Subsistence theory of wages
Encyclopedia
The iron law of wages is a proposed law of economics that asserts that real wages always tend, in the long run, toward the minimum wage necessary to sustain the life of the worker. The theory was first named by Ferdinand Lassalle
in the mid-nineteenth century. Karl Marx
and Friedrich Engels
attribute the doctrine to Lassalle (notably in Critique of the Gotha Programme (1875), Marx), crediting the idea to Thomas Malthus
in his work, An Essay on the Principle of Population
, and the terminology to Goethe's "great, eternal iron laws" in Das Göttliche.
According to Lassalle, wages cannot fall below subsistence level because without subsistence, laborers will be unable to work. However, competition among laborers for employment will drive wages down to this minimal level. This follows from Malthus' demographic theory
, according to which population increases when wages are above the "subsistence wage" and falls when wages are below subsistence. Assuming the demand for labor to be a given monotonically decreasing function
of the real wage rate, the theory then predicted that, in the long-run equilibrium of the system, labor supply (i.e. population) will 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 Ricardo
noticed, this prediction would not come true as long as a new investment
, technology, or some other factor caused the demand for labor to increase faster than population: in that case, both real wages and population would increase over time. The demographic transition
(a transition from high birth and death rates to low birth and death rates as a country industrializes) changed this dynamic in most of the developed world, leading to wages much higher than the subsistence wage. Even in countries which still have rapidly expanding populations, the need for skilled labor causes some wages to rise much faster than others.
"gets the credit of having invented" the phrase the "iron law of wages", as Lassalle wrote about "das eherne und grausame Gesetz" (the iron and cruel law).
claimed that Anne-Robert-Jacques Turgot
first formulated the concept. Some (e.g., John Kenneth Galbraith
) attribute the idea to David Ricardo, who supposedly justified it on the basis of Malthus's theory of population. According to Terry Peach, economists interpreting Ricardo as having a more flexible view of wages include Haney (1924), J. R. Hicks (1973), Frank Knight (1935), Ramsay (1836), George Stigler (1952), and Paul Samuelson (1979).
Antonella Stirati disputes the attribution of the law's idea to Classical economists
other than Malthus. She sees Ricardo, for example, as being closer to the more flexible views of population characteristic of economists prior to Malthus. 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:
Furthermore, Ricardo not only believed that the market price of labor could long exceed the subsistence or natural wage but also claimed that the natural wage was not what was needed to physically sustain the laborer but depended on "habits and customs":
, firms make sure that their workers have enough money to buy food and housing because adequately fed and housed workers are more productive than workers teetering on destitution.
, 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 criticized Lasalle for misunderstanding David Ricardo
. Marx also noted that the foundation of what he called "modern political economy" only needs, for the theory of value, that wages be a given magnitude. He did this in praising the Physiocrats
.
Ferdinand Lassalle
Ferdinand Lassalle was a German-Jewish jurist and socialist political activist.-Early life:Ferdinand Lassalle was born on 11 April 1825 in Breslau , Silesia to a prosperous Jewish family descending from Upper Silesian Loslau...
in the mid-nineteenth century. Karl Marx
Karl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
and Friedrich Engels
Friedrich Engels
Friedrich Engels was a German industrialist, social scientist, author, political theorist, philosopher, and father of Marxist theory, alongside Karl Marx. In 1845 he published The Condition of the Working Class in England, based on personal observations and research...
attribute the doctrine to Lassalle (notably in Critique of the Gotha Programme (1875), Marx), crediting the idea to Thomas Malthus
Thomas Malthus
The Reverend Thomas Robert Malthus FRS was an English scholar, influential in political economy and demography. Malthus popularized the economic theory of rent....
in his work, An Essay on the Principle of Population
An Essay on the Principle of Population
The book An Essay on the Principle of Population was first published anonymously in 1798 through J. Johnson . The author was soon identified as The Reverend Thomas Robert Malthus. While it was not the first book on population, it has been acknowledged as the most influential work of its era...
, and the terminology to Goethe's "great, eternal iron laws" in Das Göttliche.
According to Lassalle, wages cannot fall below subsistence level because without subsistence, laborers will be unable to work. However, competition among laborers for employment will drive wages down to this minimal level. This follows from Malthus' demographic theory
Malthusian catastrophe
A Malthusian catastrophe was originally foreseen to be a forced return to subsistence-level conditions once population growth had outpaced agricultural production...
, according to which population increases when wages are above the "subsistence wage" and falls when wages are below subsistence. Assuming the demand for labor to be a given monotonically decreasing function
Monotonic function
In mathematics, a monotonic function is a function that preserves the given order. This concept first arose in calculus, and was later generalized to the more abstract setting of order theory....
of the real wage 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 Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
noticed, this prediction would not come true as long as a new investment
Investment
Investment has different meanings in finance and economics. Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security for the principal amount, as well as security of return, within an expected period of time...
, technology, or some other factor caused the demand for labor to increase faster than population: in that case, both real wages and population would increase over time. The demographic transition
Demographic transition
The demographic transition model is the transition from high birth and death rates to low birth and death rates as a country develops from a pre-industrial to an industrialized economic system. The theory is based on an interpretation of demographic history developed in 1929 by the American...
(a transition from high birth and death rates to low birth and death rates as a country industrializes) changed this dynamic in most of the developed world, leading to wages much higher than the subsistence wage. Even in countries which still have rapidly expanding populations, the need for skilled labor causes some wages to rise much faster than others.
Lassalle
According to Alexander Gray, Ferdinand LassalleFerdinand Lassalle
Ferdinand Lassalle was a German-Jewish jurist and socialist political activist.-Early life:Ferdinand Lassalle was born on 11 April 1825 in Breslau , Silesia to a prosperous Jewish family descending from Upper Silesian Loslau...
"gets the credit of having invented" the phrase the "iron law of wages", as Lassalle wrote about "das eherne und grausame Gesetz" (the iron and cruel law).
Ricardo
The content of the iron law of wages has been attributed to economists writing earlier than Lassalle. For example, Antonella Stirati notes that Joseph SchumpeterJoseph Schumpeter
Joseph Alois Schumpeter was an Austrian-Hungarian-American economist and political scientist. He popularized the term "creative destruction" in economics.-Life:...
claimed that Anne-Robert-Jacques Turgot
Anne Robert Jacques Turgot, Baron de Laune
Anne-Robert-Jacques Turgot, Baron de Laune , often referred to as Turgot, was a French economist and statesman. Turgot was a student of Francois Quesnay and as such belonged to the Physiocratic school of economic thought...
first formulated the concept. Some (e.g., John Kenneth Galbraith
John Kenneth Galbraith
John Kenneth "Ken" Galbraith , OC was a Canadian-American economist. He was a Keynesian and an institutionalist, a leading proponent of 20th-century American liberalism...
) attribute the idea to David Ricardo, who supposedly justified it on the basis of Malthus's theory of population. According to Terry Peach, economists interpreting Ricardo as having a more flexible view of wages include Haney (1924), J. R. Hicks (1973), Frank Knight (1935), Ramsay (1836), George Stigler (1952), and Paul Samuelson (1979).
Antonella Stirati disputes the attribution of the law's idea to Classical economists
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....
other than Malthus. She sees Ricardo, for example, as being closer to the more flexible views of population characteristic of economists prior to Malthus. 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:
Furthermore, Ricardo not only believed that the market price of labor could long exceed the subsistence or natural wage but also claimed that the natural wage was not what was needed to physically sustain the laborer but depended on "habits and customs":
Mainstream criticism
Wages in most countries are above subsistence level. Many modern economists believe firms pay their workers a premium over subsistence levels to make them more efficient. In the theory of efficiency wagesEfficiency wages
In labor economics, the efficiency wage hypothesis argues that wages, at least in some markets, are determined by more than simply supply and demand. Specifically, it points to the incentive for managers to pay their employees more than the market-clearing wage in order to increase their...
, firms make sure that their workers have enough money to buy food and housing because adequately fed and housed workers are more productive than workers teetering on destitution.
Socialist criticism
Socialist critics of Lasalle and of the alleged iron law of wages, such as Karl MarxKarl Marx
Karl Heinrich Marx was a German philosopher, economist, sociologist, historian, journalist, and revolutionary socialist. His ideas played a significant role in the development of social science and the socialist political movement...
, 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 criticized Lasalle for misunderstanding David Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...
. Marx also noted that the foundation of what he called "modern political economy" only needs, for the theory of value, that wages be a given magnitude. He did this in praising the Physiocrats
Physiocrats
Physiocracy is an economic theory developed by the Physiocrats, a group of economists who believed that the wealth of nations was derived solely from the value of "land agriculture" or "land development." Their theories originated in France and were most popular during the second half of the 18th...
.