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My explanation is that the free market doesn't exist, and nobody really wants it. In a perfectly competitive free market, wages (and capital gains, too) should
by js8 6y ago
My explanation is that the free market doesn't exist, and nobody really wants it.
In a perfectly competitive free market, wages (and capital gains, too) should correspond to subsistence wages. However, this poses a problem. If all that additional value is created by firms, to whom is it all divided, if everybody gets just subsistence?
In my view, simply, this situation cannot happen. Instead, in the real world, the markets are always full of oligopolies which were intentionally created by all market participants (including employees) to split up all the created value, somehow.
In practice it takes many forms. It is likely that company employees unconsciously form coalitions that sabotage lot of outsourcing. Some of the coalitions correspond to nation states. In fact, should they fail to do it, they will have less income, and will be less relevant, because they will make less spending decisions.
So the result is somewhat random, it is result of dynamic evolutionary pressures that create market friction, and cannot be explained away by forces of free market rationality.
- whatshisface 6y ago>In a perfectly competitive free market, wages (and capital gains, too) should correspond to subsistence wages. Wait, why? You might want to support that claim a little better before you build a whole theory on it. Mainstream theory suggests that in the long run profit will converge to zero, but that doesn't mean that wages, which are the prices set in the labor market, will all converge on the same value. Frankly it doesn't even mean it's not possible to profit while running a business, because the cost of capital is counted against profit when it's claimed that profit converges to zero.
- js8 6y agoAccording to classical theory, just like with capital, the cost of labor should converge to the marginal cost that was needed to produce it (i.e. to zero profit for the employee). Of course it doesn't mean that everybody has to have to the same wage (for example, if your job requires more education, that's additional cost). But if profit (value) is created in the economy as a whole (that is the reason to have it in the first place), and yet every unit in it converges to have zero profit (marginal revenue = marginal cost), what happens with all the extra money? Or ask the other way around. Under neoclassical theory, the price of all commodities should converge to their costs. If labor is just another commodity, it should be true for labor as well. What is different for labor, from the perspective of the neoclassical theory, that it wouldn't behave like that? I think the neoclassical theory is inconsistent, and the assumption, that because all these can converge to zero profit independently, they also can converge altogether, is simply wrong. Therefore, there will always be an area in the economy, which doesn't operate according to neoclassical theory, where the profits are close to zero, that is, there will a component of income that cannot be explained away by costs (which is what the article is trying to do).