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Productivity and Wages

Economists are generally hardly interested in how markets really work. If they were, they would have abandoned the concept of equilibrium as soon as its inconsistency with freedom and individuality became apparent through the work of Sonnenschein (1972), Mantel (1974) and Debreu (1974). The fact that they haven’t, indicates that the majority of them is more concerned with the ideological defense of markets, than with finding out the truth about them (as I argued here). This ideological slant is also apparent in the assumptions that underlie labor market models. Crucial among those, is the assumption that wages and salaries reflect a person’s marginal product. That is, it is generally assumed that people’s wages are equal to the production value that is added by the last person hired. This assumption is unlikely to hold in reality.

First, a person’s marginal product can only be calculated in very specific circumstances. In the pin factory that Smith illustrated the virtues of the division of labor with, the concept actually would have made sense. In this example, Smith describes how one unskilled laborer could make at most twenty pins a day. With each extra worker the production process can be broken up into smaller parts, allowing each worker to specialize in only one or a few operations, such as heating, straightening or cutting the wire to size. This specialization process, Smith says, can lead a group of ten people to  ‘make among them upwards of forty-eight thousand pins in a day’ (Smith,1776). This thus boosts their average productivity to four thousand eight hundred pins per worker per day. Each time the process is broken down into smaller parts, however, the productivity gains become smaller. One can imagine how having one person tending the fire, significantly improves the productivity of the whole team. Adding an extra person to haul wood when needed, will however hardly improve the team’s production further. So the concept of marginal productivity only makes sense when production is possible with any number of people and the contribution to production of each extra person is less than the contribution of the previous person hired.

This logic breaks down when there is real team production. If you have to move a couch, you need at least two people. If there is only one, his marginal product is zero. If you add a second, the job can be done. So in actual teamwork the concept of average productivity makes sense, but marginal productivity is a useless concept. In fully industrialized economies most production is genuine team production in this sense. A specific machine usually needs a specific technically determined amount of people to operate it. Not more, not less. When operated by the right amount of people, it churns out a technically determined amount of products per day. So in most cases it makes sense to speak of the marginal product of a team manning a machine, but not the marginal product of labor (or capital, for that matter). Moreover, the marginal product of each additional team is likely to be pretty constant, rather than fall. Under these circumstances, there would be no profit left if the company paid each team its marginal product.

Secondly, in the few cases where the concept of marginal productivity would still make sense, a good proxy would be the amount of production foregone when a person calls in sick or is fired. Using this proxy, however, we must conclude that most managers have a zero or even negative marginal product. When Ricardo Semler, the CEO of Semco Partners, took over from his dad, he fired almost all managers, but instead of falling, the average productivity of his employees actually rose quite dramatically (Wieners, 2004). Apparently, then, the managers held them back from achieving their full potential. This implies that the marginal product of their managers was negative. So instead of getting wages many times those of the employees, they should have actually been charged for the privilege to manage them. In the Netherlands, Buurtzorg has illustrated the same principle (cf. De Beter, 2018). Within our own faculty, you can see the same dynamic illustrated on a regular basis. If an experienced timetable creator calls in sick for a week, all teachers and all students suffer. If a teacher calls in sick, only his or her students are inconvenienced. If the dean calls in sick, we probably wouldn’t even notice. Using this logic then, the dean should be paid less than teachers and teachers less than timetable creators.

All in all, the labor market is not a fair place where people are remunerated for their contribution. Instead, the lower your contribution, the higher your pay. I know this smacks of Marxism. It sounds as though capitalists are just leaches exploiting the living daylights out of actually productive people. But I am not calling for a revolution. I just think that the business of science is to find and ruthlessly expose the truth. I cannot and will not embrace alternative facts in order to defend the status quo. No progress, be it in science, society or technology, has ever come from attempts to shield the status quo from criticism by ignoring disconcerting or disconfirming facts. So, fellow economists, man up and prove me wrong. Alternatively, you can change your theory or just admit that you find reality boring and the truth uninteresting. If the latter is the case, I dare you to explain why you call yourself a scientist.


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