Mill's Wage Fund and Interventionism

While Diana has been thinking about experts in the last year or so (see below), I have still been thinking about interventionism. Like her, I see this everywhere once I begin to think about it.

One of the great formations of this argument was by Ludwig von Mises. He took socialism seriously, and being from Vienna, he saw some of the many different forms socialism can take. Having sat in Cafe Central near the Ring Strasse in Vienna and sipped strong coffee, I can somewhat relate to the revolutionary ideas of Trotsky. However, being a native English speaker, I have always had a deep love for the debate waged in England and for too long under-appreciated the continent. I think that Mises looked to Mill for a strong defense of Socialism precisely because he knew the importance of the English tradition for the way economics was headed. After all, Mill was not in it for the revolutionary ideas, and both Mill and Mises took seriously the critique of capitalism where they found its critics to be intellectually honest.

Today, when I was making my history of thought test, I thought about how the intervention concept might relate to Mill's wages fund. Not to downplay Mises, but Mill's concept of the wages fund states that there is a certain amount of profit (revenue from capital) that can go to labor, a forerunner of the idea of labor's share of income. If the labor share of income is somewhat stable (an assumption that has empirical backing), then trying to raise the wage will cause unemployment. Now the cause of the unemployment is somewhat subtle. Mill didn't formulate the theory in a way modern economists can understand. That is to say he didn't use math. So, in an important way, we don't know exactly what he meant. However, if we follow my connection to the labor share of income, then the theory is not entirely useless as a pattern prediction.

This brings me to what Diana and I have been working on. Pattern predictions are statements about regularities in the world. They are not like neoclassical models because they are not expected to be replicated or to exist as controlled experiments. Misesian a priorism, in my opinion, is best categorized as pattern prediction. Mill had his own connections to a priorism. This has derogatorily been called the "Ricardian Vice" meaning the drastic oversimplification of economic models. When Mill is read this way, he is clearer. We raise the minimum wage (through unions) then that amount available for wages is distributed to the lucky recipients of the higher wage. The other portion of the labor employed loses this amount, but not in wages but by losing their jobs.

Now, I am going to be ahistorical. What do we learn from this example? How can employers pay more for labor than what it is worth under a competitive market. I think the answer to this is very simple. There must be some capital substitution (here is a modern example). Because wages rise the employer expects to see more productivity from that wage. The best way to do this is to increase capital investment. If wages are going to remain high for some time, the plant needs better machines which will increase productivity and drive down the number of labor hours needed to run the plant. We do need capital investment, but over-investment can be defined here as the rate which increases the unemployment rate.

This hardly redeems Mill, but it does suggest that Mill was on to something. Like Mises, he found a place where well intended interventions disrupted the rate of growth in capital and the cost of this acceleration in growth is passed onto those with the lowest skills in society. I find this much more intuitive and would love to test it to see if the intuition holds.

Pattern predictions state that all interventions create disruptions. Lipsey and Lanchaster still made the argument most clearly to their contemporary economists in the late 1960s. However, Mises made the point in a way that was meant to be understood by well-intended policy makers. Other examples include: Robert Higgs who talks about intervention when he says war help to grow the size of government through a ratchet effect. Buchanan talks about intervention coming directly as a result of not having a binding budget constraint on government. Al Roth applies the term repugnance to a wide category of interventions. My dissertation work tried to take this last piece and connect it to the story of the rise of economics in the last 300 years. I continue to find examples that confirm my reading. I still think that economics is the story of pointing out that interventions have consequences. Often, as in the case of Mill's wages fund, these consequences have high human costs among the least-well-off in society. It that lesson could be learned, I think most support for society wide interventions would erode.