Re: Could increasing productivity cause wages to drop, instead of increase?

From: Igor (jjweatherby_at_houston.rr.com)
Date: 10/30/04 

Date: Sat, 30 Oct 2004 20:50:30 GMT

Daniel Oliver wrote:

> definately a pandora's box to economics question.
>
> I think analyzing the topic from a extreme macro-persepective on this
> question is quite useless. We need to look at it at a more micro
> stand point.
>
> Situation 1 in which increasing productivity decreases wage:
>
> Lets say King Jethro has a nation of 10,000 farmers that work at $20
> an hour to produce 10,000 units of food. He buys 100 tractors, and
> now only needs 1000 farmers, to produce 10,000 units of food. Wages
> will drastically drop, because he now only needs 1,000 farmers. 9,000
> farmers get displaced. The king likes this because now more farmers
> are at his whim. He does not have to plead to get people to farm.
>

You assume he is still only making one thousand units of food. To
understand why labor demand will increase think about what will happen
to production. If Jethro breaks even at 10,000 units of food when the
cost is $20 will not make much more profit now that the cost is much
lower? Lets look at this way. At if each worker is paid $20 an hour and
  each worker produces say 1 units of food an hour. Then you have to pay
  $200,000 dollars for 10,000 units. Now if each worker produces 10
times more than labor cost has just dropped to $20,000 for 10,000 units.
If price of the units of food stay the same would Jethro not increase
his production in order to get more profits? Why would Jethro still only
make 10,000 units of food. If people are willing to pay say $20 a unit
and it now only cost you $10 a unit what business would not increase his
production above 10,000 units? There are clearly profits to be made.

That is why productivity will increase labor demand. As workers become
more productive firms will want to hire more workers because they get a
higher return on the worker. As labor demand increases holding supply
constant the wage rises.

>
> Situation 2 in which increasing productivity increases wage:
>
> A commune of 10,000 farmers, work to produce 10,000 units of food.
> They buy 100 tractors, and only need 1000 farmers to produce 10,000
> units of food. 9000 farmers get displaced but aren't mad because they
> share the productivity increase. They go on to find other jobs that
> provide a net gain for the commune.
>

Again you are assuming they still produce the same amount of food. Why?
If the commune does not work for profits then we do not know what they
will do. The model does not apply. There is no profit motive. The profit
motive is what drives firms to hire in the first place. If the commune
is under a command system it is very likely that those workers could
have produced much more.

>
> These 2 situations simplify the anwser to the open ended question. If
> the capital or productivity increase is controlled by a few, then
> wages will decrease.
>

No you assume that the business will produce the same amount. If demands
are constant and your cost drops NO BUSINESS WILL KEEP PRODUCTION
CONSTANT. Any businessman who will last in the market for any period of
time will realize this is time where profits can be increased and
increase production. This still works under imperfect competition as
long as demand is elastic.

> If the capital or productivity increase is controlled by the majority,
> then wages will increase.
>

Communes do not pay wages.

> To say situation 2 is the only thing occuring in our world is quite a
> joke. Why did lords ever buy weapons? Not only to defend, but to
> keep the cost of labor down.
>

Wrong again. Nobility bought weapons to pry the hard earned profits from
the hands of their subjects. This was not capitalism. The state
extracted all profits and more. There was no profit motive so peasants
only grew enough to feed themselves and keep the tax collectors from
killing them. This is why high taxes kills an economy.

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