The
Subsistence Theory of Wages, also known as the
Iron Law of Wages, was a law of economics that asserted that real wages in the long run would tend toward the value needed to keep the workers'
populationIn biology, a population is the collection of inter-breeding organisms of a particular species; in sociology, a collection of human beings. Individuals within a population share a factor may be reduced by statistical means, but such a generalization may be too vague to imply anything...
constant. The theory was named and popularized by the German socialist
Ferdinand LassalleFerdinand Lassalle was a German-Jewish jurist and socialist political activist.-Early life:Lassalle came from a prosperous Jewish family in Loslau later Breslau, Prussia; his father was a silk-merchant and intended his son for a business career, sending him to the commercial school at Leipzig...
in the mid-19th century.
According to Lassalle, wages cannot fall below subsistence level because without subsistence, laborers will be unable to work for long.
The
Subsistence Theory of Wages, also known as the
Iron Law of Wages, was a law of economics that asserted that real wages in the long run would tend toward the value needed to keep the workers'
populationIn biology, a population is the collection of inter-breeding organisms of a particular species; in sociology, a collection of human beings. Individuals within a population share a factor may be reduced by statistical means, but such a generalization may be too vague to imply anything...
constant. The theory was named and popularized by the German socialist
Ferdinand LassalleFerdinand Lassalle was a German-Jewish jurist and socialist political activist.-Early life:Lassalle came from a prosperous Jewish family in Loslau later Breslau, Prussia; his father was a silk-merchant and intended his son for a business career, sending him to the commercial school at Leipzig...
in the mid-19th century.
According to Lassalle, wages cannot fall below subsistence level because without subsistence, laborers will be unable to work for long. However, competition among laborers for employment will drive wages down to this minimal level. This followed from Malthus'
demographic theoryA Malthusian catastrophe was originally foreseen to be a forced return to subsistence-level conditions once population growth had outpaced agricultural production. Later formulations consider economic growth limits as well...
, according to which the growth rate of population was an increasing function of wages, reaching a zero for a unique positive value of the real wages rate, called the
subsistence wage. Assuming the demand for labor to be a given monotonically decreasing function of the real wages rate, the theory then predicted that, in the long-run equilibrium of the system, labor supply (i.e. population) will be equated to the numbers demanded at the subsistence wage. The justification for this was that when wages are higher, the supply of labor will increase relative to demand, creating an excess supply and thus depressing market real wages; when wages are lower, labor supply will fall, increasing market real wages. This would create a dynamic convergence towards a subsistence-wage equilibrium with constant population.
As
David RicardoDavid Ricardo was an English political economist, often credited systematizing economics, and was one of the most influential of the classical economists, along with Thomas Malthus and Adam Smith. He was also a member of Parliament, businessman, financier and speculator, who amassed a considerable...
first noticed, this prediction would not come true as long as a new
investmentInvestment or investing is a term with several closely-related meanings in business management, finance and economics, related to saving or deferring consumption. Investing is the active redirection of resources: from being consumed today, to creating benefits in the future; the use of assets to...
or some other factor caused the demand for labor to increase at least as fast as population: in that case the equality between labor demanded and supplied could in fact be kept with real wages higher than the subsistence level, and hence an increasing population. In most of his analysis, however, Ricardo kept Malthus' theory as a simplifying assumption.
During the mid-19th century, when Lassalle articulated his theory, wages for both manufacturing laborers and agricultural workers were in large part quite close to subsistence level.
Ricardo
The subsistence theory of wages has been frequently attributed to the English economist
David RicardoDavid Ricardo was an English political economist, often credited systematizing economics, and was one of the most influential of the classical economists, along with Thomas Malthus and Adam Smith. He was also a member of Parliament, businessman, financier and speculator, who amassed a considerable...
. However, this attribution is disputed. Ricardo drew a distinction between a natural price and a market price. For Ricardo, the natural price of labor was the cost of maintaining the laborer. However, Ricardo believed that the market price of labor or the actual wages paid could exceed subsistence level indefinitely due to countervailing economic tendencies:
- "Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse, which an increased capital gives to a new demand for labor, be obeyed, than another increase of capital may produce the same effect; and thus, if the increase of capital be gradual and constant, the demand for labor may give a continued stimulus to an increase of people..."
Furthermore, not only did Ricardo believe that the market price of labor could long exceed the subsistence or natural wage, he also claimed that the natural wage was not what was needed to physically sustain the laborer, but depended on "habits and customs":
- "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."
Mainstream criticism
In modern times, the predictions of Lassalles' subsistence theory of wages have been discredited not only by continuing
economic growthEconomic growth is a term used to indicate the increase of total GDP. It is often measured as the rate of change of gross domestic product . Economic growth refers only to the quantity of goods and services produced; it says nothing about the way in which they are produced...
– along the lines already known to Ricardo – but also by the
demographic transitionThe Demographic transition model is a model used to represent the process of explaining the transformation of countries from high birth rates and high death rates to low birth rates and low death rates as part of the economic development of a country from a pre-industrial to an industrialized...
whereby in richer societies demographic growth becomes a
falling function of real incomes and wages, upturning Malthus' demographic theory. Thus, mainstream economics rejects the subsistence theory of wages.
Socialist criticism
Socialist critics of Lasalle and of the alleged Iron Law of Wages, such as
Karl MarxKarl Heinrich Marx was a Germanphilosopher, political economist, historian, political theorist, sociologist, communist and revolutionary, whose ideas are credited as the foundation of modern communism...
, argued that although there was a
tendency for wages to fall to subsistence levels, there were also tendencies which worked in opposing directions. Marx criticized the Malthusian basis for the Iron Law of Wages. According to Malthus, humanity is largely destined to live in poverty because an increase in productive capacity results in an increase in population. Marx also criticized Lasalle for misunderstanding
David RicardoDavid Ricardo was an English political economist, often credited systematizing economics, and was one of the most influential of the classical economists, along with Thomas Malthus and Adam Smith. He was also a member of Parliament, businessman, financier and speculator, who amassed a considerable...
.
Austrian criticism
Ludwig von MisesLudwig Heinrich Edler von Mises was an Austrian aristocrat, economist, philosopher, author and classical liberal who had a major influence on the modern libertarian movement and the Austrian School.-Early life:...
argues that if one adopts this reasoning in order to demonstrate that in the long run no rise in the average wage rate above the minimum is possible, one must also imply that no fall in the average rate can occur.