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Surplus and classical distribution theory
Anthony Brewer
Department of Economics
University of Bristol
It is often said that the classical economists had a 'surplus' theory
of distribution. I will argue that although there is some truth to this
claim, it is one that must be rather carefully qualified. I have become
increasingly convinced that the vague and imprecise way the word
'surplus' is used is a hindrance to clear thinking.
What is a surplus theory? If x + y = z, and if x and z are fixed
independently of each other and of y, then one can say that y is the
surplus of z over x. For example, if my brother and I get a cake and if
he first takes what he wants, regardless of the size of the cake, then
my share is a residual or surplus. What he takes might depend, say, on
how he feels, provided it does not depend on the total to be divided.
But if we split the cake equally, or by any other rule that makes his
share depend on mine or on the size of the cake, then my share is not a
pure surplus.
In the surplus interpretation, classical distribution theory looks like
this: (a) wages are fixed at a given level, (b) wage plus non-wage
income equals (the value of) total output, so (c) non-wage incomes are
determined by the surplus of output over wages. Valuation of output
poses well-known problems, but my concern here is with the problems
which would remain even if output were homogeneous. Note in particular
that proposition (a) is the key to the surplus theory, since (b) is
really quite trivial. A surplus theory with any substance to it must do
more than assert proposition (a) - it must offer some coherent
mechanism to bring it about.
The classical wage theory of wages was directly based on population
theory - (a) if wages are above subsistence, population and hence
labour supply grows, and (b) wages are governed by demand and supply,
in that rising labour supply, ceteris paribus, lowers wages (e.g.
Ricardo, p. 94). In a static model it would follow that wages tend to
subsistence.
There are other ways in which wages could be fixed prior to everything
else, but they cannot plausibly be attributed to the classics. Wages
could be fixed by law or binding custom, but the classics did not think
so since they discussed variations in wages in response to changing
economic conditions. Employers could conspire to fix wages at
subsistence. Smith did mention conspiracy, but his texts as a whole
cannot plausibly be interpreted in those terms. Employers might
voluntarily pay subsistence (but no more) because workers cannot work
efficiently if they are paid less. This would be a sensible story, but
I cannot find it in the the classics. Bargaining theories of wages are
sometimes mentioned in this context, but any sensible bargaining theory
makes the outcome depend on the total to be divided. Smith did discuss
bargaining power, implying that employers could force wages down to
subsistence, but immediately added that it did not apply to a growing
economy.
What of the claim that wages are determined by social or historical
factors, over and above physical subsistence? A legal or customary wage
could include elements other than physical subsistence, but that is not
relevant to classical economics. If there is a social element in
classical wage theory it must be built into the population theory. If
people will starve (or allow their children to starve) rather than be
'indecently' dressed, then clothes to a socially determined standard of
decency are necessary. If, as Cantillon suggested, people will not
marry unless they can be sure of an adequate standard of life for the
resulting children, then the equilibrium wage will adjust accordingly.
It is not enough to utter the words 'historical and moral element' like
a mantra. The mechanism has to be explained, and demonstrated in the
texts.
Did the classics have a surplus theory as defined? For reasons of
space, I shall consider only Smith and Ricardo. First Smith. His main
theory of wages is very clear from the bulk of the Wealth of Nations,
despite the rather confusing alternatives considered at the start of the
chapter on wages. He was concerned with growing economies, where wages
must be above subsistence to allow the labour force to grow in line
with the demand for labour, so wages depend on the growth rate (Smith
I.viii.16-27). That could still be counted as a surplus theory in the
sense defined above if growth, and hence wages, were independent of
output and profits, but they are not. In colonies, for example, high
per-capita output on the best land and low rents (or land prices) lead
to rapid accumulation and high wages. In countries which have reached
their 'full complement of riches', investment opportunities are low,
profits are low, and so are wages. Smith had not worked out all the
details of these interactions, but it is clear that he had advanced
substantially beyond a crude surplus theory.
Labour is not homogeneous. The structure of wages clearly affects
profits and other variables. To assert, as some do, that the structure
of relative wages can simply be treated as given prior to everything
else is an evasion, not a solution to the problem. Smith at least
tackled the question seriously.
Could it be said that although Smith did not hold a subsistence wage
theory there is an asymmetry between his treatment of wages and profits
which justifies treating his theory as in some way surplus-like? I have
some sympathy with this view, but it is difficult to sustain. Labour
supply depends on population (inter alia), which grows because of
natural human desires. But the accumulation of stock (capital) also
depends on a natural human desire, the desire to better oneself.
Population growth is checked when the wage falls to subsistence, and
accumulation is also checked when profits fall to a minimum set by the
risk of loss. This does not amount to perfect symmetry between wages
and profits (why should it?), but it is hard to see either as prior to
the other.
Ricardo, by contrast, did state a crude surplus theory, with wages
reduced to subsistence by the demographic mechanism and non-wage
incomes as the residual. The problem is that he also understood and
accepted Smith's more sophisticated wage theory. The crude subsistence
wage theory, with or without social elements in subsistence, is valid
in a non-stationary state if and only if demographic changes work
through much faster (strictly, infinitely faster) than changes in the
demand for labour caused by capital accumulation. It would be
absurd to believe that they do (as Marx, for example, pointed out). The
simple subsistence wage, and hence the simple surplus element in
Ricardo's theory, is its weak point, not its strength. One can
reasonably debate whether he thought of it simply as a heuristic
simplification or whether there is a real inconsistency (c.f.
Hollander, 195-6, Peach, 130-1). In any case, to attribute an
unqualified surplus theory of distribution to either Smith or Ricardo
is to undervalue and oversimplify their writings.
Finally, a very brief word on Marx (who I do not count as a classical
economist). He explicitly rejected the Malthusian theory of wages, and
could not therefore take over the classical version of surplus theory
as it stood. His main statement of the theory of surplus value in Vol. I
of Capital depends on a definition of the 'value of labour power' in
terms of subsistence requirements (with a 'historical and moral
element'). It offers no reason why wages should be at this level and
therefore has no substantive content. However, Chapter 25 contains a
different story, in which accumulation raises the demand for labour
power and drives up wages but rising wages in turn check accumulation,
while labour-saving technical change tends to bring wages down again.
This incomplete sketch of dynamic interaction between wages, profits,
and growth clearly does not meet the conditions for a surplus theory as
defined above.
I conclude: (1) the substance of a surplus theory of distribution has
to derive from the wage theory on which it is based. (2) To the extent
that there was a classical surplus theory, it was based on 'Malthusian'
population theory and stands or falls with it. Any claim that such a
theory can be used in modern conditions is clearly untenable. (3) Even
a Malthusian population theory only yields a pure surplus theory of
distribution in a static economy. As Smith and Ricardo both knew, in a
growing economy distribution and growth interact to produce wages above
subsistence, invalidating a simple surplus theory.
Hollander, S. Classical Economics, 1987, Blackwell
Peach, T. Interpreting Ricardo, 1993, CUP
Ricardo, D. Principles (Works, vol I), ed P. Sraffa, 1951, CUP
Smith, A. Wealth of Nations (Glasgow Edition), 1976, CUP.
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