Ditch marginal productivity theory once and for all

5 Jan, 2015 at 17:28 | Posted in Economics | 2 Comments

By all these accounts, labor’s share of gross income is falling. At the same time, productivity is increasing.
corporate-profitsv-wagesFor the marginal productivity theory to make sense, you have to assume that labor compared to other factors of production is less productive than it was before. It’s hard to see how this could be true in an economy dominated by the service sector, as in the US. So, not surprisingly, the data doesn’t support marginal productivity as an explanation of income distribution. To see why, here’s a relatively short but detailed criticism of this armchair theory through reality checking.

As the same writer points out, the theory is quietly being removed from most textbooks because it’s useless, except to dead-enders like Mankiw, who continues to teach it from his perch at Harvard. So if most economists think so little of it, why does it survive?

Maybe it’s because the distribution it describes is supposed to arise from the operation of Natural Law. As such, it fits neatly with Invisible Hand mumbo-jumbo. Natural Law isn’t a testable or usable theory. Instead, it is a normative theory. It tells you what the writer thinks is the moral and righteous position. People who tell you marginal productivity theory is true want you to think that current distribution of income is natural and just, and that any other distribution would be unjust, unfair to someone.

That’s what that Natural Law stuff means: the income you get from the labor market is what it Should Be, and if you get more, you’re taking it away from someone. Maybe that someone is another worker, but more likely, you’re stealing from the owners of the things used in production: the return to which the capital owner and the land owner are entitled by virtue of the Natural Law. Samuelson and Nordhaus teach their students that the economy as currently constructed is natural and fair.

Add to that a desire to believe that the economic system is fair, and a constant media and political drumbeat about the wonders of capitalism, and you have the perfect setting for uncritical belief in a false and stupid idea. You are worth more than the “market” says.

Ed Walker/Naked Capitalism


  1. I find this question especially interesting because it was John Bates Clark who was the main force behind the drive to apply the Theory of Marginal Utility to everything. His most famous student, Thorstein Veblen, spent most of his adult life mocking Clark for these ideas. It could be argued that his “Instinct of Workmanship” is an intellectual scream at marginal utility. Veblen had Clark at Carleton and for years, that school would hold an annual Veblen-Clark lecture series open to the townspeople here in Northfield. I haven’t heard they are still doing it and if they have stopped, it is probably because they find it difficult to find anyone who can represent the Veblenian perspective. Carleton itself has become as reliably neoliberal at the University of Chicago. Interestingly, the Clark Medal in economics was once awarded to the most promising conservative young economist. They don’t label it as such any longer but the idea is the same. Not surprisingly, Paul Krugman is a former winner.

  2. The more correct position on the inequality problem, which is by no means anything new, Piketty or not, is the analysis of Lean Production (Vidal) and Lean Thinking in Management (Begam, 2013; Bose 2012), These analysts point out the old problem of how to get workers to produce, how to form effective and efficient work groups, distinct from “”social”” groups where fighting and dependency takes place. The influx of global labor markets, the rise in overpopulation, the effects of open “borders,” and the dramatic difference between wages and salaries, or a two tiered system has created a more ‘willing’ labor situation but also a more brutal management attitude. As usual, management does not want to pay for good labor, but they do want good labor.

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