Neo-Classical Ideas on Wages

Neo-Classical Ideas on Wages

The most generally accepted theory of wages today is the marginal productivity theory. Once again, it is to Adam Smith that we turn for the first mention of such a thesis. He stated— without explanation, possibly without much thought—that the produce of labor was the wages of labor. A fuller statement oc­curred in Johann Heinrich von Thunen's Der Isolierte Stoat in 1826. This statement was worked out with mathematical pre­cision; but in spite of the later popularity of the idea itself, thi» author's work has not been seriously considered. The best ex­ponent was John Bates Clark (1847-1938), Professor of Economics at Columbia University. As analyzed by Clark the marginal productivity theory is really the explanation for the payment of rent, interest, profit, and price. Essentially the theory is this: the price of labor is determined by its marginal utility to the employer. Each unit of labor hired by the employer contrib­utes to the value of the product, but the amount which each successive unit contributes is less than that of the one preceding; when the point is reached at which the contribution of the worker most recently hired just equals the wages he receives, the em­ployer will no longer hire additional workers. The price of every other worker can be no greater than that of the last hired who stands ready to replace any of the preceding workers. The wages paid, then, are equal to the productivity of the last worker hired, or to the marginal productivity of the labor force.

The assumptions which must be made and the impracticality of the theory have, in recent years, undermined its popularity. It assumes a state of perfect competition which of course does not exist. The lack of knowledge of the market, the immobility of labor, and the presence of trade unions make it unrealistic. Moreover, the difficulty of separating the productivity of labor alone, from that of capital, seems insurmountable. On the whole, while such authorities as Alfred Marshall supported the theory, with reservations, the peak of its popularity has passed. No other theory of consequence has yet appeared to take its place.