This confuses me. Wouldn’t the increased productivity of labor decrease the necessary amount of employed labor, thereby creating a “race to the bottom” of wages, resulting in an increase of profit, yet a decrease in wages?
Assuming full employment, the capitalist needs to bid labor away from other lines of employment in order to hire them to generate productivity from his capital investment. The very fact that this capital is more productive allows him to bid more for labor and still make a profit.
Why would you assume full employment?
Because the alternative is assuming labor costs are zero.
That makes sense. So you’re saying that without distortions in the market created by the state, wages would drop, and employment would rise, until they balanced each other?
It seems like an intriguing proposition in our current global economy, with labour and capital racing around the planet, trying to outpace one another, until wages would rise and capital would fall until the difference would be so razor thin, they would eventually balance out…
Holy cow! Lassiez-Faire (almost) Worker’s Paradise!
Oh, wait. I forgot to factor in invention and innovation. But then again, without artificial protections, the advantage provided would only exist for a split second, economically speaking…
Holy cow! Back to Lassiez-Faire (almost) Worker’s Paradise!
I guess Marx was right (about one thing), economic equality is inevitable, if you let the market run it’s course! How ironic is that?
The increased productivity of labor means greater general provision of consumers’ goods and services, which results in lower money prices for consumers’ goods and services, which means the same wages will purchase more consumers’ goods and services.
How can the laborer be hired away from other capitalists with the fruits of the productivity that that same laborer will enable in the future?
Catching fish with your bare hands is less efficient than catching fish with a net (introduction of capital). The more plentiful and sophisticated capital afforded to you, the greater your productivity (output per time period). The more stuff you have, the wealthier you are (economically speaking). The way this works In complicated advanced economies is by the process of competition. As the supply of capital increases, the demand for labor (increased competition) will increase, and therefore real wages increase. The total capital supply wants to absorb the total labor supply and engage in production. (the axiom, “better more profit than less profit” moves real wages towards their productivity levels, and destroys cartels).
To say that economic inequality is inevitable is an obvious fact of reality. But poverty is not, in anyway, inevitable, nor is the elimination of poverty impossible.
Correct me if I’m wrong, but are you and I basically saying the same thing here?
I didn’t read your comment, but basically yes. At least, your explanation is the way it works in market economies. Crusoe does not see prices on his island–but an increase in his productivity level (introduction of capital) still makes him wealthier (catches more fish, ect).
Okay cool. That’s what I thought… just checking.
Also, for the reason I express above, Stranger’s analysis doesn’t make sense to me. Can you comment on that as well?
This is one type of phenomena. For example, an entrepreneur may come up with a more technically efficient combination of capital, or discover new technology, which, when combined with labor, will lead to higher marginal returns. This allows him to bid away labor from other employments and still retain entrepreneurial or “super-normal” profits. This will also increase the natural rate of interest assuring that this more technically efficient entrepreneur is granted access to scarce capital. Of course, if the market rate of interest doesn’t rise to the natural rate, then you get the ABC, and a bubble (like the tech bubble).
His example is more specific.
Okay, thanks.