p. . . The Act, passed in , was applied against Trade Unions as early as . It took almost other two decades, and very different economic, social, and political conditions, to have the Act applied against the Standard Oil Trust, in .
Chapter IV
From “combinations” to social classes: changes in class relations and changes in distribution and employment I.
Particular “combinations” and class “combinations” in Smith
Having seen, in the preceding Chapter, what flaws can be found in the marginalist treatment of collective actions and “combinations”, we can now proceed to develop an alternative analysis, or — as for the present work — the first tentative elements of that alternative analysis. An important step further consists in distinguishing two different things that marginalist authors try to analize, as we have seen, under the same term of “combinations”, and in this we can derive some help from Adam Smith. Smith uses the term “monopoly” in two radically different ways, i.e. to indicate what we may respectively call a class monopoly and a particular monopoly. We can meet with an instance of class monopoly when Smith states that «the rent of land, considered as the price paid for the use of the land, is naturally a monopoly price» . When the term is used in this sense, “monopoly” refers to a social class as a whole (in this case, that of landowners); and the corresponding distributive variable (in this case, rent) is fixed, on the basis of the relative bargaining power of the class in question, at an “ordinary” and uniform level . This is contrasted with the particular monopolies that may arise, for instance, when an individual capitalist does not disclose a technical . S (), bk. i, ch. xi. . In the case of rent, this ordinary and uniform level is what Marx calls “absolute rent”, (), ch. ; see also P and R (), where absolute rent is introduced in the production equations, and the relation between absolute rent, rate of profits and wages is derived.
Production, Value, Distribution and Employment
innovation to his “rivals”, and thereby reaps “extraordinary” profits, larger than the ordinary, uniform level prevailing elsewhere; or when “regulations of police” and special “statutes” grant some monopoly, or “exclusive privilege”, to an «individual, trading company, [. . . ] or corporation» in “particular employments”, so that the «monopolists [. . . ] raise their emoluments greatly above their natural rate» . From such particular monopolies a “monopoly price” results, that «is upon every occasion the highest which can be got» , and that may exceed the natural price “in almost any degree” . These and other particular monopolies are repeatedly criticized by Smith, who stigmatizes how, by means of them, «the private interest of a part, and of a subordinate part of the society» overcomes «the general interest of the whole» . On the contrary, he has a favourable opinion of “country gentlemen”, since they are «the least subject to the wretched spirit of monopoly» . This may seem contradictory, since “country gentlemen”, in their role of landowners, are involved in what Smith regards to be, as we have seen above, the “monopoly” of land. But it is here that the distinction between the two kinds of “monopolies” becomes specially relevant. “Country gentlemen” do not participate in any particular monopoly: [They] are generally disposed rather to promote than to obstruct the cultivation and improvement of their neighbours farms and estates. They have no secrets, such as those of the greater part of manufacturers, but are generally rather fond of communicating to their neighbours, and of extending as far as possible any new practice which they have found to be advantageous.
Moreover, country gentlemen, being «dispersed in different parts of the country, cannot so easily combine as merchants and manufacturers», and lack the “exclusive corporation spirit” that can be found in the latter. From these remarks we can derive that a class monopoly is distinguished by Smith from a particular monopoly, because the latter . . . . . .
S (), bk. i, ch. vii. Ibid. Ibid., ch. xi, part i. Ibid., ch. x. Ibid., bk. iv, ch. ii. Ibid.
. From “combinations” to social classes
consists in the formation, within any class, of a “particular tribe” , enhancing barriers against the other members of the same class, and thereby reaping advantages at the expense of them. This is considered as similar to medieval “corporations”, in that both particular monopolies and corporations “obstruct” the potential tendency of the excluded “neighbours” (landowners, capitalists, labourers) to flow into the most advantageous industries. On the other hand, certain class monopolies seem to be considered as a fundamental part of the general institutional arrangements at the basis of society as a whole: these class monopolies consist in a different kind of (tacit or explicit) “combination”, since each of them brings together and disciplines all the members of the class in question; and such class combinations are “constant”, “uniform”, “usual”, “natural” , thus contributing to foster the existing social order. This difference between the two kinds of “monopolies” explains why the price fixed, for instance, by a particular “combination” of “sugar planters” is seen by Smith as a “monopoly price”, while the «ordinary price of barley has never been a monopoly price», even though the price of both products includes the “monopoly price” of land — the difference being that «the rent and profit of barley land have never been above their natural proportion to those of other equally fertile and equally well cultivated land» , since the presence of class monopolies has not implied any barrier against land and capital coming from other sectors.
II.
Mobility of capital, land, and labour; why it may induce solidarity within a class “combination”
Of course, this absence of barriers to the mobility of capital, land, and labour as well, is not seen by Smith as only peculiar to the barley cultivation, since the presence of class combinations in the economy as a whole is considered by Smith as compatible with inter–industry flows of capital, land, and labour following this general behaviour: . Ibid. . Ibid., bk. i, ch. viii. . Ibid., bk. v, ch. ii.
Production, Value, Distribution and Employment If in the same neighbourhood, there was any employment evidently either more or less advantageous than the rest, so many people would crowd into it in the one case, and so many would desert it in the other, that its advantages would soon return to the level of other employments.
We have already noted (see Ch. II, § vii) that this mobility may not only be allowed by the presence of general “combinations”, or social classes, but may also foster a greater internal solidarity among the members of any class. Here, we can show by means of a simple example why this solidarity may come about. Consider an economy in which two commodities are produced and used, and where there is mobility of capital between the two industries, but no mobility of labor; so that we shall have a tendency to a uniform rate of profit, but two persistently different rates of wages for the two industries. If both commodities are basic and wages are measured in terms of the Standard net product , we can easily see that the relation between the three distributive variables is: 1
r + q1 l1 w1 + q2 l2 w2 = 1 R where (in usual notation): R is the Standard ratio, qi are the multipliers of the Standard commodity, li are the coefficients of labor inputs in the two industries, wi are the rates of wages in the two industries, r is the uniform rate of profits. The relation implies that, when capitalists become stronger, say, in the second industry, and succeed in imposing a lower w2 , there will be an increase in the uniform rate of profit, even if w1 remains constant. In other words, also the capitalists of the first industry derive an advantage from the higher strength of the capitalists of the second industry. We can envisage the flow of capital between industries and its effects in the following way. Initially, the lower w2 implies that the rate of profits in the second industry becomes temporarily higher than the rate in the first industry; this brings about an inflow of capital into the second industry, consequently reducing the market price of this commodity. At this point, on the one hand, the rate of profits . Ibid., bk. i, ch. x. . For the definitions of “basic commodity” and “Standard product” see S (), pp. and .
. From “combinations” to social classes
in the second industry begins to fall; and, on the other hand, the lower price of the second commodity reduces the input outlays in the first industry, thus increasing the rate of profits of this industry. The two rates of profits will tend towards a uniform level, higher than its starting level . As a consequence, this diffusion of advantages (or, as the case may be, disadvantages) will prompt each capitalist to support the actions of the capitalists of other industries, and a more stable and tight “universal capitalists’ combination” may result. Interestingly enough, this solidarity among capitalists becomes weaker when the input–output interconnections among industries are weaker. For instance, if the second industry of the above example is non–basic, the uniform rate of profit will be determined by the conditions prevailing in the first industry (the only basic one), so that the capitalists of this industry will not be (at least not directly) interested in the bargaining power of the capitalists of the other, non– basic, industry. On the other hand, the capitalists of the non–basic industry will be more interested in lowering the wage of the other industry than in lowering the wage of their own industry. Notice again how the properties of the w–r curve provide a fundamental starting point for analyzing aims and actions of the opposing classes.
III.
Why the above mobility is not a “natural” outcome of “liberty”
These inter–industry flows of capital, land, and labour that Smith sees as compatible with class combinations, can be considered as a form of competition; and it is evident how this form of competition radically differs from the marginalist notion of “perfect competition”, that excludes any kind of “combination”, and equally excludes the rules and internal discipline that a class combination usually implies. . During the process of adjustment towards the new normal position, it might also occur a slight and temporary increase of w2 , as a possible (not necessary) consequence of the inflow of capital in the second industry, but this is anyway compatible with a long–run tendency to a w2 level lower than the initial one.
Production, Value, Distribution and Employment
However, in spite of this different notion, even Smith conceives of competition as the “natural” outcome of “freedom”. When Smith writes of the inter–industry flows of capital, land, and labour we have seen above (see the passage quoted at the beginning of § ii), he adds that they would occur in a society where things were left to follow their natural course, where there was perfect liberty, and where every man was perfectly free both to chuse what occupation he thought proper, and to change it as often as he thought proper. Every man’s interest would prompt him to seek the advantageous, and to shun the disadvantageous employment.
Even though Smith’s conception of the “free man” is compatible with social relations and norms (and is thus very different from the marginalist notion of “freedom”), and even though Smith mainly means by “liberty” an absence of particular combinations, however, his idea that those inter–industry flows can be seen as a “natural” outcome of that “perfect liberty”, i.e. of the mere absence of particular combinations, is anyway not convincing. We have already seen in the preceding Chapter that the (initially) “free” individual may find an individual advantage in forming some “combination”, and may “freely” accept its norms and possible sanctions. This remains true even when “free” is meant in the Smithian sense, and we cannot a priori exclude that also a class combination may be formed by means of the “free” choices of its members. But what will be the internal organization of this “combination”? Even if it is not a particular combination, will it be always and “naturally” compatible with the inter–industry flows in question? In the example of § ii, we have seen a case in which the internal organization of the capitalist class is compatible with, and is even strengthened by, inter–industry flows of capital. But this is not the only possibility. For instance, the capitalist class may choose the following strategy. Assume an initial situation in which a sufficiently strong working class imposes a certain wage level, measured in terms of corn. The capitalist class may try to raise its collective rate of profits without an open fight against the workers, and therefore living the wage at its . S (), I.x.a..
. From “combinations” to social classes
initial level, in terms of corn. This rise in collective profits — without any change of wages in terms of corn — is generally possible when the capitalist class imposes appropriate changes in relative prices (as will be shown below). The imposed changes in relative prices will also imply different rates of profits in the different industries, but this does not necessarily bring about flows of capital towards the most profitable industries, even in absence of particular combinations in these industries. The capitalist class may in fact succeed in gathering profits from the different industries in a common pool; then, these common profits can be redistributed to each capitalist on the basis of a uniform collective rate of profits (determined by the ratio between total common profits and total capital employed). Since it is generally possible to achieve higher profits in this way (see below), each capitalist may “freely” agree to abstain from movements of capital, in order to gain a uniform rate of profits higher than the initial one. In order to better understand why inter–industry flows are not a “natural”, or necessary, consequence of the mere absence of particular combinations, let us consider the following example. Assume an economy which produces and uses two commodities, and where workers consume only the second commodity. The economy is described by the following production equations:
0, 1p1 + 0, 2p2 (1 + r1 ) + w = p1 0, 3p1 + 0, 4p2 (1 + r2 ) + w = p2 = 1
In an initial situation, there is a uniform rate of profits (r1 = r2 ), and the working class imposes the following wage level, in terms of the second commodity: w = 0, 35. The corresponding uniform rate of profits is: r = r1 = r2 = 10%. The price of the first commodity is: p1 = 0, 64. In a subsequent situation, an agreement is “freely” formed within the capitalist class, in order to realize the following strategy. The capitalist class imposes an increase in p1 , from 0, 64 to 0, 65 — while the wage in terms of the second commodity is left unchanged. Now, the rates of profits of the two industries can no longer remain uniform, and they will correspondingly be: r1 = 15% and r2 = 9, 2%.
Production, Value, Distribution and Employment
At this point, the capitalists, on the basis of their agreement, abstain from “crowding” into the more profitable first industry, and gather the profits of both industries in a common pool. If we assume that units of the first commodity and units of the second commodity are produced, the ratio between the common profits of the two industries and total capital will result = ,%. Thus, the capitalist class can redistribute total profits in such a way that each capitalist, in both industries, will gain a rate of profits = ,%, higher than the initial level (%). It may be perplexing that capitalists can achieve a higher rate of profits without a reduction in wages. The explanation is simple: wages remain unchanged in terms of the second commodity, but not in terms of the first. Comparing the two above situations, wages in terms of the first commodity decrease from , to ,. Thus, the strategy of the capitalist class may succeed because workers, that consume only the second commodity and therefore do not see changes in their consumption, may not realize that they have, in consequence of that strategy, a more difficult potential access to the first commodity. Coming back to our point, notice that, in the above example, no “particular tribe” of capitalists has reapen advantages at the expense of other members of the same class; but, all the same, no flow of capital has “crowded” into the more profitable first industry, and this because of a general agreement “freely” accepted by each capitalist. IV.
Smithian “competition”, class relations, and the institutional arrangements of society
The relevance of the above example lies not in presenting a highly plausible case, but in showing how difficult it is, even within a Smithian analysis, to construct a notion of “competition” and a notion of “liberty” such that a tendency to the former “naturally”, or necessarily, follows from the presence of the latter. Therefore, if we wish to consider a situation in which some kind of “competition” prevails, we should begin by putting aside any notion of “perfect liberty”. We have already seen in § III.xv that, even in Stigler’s opinion, some social restraint (a Sherman Act) is a requirement for “competition”; but this implies, as we have noted, that one cannot
. From “combinations” to social classes
retain the marginalist notion of “competition” as absence of any social restraint, and, moreover, that we would need an analysis capable of explaining where the social restraint at the basis of “competition” comes from. On the other hand, if we use the Smithian notion of “competition”, that is compatible with some social restraints, and mean by it the tendency to the above inter–industry flows, we find, as we have just seen, that a mere Sherman Act, meaning by it a mere prohibition to form particular combinations, is still not sufficient to guarantee the presence of (Smithian) “competition”. In fact, we have seen that, even in absence of particular combinations, the behaviour of class combinations — though possibly compatible with the Smithian inter–industry flows (example of § ii) — may, however, be sometimes incompatible with them (example of § iii). Thus, the presence of (Smithian) “competition” requires a set of social/juridical norms that should not only prohibit particular combinations but also appropriately restrict the behaviour of social classes. On the other hand, such social/juridical norms would generally encroach on the power relations between classes. We have already hinted at the the role of the Sherman Act in the fight against Trade Unions (§ III.xv); and in the example of § iii, if some social/juridical norm prohibits the strategy chosen by the capitalist class, this would weaken the capitalists’ bargaining position vis–à–vis the workers. In this way, that juridical norm enforced by the State, or that social norm enforced by some habit, which may be required to obtain (Smithian) “competition”, would at the same time play a fundamental role in shaping the system of class relations. And, viceversa, the predominance of a certain system of class relations would have a fundamental bearing on whether “competition” prevails or not. For instance, the mobility of capital among industries contributed to the dissolution of medieval corporations and contributed to the formation of a general class of capitalists, while, in its turn, the predominance of this class and of its influence on the State contributed to the dissolution of the institutional framework at the basis of those corporations. Here, we see that the more we advance in treating “competition” and class relations, the more we find interdependent connections with the fundamental institutional arrangements of society as a whole, and thus with the form of the State.
Production, Value, Distribution and Employment
An extensive treatment of such vast and complex matters falls largely beyond the scope of the present work. We shall only add a few observations, relevant for our limited purposes.
V.
A wide range of phenomena should be taken into account
The discussion we have developed so far points to an analysis of class relations and competition in which a wide range of phenomena should be taken into account, such that it is even difficult to give an exhaustive list of them. Some of the relevant phenomena may be the direct outcome of individuals’ choices, e.g. a strike, or a lock–out, or those class strategies we have exemplified, under very simple assumptions, in this and the preceding Chapter. In these cases, social changes or institutions can be seen as more directly deriving from agreements, within certain groups, based on rational criteria and deliberate consciousness. But the formation, development and collective actions of social classes are also intertwined with other phenomena, far from being less important, that are not directly influenced by individuals’ choices, and that often restrict the individuals’ will and/or contribute to shape it. We should consider, for instance, such juridical norms as those mentioned by Smith, when he notes that «the law authorises, or at least does not prohibit [the masters’] combinations, while it prohibits those of the workmen» , adding that «whenever the legislature attempts to regulate the differences between masters and their workmen, its counsellors are always the masters» . We can also note that juridical norms are generally connected to sanctions that are ultimately applied by the force of arms. Therefore, while Böhm–Bawerk is right in saying that “economic power” does not derive from “direct compulsion” , it should also be clarified that every kind of social power is somehow linked with the force of arms. It also seems reasonable and plausible to include in our analysis various forms of social/cultural conditioning, and to consider the . S (), I.viii.. . Ibid., I.x.c.. . B–B (), p. ; emphasis added.
. From “combinations” to social classes
individual as situated in an “institutional environment” that endows him with «propensities and codes of conduct that befit him to maintain the social state» . A factor of this kind can be found at the basis of the “common humanity” Smith refers to for explaining why the wage does not fall below certain, institutionally determined, levels, even in presence of unemployment . A further phenomenon of social conditionining — and an important one for explaining that general economic and institutional framework within which competition itself operates — is the formation of an esprit de corps within any social class, which can influence any single member’s aims and actions through customs and social sanctions .
VI.
How to organize their treatment; a hint from Engels; why necessary, univocal, irreversible “laws” are excluded
How to organize the treatment of all these factors? A hint can be derived from what Engels writes when he tries to explain the interdependent connections between, on the one hand, the “economic situation”, whose changes are seen as mainly linked with changes in the division of labour, and, on the other hand, the political forms of the class struggle and its results, the constitutions established by the victorious class after a successful battle, juridical forms, and even the reflexes of all these actual struggles in the brains of the participants, political, juristic, philosophical theories, religious views.
In this connection, Engels remarks: There is an interaction of all these elements in which, amid all the endless host of accidents (that is, of things and events whose inner interconnection is so remote or so impossible of proof that we can regard it as non–existent, as negligible), the economic movement finally asserts itself as necessary. Otherwise the application of the theory to any period of history would be easier than the solution of a simple equation of the first degree. . . . .
B (), pp. –. See also G (b), §§ –; (a), §§ –. S (), I.viii.. This second kind of sanctions may consist, for instance, in forms of ostracism. E ().
Production, Value, Distribution and Employment
This passage is mainly interesting for the problems it poses. In the first place, it is important to note that one–way, mechanical causality relations are excluded; but this opens the question of how to study the network of interdependencies, being quite evident from the last dismissing words on “equations” that an all–embracing system of equations is also excluded (for the reasons we shall presently try to clarify). Then, there is the problem of better characterizing the “elements”, i.e. those main phenomena on which we wish to focus, and which we may respectively collect in the sphere of production and the juridical– political sphere. Here, it would be interesting to compare this distinction with the distinction that Grotius and Hobbes draw, when discussing how individuals and societies try to preserve themselves from death — i.e. the distinction between the sphere of activities designed to acquire the necessities for subsistence and that designed to the defense against physical attacks . A further problem consists in understanding why (or whether) the “economic movement asserts itself as necessary”, where, in particular, it is not clear what “necessary” means in the context of the above network of interdependent relations. Finally, we should assess the role and relevance of the “endless host of accidents” . This is where we can dwell upon a little more. These “accidents” consist in all the things that may have any kind of (long–run) influence on the above network of interdipendent relations between the main phenomena (the “elements”) on which we are focusing. For instance, we cannot a priori exclude that solar spots, having an influence on magnetic fields and electric activities on the Earth, may also have some effects on electric activity within human brains, and may therefore also influence class relations. We might consider those effects as “negligible”, as Engels says — but, in the first place, how are we going to prove that those effects are truly “negligible”? And, even assuming that such proof can be found, the . See G (), H (). . These are perhaps not far, at least under some aspects, from those “incalculable accidents” we have seen in Edgeworth (see above, § III.xiv). It should be noted that, in both contexts, these “accidents” refer to long–run factors, and have therefore nothing to do with the temporary accidental fluctuations that may influence, in any point of time, actual (market) prices.
. From “combinations” to social classes
conclusion on “negligibility” would be limited to only one “accident” amid the “endless host” of others. Considering how it is difficult (to say the least) even to give an exhaustive list of these “accidents”, it does not seem reasonable or plausible to assert that the total influence of all the “accidents” is “negligible”. Engels himself seems to point, half–consciously, towards this conclusion when he writes that the above interdependent relations among the “elements” undergo such significant alterations, because of those “accidents”, that they are not to be studied by any “equation”. On the other hand, if the “accidents” as a whole have a significant total influence, how are we going to take account of it? Here, it seems reasonable to avoid the pretention to explaining everything; we should rather conceive of our theory as founded on an initial insight into the object of enquiry, by means of which certain phenomena are singled out and considered as those we wish to focus on — while other phenomena (the “accidents”) will be deliberately left outside the investigation (not because less important, but because, in some sense, less interesting for the purposes of the theory). Thus, our theory can examine, for instance, how changes in the labour force, due to demographic factors, may have an influence on unemployment and workers’ relative bargaining power — but we shall not discuss, say, how changes in human dna, possibly accompanying that demographic development, may react on individuals’ psyche and behaviour. This will imply, since we have no grounds for excluding that the latter influence may be significant, that we shall not represent the relation between the demographic development and wages by means of a necessary, univocal, and irreversible “law”. We shall rather try to see whether each level of demographic development may be connected to a more or less wide range of wage levels, leaving open several real possibilities. In their turn, changes in wages may influence demographic changes, and even this influence may undergo alterations because of “accidents” that will be deliberately left outside of the analysis (such as the different psychological reactions of each individual to the change in wages), so that, even concerning this side of the relation, we shall leave open several real possibilities. The analysis will be more difficult, the conclusions less certain, but we shall have avoided to reduce human beings to cardboard puppets
Production, Value, Distribution and Employment
— as it often happens in modern mainstream “models”, that can be still aptly described, in Keynes’s words, as pseudo–mathematical [. . . ] concoctions, as imprecise as the initial assumptions they rest on, which allow the author to lose sight of the complexities and interdependencies of the real world in a maze of pretentious and unhelpful symbols.
VII.
The surplus approach treatment of changes in class relations, distribution, and employment; the range of real possibilities; plausible scenarios
These reflections can give a clue about the reason why, within the surplus approach, the relations, relating to the above aspects of the formation, development and collective actions of social classes, are considered as having a nature radically different from the production equations and the derived wage–rate–of–profits curve. The construction of the production equations is based on some basic premises and data about the institutional arrangements and techical conditions prevailing in any (initial) situation we wish to discuss . Thus, we shall ask about that situation: What are the general social and economic roles that identify the social classes? Are we going to include among them, say, a landowners’ class, with such a role that can justify the introduction of an absolute rent in the equations? And further: How developed is the division of labour? What are the outputs and what are the available methods for producing them? Finally: Is there a sufficient mobility of capital, land, and labour, so that a long–run tendency prevails to uniform rates of remuneration? Once these basic features have been fixed, the production equations take a precise form and follow as a logically necessary implication. If «there is a surplus to be distributed» (and there is no absolute rent), «we add the rate of profits as an unknown», and if «the wage is treated as one of the variables» as well, «the result is that [. . . ] the system can move with one degree of freedom» . . K (), ch. , § iii. . See G (), (b); Piccioni (), (). . S (), §§ –.
. From “combinations” to social classes
Here, we can ask the same question we have asked about Böhm– Bawerk’s “alternatives” (see § II.viii): What meaning should be given — within the surplus approach — to these “movements of the system”, i.e. the movements of the wage and the rate of profits along the same w–r curve (derived from the preceding equations)? Are those “movements” only notional possibilities, or can they also be considered as real possibilities, in the surplus approach? This is where the surplus–approach analysis radically diverges from the marginalist claims. We have already shown (see § III.xiii) that, in marginalist theory, there is no general “law”, and no particular configuration of parameters, that could exclude any arbitrary, class– enforced, wage change from persistent real possibilities; and we have concluded that the formation, development and collective actions of social classes can be considered, not only generally persistent, but also an object of investigation that simply does not require any mention to any supposed “demand curves” for “production factors”. Now, we can also add that a positive analysis, not only about those features that do not characterize, but also about those features that do characterize changes in class relations — whose first steps have been hinted at in this Chapter — leads us to a representation of such changes, in which there is no necessary, univocal, irreversible connection between the data on which production equations are built and those changes in class relations themselves. Thus, not only any arbitrary wage change shall be considered, in this surplus–approach representation, as a real possibility, but, furthermore, it will also be considered as a real possibility that the same production equations be compatible with any arbitrary wage change. As a consequence, also the change in the rate of profits, resulting from any arbitrary “movement” along the same w–r curve, will equally be considered as a real possibility. This is why Garegnani criticizes Salvadori, when the latter sees Production of Commodities as a mere collection of notional “thought experiments” . Evidence of Sraffa’s interest for real possibilities, and not merely notional thought experiments, can be found, for instance, in the attention he devotes to the real forces behind any change in distribution, be it a change in the “physiological or social . G (), p. , note .
. From “combinations” to social classes
conditions” that determine necessaries, or a change in the “money rates of interest” . On the other hand, the very presence, at the most abstract level of analysis, of a range of real possibilities requires a supplement of analysis for dealing with the particular circumstances present in any concrete situation. In this connection, it will be helpful to introduce a third qualification to the notion of possibility: the particular concrete situation will be studied by discussing which, among the really possible scenarios, can be deemed more plausible, on the basis of those particular circumstances.
. S (), § .
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