Monday, January 31, 2011

Karl Polanyi on market society, economic liberalism, & Speenhamland

Below is an item that I sent to the students in my seminar on the history of economic thought (Economic Liberalism & Its Critics) in Spring 2011. It may be of more general interest. (Also available here.)

–Jeff Weintraub

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PPE 475-302: Economic Liberalism & Its Critics
Spring 2011
Jeff Weintraub

HANDOUT #9: Polanyi on market society, economic liberalism, & Speenhamland Some clarifications and tips

As I mentioned in class, you won’t be getting a detailed handout to guide your reading of Karl Polanyi’s The Great Transformation. (I do recommend that you review Handout #3A … and, if you like, you might also find the Foreword by Joseph Stiglitz and/or the Introduction by Fred Block useful to help orient yourselves, though neither is required or essential.)

However, I want to offer you some tips about how to deal with one historical topic that Polanyi discusses in The Great Transformation: the so-called Speenhamland system and its consequences. Polanyi’s discussion of Speenhamland is mostly concentrated in chs. 7-8, but bits of it are spread through chs. 9-10 as well, and there are occasional references thereafter. (Page numbers below refer to the 2001 Beacon Press edition.)

The main point I want to emphasize is that you should not get too hung up on Polanyi’s discussion of Speenhamland. It’s not really crucial to his central theoretical and historical arguments. And my impression is that for many readers (I include academics as well as students), Polanyi’s discussion of Speenhamland not only is easy to misunderstand, but also tends to be distracting and even misleading in terms of understanding his central arguments in The Great Transformation. In fact, if there were some simple and convenient way to cut Speenhamland out of the assigned reading, I might be tempted to do that. But the discussion of Speenhamland is too closely woven into Polanyi’s historical narrative to be easily disentangled. So instead I will use this memo to clarify what you do and don’t need to worry about in connection with Polanyi’s account of Speenhamland, to help you avoid being either distracted or misled.

=> First, a quick overview of Polanyi’s argument to provide some background and context.

Polanyi argues that one of the crucial defining features of modernity has been the emergence, to an unprecedented extent, of a self-regulating market economy. Contrary to the claims of economic liberalism, Polanyi insists, the market economy is neither ‘natural’ nor universal. Socio-economic systems that include markets to a greater or lesser degree, along with other modes of economic activity and coordination, have certainly been around, in various forms, for thousands of years. But the emergence of a comprehensive, fully developed, self-regulating market economy—an economic system dominated by the market and its systemic logic—is a distinctive and historically recent phenomenon. Polanyi further argues that if one considers all the social requirements and consequences of a self-regulating market economy, they add up to a massive overall transformation in society, politics, and culture. Thus, “A market economy can exist only in a market society” (GT, p. 74).

In chs. 3-10 of The Great Transformation (Section I of Part Two), Polanyi is, among other things, telling two historical stories, which are interrelated but analytically distinct. He is tracing (a) the emergence of market society and (b) the emergence of the philosophy of market society, economic liberalism. The notion of a society based on the self-regulating market, which is at the heart of economic liberalism, has been one of the most powerful, persistent, and influential utopian visions of the modern era. Both of those phenomena built on long-term processes involving a range of western societies. But in both cases the first breakthrough to their full consolidation happened in Britain. So a good deal of Polanyi’s historical discussion in that part of The Great Transformation focuses on Britain in the late 18th and early 19th centuries (what some might call the early phase of the ‘long’ 19th century).

I spoke of the emergence of a self-regulating market economy “to an unprecedented extent” because no actual society has ever been a pure market society, with total commoditization and the completely unhampered operation of the self-regulating market. This is neither accidental nor unfortunate, according to Polanyi, since such a society would be unsustainable and humanly unlivable. Not only do specific individuals and groups have various reasons, sometimes quite selfish, to try to protect themselves and their interests against market pressures and effects. Even more fundamentally: “To allow the market mechanism to be the sole director of the fate of human beings and their natural environment, indeed, even of the amount and use of purchasing power, would result in the demolition of society” (p. 76).

The emergence of the self-regulating market thus provoked, and has continued to provoke, a wide range of reactions seeking to protect particular groups, institutions, social practices, and communities, as well as whole societies, against the comprehensive and unhampered operation of the market. Polanyi sums this up as a broad “countermovement” for the “self-protection of society.” It is worth emphasizing that the manifestations of this “self-protection of society” have been very diverse in nature and intent, often uncoordinated, and sometimes even contradictory. They include measures and practices that are selfish and public-spirited, governmental and non-governmental, wise and unwise, beneficial and harmful, radical and conservative—as well as grand political tendencies ranging from fascism and Stalinism to the New Deal, social democracy, environmentalism, and so on.

Much of the history of the last several centuries has therefore been shaped, and continues to be shaped, by the dynamics of what Polanyi terms the “double movement” (e.g., pp. 79-80 & 136-139): On the one hand, there is the ongoing expansion and consolidation of the market, its increasing scope and its penetration into more and more aspects of social life, promoted by the ideological project of economic liberalism to remove all obstacles and alternatives to the unhampered operation of the self-regulating market. On the other hand, there is the multifarious “countermovement” of social self-protection, which has valuably prevented the market from totally subsuming society but, in the process, has also produced various unintended and sometimes unwelcome consequences of its own.

There is a good deal more to Polanyi’s argument, but those are some of the basic outlines.

=> How does Speenhamland fit into this larger picture?

“Speenhamland” was one name for a system of poor relief operating in England during the late 18th and early 19th centuries (also referred to in contemporary debates as the Poor Law—by Ricardo, for example, in ch. V of his Principles of Political Economy and Taxation). It covered the rural poor, who by that time were overwhelmingly agricultural wage-laborers rather than peasant farmers. In order to keep wages from falling below a basic subsistence minimum, the wages of workers that did fall below that rate were subsidized by local authorities to bring them up to the minimum scale (based primarily on the prevailing price of bread in the area). You can get the details from chs. 7-8 of GT. Polanyi argues that the intent was to help buffer not only the poor but also the structure of rural society against the potentially disruptive effects of an emerging national labor market. Polanyi also argues that, for various reasons, the system was badly designed. It generated a cascade of unintended consequences that wound up contributing to widespread demoralization and pauperization among the rural poor rather than actually helping them.

There has been historical debate about Polanyi’s account of Speenhamland. Some analysts, including admirers as well as critics of Polanyi’s overall perspective, have questioned his analysis of Speenhamland and its consequences. Much of the distress blamed on the Speenhamland system, at the time and in retrospect, may have been due to quite different economic factors operating during that period. Or maybe not.

Fortunately, for our purposes in this course we don’t need to get involved in those particular historical debates. Whether or not Polanyi is right about the immediate social and economic consequences of the Speenhamland system is, to repeat, peripheral to his central arguments in The Great Transformation. Instead, here are the main points you need to keep in mind concerning Polanyi’s account of Speenhamland.

● I said earlier that in chs. 3-10 of The Great Transformation Polanyi is, among other things, telling two historical stories that are interwoven but analytically distinct: about (a) the emergence of market society and about (b) the emergence of the philosophy of market society, economic liberalism. Polanyi’s account of Speenhamland is not directly significant for the first of those two stories. Instead, it is most directly relevant to the second story, concerning the development of economic liberalism.

Polanyi is struck by the radicalism of economic liberals in the era of Malthus and Ricardo, and their callous and punitive attitude toward the poor—very different in tone from the attitude of Adam Smith, for example. He argues that these features of their world-view were powerfully shaped by the experience of Speenhamland, as they interpreted it. The conclusion they drew was that any interference with the self-regulating market, no matter how well-intentioned, would necessarily generate disastrous results. “Out of the horrors of Speenhamland men rushed blindly for the shelter of a utopian market economy” (p. 107).

● Whether or not Speenhamland—and, more important, the critical analysis of Speenhamland by economic liberals—played a central role in this ideological radicalization, that is indeed the conclusion they drew.

● Polanyi, of course, believes that this conclusion was profoundly wrong, and that the whole tradition of market utopianism has had disastrous consequences of its own, both direct and indirect. In fact, ‘interferences’ with the market are both inevitable and essential. But some are wiser and more effective than others, and the results depend not only on the measures themselves but on the social and historical circumstances involved, which need to be considered concretely rather than dismissed on the basis of abstract ideological dogmas.

=> Otherwise, once you have made sense of Polanyi’s account of Speenhamland, I advise you to side-step this topic and focus on the main arguments of The Great Transformation.

—Jeff Weintraub

Tuesday, January 25, 2011

Kenneth Arrow & Frank Hahn put Smith’s theory of the market in perspective

This was sent to the students in a seminar on the history of modern economic thought, "Economic Liberalism and Its Critics", that I'm teaching this semester. Right now we're reading & discussing (portions of) Adam Smith's Wealth of Nations. This little item is relevant to that, and it may also be of more general interest. —Jeff Weintraub

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To: Members of PPE 475-302 (Economic Liberalism & Its Critics)
From: Jeff Weintraub
Re: Kenneth Arrow & Frank Hahn put Smith’s theory of the market in perspective

Nowadays, more than two centuries after Adam Smith published The Wealth of Nations and after so many of his ideas have been absorbed and elaborated by academic disciplines, ideologies, and everyday public discourse, it can sometimes be too easy to take his theory of the market for granted. And doing that can have at least two different kinds of effects, both unfortunate. On the one hand, it may incline people to swallow these ideas too easily and uncritically, as though they were simply common sense, without realizing how controversial and paradoxical many of them are. And on the other hand, it may lead people to underestimate the powerful and startling originality of Smith’s theoretical achievement in WN. To reiterate a point that I've already emphasized, what the core theory of WN offers is not simply a set of technical economic analyses, but a coherent and comprehensive vision of social order.

The following passage from the Preface to Kenneth Arrow & Frank Hahn’s General Competitive Analysis (1971), which was long one of the most prominent texts in general equilibrium theory, captures something important about the point and significance of Smith’s theory of the market and makes it clear why the central thrust of his theory should remain startling, as well as illuminating, to anyone who takes it seriously.
There is by now a long and fairly imposing line of economists from Adam Smith to the present who have sought to show that a decentralized economy motivated by self-interest and guided by price signals would be compatible with a coherent disposition of economic resources that could be regarded, in a well-defined sense, as superior to a large class of possible alternative dispositions. Moreover, the price signals would operate in a way to establish this degree of coherence. It is important to understand how surprising this claim must be to anyone not exposed to the tradition. The immediate "common sense" answer to the question "What will an economy motivated by individual greed and controlled by a very large number of different agents look like?" is probably: There will be chaos. That quite a different answer has long been claimed true and has indeed permeated the economic thinking of a large number of people who are in no way economists is itself sufficient ground for investigating it seriously. The proposition having been put forward and very seriously entertained, it is important to know not only whether it is true, but whether it could be true. A good deal of what follows is concerned with this last question, which seems to us to have considerable claims on the attention of economists. (pp. vi-vii)
(You will come across this passage again later in the course, since it is quoted by Amartya Sen in his essay “Rational Fools”. But in the meantime it’s worth pondering while you’re still in the midst of reading Smith.)

—Jeff Weintraub

Friday, January 14, 2011

Adam Smith on poverty, progress, wages, and "universal opulence" — A theoretical conundrum

In Fall 2010 I taught an undergraduate seminar on modern social & political theory—or, to view it from another angle, the social & political theory of modernity—which included reading & discussing substantial portions of Adam Smith's Wealth of Nations. Two students in the seminar, Daniel Albornoz and David Kanter, raised a question about one point in Smith's argument that has perplexed interpreters, disciples, successors, and critics of Smith since at least the early 19th century. The issue they identified is important and contentious, both theoretically and substantively, and the way they framed the problem was perceptive. So after we had talked about it a bit, I wound up sending them a moderately long response via e-mail.

It occurs to me that this discussion might be of more general interest, and other Adam Smith aficionados might have opinions on this subject different from mine. So (with the agreement of Dan & David) I'm putting it out in the public sphere. Any thoughts out there?

(Page numbers refer to the Liberty Classics edition of WN.)

Yours for theory,
Jeff Weintraub

=> UPDATE (1/16/2011): Gavin Kennedy of the University of Edinburgh posted a two-part response to this discussion in his blog, Adam Smith's Lost Legacy ...
... which was partly re-posted, with a bit of further commentary, by Mark Thoma in his Economist's View blog. My partial & preliminary counter-response is HERE.

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Sunday, October 10, 2010

Hi Dan & David,

This follows up a loose end from our conversation during office hours on Friday. You raised an important question regarding Adam Smith's theory (a point that had already been touched on in your discussion group's Smith I memo). I didn't want to say too much in response, partly in order to let you wrestle with the issues yourselves ... but having thought about it further, perhaps I ought to say a bit more than I did.

=> As we all know, Smith believes that the long-term process of socio-economic development, driven by the dynamics of the market and the division of labor, will steadily increase the overall productivity, prosperity, and "opulence" of societies over time. He also believes that the benefits of this increasing prosperity will be spread throughout the society (though, of course, unequally). In particular, he expects that, given the "natural progress of opulence," the standard of living of the poor—by which he means the great majority of people in society—will increase steadily and significantly (as long as the market is allowed to operate unhindered). From Smith's point of view, that consequence is one of the strongest justifications for the whole market system and its long-term developmental logic (e.g., WN pp. 22-24, 95-96, etc.). After all, "No society can surely be flourishing and happy, of which the far greater part of the members are poor and miserable" (WN p. 96).

Smith further believes that, broadly speaking, he has plenty of historical evidence for expecting an ever-increasing "universal opulence that extends itself to the lowest ranks of the people" (p. 22), and he appears confident that this conclusion follows plausibly from the overall logic of his theory. However, it's fair to raise the question of whether or not Smith has provided an adequate and convincing theoretical account to explain how and why this happy outcome should occur.

In your discussion group's Smith I memo, the four of you expressed your skepticism this way:
On what does Smith base this claim? Is it that prices will continue to drop as production becomes more efficient? Is it that wages will rise as there is more and more competition among capitalists? In our discussion we struggled to flesh out Smith’s reasoning here. In light of how simple Smith envisions most tasks to be when the division of labor has reached an advanced state, what sort of incentive would capitalists have to pay labor more than survival wages? Smith seems to think that most anyone can do most any super-specialized job (hence his worry about “pinheadism”). If that is the case, any laborer could be replaced by any other laborer. And if that is the case, wouldn’t the equilibrium wage just settle at the wage necessary to keep the laborer and a few of his offspring alive? That sort of existence does not sound all that appealing.
Good questions. As I've said before, your discussion here points to some genuinely interesting and significant issues, and the way you frame the problem is perceptive. Smith does try to address these issues and related ones—he does so primarily in Book I, ch. VIII of WN—but that doesn't necessarily mean he's done so in a fully successful way. So let me reframe and elaborate your question a bit, and fill in some of the logical steps more explicitly.

=> The first key point is that, according to Smith, one feature of the long-term process of socio-historical development is that the great majority of the population will "naturally" and necessarily become wage-laborers (or the wives and children of wage-laborers). That is, they will gain their livelihood, not by selling the products of their labor, but by selling their labor itself as a commodity. Labor, like every other commodity, has an exchange-value determined (more or less, and in the long run) by market processes and expressed in its price. So the material well-being of the vast majority of the population depends on the price of labor, which is to say the level of wages.

Rates of wages, like the prices of all other commodities, are "naturally regulated" (WN p. 72). How does that work? Like every other commodity, labor has both a "natural" price and an actual market price, and in the long run market forces (supply & demand, etc.) will push the actual price of a commodity toward its natural price. At any given moment, the actual price of a commodity may fluctuate above or below its natural price, but the natural price is "the central price to which the prices of all commodities are continually gravitating" (WN p. 73) as long as the market is allowed to operate without serious interference or distortion. Basically, the natural price corresponds to the normal cost of producing the commodity (relative to the costs of producing all other commodities in the system). If more efficient production techniques, technological improvements, and/or other factors allow that commodity to be produced at lower cost, then its natural price will go down—and vice-versa.

If we follow that logic, the "natural" price of labor in a particular society at a particular moment would be determined by the overall cost necessary to produce & reproduce laborers (including children who will become future laborers) and to maintain their capacity to go on working—i.e., a subsistence wage. So why should we expect wages (i.e., the price of labor) to keep increasing? Why wouldn't the "equilibrium wage," as you put it, "settle at" a subsistence wage? (And why shouldn't cheaper prices for food and other necessities simply lower the "natural" price of labor, and thus the level of a subsistence wage?)

As you also point out, this problem should be further sharpened if in fact, as Smith predicts, the "progress of the division of labor" means that the work performed by most workers, "the great body of the people," becomes increasingly narrow, specialized, simple, and mindless (WN pp. 781-782). Aside from making workers in the labor market increasingly interchangeable (which you mention), wouldn't this tend to reduce the cost of producing and reproducing labor (less training and expertise needed, for example), thus further lowering its natural price?

So why aren't workers stuck at a subsistence wage, even as the productivity and prosperity of the society around them continues to increase?

=> OK, here are some of the ways that Smith tries to deal with these issues.

Smith does acknowledge (e.g., on pp. 85-86 of WN) that wages can sometimes sink to this subsistence level (though, for obvious reasons, they can't stay below that level for an extended period). However, he adds (p. 86), there are "certain circumstances" that allow the normal rate of wages to go "considerably above that rate". Clearly, he expects (and hopes) that these "circumstances" will be common, not exceptional. What are they?

Basically, he argues that labor will command a higher price, and therefore workers will have a better standard of living, whenever the (effective) demand for labor outstrips the supply of labor. Are there any "circumstances" in which this might be a steady rather than merely transitory condition? In general, that is most likely to happen in periods of continuous economic growth (the more rapid the better). And one of the factors driving this process, by the way, is that as long as the economy is humming along pretty well, every increase in the accumulation of capital will produce an increase in the demand for labor (since the capitalist who has accumulated those resources will want to put them to profitable use, for which he needs workers). Under these circumstances, the actual price of labor will remain above its natural price—not in a temporary or fluctuating way, but systematically.

(For these arguments, see especially WN pp. 86-89 & 99-104.)

Under these circumstances, let us remember, a capitalist will not pay higher wages because he wants to (generally speaking), but rather because he can (since there are more resources at his disposal), because he has to (since he's in competition with other capitalists who also want to hire workers, and labor is scarce relative to capital), and because it's worth his while (since he can put the additional labor to more productive and ultimately profitable use). If he and other capitalists could keep the going wage closer to a subsistence level, they would (and, Smith adds, they try).

=> In bare outline, those are the main elements of Smith's theoretical response to the question you raised.

(At least, it's an important part of his response. Can you think of any other factors or mechanisms, compatible with the overall logic of Smith's theory of the market, that might lead wages to increase systematically as overall productivity and "opulence" increase in a society?)

Is that a strong and entirely satisfactory response? Well, that's for you to ponder.

I will say, though, that I think there are plausible grounds for wondering whether Smith's solution to this particular conundrum is entirely successful. It certainly does look like a peculiarly ad-hoc, equivocal, and in some respects paradoxical solution to such a central theoretical problem.

At the heart of Smith's whole vision of society and socio-historical development, after all, is a theory of the market as a self-regulating impersonal system which, if allowed to operate unhindered, "naturally" or spontaneously achieves a (more or less) optimal allocation of economic resources and activities and promotes ever-increasing growth in efficiency, productivity, and overall social wealth. And the market system is coordinated, above all, by the mechanism of prices. But the market can be expected to deliver optimal overall results only if, and to the extent that, the actual prices of commodities conform (roughly, over time) to their "natural" prices. That's why interfering with "natural" market processes to fix or distort prices so that they diverge from "natural" prices will tend to generate sub-optimal or even pathological results. However, it turns out that the main benefit, and justification, of the market system depends on the price of one particular commodity, labor, systematically diverging from its "natural" price. That may or may not strictly contradict the overall logic of the theory, but at the very least there seems to be a theoretical tension there.

Furthermore, even if we accept that Smith has demonstrated that a situation of continuous economic growth and capital accumulation prevents the actual price of labor from sinking down to its "natural" price and getting stuck there, would that analysis provide us with any reason to feel confident that economic growth will lead to a steady increase in wages over time (rather than simply enriching landlords and capitalists, while average wage rates remain more or less constant)? That's less clear.

In short, I suppose I share your skepticism about whether Smith can offer a solid theoretical justification, or even explanation, for his optimistic conclusion about the tendency of the market system and the division of labor to produce that ever-increasing and "universal opulence that extends itself to the lowest ranks of the people" (WN, p. 22)—at least, within the theoretical framework he's constructed. If one wanted to 'save' that optimistic conclusion about the overall social benefits of the market system (as Smith certainly would), then doing so might well require some modifications in the core theoretical apparatus. (Or maybe not?)

=> I suppose it's worth adding that, for almost two centuries following Smith's work, a wide range of people argued, from different ideological and theoretical directions, that his optimistic conclusion was not convincing, plausible, or correct. That is, they argued that the "natural" operation of the market system does not automatically, spontaneously, or necessarily spread the material benefits around to the workers and steadily increase their standard of living. Some even argued that it couldn't do this, except perhaps in temporary bursts.

I say "from different directions" because the people who reached this conclusion included some of Smith's own followers and disciples within the tradition of classic political economy, e.g., Malthus, and critics of the market system and of Smith's theory, including, but definitely not limited to, Marx and his followers. (There is a widespread impression, going back to the 19th century, that Ricardo shared Malthus's unequivocally gloomy outlook on this question; but, for reasons indicated in my Ricardian P.S. below, that's not quite right—Ricardo's position is a bit more internally conflicted.)

Actually, this remains a live issue, though nowadays economists who address it generally do so using a somewhat different conceptual apparatus. Of course, it is now widely accepted that, at least in certain circumstances, a capitalist market economy can generate steady long-term economic growth in a way that spreads the benefits through most of the population, producing broad-based and ever-increasing overall material affluence (perhaps with occasional hiccups). But how and why that happens, as well as the factors that might explain whether and to what extent it happens (since those patterns happen to vary considerably in practice)—all those remain open questions, theoretically and empirically.

=> Meanwhile, I hope I've given you some more food for thought to chew on.

Yours for theory,
Jeff Weintraub

A Ricardian P.S. Incidentally, one indication that the argument I outlined above really is Smith's response to this problem, and not just my own interpretation of Smith's reasoning, comes from way it was restated by one of Smith's most influential successors and disciples in the next generation of British political economists, David Ricardo. But Ricardo's overall treatment of these issues may also help to bring out the shaky and uncertain features of Smith's solution.

In the opening pages of Chapter V of The Principles of Political Economy and Taxation (1817), "On Wages," Ricardo reproduces the central logic of the Smithian analysis I outlined above and makes it even more explicit. Here is how Ricardo sums things up in the first few pages of Chapter V (pp. 52-53):
  • "However much the market price of labour may deviate from its natural price, it has, like [other] commodities, a tendency to conform to it."
  • But "It is [only] when the market price of labour exceeds its natural price that the condition of the labourer is flourishing and happy [....]"
  • So is it unrealistic to expect workers' standard of living to improve over time? Not necessarily. "Notwithstanding the tendency of wages to conform to their natural rate, their market rate may, in an improving society, for an indefinite period, be constantly above it; for no sooner may the impulse which an increased capital gives to new demand for labour be obeyed, than another increase of capital may produce the same effect [....]"
Of course, Ricardo's positions are not always identical to Smith's, to say the least. And even in this chapter on wages, Ricardo elaborates his analysis in some ways with which Smith might not entirely agree. But when it comes to the theoretical core of Smith's attempt to explain how and why wage-laborers might share in the increasing wealth of a society—at least in the sense of having a standard of living above the minimum subsistence level—I think it is hard to deny that Ricardo has closely reproduced the central thrust of Smith's analysis.

So far, so good—from the perspective of workers and humanitarians. However, leaving it at that would be misleading. If we go beyond the first two pages of Chapter V and consider Ricardo's overall treatment of these issues, the tone and substance of his analysis looks a good deal more ambivalent and less optimistic than those formulations, taken in isolation, might seem to suggest. In fact, as the discussion proceeds, the apparently reassuring implications of those statements get increasingly qualified, and at times even seem close to being repudiated. What Ricardo gave with one hand, he gradually takes back with the other.

Yes, Ricardo does appear to accept that it is sometimes possible for continuous economic growth to keep workers' average standard of living above the subsistence level "for an indefinite period". (I see no hint of ever-increasing "universal opulence" in Ricardo.) But is that outcome likely?

Smith's response to that last question would be positive (at least, for a "civilized" and "well-governed society" [WN p. 22]). That positive response is crucial to his overall picture of the nature, dynamics, and prospects of modern "commercial" society.

Ricardo's response turns out to be, at best, uncertain and highly conditional. The conditions that make it possible for wages to remain above the subsistence labor depend on maintaining a (beneficial) imbalance between the supply and demand for labor. But even though it is sometimes possible to maintain that imbalance "for an indefinite period," it remains an anomalous deviation from the central logic of the market system, which should eventually bring the actual price of a commodity into line with its natural price. For Ricardo, it seems highly unlikely that this kind of socially beneficial anomaly could be maintained permanently. In practice, the mechanisms that can temporarily keep the actual price of labor above the natural price are most likely to be effective in economically underdeveloped, socially backward, and badly governed societies, especially those with a lot of unused or under-used land (p. 56). In such societies, reforms that unleash the magic of the market can indeed lead to rising wages for a while. But in "rich countries, where all the fertile land is already cultivated," those exceptional mechanisms will cease to operate (p. 56). The ordinary laws of the market will then reassert themselves, pushing average wage rates down to the natural price. Thus:
In the natural advance of society, the wages of labour will have a tendency to fall, as far as they are regulated by supply and demand; for the supply of labourers will continue to increase at the same rate, whilst the demand for them will increase at a slower rate. [p. 57]
In so far as this tendency can be counteracted in economically developed commercial societies, the remedy would have to lie in "a reduction in people" (p. 56) through lower birth rates (pp. 61-62). (Others who shared this perspective also recommended emigration as a way of helping relieve population pressure, but I don't think Ricardo himself emphasized that "remedy".)

=> The pessimistic side of Ricardo's analysis of wages is due in part to his acceptance of the grimly discouraging implications of Malthus's theory of population. But it's worth emphasizing that Ricardo's departure from Smith's optimistic expectations about ever-increasing improvements in most people's standards of living is also rooted in more fundamental theoretical reservations. Ricardo is keenly aware that expecting the actual price of one particular commodity, labor, to diverge permanently from its natural price, and to do so on the basis of a permanent (and permanently beneficial) imbalance between supply and demand, is in tension with the central logic of the theory of the market as he and other (broadly) Smithian political economists understand it. And this theoretical anomaly clearly bothers him.

Later in the book, this theoretical tension and its implications burst out sharply in the first two paragraphs of Chapter XXX (p. 260). Ricardo begins by restating and emphasizing, in general terms, a key element of Smithian price theory:
It is the cost of production that must ultimately regulate the price of commodities, and not, as has been often said, the proportion between the supply and demand: the proportion between supply and demand may, indeed, for a time, affect the market value of a commodity, until it is supplied in greater or less abundance, according as the demand may have increased or diminished; but this effect will be only of temporary duration. [my emphasis]
In the long run the interplay of supply and demand merely serves to bring the actual price of a commodity into line with its natural price. Increased demand for a commodity, by bumping up its market price, will simply call forth increased supply, thus restoring the "natural" balance. Ricardo then uses a concrete example to spell out the implications:
Diminish the cost of production of hats, and their price will ultimately fall to their new natural price, although the demand may be doubled, trebled, or quadrupled.
It would thus appear that, in the long run, the market price of any commodity must "ultimately fall" to its natural price. OK, but would Ricardo make an exception for one particular commodity, labor? The next sentence disposes of that possibility.
Diminish the cost of subsistence of men, by diminishing the natural price of the food and clothing by which life is sustained, and wages will ultimately fall, notwithstanding that the demand for labourers may very greatly increase.
Thus, if increasing productivity generates cheaper and more abundant food and other necessities, the result must "ultimately" be, not an improved standard of living for wage-laborers who depend on these commodities, but simply a corresponding fall in wages. So much for "universal opulence". I think it's clear that the implications of this discussion run sharply counter to Smith's own hopes and expectations, and that he would not like Ricardo's conclusion one bit. But I also think Ricardo could plausibly argue, at least, that his more pessimistic conclusion accords with the central theoretical logic of Smith's own theory. If Smith wanted to argue against that claim, how would he do so?

—Jeff Weintraub

Monday, January 10, 2011

How to honor Gabrielle Giffords

The attempted assassination of Arizona Congresswoman Gabrielle Giffords on Saturday, which left 6 people dead—including a federal judge—and Giffords in critical condition, seems to have shaken up the rest of the House of Representatives. As Ezra Klein, among others, reports
The awful events of the weekend have reshaped the legislative agenda. Majority Leader Eric Cantor announced that the House will be postponing the week's planned votes -- including the repeal of health-care reform.
Klein adds, possibly with a touch of wishful thinking:
And when the body does return to normal business, expect a more restrained tone to the proceedings. It's very difficult to say how that will change what Congress does and does not get done, of course. But compared to Friday, when the passions of the election were still riding high and the two parties were gearing up for the epic and angry clash they'd promised voters, it's going to be a very different mood when the lawmakers reconvene.
We'll see how long that lasts.

Cooling down the political atmosphere, at least for a moment, strikes me as a good idea under the circumstances. And the vote on repealing health care reform was a symbolic gesture intended precisely to inflame partisan passions and provide an occasion for overheated Republican demagoguery, so putting it off is probably the decent thing to do.

=> But suspending all legislative votes for a week seems like an oddly inappropriate way to show respect for someone like Gabrielle Giffords, who by all accounts has been a very active, serious, and public-spirited member of Congress. An e-mail message I just got from Michael Cole (of UC San Diego) suggests a more positive and constructive alternative.
The idea is this.
Identify a piece of legislation that Giffords was pushing that is NOT highly partisan. Get Congress to pass it. That would honor her. The rest is horseshit as usual.
That makes sense to me. Any ideas out there?

—Jeff Weintraub