Confusion Regarding Mises’ Characterization of Ricardo’s View of the Iron Law of Wages/Natural Price of Labor

In Human Action, Mises says:

If one sees in the wage earner merely a chattel and believes that he plays no other role in society, if one assumes that he aims at no other satisfaction than feeding and proliferation and does not know of any employment for his earnings other than the procurement of those animal satisfactions, one may consider the iron law as a theory of the determination of wage rates. In fact the classical economists, frustrated by their abortive value theory, could not think of any other solution of the problem involved. For Torrens and Ricardo the theorem that the natural price of labor is the price which enables the wage earners to subsist and to perpetuate their race, without any increase or diminution, was the logically inescapable inference from their untenable value theory. But when their epigones saw that they could no longer satisfy themselves with this manifestly preposterous law, they resorted to a modification of it which was tantamount [p. 605] to a complete abandonment of any attempt to provide an economic explanation of the determination of wage rates. They tried to preserve the cherished notion of the minimum of subsistence by substituting the concept of a “social” minimum for the concept of a physiological minimum. They no longer spoke of the minimum required for the necessary subsistence of the laborer and for the preservation of an undiminished supply of labor. They spoke instead of the minimum required for the preservation of a standard of living sanctified by historical tradition and inherited customs and habits. While daily experience taught impressively that under capitalism real wage rates and the wage earners’ standard of living were steadily rising, while it became from day to day more obvious that the traditional walls separating the various strata of the population could no longer be preserved because the social improvement in the conditions of the industrial workers demolished the vested ideas of social rank and dignity, these doctrinaires announced that old customs and social convention determine the height of wage rates.

An epigone is a follower of someone. So as I read this, Mises is saying that the followers of Torrens and Ricardo are the ones who “tried to preserve the cherished notion of the minimum of subsistence by substituting the concept of a ‘social’ minimum for the concept of a physiological minimum” and “announced that old customs and social convention determine the height of wage rates.” This implies to me that Ricardo and Torrens believed in a “physiological minimum” notion of subsistence and it was their later followers who tried to keep the notion of subsistence alive by changing it.

But here is Ricardo himself, as quoted on Wikipedia:

It is not to be understood that the natural price of labor, estimated even in food and necessaries, is absolutely fixed and constant. It varies at different times in the same country, and very materially differs in different countries. It essentially depends on the habits and customs of the people. An English laborer would consider his wages under their natural rate, and too scanty to support a family, if they enabled him to purchase no other food than potatoes, and to live in no better habitation than a mud cabin; yet these moderate demands of nature are often deemed sufficient in countries where ‘man’s life is cheap’, and his wants easily satisfied. Many of the conveniences now enjoyed in an English cottage, would have been thought luxuries in an earlier period of our history.

The bit about the natural price of labor estimated in food and necessaries not being fixed and constant but instead depending ” on the habits and customs of the people” does not sound like a reference to a physiological minimum to me. It sounds very much like the idea that “old customs and social convention determine the height of wage rates.”

I noticed this because in his book Capitalism, George Reisman says:

Marx repeats some of the qualifications of Ricardo about the meaning of “subsistence.” He says:

. . . the number and extent of his [the wage earner’s] so-called necessary wants, as also the modes of satisfying them, are themselves the product of historical development, and depend therefore to a great extent on the degree of civilisation of a country, more particularly on the conditions under which, and consequently on the habits and degree of comfort in which, the class of free labourers has been formed. In contradistinction therefore to the case of other commodities, there enters into the determination of the value of labour-power a historical and moral element. Nevertheless, in a given country, at a given period, the average quantity of the means of subsistence necessary for the labourer is practically known.23

The bit about Marx repeating some of the qualifications of Ricardo surprised me a bit, cuz I didn’t know Ricardo thought along those lines. But then I looked up the quote, and I thought Reisman’s characterization of Marx as repeating some of Ricardo’s ideas was right. Then I looked up the Human Action quote, and it seemed like Mises had gotten his characterization of Ricardo wrong.

It is quite possible that I am misreading or missing some necessary context, particularly with Ricardo, who I am not really familiar with at all first-hand. Thoughts? Criticisms?

Comments on a Bit of Reisman’s Capitalism

I was reading a bit of George Reisman’s Capitalism in connection with getting some background on an Elliot Temple blog post and I decided that I want to read a bit more. So we will see how that goes. I am reading chapter 14, “The Productivity Theory of Wages”. In this blog post I comment on stuff in the first two sections of that chapter. “1. The Influence of the Exploitation Theory”, and “2. Marx’s Distortions of the Labor Theory of Value”, respectively. In the first part of this chapter, Reisman talks about Marx’s economic ideas.

Reisman quotes Marx here:

A use-value, or useful article, therefore, has value only because human labour in the abstract has been embodied or materialized in it. How, then, is the magnitude of this value to be measured? Plainly, by the quantity of the value creating substance, the labour, contained in the article. The quantity of labour, however, is measured by its duration, and labour-time in its turn finds its standard in weeks, days, and hours.8

Various objections can be made here. As I explained in this post,

  1. Is the value of a product based on the amount of labor that went into it? Explain.

No. There are numerous counterexamples. Whiskey can gain value despite simply being held in storage. Bread can lose value as it goes stale, and become less valuable than flour. iPhones can lose value merely sitting on a shelf.

What determines value is the demand for consumers for the existing supply of items in question in light of the scarcity of that supply.

Reisman raises a different issue:

In answer to the objection that his theory implies that commodities should be more valuable the more idle and unskillful the workers are who produce them

Yes, good point. Just have a bunch of lazy people or incompetents try to make iPhones and that should raise the value, right? 🙄 Anyways let’s check out Marx’s reply to this criticism:

Marx states that he is speaking of “socially necessary” labor-time. “The labour-time that is socially necessary,” he explains, “is that required to produce an article under the normal conditions of production, and with the average degree of skill and intensity prevalent at the time.”9

Earlier it sounded like Marx was talking about actual labor-time determining the value. Now he’s talking about socially necessary labor-time, which somehow takes into account doing an efficient and competent job. That is not a simple labor theory of value, so Marx is contradicting himself.

Reisman writes about how Marx tries to solve the problem of skilled and unskilled labor:

This problem is the fact that the products of a given amount of skilled labor tend to be worth more than the products of the same number of hours of unskilled labor—a circumstance which represents a direct contradiction of the proposition that the value of all commodities is in proportion simply and only to the relative quantities of labor required to produce them. Marx writes: “Skilled labour counts only as simple labour intensified, or rather, as multiplied simple labour, a given quantity of skilled labour being considered equal to a greater quantity of simple labour. . . . For simplicity’s sake we shall henceforth account every kind of labour to be unskilled, simple labour; by this we do no more than save ourselves the trouble of making the reduction.”11

I like the argument in Time Will Run Back on this point. The relevant material for a few paragraphs, but I’m only going to quote a couple that I have some direct comments on:

“But Marx didn’t say,” persisted Adams, “that one hour of skilled labor actually was two or five or ten hours of unskilled labor, but merely that it counted as that in fixing exchange relations.”

“It’s wonderful what you could do with that phrase ‘counts as,’” replied Peter, “once you got fairly started. For example, you ask the manager of a collective, ‘How many chickens have you got on your farm?’ And he answers, ‘I figure we have a hundred and fifty.’ So you go around there and count them, and you find they have only fifty chickens. ‘But,’ says the manager, ‘we also have a cow.’ ‘What has that got to do with it?’ you ask. ‘Surely,’ says the manager, ‘you will admit that one cow counts as a hundred chickens!’ Or suppose you want to prove that commodities exchange in accordance with their relative weight in pounds. You find, as a matter of fact, that one pound of gold exchanges for 30,000 pounds of pig iron. But you were speaking, you say, emulating Marx, only of ‘common, average’ pounds, and the pounds in gold ‘count as’ concentrated or multiplied common average pounds of the kind found in pig iron. In fact, you continue triumphantly, each pound in gold ‘counts as’ 30,000 pounds in pig iron, because ‘experience shows’ that it does! A mysterious ‘social process beyond the control of the producers’ shows that it does!”

The use of “counts as” being critiqued here lets you treat things as having attributes that they don’t when it’d be convenient for you to do so, for the purpose of selectively ignoring reality and shielding a theory against criticism. It is an anti-critical retreat from reality. So if you want to protect the “commodities exchange in accordance with their relative weight in pounds” theory, you ignore that commodities don’t exchange like that by saying that any counterexamples “count as” having the attribute this theory requires. The same applies to wanting to say you have a certain number of chickens on your farm, or wanting to say commodities exchange according to the working time embodied in them. Imagine if this notion of “counts as” was applied to and purchases. eBay scammer to customer: “Don’t worry, the iMac box ‘counts as’ an iMac, so everything is alright and our transaction is completed.” Or imagine if you tried to pay back a large U.S. dollar-denominated loan balance and argued that your Canadian dollar “counts as” $100,000 U.S. dollars. You could multiply the examples endlessly.

We should come up with theories for the purpose of understanding and explaining reality. If we have to selectively ignore parts of reality and lie about the attributes of things in order to make the theory work, we are no longer trying to explain reality but trying to save the theory itself. The theory becomes a castle in the sky detached from the world of facts rather than a tool for understanding the world.

Reisman explains Marx’s view, connected to his labor theory of value perspective, that “the total of the value added at any stage in production, and thus the total of the income earned in that stage of production—that is, the sum of profits and wages together—must be due to the performance of fresh labor
at that stage of production.” Reisman then then offers the following criticisms by way of counterexamples:

It should be realized that, according to Marx’s view, if there were a fully automated factory, requiring the performance of virtually no fresh labor to transform materials into a product, the value of the product could not exceed the value of the materials plus the depreciation on the machinery and factory. Similarly, according to Marx’s view, there is no way of explaining the well-known fact that older wine or whiskey has a higher value than younger wine or whiskey, even though no additional labor is performed in the aging process.

The fully automated factory example is a great one. Car factories are already highly automated (even moreso in Japan I think). A fully automated one doesn’t seem very fanciful. Would the value of a car or truck coming out of such a fully automated factory be merely equivalent to the value of the materials used to make the cars plus the wear and tear on the machines in the factory? Also, if labor is required to add value, then the more automated the production of something became, the closer it would approach only being valued according to the value of the materials plus depreciation, rather than operating in accordance with the uniformity of profit principle. In Reisman’s Marxism book, he makes a related point, which I talk about here:

Marx thought that the wage-paying part was the only profitable part. If this were true, as Reisman points out, then investments in labor intensive businesses like restaurants would be more profitable than capital-intensive lines of business such as steel mills. Reisman reminds us that the rate of profit tends towards being the same in different branches of production cuz profit-seeking businessmen move capital around.

The Failure of the “New Economics” Chapter 2 Mindmaps

Some MindMaps made in MindNode of my interpretation of the content of chapter 2 of Henry Hazlitt’s “The Failure of the ‘New Economics'”.

My organization is based around what I thought made sense — I don’t follow Hazlitt’s organization of the chapter strictly. Any errors in interpretation are of course my own.

Hazlitt does some big picture criticisms of Keynes PDF

Keynes on Involuntary Unemployment PDF

Keynes vs. “the classical theory” PDF

Keynes wants to disprove that the most frequent cause of unemployment is excessive wage rates PDF