Block: Labor Economics

Walter Block criticizes Bernhardt and Scoones for discovering a peculiar “market failure” in the labor market.

The alleged failure invokes the idea that giving an employee a raise will “signal” to other entrepreneurs that the worker thereby blessed is more valuable than previously thought with the result that those entrepreneurs will have a renewed reason to try to steal the worker away.

Thus, entrepreneur A may reason as follows:

Smith is getting $60K / year. I think he’s a very productive guy and is rather underpaid and knows it. I don’t want to lose him. I think entrepreneur B could lure Smith away with a promise of $70K per year. To prevent this outcome, I myself shall offer Smith a $10K raise. But wait a minute. If I raise his salary, then B will surely notice this and come under the impression that Smith is a better worker than B has thought before. So, B will decide to offer Smith $80K / year. I can’t pay that much. So, I lose Smith either way, but at least if I don’t give him the raise, I keep the $10K. So, I won’t give him the raise.

The result is that the worker will not be promoted “as quickly or often as is socially optimal.”

Block offers a number of intriguing arguments against this claim. Some of them fail, like the idea that A can create a “poison pill” by promoting “employees who are totally underserving of this accolade, in the hope that B will snatch them up — and lose out thereby.” Wait, Walter, what? This requires that a highly implausible situation exists, namely that out of millions of firms out there, the poison pill will be swallowed by A’s direct competitor Q quickly enough and for long enough that the harm to Q will outweigh the harm to A. Most of the time, A will simply fire the malcontent.

Here’s my own argument. Consider the following illustration.

I took my cat to the vet recently and was told that the cat is getting fat in his almost-senior years, and one way to improve his health is to switch him to wet canned food diet. So, I went to PetSmart and was impressed by a large variety of canned food with prices ranging from ¢50 per can to $1.30 per can. Suppose then that I reasoned as follows: “I love my cat and want the best for him. The expensive food wouldn’t be such unless it were better. So, that’s what I’ll buy.” Obviously, no sane consumer reasons like that.

And indeed, I asked one of the store girls whether the cheaper brand was good. She was a little reluctant to affirm its “goodness” but told me it was their most popular brand. I was not surprised at this validation of the law of demand. Further investigation revealed some possible reasons why the more expensive cat food existed: some was “grain-free,” and so contained fewer carbs and more protein, some had purer ingredients, etc. I then decided whether the benefits outweighed the costs. (In the end, I bought a few different brands to test them out.)

The simple counter to Bernhardt and Scoones is that the price of a good is a very poor signal of the quality of the good. If B picked his employees based on how much they earned in other firms, B would quickly find himself staffed with expensive incompetents and disappear.

There are then two effects: (1) Smith comes to value his job with A more because of the raise; (2) B comes to consider Smith to be more productive than before because of the raise. Of these, reason and experience dictate that (1) should be far stronger than (2), such that the marginal benefit to A of a $1K raise to Smith outweighs its marginal cost, overall diminishes Smith’s job search activity, and so will be selected for.

Suppose, however, that I am wrong, and effect (2) is stronger than effect (1). Then Smith will still get his $10K / year raise by changing his job to come to work for B! (Even if B is now less aware of Smith’s abilities, Smith must himself suspect that he could do better. Otherwise, if neither B nor Smith himself think Smith is underpaid, then A has no reason at all to give Smith a raise. A will just sit back and enjoy his quasi-rent on Smith.) With their positions now reversed, A will now wonder whether Smith was a better worker than A imagined before Smith deserted him. Perhaps A will in turn offer Smith $80K to come back! Smith will still receive his raise via this somewhat circuitous route.

Suppose now that Smith does not deserve to be promoted by A. A’s marginal revenue of employing him is close to Smith’s marginal cost. If B steals Smith away and pays him $70K, then if Smith justifies his new salary with increased productivity in B’s enterprise, then we have an entirely economic and efficient re-allocation of a resource.

In short, I agree with Walter that there is no market failure, though for slightly different reasons.

Walter Block makes a peculiar argument in defense of the idea that subsistence wages do not prevail under capitalism.

As I understand it, Walter points out that a worker facing starvation can always tell his employer: “Will work for food and shelter,” thereby enslaving himself to the entrepreneur. But slavery existed for far longer than capitalism, and no slave likely ever died from lack of food while toiling for the master. Moreover, regarding black slavery in America, Walter points out, slaves were “well fed and well cared for.” But free labor is far more productive than slave labor. Hence, if no slave ever starved or froze to death, then a fortioti, neither should a free worker. We conclude that the latter’s “productivity level and wage… must be higher than that necessary for subsistence.”

Let’s first clarify that slaves are not paid wages; they are not labor but capital goods to their owner. As such, they depreciate and must be maintained, with food, health care, etc. It is no surprise that they were well-fed given that they were required to do hard manual labor.

But is it the case that the option of enslaving oneself always exists? Walter quotes Mises a few times, so let me do the same:

We may depict conditions of a society of agriculturists in which every member tills a piece of land large enough to provide himself and his family with the indispensable necessities of life. …

The inherent weakness of such a society is that the increase in population must result in progressive poverty. If the estate of a deceased farmer is divided among his children, the holdings finally become so small that they can no longer provide sufficient sustenance for a family.

Everybody is a landowner, but everybody is extremely poor. …

The alternative to this outcome is the emergence of a huge mass of landless proletarians. Then a wide gap separates the disinherited paupers from the fortunate farmers. They are a class of pariahs whose very existence presents society with an insoluble problem. They search in vain for a livelihood. Society has no use for them. They are destitute. (Human Action, 835)

Let’s call these landless proletarians, “beggars and thieves,” b&t. According to Mises, it would be not be profitable to the farmers to keep them even as slaves. Mises states: “Conditions as they prevailed in large areas of China provide a sad illustration of the misery of the tillers of small parcels.” Here’s a real-life “applicable to reality” situation in which indeed neither capitalism nor a slave-owning order exists.

Walter writes that “widespread starvation… could not have existed.” But Mises shows that it could and did, at least in this case. It turns out that there can be conditions under which even slavery would be unprofitable to the slave-master.

How then does Walter know that the our alleged “labor problem” under globalization is not similar to the problem of b&t under this version of feudalism? Or rather I agree that the present situation does not resemble the predicament of the b&t, but that is precisely what the “radicals” deny. In order to prove them wrong, we need positive arguments, such as those Mises characterized as “obvious and indisputable.”

It is true, as Mises concludes his argument, that

Laissez faire and its off-shoot, industrialism, converted the employable poor into wage earners. In the unhampered market society there are people with higher and people with lower incomes. There are no longer men, who, although able and ready to work, cannot find regular jobs because there is no room left for them in the social system of production.

But this needs to be demonstrated. In other words, it must be shown that not only is there no “reserve army of the unemployed,” but that there is no reserve army of the unenslaved, either. And Walter’s argument does not do that.

P.S. See also Mises’ “Remarks About the Popular Interpretation of the ‘Industrial Revolution’,” HA, 617.

Walter Block presents the Misesian understanding of time preference: if present goods were not apodictically preferable to future goods, then

we could never act in the present, for every action done now could have been done in the future. The fact that we choose to act in the present, when we could have waited, shows that we prefer the present; that we enjoy goods, the sooner, the better. But the future will present the same alternatives: action and non action.

Future action will thus also imply time preference for the present, paradoxically. By acting in the immediate future, instead of waiting for the even more distant future, we also show ourselves as present oriented.

The only way to illustrate a lack of preference for the present is never to act at all — a manifest impossibility for human beings. (39)

This account reflects Mises accurately but is still mistaken. Mises’ error lies in the fact that the (true) negation of (false) “I always prefer to consume later to sooner” is not “I always prefer to consume sooner to later” but “Sometimes I prefer to consume sooner to later.”

Mises’ proof amounts to saying that if a man has a motive, means, and opportunity to consume, then he will consume. He will not fail to consume for any reason, including by postponing consumption. This, however, is hardly interesting.

Again, while we act for the future, we enjoy and live only in the present, and so the statement that present goods are preferred to future goods turns out to be, according to the Mises’ interpretation of it, as perfectly analytic as that enjoyment is preferred to lack of enjoyment.

That all consumption by definition takes place in the present is true but toothless: yes, any enjoyment takes place in the now; so does any experience whatsoever; but it is not really because one prefers to enjoy now, but because there is no way to enjoy anything at any time other than now. One cannot either choose or renounce the impossible.

Let us therefore approach this problem differently.

Let Smith’s income be $100k per year. He is considering buying a house worth $240k. “Necessities” of life, as far as Smith is concerned, take up $20k per year; in other words, Smith adamantly refuses to spend less than this amount. He is particularly attracted to the following three choices:

1. he saves $80k per year; or
2. he saves $60k per year; or
3. he decides against buying the house at all and spends the entire $100k each year.

Either way, the house will be unavailable to him for at least 3 years. This fact is studied not by economics but by arithmetic.

The difference between (1) and (2) is that in (2) his standard of living in the first 3 years is higher, but he has to wait an extra year to buy the house. The former is a benefit of choosing (2); the latter is a cost. Even if Smith chooses (2), the cost needs to be felt and given proper respect. This cost I term “disutility of waiting.” If he chooses (3), then the disutility will be perpetual. Again, this is a cost, and on his deathbed, Smith would have to reflect on his life and say: “Despite the fact that I never got to own a house, I have no regrets.”

It is a corollary of Misesian time preference that waiting, understood as the cost of a choice to save less and consume more, has disutility; and the longer the wait, the greater the disutility.

“Waiting” and the disutility thereof has two senses. First, there is a desire to bring closer or at least make reachable a definite future enjoyment, and relinquishing immediate consumption is a necessary evil resorted to in order to attain a greater good. Present sacrifices diminish disutility of waiting.

Thus, Crusoe has a choice of whether (a) to keep evenly rotating, catching fish with a rod, and “wait” for (1) a much superior net forever; or (b) to tighten his belt and make the net in 2 months; or (c) to barely subsist but make the net in 3 weeks. His choice constitutes the practical aspect of his own time preference.

Second, suppose Crusoe picks (b). But he would also like to make (2) a pen for his livestock. This task will occupy him for 1 month. He has to choose still further between (1b) and (2). The fact that he has to wait less for the pen as compared to the net is an advantage of the former, a reason pro of it. If Crusoe is to choose the net anyway, then the utility of the net has to outweigh the utility of the pen, even given the pen’s lower cost of the time input, to such an extent that the net’s overall psychic profit is higher than the pen’s psychic profit. This is the theoretical aspect of time preference as such.

For much more on time preference, see my book Summa Against the Keynesians.

The first aspect of the interest rate concerns the price of not waiting. If I am to have any incentive to choose to give up today’s consumption for the sake of a particular satisfaction tomorrow, then it must be the case that bringing closer to fruition the future good ranks higher on my values scale than the present good sacrificed. However, if I want to put a number on the interest rate, then I cannot deal with valuations alone, because those are ordinal: they form a hierarchy, a scale and cannot be divided by each other. Still less is it possible to obtain a numeric interest rate by comparing “present goods” with “future goods,” because no mathematical operations can be attempted on heterogeneous goods.

Therefore, the rate of interest is a monetary phenomenon.

How does time preference figure in the determination of interest? Let’s say I am thinking of buying a computer for $1,500. I can choose to have the computer from now to 5 years from now. Alternatively, I will agree to refrain from my purchase and give up the $1,500 for a year if someone were to give me an extra $500 at the end of the year. It so happens that a monitor and a printer together cost $500. My second choice is to have computer + monitor + printer from 1 year from now to 5 years from now.

The second choice pulls the enjoyment of the monitor and printer closer to me, while the first choice would postpone their purchase indefinitely. As a result, the disutility of waiting is smaller for the second choice at the expense of some immediate enjoyment, namely of the computer from now to 1 year from now.

My own personal interest rate then is 500 / 1,500 = 33%. Now answer: by how much must $500 + 1,500 be discounted a year from now to result in $1,500 now? The answer is, by 25%.

In general, if the interest rate is i per time period, then the rate of discounting is i / (1 + i) per the same period. We do not discount the future because it is uncertain or less important than the present. The future will be here soon enough.

The easiest way to see the essence of the trade-off is to contemplate some Crusoe economics. If Crusoe catches fish, then he has the option of consuming the entire catch every day. There is not enough time left in the day for him to do anything else. Even if he would like to, say, build a shelter, he can’t and ends up “waiting” for it forever. A choice is open him, however, to go somewhat more hungry yet save some fish. Having accumulated a cache of dry fish, Crusoe quits fishing for a time and works on the shelter project, sustaining himself with the savings. A month later, the glorious house is built, and Crusoe restores his consumption of fish.

The choice then for Crusoe is between 1) plenty of fish from now till forever and 2) just enough fish to survive from now to 2 months from now (1 month saving and 1 month investing into building the house) yet a shelter plus plenty of fish from 2 months from now till forever.

Going back to our computer, why would anyone offer me the $500? Well, on the loan market people with different time preferences benefit from each other’s existence. Maybe Crusoe has worked very hard the previous year and feels like indulging himself. He wants a few good meals, but has spend all of his savings. He can borrow the fish from Friday, increasing his present consumption at the expense of future goods, because the interest payments later on will diminish his disposable income. Friday does not care how to receive the benefits from his own savings. He can invest them into a project, say, weapons to protect him against the cannibals, just as Crusoe did with the shelter. But loaning the fish to Crusoe works just as well, if the price — the interest rate — is agreeable to both.

When Crusoe borrows, this increases both his present consumption and the disutility of waiting for future goods.

Time preferences determine the interest rate both on the consumer loan market and in regard to the world of business, investment, and production.

As per the nature of time preferences, longer production processes must be more productive if they are to justify a diminution of immediate enjoyments.

A computer 1 year from now to 5 years from now is inferior to a computer, printer, and monitor 1 year from now to 5 years from now, achieved at the expense of denying oneself the computer from now till 1 year from now.

Therefore, Walter Block is right in saying that in regard to wages, it is DMVPs of workers in different stages of the production structure that are equalized. A worker both in a short process and in a long process gets $100 in the state of equilibrium, but the long process also faces higher interest expenses and must be more productive in order to be invested into in the first place. The worker receives $100 but produces $105 worth of goods.

Walter Block makes two claims about labor unions. First, that it is “impossible” to find cases where any significant action of a union did not “engage in violence or threat of violence.” Second, which is an even stronger statement, that we can’t even imagine a union that does not initiate violence. Presumably, then, using unjust violence or threat thereof is part of the very essence of labor unionism. It would never make sense for workers to unionize unless they were from the beginning planning to commit crimes against person or property. (53-64) Walter comments later that though it’s not after all impossible for a worker’s association to “eschew both white-color and blue-color crime,” something so innocent should not really be called a “union.” (58)

Of some interest is Walter’s question, “May a libertarian join a union?”

Now libertarianism is not a personal morality or a way to become a better person. It does not ask, “Is it morally permissible for me as a libertarian to join a union?” It is a political ideology that asks on the contrary, “Should I punish other people, precisely non-libertarians, when they join a union?” or “Should I insist, in making my voice heard, that unions not be given coercive powers to use violence against innocents or threaten to do so?”

A libertarian then can be an awful “hypocrite,” enjoying above-market wages as a member of the union and aggressing against scabs but still think that politically, the unions ought not to have this power, thereby remaining a libertarian. He may enjoy his unionist privilege but not approve it. He may even, while benefiting from labor unionist legislation personally, vote for a politician who promises to abolish this legislation.

I once asked Stephan Kinsella how he can be an intellectual property lawyer while condemning IP. His reply was to the effect that how does his tiny little personal life impinge upon great issues like whether we as a society do or do not countenance IP?

Imagine a society in which there is no law and which resembles a never-ending barroom brawl. People are killing and looting each other. (Assume there’s stuff to loot.) A certain Smith thinks: “If I fail to join the society-wide brouhaha, I’ll end up a complete loser. Others will just crap on me. I’ve got to go and do some pillaging and plundering myself.” However, Smith continues, “Though I am cursed with being part of a brutal, cruel, and dark populace around me, and am forced to join the war of all against all, I long for a world of peace, secure property rights, and freedom. In such a world, I would be a model citizen.” Smith is both an immoral aggressor personally and yet a libertarian politically.

Similarly, I don’t care whether Walter uses government roads or teaches in a state university. I am more concerned with the question of whether roads and universities can be privatized with profit for society as a whole. I don’t care if Smith lives in a rent-controlled apartment; I do not condemn him or call him a sinner or seek to reform his character. As a libertarian, I’d recommend that rent control be abolished, and that’s it. That’s the extent of the pull or scope of this ideology.

(It is true that the grounds for this recommendation can be either economic or moral. I’m sure Walter understands both perfectly. The moral case is that it is wrong to infringe upon the landlord’s property right. But even while making my case this way, I totally ignore the question of whether it is “moral” to benefit from rent controls as a tenant. It’s the state that violates the right not the tenant. So, “morality” is equivocal here.)

As a result, Walter is entirely right that a tenant in a rent-controlled apartment who joins a group called Tenants Against Rent Control indeed is permitted to call himself libertarian.

Now Mises writes:

The nineteenth-century success of free trade ideas was effected by the theories of classical economics. The prestige of these ideas was so great that those whose selfish class interests they hurt could not hinder their endorsements by public opinion and their realization by legislative measures.

At the most, then, a libertarian personally enjoying a state privilege is expected not to resist and even to support, despite any selfish interest, any campaign to abolish this privilege. For example, a farmer should then strive to get price supports abolished despite perhaps suffering personally if they are abolished.

Again, the political problem is not that numerous old people receive Social Security benefits. Are they thieves? Maybe, let God judge them; I won’t. The problem is that they will raise hell against anyone who suggests getting rid of Social Security. However, regarding such miscreants, Mises argues: “If modern civilization were unable to defend itself against the attacks of hirelings, then it could not, in any case, remain in existence much longer.”

So then: down with unions!

In this paper, Walter Block applies libertarian axioms and theorems of property rights to labor unionism. His reasoning is thorough and unimpeachable throughout.

Sometimes I don’t get him, though. When he talks about road privatization even within towns, his ideas are easily dismissed as if, in his own words, “ravings of a lunatic.” Yet in this article he makes a perfectly sensible point regarding whether a union can picket on public roads and sidewalks. Let’s indeed, Walter says, consider a picket line to be a perfectly innocuous supplier of information, as unions themselves insist.

In that case, the best analogy is the man who walks up and down the street with sandwich board placards advertising for a local merchant. Would the court allow one or even two such moving billboards? Certainly, provided that they kept some distance between themselves, and did not interfere with passersby. Would the court allow dozens of tightly packed sandwich board carriers who impeded the normal traffic flow? Certainly not.

We conclude from these considerations that striking unionist who use “public property” should be treated exactly like any other group of people attempting to advertise information [in the eyes of the law].

A unionist may refer to “his” job. He assumes he has the liberty to go on strike, get what he “demands,” and go back to this job. But, Walter points out, a job is an agreement between two parties to exchange services for money continuously. If any party, whether the employer or the employee, changes its mind, the agreement dissipates, and the “job” goes away. The unionist does not therefore own his job the way he owns his truck.

As a result, a strike under laissez-faire would put the worker’s “job” in serious jeopardy, if the company struck against hires replacement workers and even says goodbye to the strikers permanently. This would have most salutary effect on labor discipline. From the social point of view, production must go on, and consumers must be served each and every day. It is absurd for workers to threaten to impoverish a community by refusing to produce.

Unions are the only organizations in modern society permitted both by law and the common ideology to aggress against innocent parties, such as “scabs” and the consumers of their employer’s products. As Robert Murphy comments, “Unions are among the few groups to issue formal ‘demands.’ Some of the others are hijackers, kidnappers, and bank robbers.”

But should we side with the conservatives who “take the view that anti-trust and anti-combines law ought to be applied to unions”? No, says Walter.

First, a strike is not inherently illegitimate. If a single person can lawfully quit his job, then “all workers, together, have every right to do so, en masse. All conspiracy laws ought to be repealed, provided only that the agreement is to do something that would be legal when undertaken by a single individual.” A strike, he goes on, “refers not to one act, but to two. A strike is, first, a withdrawal of labor in unison from an employer, on the part of the relevant organized employees. Against this, there can be no objection. … There is a second aspect of the strike, however. This element is pernicious, insidious, and entirely improper: the union practice of making it impossible for the struck employer to deal with alternative sources of labor, who are anxious to compete for the jobs the strikers have just vacated.”

In the previous post, we saw that Walter considers unions’ unjust violence to be their very essence, going so far as to define the nature of a “labor union” to be thus morally wicked. Unions are defined by both of the foregoing aspects. Mises agrees: “When in the past the laws of some countries denied to employees the right to form unions, they were guided by the idea that such unions have no objective other than to resort to violent action and intimidation. When the authorities in the past sometimes directed their armed forces to protect the employers, their mandataries, and their property against the onslaught of strikers, they were not guilty of acts hostile to ‘labor.’ They simply did what every government considers its main duty. They tried to preserve their exclusive right to resort to violent action.”

However, it is not the case that governments are innocent in this matter. Thus, second, in the case of coercive violent unionism, Walter quotes Rothbard:

the remedy… is not to pass laws outlawing strikes; it is to remove the substantial body of law, federal, state, and local, that confers special governmental privileges on labor unions. …

when general indignation against unions led to Taft-Hartley Act of 1947, the government did not repeal any of these special privileges. Instead, it added special restrictions upon unions to limit the power which the government itself had created. …

The government’s seemingly contradictory policy on unions serves, first, to aggrandize the power of government over labor relations, and second, to foster a suitably integrated and Establishment-minded unionism as junior partner in government’s role over the economy.

One intervention begets others, until society is a meaningless mess.

Walter concludes, reasonably, that “sound public policy… consists in… stripping unions of all coercive powers.”

Walter Block lists a variety of negative effects of labor unions: they

distort wages and prices, curb production, decrease nonmonetary rewards, hinder labor/management relations, and have an overall detrimental effect on the economy.

He proceeds to give a masterful analysis of each.

Let me comment on one point, namely that strikers are hoping that “excess profits” will cover the wage increases demanded on pain of a strike.

There is a market process argument at the core here. There is no such thing as excess profits. Any monopoly price of an innovative product is temporary, because it immediately attracts imitators to the industry. These imitators lower prices by boosting production and increase costs as per the laws of diminishing marginal utility and increasing marginal cost. Some amount of time usually passes between the time when an invention or new production process is commercialized by the first seller to the market and when all profits are arbitraged away. Profits can be had but not for too long.

During the time of profits, workers are indeed not receiving the full product of their labor. This is because no other entrepreneur is offering them more money. How then do wages rise? Precisely when the process of imitation commences. Then, as other businessmen enter the industry and compete for labor, workers obtain a greater bargaining power. They see that a year after the introduction of a product, numerous close substitutes have appeared including those superior to the original product. They can tell their present employer: raise our wages or we’ll leave to work for those newcomers.

The social function of this process of innovations that bring about profits and imitation that demolishes profits is precisely economic progress. It’s the yang and yin of the economy, chasing each other and in uniting with each other, producing the fruit of growth and improvement of social conditions. The market flows and will flow swirling on forever.

Labor unions subvert this virtuous dynamics. They are not content to wait until imitators, by bidding up on labor, cut the profits of the initial innovator and offer higher money wages. They try to devour the profits directly and immediately by threatening their employer with great inconvenience of a strike. They say: we’ll shut down your company unless you part with your profits. Whether or not a strike is not immoral when carried out properly, unions wound the market process. They diminish the incentive to their employer to innovate, because what is the point, if he is given no time to enjoy his profits, because workers immediately eat them up, even despite the fact that they cannot find better jobs elsewhere? This behavior is disturbing and anti-social, and the economy is harmed as a result.

Boyd Blundell, in a debate with Walter Block, with the arrogance and fanaticism of a social justice warrior, calls Walter’s stance on unions “not even wrong.”

In fact, it is Blundell’s article that is preposterous. For example, he claims that the only reason why working conditions would not “revert to the horrors of the 19th century industrial factories” is that “the gains in working conditions and wages that were made by unions have now been codified in law. It is laws that guarantee basic workplace safety, minimum wages, and so on.”

Now presumably, we still have private enterprise as the main employer. But laws force a person or organization to act in a certain way, threatening punishment for disobedience. Therefore, employers would, if left to themselves, exploit workers all the way to their Marxian-style immiseration. It is the state, as some knight in shining armor, that comes to the rescue of workers by commanding entrepreneurs to pay more, either in safety, etc. or in money wages.

I’ll just leave this “argument” for anyone even slightly conversant with economics to marvel over and contemplate Blundell’s stupidity or naïveté.

I think it would have been useful for Walter to make explicit the distinction between real wages and nominal wages. Real wages are just prosperity per capita; what an average worker can buy with his wages. The state of affairs in which there are numerous goods at low prices is preferable to one in which there is only a limited selection of goods at high prices.

It is true that real wages depend on “how hard and how intelligently people work and the amount and sophistication of the tools and capital equipment they are given by their employer to work with. This, in turn, depends upon how much saving occurred in the previous periods and even before that, how economically free and law abiding is the populace.”

But I think that Blundell’s main concern is nominal wages, in particular, the distribution of income to factors in the form of wages, interest, rents and to entrepreneurs in the form of profits.

His argument seems to be that a worker is usually specialized in a particular area. His human capital is specific to a line of work. As a result, for example, a quality NFL player Smith can either play football and make millions or work at McDonald’s and make $8 per hour. There is no intermediate job for Smith that would provide him with even middle-class comforts. Even if Smith’s productivity is $10 million per year, Smith can easily be blackmailed, since it is “bargaining” that will determine the exact wage that will fall somewhere between $16K and $10M. Smith would then benefit from joining a union in order to gain bargaining power and push his wage higher at the employer’s expense.

That might be so, if there were no competitors for Smith’s talents. Thus, Walter replies:

Shaq’s productivity would be roughly the same for the Knicks, the Lakers (his previous team), the Hornets, or his present team, the Heat. Apart from that he could play in a European, Asian, or South African league, with only a slight reduction in (second best) MRP, and hence wages. If unlikely to the extreme, all of these firms tried to pay Shaq and his fellow athletes far less than that, they could always borrow a leaf from the old American Basketball Association, and set up their own new league in competition with the NBA and all these others.

Theoretically, it is enough that there be just two firms competing for a worker to start the process of auction on this worker that will culminate in his being paid a wage close to his marginal productivity. In practice, this condition is almost always fulfilled in abundance.