The Real Wage and the Marginal Product of Labor

As I see it, the errors in Keynes’s analysis in chapter 2 of the General Theorv were his acceptance of diminishing returns in the short-period relation between output and labor employed, and of perfect competition in the product market. These "errors," however, are easily corrected and do not alter Keynes’s basic and correct ideas—that employment is determined by aggregate demand, that real wages are determined by aggregate demand given the degree of competition and the level of capital utilization and other determinants of the productivity of labor, and that the supply of labor, at least below full employment, has no effect on either employment or real wages.

I would like to reiterate that the formulation we have established here is "Ricardian" rather than neoclassical. Basically, all we have said is that the mark-up represents a deduction from the product of labor, and that since the mark-up is certainly not procyclical and productivity probably is procyclical, as the "margin" of production is extended, real wages rise. Sraffa (1960, pp. v-vi) has argued that such a use of the term "marginal" is spurious, since the true application of the term "requires attention to be focused on change," while this use of the term, as in Ricardo’s discussion of the margin of cultivation, need only be a matter of differences in quality among existing productive facilities rather than changes in scale or in input proportions. We have come a long way from the neoclassical idea of a marginal product of labor, but this should not make either us or Keynes embarrassed about Chapter Two of the General Theory, one of the most interesting and important chapters in the book.

Lawlor, Darity, and Horn (1987) noted that Sraffa (1926) had pointed out that the determination of prices and quantities by the interaction of supply and demand necessitates an independence between supply and demand that does not obtain except under very restrictive conditions. Sraffa (1960) extends this argument by showing that scarcity, as in scarce factors of production, is not necessary to determine value and in fact cannot determine value independently of income distribution. Keynes’s and Kalecki’s work shows that when we take effective demand into account, output is determined solely by demand and distribution by the conditions of competition. Kalecki’s and Keynes’s work can thus be taken as an Hegelian "supersession" of classical and neoclassical economics when we realize that workers cannot bargain in terms of a real wage and that output not saleable will soon no longer be produced.

Working Paper No. 12(1.43 MB)