E. Productivity and Marginal Productivity

Great care must be taken in dealing with the productivity concept. In particular, there is danger in using a term such as “productivity of labor.” Suppose, for example, we state that “the productivity of labor has advanced in the last century.” The implication is that the cause of this increase came from within labor itself, i.e., because current labor is more energetic or personally skillful than previous labor. This, however, is not the case. An advancing capital structure increases the marginal productivity of labor, because the labor supply has increased less than the supply of capital goods. This increase in the marginal productivity of labor, however, is not due to some special improvement in the labor energy expended. It is due to the increased supply of capital goods. The causal agents of increased wage rates in an expanding economy, then, are not primarily the workers themselves, but the capitalist-entrepreneurs who have invested in capital goods. The workers are provided with more and better tools, and so their labor becomes relatively scarcer as compared to the other factors.19

That each man receives his marginal value product means that each man is paid what he is worth in producing for consumers. But this does not mean that increases in his worth over the years are necessarily caused by his own improvement. On the contrary, as we have seen, the rise is primarily due to the increasing abundance of capital goods provided by the capitalists.

It is, then, clearly impossible to impute absolute “productivity” to any productive factor or class of factors. In the absolute sense, it is meaningless to try to impute productivity to any factor, since all the factors are necessary to the product. We can discuss productivity only in marginal terms, in terms of the productive contribution of a single unit of a factor, given the existence of other factors. This is precisely what entrepreneurs do on the market, adding and subtracting units of factors in an attempt to achieve the most profitable course of action.

Another illustration of the error in attempting to attribute increased “productivity” to the workers themselves occurs within the various segments of the labor market. As we have seen, there is a definite connexity between all the occupations on the labor market, since labor is the prime nonspecific factor. As a result, while wage rates are not equalized, psychic wage rates will all tend, in the long run, to move together and maintain a given skill-differential between each occupation. Therefore, when a certain branch of industry expands its capital and production, an increase in DMVP, and therefore in wage rates, is not confined to that particular branch. Because of the connexity of the supply of labor, labor tends to leave other industries and enter the new ones, until finally all the wage rates throughout the labor market have risen, while maintaining the same differentials as before.

Suppose, for example, that there is an expansion of capital in the steel industry.20 The MVP of the steel worker increases, and his wage rates go up. The increase in wage rates, however, is governed by the fact that the rise will attract workers from more poorly paid industries. For example, suppose that steel workers are receiving 25 grains of gold per hour, while domestic servants receive 15 grains per hour. Now, under the impetus of expansion, the MVP and hence the wage rate of the steel workers go up to 30 grains. The differential has been increased, inducing domestic servants to enter the steel industry, lowering steel wages, and especially raising servants’ wages, until the differential is re-established. Thus, a rise in capital investment in steel will increase the wages of workers in domestic service. The latter increase is clearly not caused by some sort of increase in the “productivity” or in the quality of the output of the domestic servants. Rather, their marginal value productivity has increased as a result of the greater scarcity of labor in the service trades.

The differentials will not remain precisely constant in practice, of course, since changing investment and changing methods also alter the types of skills required in the economy.

The shift in labor supply will not usually be as abrupt as in our example. Generally, it will take place from one occupation or one grade to a closely similar grade or occupation. Thus, more ditchdiggers might become foremen, more foremen supervisors, etc., so that shifts will take place from grade to grade. It is as if the labor market consisted of linked segments, a change in one segment transmitting itself throughout the chain from each link to the next.

• 19It should be understood throughout that when we refer to increases in wage rates or ground rents in the expanding economy, we are referring to real, and not necessarily to money, wage rates or ground rents.
• 20This assumes, of course, that there is no offsetting decline in capital elsewhere. If there is, then there will be no general rise in wages.