'of necessity there would be fewer workers required'

Not so. If the capital was not merely labour saving then more output could be produced at the same cost, the higher-paid workers would consume more and this would employ some (or perhaps all) of the lower-paid workers. 

Avner Offer


======================================================
From Avner Offer, Chichele Professor Emeritus of Economic History, University of Oxford
  All Souls College, High St., Oxford OX1 4AL, tel. 44 1865 281404
 email: [log in to unmask]
 personal website:
 http://sites.google.com/site/avoffer/avneroffer
________________________________________
From: Societies for the History of Economics [[log in to unmask]] on behalf of Steve Kates [[log in to unmask]]
Sent: 14 November 2013 00:19
To: [log in to unmask]
Subject: Re: [SHOE] Hayek and trade unions

Ric Holt wrote:

"I did a paper many years ago looking at the impact of the United Farm Workers  on domestic agricultural wage rates. The union was able to put an end to Public Law 78, which allowed guest workers from Mexico (creating the close economy Dave mentioned). With unionization, wages for agricultural workers went up which forced farmers to turn to technological development (capital) in the production process. Over time less unskilled workers were definitely hired, but that is exactly what the union wanted. What was needed with new capitalization was less unskilled workers and more workers with skills to run the new technology in the fields and stability in the labor market. This increase overall marginal production, which justified the higher wage rates the unions were demanding. A win-win situation for everyone."

I don't know whether Ric was trying to establish my point or refute it, but here is the same union mentality I confronted in Australia. The union drove wages up to increase the capital intensity of the industry and as a means to raise the wages of the employees who ended up with jobs. But of necessity there would be fewer workers required and the effect would be on employment. The unneeded workers might find jobs somewhere else but whatever those jobs would be were again, of necessity, more poorly paid than they were paid as farm workers since those alternative jobs were already available but not chosen. Marginal productivity theory is part of what we now call the theory of the firm. It provides little insight into the entire economy and on the demand for labour overall. Hayek who understood Mill uncommonly well - though I do have my differences with him on some issues - would have been trying to make this point.

As for the Galbraith-Friedman correspondence, the India-Pacific is surprisingly more interesting journey than one might imagine. Thank you for digging it out although I don't think that was what Ric might have intended as the central focus in bringing it up.


On 14 November 2013 07:53, Ric Holt <[log in to unmask]<mailto:[log in to unmask]>> wrote:
I guess I want to pursue my last post a little bit. We all know that Keynes, along with American utopian thinkers like Edward Bellamy, believed some day we would be able to separate consumption from production. This was partly due to technological development through capital investments. What this should mean is that we can increase our levels of production, but use less labor. This would provide citizens an opportunity to have a livable material lifestyle along with more leisure and opportunities to do personal and social good. Clearly there would have to be some type of redistribution from those who control and own capital to the population at large. This can take the form of being in school longer and retiring earlier (public institutions we already have in place). Given the high return on capital today and the need for less labor for production, why couldn't we fulfill Keynes' utopian vision (It is also part of a vision Galbraith had also).

Ric Holt
Southern Oregon University


On Wed, Nov 13, 2013 at 11:29 AM, Ric Holt <[log in to unmask]<mailto:[log in to unmask]>> wrote:
I did a paper many years ago looking at the impact of the United Farm Workers  on domestic agricultural wage rates. The union was able to put an end to Public Law 78, which allowed guest workers from Mexico (creating the close economy Dave mentioned). With unionization, wages for agricultural workers went up which forced farmers to turn to technological development (capital) in the production process. Over time less unskilled workers were definitely hired, but that is exactly what the union wanted. What was needed with new capitalization was less unskilled workers and more workers with skills to run the new technology in the fields and stability in the labor market. This increase overall marginal production, which justified the higher wage rates the unions were demanding. A win-win situation for everyone.

To lighten things up, here is a recent letter I came across from Ken Galbraith.

Ric Holt
Southern Oregon University


Milton Friedman sent Galbraith a note on February 10, 1975 saying that he was going to Australia and thinking of taking a trip “across the Australian continent on the India Pacific Railway.” He heard that Galbraith had taken the trip and wanted his advise whether it would be worth his time and effort.


To Milton Friedman

February 26, 1975

                                                                              [Gstaad, Switzerland]

Dear Milton:

            I think my alert office has already sent you a copy of my description of the journey. It will give you all the information you need for a decision and perhaps more. On balance, I would certainly do it.

            The same mail brought a letter from Peking asking if I could arrange to send a copy of Friedman and Schwartz. The prospect for Communism is more devastating than I thought. I am also sending to the press this week a book on MONEY – WHENCE IT CAME AND WHERE IT WENT – which is rich in praise of your scholarship, more reserved on your conclusions.


                                                                        Yours faithfully,

                                                                        John Kenneth Galbraith


On Tue, Nov 12, 2013 at 5:47 AM, Colander, David C. <[log in to unmask]<mailto:[log in to unmask]>> wrote:
I think the issue depends in part of whether the analysis is being done in a closed economy or an open globalized economy.  In a closed economy one has many more feedbacks, and capital labor ratios in capital industries need to be compared to capital labor ratios in consumption industries.  One also needs assumptions about technical progress and growth.  I see no definite result coming from this analysis.
                In an open economy, however, the forces are quite different—more micro in structure.  High wages (costs) in one country will encourage production to go abroad, other things equal.  In a globalized economy real wages become relative wages, and the argument that high wages cause unemployment is much more defensible.

Dave

David Colander
[log in to unmask]<mailto:[log in to unmask]>
802-443-5302<tel:802-443-5302>

From: Societies for the History of Economics [mailto:[log in to unmask]<mailto:[log in to unmask]>] On Behalf Of Steve Kates
Sent: Monday, November 11, 2013 10:58 PM
To: [log in to unmask]<mailto:[log in to unmask]>
Subject: Re: [SHOE] Hayek and trade unions


Once again I find myself replying in support of James Ahiakpor.

In Australia where I was involved in our National Wage Cases on behalf of employers, there was an argument we continually had to deal with which came from the bench and not the unions. It was that raising wages would be good for the economy since it would force businesses to become more capital intensive. The assumption here was that the higher productivity forced on employers would lead to increases in the economy's ability to finance the higher real wage being imposed.

Marginal productivity theory is part of micro and will tell you what an individual firm will do in the face of higher real labour costs. It does not, however, tell you what will happen across the economy. Forcing real wages higher than the underlying productivity of the economy will support will drive some people out of work. This seems to me so obvious that both then and now it leaves me nonplussed to see it even mentioned, but then I, like James, think about these questions using classical forms of analysis. Unfortunately, like Hayek said, it still seems to be a completely new argument to most people.

The only difference between myself and James is that I would send you to Mill rather than Ricardo.

On 11 November 2013 23:51, Robert Leeson <[log in to unmask]<mailto:[log in to unmask]>> wrote:
Can someone explain Hayek's (1978) logic:

“I have just published an article in the London Times on the effect of trade unions generally. It contains a short paragraph just pointing out that one of the effects of high wages leading to unemployment is that it forces capitalists to use their capital in a form where they will employ little labor. I now see from the reaction that it's still a completely new argument to most of the people. [laughter]”

Statically, Hayek may be right: capital and labour are, in large part, substitutable inputs – if labour becomes relatively more expensive, at the margin, demand for labour will fall. The time structure of production, however, appears to  render Hayek’s assertion false.  In a standard neoclassical model, an increase in capital per worker will, ceteris paribus, increase the marginal product of labour and thus the demand for labour - which will tend to raise the equilibrium real wage. Since in neoclassical equilibrium, the real wage is equal to the marginal revenue product of labour (the price of output, P times marginal physical product, MPP), the only mechanism by which Hayek’s assertion holds is by adding a missing link: deflation.

Hayek (1939 [1933], 176, 178) claimed that he was seeking a return to “some sort of equilibrium” via labour liquidation: yet a fall in the price level (deflation) would increase labour market disequilibrium (liquidation) by increasing real wages (W/P) and reducing the marginal revenue product of labour (P times MPP) and thus the demand for labour.

Is there some aspect of the reswitching debate which may validate Hayek's claim; or is there some aspect of Austrian capital/cycle theory that provides support?

RL



--

Dr Steven Kates
School of Economics, Finance
    and Marketing
RMIT University
Building 80
Level 11 / 445 Swanston Street
Melbourne Vic 3000

Phone: (03) 9925 5878
Mobile: 042 7297 529





--

Dr Steven Kates
School of Economics, Finance
    and Marketing
RMIT University
Building 80
Level 11 / 445 Swanston Street
Melbourne Vic 3000

Phone: (03) 9925 5878
Mobile: 042 7297 529