What I have to say may, I think, best be developed by looking at a typical instance that illustrates price determination through social control in a particularly noticeable manner: the case of the settlement of wage disputes by means of a strike.
According to the accepted formula of modern wage theory, based on the marginal-utility theory, the amount of wages in case of free and perfect competition would be determined by the “marginal productivity of labor,” i.e., by the value of the product that the last, most easily dispensable laborer of a particular type produces for his employer. His wages cannot go higher, for if they did, his employer would no longer gain any advantage from employing this “last” laborer; he would lose, and consequently would prefer to reduce the number of his workers by one; nor could the wages be substantially lower, in the case of effective competition on both sides, because the employment of the last worker would still produce a substantial surplus gain. As long as this is true, there would be an incentive to the further expansion of the enterprise, and to the employment of still more workers. Under an effective competition among employers this incentive would obviously be acted upon, and could not fail to eliminate the existing margin between the value of the marginal product and the wages in two ways: by the rise of wages, caused by the demand for more workers; and by a slight diminution of the value of the additional produce, due to the increased supply of goods. If these two factors are allowed to operate without outside interference, they would not only delimit wages, but actually fix them at a definite point, owing to the nearness of these limits, let us say for instance at $5.50 for a day’s labor.
But let us now assume competition to be not quite free on both sides, but that it be restricted, or eliminated, on the side of the employers; either because there exists only one enterprise of that particular branch of industry over a large territory, thus giving it natural monopoly over the workers seeking employment, or because there is a coalition of entrepreneurs within that industry, who mutually agree not to pay their workers a wage higher than, let us say, $4.50. In either case, this coming into play of “control,” a superior power of the employers, will certainly suffice to lead the wages to be fixed at a point below $5.50, say at $4.50, other conditions remaining equal.
How would this correspond with the standard explanation offered by the marginal-value theory? The answer is not difficult. In fact, the solution has been repeatedly stated in the fairly well developed theory of monopoly prices. I shall merely try to restate the familiar arguments in a clear and systematic manner.
We have before us a case of “buyers’ monopoly.” The widest margin within which the monopoly price can be fixed is limited, from above, by the value of the labor to be purchased by the entrepreneur exercising that monopoly, and from below, by the value of unsold labor to the laborer himself. The upper limit is determined by the value of the produce of the last worker, for the reason that the entrepreneur will not assume any loss from the last worker he employs and that the same amount of labor cannot be paid for in unequal amounts. This upper limit of the possible wage would, in our illustration, be $5.50.
More is to be said in regard to the lower limit. The very lowest limit is determined by the utility that would be left to the worker if he were not to sell his labor at all. It is thus, primarily, the use-value to the worker of his own labor, provided he can make some use of his labor for himself alone.
In thinly populated new countries, with an abundance of unoccupied land, where everybody may become a farmer at will, this labor-value might represent quite a considerable amount. In the densely populated “old” countries, however, this limit is extremely low, because most of the workers lack capital, and can hardly ever profitably utilize their own labor as independent producers.
A worker who has accumulated some savings may find some compensation for not selling his labor in the escape from discomfort and hard work, or in the enjoyment of rest and leisure. Those who have any such means of subsistence will figure out just what minimum of wages would compensate them for the effort of working. To those who have nothing to fall back on, the marginal utility of a money income to be gained by working is so extremely high that even a very low wage will be preferred over the enjoyment of leisure.
In order to illustrate this with actual sums of money, let us assume this lowest limit, the use-value of labor and the enjoyment of leisure, to be very low, say $1.50. This amount may be even far below the minimum of subsistence, which, for well-known reasons, determines the lower limit of the possible permanent wages without, of course, determining temporary wages or those of each individual case.
But there may also arise other intermediate wage levels. In the foregoing illustration we have excluded all competition among the employers in that one particular branch of industry. If such competition were existing, it would inevitably force up the wages to the upper limit of $5.50; but even in its absence, there would still remain a certain amount of outside competition, namely with employers in all the other branches of industry. This means that the worker in our particular industry still has the alternative of escaping the very low wage offered to him in his own line, by switching over into other branches of production, although a number of circumstances may greatly reduce the gains to be expected from this expedient. To change from one occupation, for which one has been trained and adapted, into another, is likely to result in less productivity, and the maximum wage level attainable in the new occupation will be likely to remain far below $5.50.
The curtailment in wages will vary for each worker entering into a new branch of production according to his adaptability, or his ability to perform a different kind of skilled labor. The most painful cuts in wages will be suffered by that probably largest portion of the workers, who are not adequately trained to perform any other kind of skilled labor, and who will have to switch over from “skilled” into “unskilled” trades, and accept a poorer position in some type of common labor. Still another slight lowering of the wage level may result from the fact that the influx of new workers into that occupation may force down slightly the marginal productivity of the last worker, and thus lower the wage level for all.
Under the influence of all these circumstances we would now have to assume that the various workers set for themselves a series of individual minimum limits, below which no one would allow his wages to be reduced by the monopolistic pressure of the entrepreneurs. To illustrate these various gradations of minimum wages, let us assume the minimum of existence to be $3.00, which, as has been said, would represent not the temporary, but the permanently possible lowest wage level. The wages obtained by the most common type of labor would thus be very near to $3, say $3.10. A smaller and smaller number of workers could find employment in other occupations, as the wage rate increased in the following ascending sequence: $3.50, $3.80, $4, $4.20, $4.50, $4.80, $5. Note, however, that the upper limit of this wage scale would still remain below the marginal product of the original occupation, thus below $5.50.
What effects and limitations will result from this state of affairs in regard to the monopolistic fixation of wages within the original widest zone of $1.50 to $5.50?
Let us assume, to begin with, that the monopolistic entrepreneurs use their power in an unrestricted, purely selfish policy, unaffected by any considerations of altruism, or consideration of public opinion, uninfluenced by any apprehension that the workers might fight back through means of a labor union or strike, and convinced that they are absolutely assured of an atomized, effective competition among the individual workers. Under such premises, the rate of wages would be fixed according to the general formula applying to a purely selfish monopoly, already mentioned before in another connection: they would be fixed at that point which promises the largest returns, after a careful consideration of all circumstances, and with due regard to the inevitable fact that with changing prices, the amount of goods to be disposed of profitably will change, only that in the case of a buyers’ monopoly the results are exactly opposite to that of a sellers’ monopoly. Or stated concretely: the lower is the wage rate fixed by the monopolist, the smaller will be the number of workers available, and from a correspondingly smaller number of workers will the entrepreneurs be able to collect that increased return which might accrue from pushing the wage scale down below the value of the product of the marginal laborer, i.e., below $5.50; in fact, this value might even increase through a reduction in the output, which would cause a rise in the price of the finished goods.
Of course, there may again enter certain counteracting tendencies, such as increasing costs, with the restricted expansion of the enterprise, the growth of overhead expenses, etc. With an increase in wages (which, however, we always assume to remain below the marginal product of $5.50) the gain per laborer would decrease; but, to offset this, the number of workers from which that gain can be made will increase, or even be brought back to normal. From these considerations, it would be most unlikely that the monopolists could fix the wage rate at $1.80 or $2.00 or at any point below the minimum of existence of $3, both because this rate would not be likely to remain in force, and because it would be lower than the wage paid outside for common labor, and therefore would at once cause the majority of the workers to withdraw into those unskilled occupations which, in our illustration, receive $3.10. This danger will diminish gradually with each increase in the wage rate, and disappear almost entirely at some point, say at $4.50, at which only a few exceptional workers might find it possible to obtain higher wages in other skilled occupations, if such be open to them at all. Under the assumed circumstances, the danger of men withdrawing would have almost disappeared, and a successful attempt might be made by the monopolistic employers to fix the rate of wages at this point, without running the risk of any considerable restriction of output caused through a shortage of workers.
Two other considerations might influence an intelligent monopolist to exercise his power “with restraint.” First, a wage rate remaining far below that of other skilled occupations may, if only in the long run, lead to a shortage of workers, for while the laborers accustomed to their occupation might hesitate to change their job owing to the difficulties of transition, the new supply would fall off. Secondly, too high a rate of profit per worker would exert too powerful a strain on the employers’ union, and is likely to lead to a dissolution of the coalition by those members wishing to expand their business, or to the formation of new enterprises outside of the coalition, thus creating new competition, likely to cut down prices and to raise wages. Generally speaking, the fear of outside competition forms perhaps the greatest safeguard against too unscrupulous a use of monopolies preying on the general public.
I hardly need to re-emphasize the fact that if, under such conditions, through the “control” of the monopolists the wage level were to be reduced from $5.50 to $4.50, this would, from first to last, happen by virtue of and in conformity with the elements of the price-law, as formulated by the marginal-value theory. It is in consideration of these elements that both contending parties would fix the price at that level, by “delimiting” it from above and from below. By such action, no “fixed” price would be determined, but merely a wider price-range, as distinct from the case of perfect competition on both sides. The monopolists might just as well decide upon $4.20 or $4.80 than upon $4.50. This situation is explained by the fact that several factors entering into the calculation, such as the number of workers likely to drop out at a certain wage level, or the probability of outside competition, are not definitely known, but only to be conjectured. The monopolists would naturally try to select the most favorable point of the wage scale; but, owing to the uncertainty of so many elements entering into the fixation of this optimum point, there results a certain more or less elastic zone for its approximate location, just as in ordinary market competition for prices, when negotiations are carried on with covered cards, traders less experienced or less shrewd commit errors in sizing up inside marked situations, so that actual prices are caused to fluctuate over a wide range around the “ideal” market price.
Let us now turn to the other case, equally interesting and complicated, the influence of “control” exerted by labor unions, through the use of their instrument of power, the strike. Let us retain all previous assumptions with the same figures as above: $5.50 for the value of the product of the “last” worker, $1.50 as the personal valuation to the workingman of his unsold labor, $3 as the minimum of existence, etc., and introduce into our assumed case only one novel element, namely that the workers of the industry under discussion do not compete against each other, but that they be unionized, and thus be in a position to enforce their joint demand for higher wages by means of a strike.
Now I do not for a moment deny that this coming into play of “power” on the part of the workers may profoundly influence the price of labor. It might even raise it not only above the level of $4.50, reached in the case of reduced competition among the monopolists, but even beyond the level of $5.50, which would have been attainable under perfect competition. This last fact is particularly noteworthy and striking, for hitherto we had regarded the value of the marginal product of labor, precisely that $5.50, as the upper limit of the economically possible wage, and at first sight it might look as if “power” could actually accomplish something in contradiction to the price formula of the marginal-value theory, something that did not conform to this law, but disproved it.
Here now enters into our explanation the distinction between marginal utility and total utility, i.e., the fact that the value of a total aggregate of goods is higher than the marginal utility of each unit, multiplied by the number of units contained in the total. The fundamental question in the evaluation of a commodity or an aggregate of goods is always how much utility may be derived from the command over the good to be valued. Under the assumption of competition among all the workers, the thing to be evaluated by the employer is always the labor-unit of each worker. If the employer had in his employ, for instance, 100 workers, his negotiations with each one of the 100 workers over his wages would merely hinge upon the question of how much additional profits the employers would make by employing that one additional worker, or how much he would lose by not employing this one last worker. In that case we were fully justified in arriving at the marginal utility of each unit of labor, that is, the increase in output which the labor of the last one of the 100 workers adds to the total output of the enterprise, or $5.50.
But now this is different: in the case of a joint strike of all the 100 workers, the point in question for the employer is no longer whether he is going to run his enterprise with 100 or 99 workers, which to him would mean a difference in the output of $5.50, but whether he is to keep his enterprise going with 100 workers, or not at all. On this depends not 100 times $5.50, but obviously much more than that, if for no other reason than that labor is what is called a “complementary” good, a good which cannot be utilized by itself alone, without the necessary other “complementary” goods, such as raw materials, equipment, machinery, etc. If only one man out of a hundred withdraws from the enterprise, the utilization of the complementary factors will, as a rule, be little disturbed. One single operation — the one which can be dispensed with most easily — will be omitted, or replaced, as far as possible, through a slight change in the division of labor, so that with the deduction of one man, not more is lost than the marginal product of one day’s labor, namely $5.50.
The withdrawal of ten men would cause a more serious disturbance. But a changed disposition in the use of the remaining ninety workers would probably make it possible to find some way for at least the most important functions to continue unhampered, and the loss again to be shifted to that place where it is least felt. A continued depletion of the complementary good, “labor,” would make itself felt more and more severely. While the withdrawal of the first worker would have caused a decrease in the daily production of only $5.50, that of the second might amount to a diminution of the output by $5.55, that of the third by $5.60, and that of the tenth by as much as $6. If, as would be the case in a strike, all the 100 men walked out, there would be caused a loss, not only of the specific labor product of those 100 men, but additional productive goods would cease to be utilized. The machinery would have to stand still, the raw materials would lie idle and depreciate, etc. The loss in the value of the product would increase out of all proportion, far beyond a hundred times the last laborer’s marginal product.
The loss, of course, would be subject to great modifications, according to the actual conditions existing in each case. If the idle machinery and capital do not suffer any other damage by being idle, the additional loss would merely consist in a postponement of the completion of the respective products from the capital goods, temporarily not utilized on account of the lack of the complementary factor of labor. Their produce will be obtained in an undiminished amount only at a later period, after the resumption of production. This loss must at least equal the interest on the dead capital for the period of idleness. It may amount to more, if the delay should involve added losses, such as the inability to take advantage of favorable business opportunities, whereby indirect depreciations may be incurred.
But the damage would be still further increased if the specific character of the idle capital goods should not only cause a temporary delay, but a definite curtailment in the profits, as for example in the case of perishable raw materials, such as beets in an idle sugar refinery, or agricultural products that cannot be harvested owing to the worker’s strike, unused animal power, such as horses, or the water power of an electric power plant. The enforced shutdown may also threaten the fixed capital investments, as in mines, where ventilation and water pumps must not stop, lest the entire plant be destroyed.
How does all this affect the fixation of wages in the case of a strike?
Let us realize, first of all, that although the wage disputes are formally concerned with the per capita wages for each individual worker, to the manufacturer it is always a question of obtaining, or not obtaining, the total labor of these 100 workers. He will either get all of the workers, or none, according to whether the negotiations lead to an agreement, or to a break. The decision as to how much wages he can pay at most will thus hinge on the value that the hundred workers represent to him jointly. The per capita wage is a secondary item, and is determined by dividing the total value by the number of workers. To him, this quota represents only an arithmetical concept, not a value; to him it does not represent the value of a unit of labor.
But how high is the total value? This is explained by the theory of imputation. The value of that aggregate of labor is derived from the value of that amount of products which may be ascribed to the availability of that particular total of labor, and this again is identical with the amount of the product of labor.
Here comes into play a remarkable phase of the theory of imputation, which I recently had to defend in detail against differing opinions.1 For if the withdrawal of that amount of labor, whose value we are trying to ascertain, not only prevented the use of that labor itself, but also stopped the use of other, complementary goods, the utility of these goods would have to be added to that of labor, regardless of the fact that under certain circumstances the use of labor might have to be imputed to its corresponding complementary good, without which the products could not be obtained.
I shall merely recapitulate here without detailed discussion the various steps of the argument leading to this conclusion. Fundamentally, the total value of a whole group of complementary goods is dependent upon the amount of the (marginal) utility which they possess jointly, and thus, in case of complementary productive goods, upon the value of their common product.2
The distribution of this total value among the various units of the complementary group may take different directions, according to the different causation. If none of the units admits of any other use than joint use, and if, at the same time, no one member contributing toward the joint use is replaceable, then every single member has the full total value of the entire group, while the other members are valueless. Each complementary unit is equally capable of holding either one of the two valuations, and it is solely the outside circumstances that determine which one of them shall be worth “everything,” by being absolutely essential in the ultimate completion of the group, or which one is worth “nothing” through its isolation.
In our case of an impending strike of all the hundred workers, the employer is threatened with the total loss of the joint gain arising from the use of the two complementary groups, labor and capital, to the extent stated above, and this is why in that case he would have to attribute to labor that total joint utility, including that part which under other conditions might have to be attributed to the complementary capital goods. His subjective valuation of labor must be based upon all these things.3
Consequently, the upper limit for the highest rate of wages will advance. For all the hundred workers jointly it will rise beyond the hundred-fold amount of the single value of each day’s labor, that is, beyond 100 times $5.50, at least by the amount of the interest of the capital left idle and perhaps even above this, by the amount of the actual loss from perishing or deteriorating complementary capital goods. Thus, for instance, in case there be merely a postponement or loss of interest, it would rise above $550, up to, say, $700 for each day; in case of a direct loss in the utilization of the complementary goods, it would rise in proportion to the extent to which an actual loss takes place, perhaps to $1000, perhaps even to $2000 per day. And the maximum of the economically possible wage level for each individual worker would thereby rise from $5.50 to $7 or even to $10 or $20. This means that with any wage level remaining below this maximum, the entrepreneur would, at least for the time being, fare better than if he were to cease employing all the hundred men.
This “faring better” need, however, not imply actual profits to the entrepreneur, but merely a smaller loss than he would incur in the other alternative — the “lesser evil,” which is, of course, to be preferred to the greater one. This rise of the last possible per capita wage to $7 or to $20, on the other hand, does not represent the subjective valuation of one day’s labor to the entrepreneur. This has already been stated in the foregoing and it can hardly be sufficiently emphasized. The employer would never pay that wage, if it were a question of employing one laborer only. It represents the hundredth part of the total value of 100 laborers, which is a very different unit from the individual value of each unit of labor.
In the wage negotiations between an employer and a labor union the range would thus be limited by the value to the laborer of his unsold labor (i.e., the amount of $1.50 as his lowest limit), and by the per capita quota of the total value of all 100 laborers at the rate of $10 as upper limit, to take one of the three figures as an illustration.
In our imagined case, direct competition being absent on both sides, entrepreneur and workers would meet each other within their limits on similar grounds, just as the two parties of buyers and sellers meet in the case of isolated exchange.4
In theory, it would not be unthinkable nor impossible for the rates to be fixed at any single point within the wide range between $1.50 and $10. We have, of course, come to know some circumstances that make it appear rather unlikely, though not altogether economically impossible, that the wages be fixed within the lowest section of the zone lying between the absolutely lowest limit and the minimum of existence of unskilled labor; and for reasons of similar nature, it is not very likely that the wage rate would be raised up to a point near the upper limit of $10. That it could not be kept at such a point for any length of time I shall try to demonstrate in a future investigation which I consider of special theoretical import. But not even temporarily will it readily be pushed so high. For any wage level substantially exceeding the output of the “last worker” would meet with a strong and increasing opposition on the part of the employers as involving a loss to them. Before granting such a wage rate, they would probably prefer to risk the decision of the supreme trial, consisting in fighting matters out in a lockout or strike; although an intermediate wage, approximating the actual service of the last worker, might conceivably be granted by the employers, anxious to avoid the risk of the certain losses involved in a strike, and the added uncertainty of its outcome. Nor would workers find it to their advantage to push the wages up to level actually causing losses to the entrepreneur, for this again might threaten them with a restriction, or suspension, of work, and force them out of their jobs. Thus there enters the question about the permanency of wages, which will be investigated later.
On the other hand, the workers’ difficulties will become all the greater by the strike, the more excessive wage demands they make. The threat from strike breakers or “scabs” from other branches of industry will increase with the more favorable terms which the entrepreneur can still grant below the refused rate of wages. If the striking workers should insist on a wage rate of $9, a wage of $7 may perhaps already contain a very tempting premium to scabs and substitutes, who in other occupations requiring similar qualifications may obtain only a wage of $5.50, corresponding to the output of the last worker. And once substitutes are employed, the cause of the strike is usually lost, whereas, in the other alternative, the outcome is by no means certain.
In a strike, that party wins, as a rule, which, popularly speaking, can “hold its breath” for the longest time. To the worker, the strike means unemployment. For the time being the worker may meet this loss by means of savings accumulated for this purpose, by subventions from strike funds, by consuming his property, by selling or pawning dispensable goods, or by incurring debts as far as his credit will permit. With the longer duration of the strike, these savings will become smaller and smaller until they are used up. During the period of gradual diminution of savings, the marginal utility of the rapidly decreasing means of subsistence goes up, more and more of essential wants go unsatisfied, and more and more of the vital necessities are neglected, with the increasing shortage of funds.
Finally the point is reached at which the very maintenance of life depends on a renewal of income through work, if only at a modest wage: at this point even the most obstinate resistance of the strikers is broken — provided, of course, that the resistance of the opposite party, the employer, is not crushed beforehand.
In the ranks of the employers there are the same phenomena. With the increasing duration of the strike, the desire for a settlement becomes more and more intense. The idle plant produces no income. Some of the costs of production and at least the personal living expenses of the manufacturer continue, and have to be met. If the entrepreneur has a large fortune, these expenses may be covered from that. If not, then the pressure of the strike will be felt much more rapidly and intensely. In any case, there are here two very distinct phases of the effects of the strikes that should be distinguished. The successive and increasing lack in the means of subsistence may first threaten the business of the entrepreneur, and then, if there are no funds left for the most urgent living expenses, his personal existence.
This latter, more intense effect of strikes, will normally arise only in the most exceptional cases. Nor is it likely, for these and similar reasons stated before, that in a strike wages will be fixed at the most extreme — neither at the very lowest nor at the very highest — marginal regions of the wide range “economically possible,” at least for the time being. In our illustration this zone was assumed to extend from $1.50 to $10, and a wage rate below $3 would be just as unlikely as one above $8, although, as I want specially to emphasize, such extreme wage rates are not unthinkable, nor altogether economically out of question for a short period of time.
Most of what has been said so far is based on obvious and almost trivial facts and observations which have become sufficiently familiar through common experiences with strikes. I have merely restated these matters, so to speak, in the terms of the marginal-utility theory, in order to make plain the essential point of the theoretical principle under discussion, namely, that the “influence of power” in the case of strikes, so familiar to all engaged in industry, is not altogether distinct from, or opposed to, the forces and laws of the marginal utility theory, but wholly in conformity and in harmony with these, and that every deeper analysis of the question, through what intermediate agencies and to what marginal points “power” may control the course of events at all, must lead into the more specific exposition of marginal utility, in the theory of imputation, where the ultimate explanation is to be sought and found.5
There is another far more interesting question: When will the terms of distribution, obtained through means of power, be of lasting effect?
This question is all the more interesting, in that it is by far the most important one. Even the most ephemeral fixation of prices or wages may have considerable importance to that group of individuals or for that short span of time that happens to be affected by it. On the other hand, these temporary fixations mean little or nothing for the permanent economic welfare of the various social classes; just as the classical economists have held long-trend prices to be far more important and challenging than momentary fluctuations; thus Ricardo hardly touched upon the latter, and found it worthwhile only to elaborate the theory of long-trend prices. Similarly, in the theory of distribution, paramount importance is attached to the permanent trends according to which the shares of the various factors of production tend to be distributed as distinct from all ephemeral and temporary fluctuations. Even the most ephemeral phenomena must also be understood and explained, if for no other reason than that the laws controlling them are, in the last resort, not different from those determining their permanent effects; but it goes without saying, that that phase of our theory which covers those cases outlasting the others in time and space will be far more important to us than the explanation of rapidly passing exceptions.
But there is a second reason why it seems to me that the consideration of the influences of “power” deserves greater attention from the viewpoint of their permanency, for, as far as my knowledge of economic literature goes, this most important phase of the subject has never been investigated.
While the problem of the influence of power on prices as such has hitherto been only scantily treated, and never in a systematic manner, in economic theory, fundamental investigations into the permanent effects of such influences of power seem to be totally lacking, so that here we enter, in a certain sense, upon literary virgin land.
This article originally appeared as chapter 3, “The Example of the Strike”, in Control or Economic Law (1914).
- 1Positive Theory of Capital, Book III, Chapter IX on the Theory of Value of Complementary Goods (Theory of Imputation).
- 2Positive Theory, Book III, Chapter IX.
- 3 Naturally, I cannot, in passing, review the entire difficult and complicated theory of distribution with all its details, and have to ask the readers who are interested in the complete discussion of the foregoing conclusions to read the fuller explanation given in my Positive Theory of Capital.
- 4Positive Theory, Book IV, Chapter II.
- 5 I need not call the attention of those familiar with the theory to the fact that all of what I have said here is absolutely in conformity with the so-called “theory of marginal utility,” even in parts where I had to deal with the concept of total utility. For this is merely a term introduced into the modern theory of value, chiefly by the Austrian School, as one of its particularly characteristic traits. This same theory, of course, covers and explains those cases in which valuation is based on total utility as well as those far more frequent cases in which valuation takes place literally from a “marginal utility.” (See my Positive Theory of Capital, Book III.)
