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The labour market is not like the market for bananas

I am now using Friday’s blog space to provide draft versions of the Modern Monetary Theory textbook that I am writing with my colleague and friend Randy Wray. We expect to complete the text by the end of this year. Comments are always welcome. Remember this is a textbook aimed at undergraduate students and so the writing will be different from my usual blog free-for-all. Note also that the text I post is just the work I am doing by way of the first draft so the material posted will not represent the complete text. Further it will change once the two of us have edited it.

Chapter 10 is about the Labour Market. The aim is to provide a general contextual introduction so that students have a more intrinsic understanding of what happens when someone gets a job and receives a wage. The concept of a “market” as a social construct with embedded power relations is initially developed by way of introduction.

While some might say this is extraneous material, I consider it vital for students to understand the intrinsic nature of the economic system which means that the implications of power has to be included in the conceptual development.

The Chapter will then build on the models of effective demand developed in the earlier chapters to discuss employment determination at the macroeconomic level.

The concept of a Marginal Productivity Demand Curve for labour will be challenged and an alternative explanation for macro labour demand developed. Students will learn about involuntary unemployment and how mass unemployment persists.

The Chapter will integrate the earlier discussion about the role of government to show that at any point in time, the aggregate unemployment rate is chosen by the state as a result of its fiscal decisions. This is not to say that the non-government sector is not crucial in determining levels of activity and employment. It rather recognises that once the non-government sector has formulated its spending and saving plans, it is left to government to fill any spending gaps.

The Chapter will demonstrate how mass unemployment can only be resolved via demand policies rather than through real wage cutting.

It will lead in Chapter 11, which is more focused on measurement issues (the labour market framework, demographic characteristics etc), classifying types of unemployment; understanding stock and flow concepts within the labour market; and later providing a discussion of the relationship between unemployment and inflation.

Chapter 10 – The Labour Market

10.1 Introduction

In this Chapter, we consider the labour market where workers and capital meet to determine nominal wage rates and employment. The concept of a market for “labour” is somewhat of a misnomer because if we try to analyse the transactions that occur in this arena in terms of a simple exchange of use values essential insights into the operations of the economy are obscured.

In what way can we differentiate the “labour market” from markets for goods and services?

The standard neoclassical textbook analysis of the labour market, which dominates the public debate when it comes to discussions about unemployment, welfare payments, the impact of taxation etc, makes no distinction between exchanges between labour and capital and the use by firms of other productive inputs.

Many years ago, the then Economics editor of The Financial Times, Samuel Brittain made this statement, which reflects the viewpoint still held by most economists today:

If the price of bananas is kept too high in relation to the price required to balance supply and demand there will be a surplus of bananas. If the price of bananas is below the market clearing price there will be a shortage. The same applies to labour. If the price – i.e. the wage – is too high there will be a surplus of workers, i.e. unemployment. If it is kept too low there will be a shortage of workers … Workers do sell their services just as banana producers sell their bananas.

[NOTE: Fine exact citation for the quote – around 1968?]

In other words, the essential insights into how the labour market operated could be gleaned by studying any market exchange. In this Chapter we will explain why this viewpoint fails to provide a deep understanding of the way the labour market operates in the macroeconomy.

[NOTE: Some more introductory comments]

10.2 Markets and Capitalism

In 1974, American sociologist Harry Braverman noted that the characteristic feature of capitalism was that the workers only sell their capacity to work (referred to by Karl Marx as “labour power”) to the capitalist in what we now term to be the labour market.

Workers are not enslaved under capitalism nor do they sell what we might call labour services. It is clear that capitalism has moved beyond slavery but why would he say that the labour market is not where labour services are sold?

Following Marx, Braverman also argued that the major challenge facing the capital is to ensure the labour power they purchase becomes a flow of labour services (or simply labour). This observation suggests that the capitalist firm faces a control problem pertaining to how the managers extract work from the potential they have bought.

Braverman wrote (pages 57-58):

When he buys labor time, the outcome is far from being either so certain or so definite that it can be reckoned away, with precision in advance. This is merely an expression of the fact that the portion of his capital expended on labour power is the “variable” portion, which undergoes an increase in the process of production; for him the question is how great that increase will be. It thus becomes essential for the capitalist that control over the labor process pass from the hands of the worker into his own. This transition presents itself in history as the progressive alienation of the process of production from the worker; to the capitalist, it presents itself as the problem of management.

In modern terms, the firm agrees to pay a wage to the worker for a given working day (which itself might vary according to various rules). At that point in the exchange the firm has purchases the labour power, which is the capacity to work. No actual labour services have been purchased in that transaction.

The task of management then is to organise, muster and deploy that labour power in a controlled way to ensure that for the time the worker has agreed to work they are delivering the desired flow of labour services to the firm.

It is in that way that the firm ensures they produce enough output from the labour power purchased, which upon sale, will return the funds outlayed on wages (and other materials the workers use) and leave a sufficient residual – profits – which will satisfy the objectives of the owners of the firm.

A study of the modern labour market therefore has to be conducted within the context of the primacy of managerial control and the need for the capitalist firm to maximise the flow of labour they gain from the labour power they purchase.

We might ask as American sociologist Michael Burawoy did in 1978:

Why is control necessary?

The answer is to be found in the observation that the objectives of workers and firms are rarely – substantively – the same. Marx considered the relations between those who sell labour power (the workers) and those who buy it (the capitalists) to be fundamentally “antagonistic” or adversarial.

We might summarise this basic conflict by assuming that workers will typically desire to be pay more for working less and capitalists want to pay the least for the most flow of labour services. We could frame this tension in more complex ways and, indeed, Marx and his followers have done that. But for our purposes that basic conflict still pervades labour markets in modern monetary economies and has to be understood.

This is not to say that business firms do not provide good working conditions and seek to reward their workers in many different ways. The point is rather that they do that without jeopardising their control function or their capacity as purchasers of labour power.

In that context, Micheal Burawoy suggests that:

… the essence of capitalist control can only be understood through comparison with a noncapitalist mode of production.

By which he means that to understand the true nature of the capitalist labour market a student has to have some appreciation of historical arrangements for labour prior to the onset of capitalism.

His main comparison is in detailing the transition from Feudalism to Capitalism. His comparison between these two systems of production allows the student to highlight the differences and the purposes of these differences in relation to the basic challenge of capitalism – to extract labour services from purchased labour power in a conflictual context.

He defines a “mode of production”:

… as the social relations into which men and women enter as they transform nature.

Under feudal relations, the worker (a serf) tills the land their lord has provided them with for some part of the week. They are allowed to consume the production that arises from that work. This production allows the serf to survive and provide for their family.

For the remaining days in the week, the serf tills the lord’s land and all of the labour expended can be considered surplus to that required to maintain the survival of the serf and his/her family. The goods and services produced in this part of the week are expropriated by the Lord for his/her own use.

Burawoy noted the crucial characteristics of this system of production are that:

  • Necessary labour (that required to maintain survival of the worker) and surplus labour are separated in both time and space.
  • The serfs have possession of their own means of subsistence as they work – that is, they farm and consume their own product.
  • Serfs undertake this work independent of the lord.
  • Surplus labour (that is, the work expended on the Lord’s own land) is transparent and the lord expropriates it through extraeconomic means (that is, by dint of his status in the system as lord).

The contrast to the capitalist mode of production, which in historical terms succeeded the feudal system is stark. The essential characteristics of that system are:

  • The necessary and surplus labour are not separated in space and time. The worker appears to work say an 8-hour day for a certain hourly wage, which blurs the distinction between the two types of labour.
  • The workers do not possess the means of production and hence the means of subsistence. A defining feature of capitalism is that the capitalist owns the productive means and the worker, while free to choose which capitalist to work for, has to work to survive. Survival requires the worker agree to work for, say 8 hours to get the wage which might be equivalent to 5 hours of production.
  • The capitalist controls the work process and the worker has to provide labour services within that control system.
  • The surplus labour is conjectural – that is, there is no extraeconomic authority based on feudal politics, social position etc to ensure that surplus production occurs. The creation and expropriation of surplus labour becomes an economic struggle that unfolds within the workplace

All of this is going on within the labour market. Every day, workers are producing goods and services which consumers and firms desire, but in doing so they are producing both necessary and surplus labour.

The production of surplus labour, which manifests as profits if the surplus value embodied in these goods and services is successfully sold, maintains the capitalist social relations. It allows the owner of capital to retain his/her position of power and at the same time ensures the worker has to return each day in order to survive.

Under feudalism, the lord remains so as a consequence of the manorial politics (the extraeconomic means) irrespective of the surplus output.

The final point to appreciate in this overview is that the hidden nature of the surplus labour under capitalism creates the need for managerial control, which aims to ensure that surplus value is created but that the system does not make it obvious that workers are working longer than necessary to maintain their existing living standards.

The insights about “markets” provided by Hungarian economic anthropologist Karl Polanyi is also relevant to this discussion.

He considered the objective of the capitalist institutions (we have described above as the (which he termed the “market economy”) was to organise the production of goods and services by bringing together all the main elements of production (labour, raw materials, machines etc) via a system of markets.

The labour market provided the labour power necessary for the labour process – the actual production process where workers delivered the labour surpluses under supervision of the management.

Of relevance, was his insights based on anthropological studies that human behaviour within these market systems is not adequately described by the notion of homo economicus, which is the behavioural foundation of the mainstream textbook approach to labour markets.

Homo economicus (or “economic man”) casts people as being rational in all their decision making and capable at all times of achieving outcomes that maximise their satisfaction (“utility”). This views considers that consumers maximise their satisfaction or welfare and business firms maximise their profits via free exchanges within markets.

This free exchange is conducted in competitive terms between free agents. In fact, there is no distinction made between say the supplier of labour and the supplier of bananas or the would-be purchaser of either. These free agents are motivated by their own narrow self-interest but in this pursuit they combine to maximise the outcomes of all.

Polanyi and other anthropologists have found that in many societies humans behave with reciprocity where cooperation rather than competition is paramount.

While the mainstream textbooks imply that the selfish behaviour they assume is common across all societies and cultures is a reflection of a basic “human nature”, the evidence provided by the anthropologists and others doesn’t support that conclusion. There is, in fact, a plethora of behaviours observed depending on the social institutions that have developed and the modes of production adopted.

Their work informs us that the capitalist institutions and mode of production is a particular system and the human behaviour that is moulded by that system is context dependent.

Polanyi argued that within a capitalist system the market economy becomes central and begins to dominate the importance of other aspects of society. The society increasingly becomes an economic society and market terminology becomes the way in which we calibrate our perceptions of the health of society.

[NOTE: MORE TO COME HERE WITH SOME RE-ARRANGEMENT]

References:

Braverman, H. (1974) Harry Braverman, Labor and Monopoly Capital: The Degradation of Work in the Twen- tieth Century (New York: Monthly Review Press, 1974)

Burawoy, M. (1978) ‘Toward a Marxist Theory of the Labor Process: Braverman and Beyond’, Politics and Society,
8(3&4): 247-312. If you have access to Sage Publications you can download the Full Paper.

Polanyi, K. (1944) The Great Transformation, Holt, Rinehart and Winston.

Saturday Quiz

The Saturday Quiz will be back again tomorrow. It will be of an appropriate order of difficulty (-:

That is enough for today!

(c) Copyright 2012 Bill Mitchell. All Rights Reserved.

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    This Post Has 10 Comments
    1. This paragraph needs editing:

      He considered the objective of the capitalist institutions (we have described above as the (which he termed the “market economy”) was to organise the production of goods and services by bringing together all the main elements of production (labour, raw materials, machines etc) via a system of markets.

    2. My question is how did capital and labor become separate?

      Could it be via “credit creation” whereby the so-called “credit-worthy” are allowed to steal the purchasing power of the less “credit worthy”? And use it to automate their jobs away?

      The Industrial Revolution and central banking started around the same time, no?

    3. As for the “rational man” theory, here are some summaries from

      Subliminal: How your Unconscious Mind Rules Your Behavior by Leonard Mlodinow

      Other studies show detergent in a blue and yellow box is preferred to boxes with different colors. And German wine sells better than French wine if German music is playing in the background while French wine sells better if French sounding music is playing.
      Not only that, but experiments with beer and wine show that describing the exact same product in different terms or packaging it differently or pricing it differently actually makes the product taste better or worse to the subjects. And this is while their brains were being scanned by a functional MRI (fMRI) which showed that in, fact, their brain was registering more pleasure for, say, the higher priced product, even though it was the same as the lower priced product.

    4. I’m wondering if you have considered David Ellerman’s arguments about labor and capital ownership conflicts as a result of the confusion between contract rights versus property rights in the management of the firm rather than a Marxian “fundamentally “antagonistic” or adversarial” relationship between employers and workers?

      The main argument is the because a legal holdover from the land property ownership equaling legal sovereignty over the native population in the feudal system has carried over to the firm management belonging to the Capitalist has creating the so called worker capitalist conflict but it doesn’t have to exist as a economic necessity from private capital ownership contra Marx ( see http://www.abolishhumanrentals.org/human-rentals/the-fundamental-myth/).

      (Cross Poster at Mike Norman’s blog) but my question is for Bill.

    5. @Septeus7

      An interesting link, but does not alter the fact that any kind of contract can be abusive. Property ownership is a fundamental factor in setting the terms of a contract, whether it be for employment, a lease, or franchise.

    6. Only if the owner of a banana were the banana itself could the labor market be said to be like the banana market. If one goes back further than feudalism, such labor markets did exist. The owners of labor were separate entities from the laborers; laborers, aka slaves, were bought and sold like banana plants.
      Suppose bananas cost more to produce than they earned for their owner; then banana owners would normally destroy their banana plants and grow something else. If slaves cost more than their earnings, apparently, under the Roman law of dominium, their owner had the libertas to get rid of their (slave) property just as a plantation owner has the right to plow under his banana plants.
      In the classical world, laborers were “chattel.” In the capitalist world they are “tools,” aka “employees.” When tools get rusted or obsolete they’re thrown in the garbage.
      Perhaps the labor problem is not economic, but moral.

    7. The headline claims and promises to show that the labour market is not like the market for bananas. But after reading the article, I can’t see why the claim is true.

      Today’s labour market is a market, with supply demand and price setting just like in any other market, as far as I can see; and I can’t see anything in the above article to the contrary.

    8. Dear Disappointed (at 2012/11/29 at 12:13)

      I suggest you think about the content a bit more deeply and consider the way in which labour power differs from the flow of labour in the production process and the implications of that. And then consider whether the use value of buying a banana requires the producer of those bananas to remain in the exchange under your control while you enjoy the consumption.

      In other words, I don’t think you understood the material you have sought to criticise at all.

      best wishes
      bill

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