Chris Harman

Thinking it through

The theory of poverty

(October 1995)

From Socialist Review, No.190, October 1995.
Copyright © Socialist Review.
Copied with thanks from the Socialist Review Archive at
Marked up by Einde O’Callaghan for the Marxists’ Internet Archive.

‘Marx was able to pour devastating scorn on the Oxford economics professor Nassau Senior, who claimed that cutting the working day for children from 12 hours to 10 hours would destroy vast numbers of jobs’

‘The radicals have only to point to the discrepancies between the operation of the modern economy and the ideas by which it is supposed to be judged, while the conservatives have the well nigh impossible task of demonstrating that this is the best of all possible worlds.

‘The conservatives are compensated by occupying positions of power, which they can use to keep criticism in check. They do not feel obliged to answer radical criticisms on their merits and the argument is never fairly joined.’

So wrote the Cambridge economist Joan Robinson shortly before she died 15 years ago. Her description of how economic debate takes place applies absolutely to the conduct of current argument over the minimum wage – including at the top of the Labour Party.

The conventional economic wisdom is that a minimum wage of £4.15 an hour would lead to the immediate sacking of large numbers of previously low paid workers by firms that will no longer be able to afford to employ them.

Several recent empirical studies refute this wisdom – for instance, the accounts in David Card and Alan Krueger’s recent book, Myth and Monument, on the impact of minimum wage laws in the US.

Proponents of the conventional wisdom simply reply that the studies must be wrong because they contradict the theory. Even Paul Anderson, writing in the allegedly radical New Statesman, can assert – without providing any empirical evidence at all – ‘The best guess is that a statutory minimum wage set at between £3 and £4 would have some negative effects on employment.’

So what is the theory that can simply ignore empirical evidence in this way?

Originally, classic bourgeois economics, as elaborated 200 years ago by Adam Smith and David Ricardo, insisted that labour was the source of value and article’s price merely an expression of the amount of labour used in its producing.

But this left open the question of where profit came from. Adam Smith suggested it was because ownership of land or factories enabled some people to live off the labour of others. ‘The master’, he wrote, ‘shares in the produce of the workmen’s labour.’

Ricardo presented a model of the economy in which the prices of goods depended on the amount of labour and materials that went into them. The implication was that a rise in wages would reduce profits, but need not affect prices or employment at all. Smith and Ricardo were enthusiasts for capitalism but left wing thinkers after them could turn their insights against the system itself.

So Marx was able to pour devastating scorn on the Oxford economics professor Nassau Senior, who claimed that cutting the working day for children from 12 hours to ten hours would destroy vast numbers of jobs.

Defenders of capitalism increasingly felt they could not hold their ground while they based themselves on the original views of Smith and Ricardo. From the 1870s on they adopted a new approach known as ‘neo-classical’ or ‘marginalist’ theory. It underlies all the modern conventional wisdom about a minimum wage damaging employment.

The theory rests on a number of postulates which it presents as self evident truths:

Overall, the neo-classicists claimed, ‘economic laws’ showed that profits could not be cut and that government or trade union action to increase wages would destroy jobs. But the points behind the theory are not self evident. In fact, the ‘radical economists’ mentioned by Robinson have proved each one of these to be wrong.

The Polish economist Michael Kalecki showed the ‘law of diminishing returns’ does not apply to most sorts of production. The Italian Piero Sraffa showed that without it supply and demand will not coincide as expected. Joan Robinson herself showed that firms were usually able to exercise a degree of monopoly control over the market. Others showed that there was no way in the real world that prices could adjust instantaneously as the theory demanded.

Both Kalecki and Keynes showed that wage cuts could lower the demand for goods, so increasing rather than reducing unemployment. On the other hand, raising wages could serve to reduce levels of unemployment.

The combined effect of all these points has been to destroy the validity of the ‘neo-classical’ approach – and with it the whole of the conventional arguments over the minimum wage.

What remains is the same assertion that underlay Senior’s position 150 years ago – that the existing level of profit is sacrosanct and must never be challenged.

This is not any sort of economic law. Rather it is a statement about how the ruling class feel under capitalism. Such feelings may lead them to threaten to curtail investment and sabotage production, adding to the chaos and instability already produced by the market system itself.

But this is a reason for combining the struggle against low pay with a struggle to get control of the ‘means of production, distribution and exchange’, not a reason for accepting that low pay is inevitable.

Last updated on 21 December 2009