merely by changing the laws on intellectual property rights you will impact the distribution of wage income. But the appropriate IP laws are a complex issue, about which even free market economists do not agree. There is no obvious straightforward way to think about the marginal product of labor; it depends on many institutional factors.
This is somewhat beside his main point, but it pertains to the central point that I will make in an essay that I am working on. My point is going to be that the whole neoclassical apparatus of marginal product is not valid in the real world. We have no precise idea what the marginal value of a worker is to an enterprise. Can you calculate the bushels-of-wheat equivalent of what you accomplish with an hour of your labor? I bet not. We are mostly Garett Jones workers, meaning that we are overhead labor. And firms’ cost is mostly overhead (recall the discussion on this blog of hospital costs). And if the people inside the market cannot measure accurately the quantities that economists think matter, what does this mean when economists try to use market measures as a basis for intervention?
What I see as Sumner’s main point is probably this, concerning the perception of fairness among non-economists vs. economists:
people probably visualize something like the following thought experiment. In 1820, a hardy pioneer and his family move out to a remote valley in Montana, where they build a cabin, plant crops and hunt for animals. There are no other families nearby. Doesn’t that family earn their marginal product? Yes, but that’s not why our intuition tells us that their compensation seems fair. Rather the perceived fairness comes from the fact that they also earn their total product.
“My point is going to be that the whole neoclassical apparatus of marginal product is not valid in the real world. We have no precise idea what the marginal value of a worker is to an enterprise.”
This seems very much consistent with Marx (and no, that is not a bad thing):
The vulgar economist has not the slightest idea that the actual everyday exchange relations and the value magnitudes cannot be directly identical. The point of bourgeois society is precisely that, a priori, no conscious social regulation of production takes place. What is reasonable and necessary by nature asserts itself only as a blindly operating average. The vulgar economist thinks he has made a great discovery when, faced with the disclosure of the intrinsic interconnection, he insists that things look different in appearance. In fact, he prides himself in his clinging to appearances and believing them to be the ultimate. Why then have science at all?
But there is also something else behind it. Once interconnection has been revealed, all theoretical belief in the perpetual necessity of the existing conditions collapses, even before the collapse takes place in practice. Here, therefore, it is completely in the interests of the ruling classes to perpetuate the unthinking confusion. And for what other reason are the sycophantic babblers paid who have no other scientific trump to play except that, in political economy, one may not think at all!
Putting this into context, the history of the marginal product theory of labor, alone, should inform us that aggregative exercises are a fool’s errand and that the only meaningful calculi are at the firm level.
The whole ugly business of marginal product traces back, as best as I can tell, to Adam Smith’s notorious pronouncement in chapter 8 of Wealth of Nations that “The produce of labour constitutes the natural recompence or wages of labour.”
From there David Ricardo advances the idea to arrive at the notion that:
“At a given initial situation, production is at a y0 level, which we can divide into wages, w0, and profits, P0. Rent paid to landlords corresponds to R0. From w0 and the level of labour, L0, we determine the wage fund at the initial situation, WF0.
In the long term, wages will arrive at a subsistence level, ws, which can be defined as the wage a worker needs in order to survive. From this, and the level of labour being employed, we determine the wage fund in the long run, WF*. As this level is the same as labour’s marginal product, the capitalist will not obtain any profits. On the other hand, landlords will get higher rents, R*.”</i? (from the Policonomics web site).
Marx bakes the cake by offering the critique quoted above and producing the surplus value theory, claiming that the source of profits under capitalism is value added by workers not paid out in wages. At the same time John Bates Clark is arriving at his cake slicing theorem that becomes the marginal product of labor theory: "[W]hat a social class gets is, under natural law, what it contributes to the general output of industry."
100 million people then get killed demonstrating for all eternity that the most appropriate place for an economist in any policy discussion is sitting silently in the corner facing the wall, a proposition more formally elaborated in the works of Milton Friedman.
In the end marginal product theory just boils down to supply and demand curves faced by individual firms. And attempts to breathe meaning into aggregates is shamanism.
Sumner’s theories on taxation as set out in the post cited, seem like apologetics for the jizya system of taxation adopted in the US in which the believers are the beneficiaries of employment in tax exempt organizations and non-believers are people in tax paying who actually work and do socially useful stuff.
What is the superior theory of where wages come from if not marginal product? If it’s not just a bunch of random flailing, then what is it?
Obviously it doesn’t match messy reality very well, nevertheless, W=MP seems to be a pretty robust first order approximation for how salaries shake out of markets, especially when most organizations are price takers, and there is lots of competition, arbitrage, and there are alternative opportunities for workers which are more closely tethered to output.
“Obviously it doesn’t match messy reality very well, nevertheless, W=MP seems to be a pretty robust first order approximation for how salaries shake out of markets, especially when most organizations are price takers, and there is lots of competition, arbitrage, and there are alternative opportunities for workers which are more closely tethered to output”
That could just as easily because P = Costs + profit, and any attempt to “measure” MP will lead into a tautology.
What do you think about an IP tax? I have thought due to regulatory capture our intellectual property laws dissuade innovation, hurt the economy and prosperity. What parameters might be useful? Without putting any deep thought into it, if total IP is over $1 million and aged by a certain number of years the government begins to charge a 1% tax on that value similar to property tax? I would consider covering both copyright and rentier IP. Copyright collections over 10 years old be taxed at a certain value. This in part might help level the playing field for the bottom 90%.
I recently read an article by Dr. Christopher Bruce, Professor of Economics at the University of Calgary titled “The Connection between Labour Productivity and Wages”. I hope you find it as insightful as I did. A link is provided below:
http://economica.ca/the-connection-between-labour-productivity-and-wages/
At some point you have to actually produce something salable. During bad times, companies become really good are determining what they have to keep and what they can shed. Marketing groups, R&D, and other overhead departs. Essential functions remain.
In those times, the wage does indeed equal marginal product. Think of it as a periodic cleanse.
(Note that it happens in the private sector but not in the government sector.)