Tuesday, February 19, 2013

Production Exchange: Production by Labor Alone

If goods were produced by labor alone there would be no problems of capitalist methods of production or of income distribution among groups of different factors of production, particularly between labor and capitalists. There would be only the problem of what and how much is produced. This problem depends, of course, on what the factors of production wish to consume, or better on how they wish to distribute their income on the purchase of various goods. But this is a problem of consumption with which we shall deal later.
Here we have only to state how much, in terms of work-hours, will be produced. The question is easily answered according to what we have already explained above. If labor were the only factor of production, work would be put into production up to the point where the money received for the work is no longer considered equivalent to the sacrifice of leisure. Money is valued here, we must remember, not for its own utility but for the utility of the goods that can be bought with it on the market according to the prevailing prices. Thus more work will be done, and production will increase either when higher rewards are offered for work—for instance, when the productivity of labor has risen—or when the workers are prepared to accept lower wages. We shall discuss this later in more detail. Here we shall but briefly anticipate: in a simple diagram like that of Figure 1 or 4 higher wage offers would mean an upward shift in the demand curve for labor, whereas willingness to work for less money would be expressed by a downward shift in the labor supply curve. It will readily be seen that both movements would result in an increase of the volume of production.
Hourly wages, i.e. the remuneration per work-hour, will—in case of a downward shift of the labor supply curve—remain unchanged so long as the demand curve for labor is horizontal. But as soon as other factors contribute to production, the demand curve for labor (for reasons to be discussed later) will run down to the right, indicating that entrepreneurs are prepared to employ additional labor only at lower wages. In this case—we shall return to it later—a lowering of the labor supply curve leads to a fall in wages. At the same time, as we shall see, the income accruing to other factors of production increases. The individual worker receives a smaller share of the community's whole cake. But the whole cake has grown because more bakers are at work, which in turn is due to the fact that the individual bakers are content with smaller slices of cake. The total amount of cake received by all the bakers now employed, however, and even their share of it, will have become larger.
We are thus led to the important conclusion that, given an unchanged demand situation, a reduction in the individual worker's share in the result of production is accompanied by an increase of the total product, whereas an increase in his share would entail a reduction of the total product—except under quite unrealistic assumptions concerning the elasticity of demand for labor and the elasticity of supply of other production factors.
We shall see again and again the working of this peculiar law, according to which changes in the remuneration of one factor of production lead to opposite changes in the volume of the total product.
We shall examine later on, in Part III, whether changes in wages can in certain special conditions influence the aggregate demand for goods, and whether, for instance, wage increases need not have the expected production-curtailing effects. Notwithstanding the possibility of influencing the volume of production by influencing demand, the fundamental fact remains that wage increases curtail production. This is a fact often overlooked nowadays by those who overrate the possible secondary effects of wage changes.
There is in a money economy a certain difficulty not existing in a pure barter economy: an increased product cannot be exchanged through the medium of the same amount of money unless the price level declines. We shall, for the time being, evade this difficulty by assuming that enough new money is always introduced into the system to prevent a decline in the price level. The price stability so ensured does not, however, imply wage stability. If labor becomes more modest in its wage demands, the wage level falls relative to the price level. The difference between the amount of money spent on wages and the amount of money received from sales accrues to other factors of production as income.

Common Sense Economics

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