The Classical Economists and Marx on Wages and Employment

The habit of conceiving of the working of an economic system in terms of demand and supply functions in commodity and factor markets is so deeply ingrained nowadays in economic thinking that many economists tend to consider such relations between price and quantity demanded or supplied as self-evident facts, rather than as elaborate theo­retical constructions.

One very important aspect of this difference, which is central to the theme under dis­cussion here, is the determination of wages as the outcome of a social and institutional process. Fundamentally, in the classical approach wages (meaning here the wages of unqualified, adult male labour) are the result of power relations (affected by institutions and economic conditions) between parties with opposite interests, within limits set by the historically acquired living standards of the workers, which determine the subsistence minimum. In the words of Adam Smith:

What are the common wages of labour, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labour.

It is not, however, difficult to foresee which of the two parties must, upon all ordinary occasions, have the advantage in the dispute, and force the other into a compliance with their terms.

farmer, a master manufacturer, or merchant, though they did not employ a single workman, could generally live a year or two upon the stocks which they have already acquired. Many workmen could not subsist a week, few could subsist a month, and scarce any a year without employment.

... But though in disputes with their workmen, masters must generally have the advantage, there is however a certain rate below which it seems impossible to reduce, for any considerable time, the ordinary wages even of the lowest species of labour.

... There are certain circumstances, however, which sometimes give the labourers an advan­tage, and enable them to raise their wages considerably above this rate; evidently the lowest which is consistent with common humanity.

When in any country the demand for those who live by wages; labourers, journeymen, servants of every kind, is continually increasing; when every year furnishes employment for a greater number than had been employed the year before, the workmen have no occasion to combine in order to raise their wages. The scarcity of hands occasions a competition among masters, who bid against one another, in order to get workmen, and thus voluntarily break through the natural combination of masters not to raise wages. (Smith 1776 [1976], hereafter WN, I.viii.11-15; see also Turgot 1766 [1973]: para. VI; Necker 1775 [1820-21]: 137-8 for similar statements)

The outcome of bargaining over wages is then affected by the institutional setting (the form of government, the degree of organization of the parties, the laws regulating the labour market) and by labour market conditions. The latter were regarded as the result, on the one hand, of demographic evolution, which determines the size of the working class population, and, on the other hand, of the rate of capital accumulation, which determines the employment level.

Wage differentials were seen as determined by a variety of factors, including the disagreeableness of jobs, the costs of acquiring the skills, the risks they involved or their social standing (WN I.x.b.1.116). An important factor is also the family role of the worker: typically adult male wages were seen to include, at a minimum, not only the subsistence of the labourer but also of his family, while this was not the case for female and child labour. Wage differentials across different types of labour employment were regarded as relatively stable over time, so that the wages of different types of work would tend to vary in the same proportion (Ricardo 1951-73, hereafter Works, I: 20-22, who quotes approvingly Smith on all this matter).

In the classical economists, employment levels were the result, given technology, of the level and composition of the social product. Composition depended on technology (determining the requirements of production) and the division of the product between different social groups, each characterized by historically and socially determined con­sumption habits (for a discussion of the analytical structure of the surplus approach, see Garegnani 1984). The level (scale) of production was the result of accumulation, with no constraints arising from the level of aggregate demand. As mentioned, most of the classics accepted Say’s law, that is, they grasped the identity of the value of production and income, and, on the other hand, believed that the part of income not spent in con­sumption would directly or indirectly finance investments in the same period, so that the income deriving from production would be entirely spent either in consumption or investment goods: “No man produces, but with a view to consume or sell, and he never sells, but with an intention to purchase some other commodity, which may be imme­diately useful to him, or which may contribute to future production” (Ricardo Works I: 290; see also WN II.iii.15). This entailed that the economists who, like Ricardo, rigorously followed the implications of this proposition, would deny the possibility of general gluts, that is, a lack of aggregate demand causing a general underutilization of existing capital.

As far as this secular tendency of labour supply to roughly adjust to the requirements of the accumulation process is concerned, while the classics tended to emphasize the role of population changes, earlier writers had focused on migration flows, and Marx on the constant re-creation of a reserve army of unemployed or underemployed workers as a result of capital accumulation itself (1887 [1954], I: 589-607).

Marx also differed from classical economists like Ricardo, among other things, in his criticism of Say’s law.

In Marx therefore the employment level depends not only on technology and level and composition of income at a given stage of accumulation, but also on the volume of aggregate demand. However, a theory capable of determining a definite level of output and employment on the basis of aggregate demand, taking into account the interdepend­ence between production, income and consumption expenditure, was advanced only by Keynes.

In the classical economists and Marx, changes in the employment level could affect the bargaining position of workers and hence the wage level - but a fall in wages caused by higher unemployment was not seen as favouring higher employment. Even before Marx, hints may rather be found at a possible negative effect on consumption demand and hence production (see, for instance, Turgot 1770 [1912-13], III: 288-9). With Marx, the tendency to keep wages low in the face of increasing productivity comes to be regarded as a distinctive inner contradiction of a capitalist system, which leads to realization problems and crises of over-production.

The surplus approach shared by the classical economists and Marx naturally leads to the perception of the existence of a conflict of interests over income distribution among social classes. Conversely, this perception disappears with the subsequent developments in the explanation of distribution. With the emergence of the notion of a decreasing relation between employment and real wage in the wage fund theory and later on of decreasing demand functions for production factors in marginalist theory, any attempt to increase the wage rate above its full employment equilibrium value, for example, owing to the action of trade unions, is regarded as causing a fall in the employment level. Thus, it is no longer true (as it was in the framework of the surplus approach) that a rise in wages will benefit a social group as a whole (the workers) at the expense of other social groups.