Iron law of wages 📈💲 ECONOMIC LAWS 💲📉

Summary

The Iron Law of Wages posits that real wages will tend to gravitate toward the subsistence level necessary for worker survival, a theory initially proposed by Ferdinand Lassalle in the 19th century. This principle highlights the dynamics of labor supply and demand, suggesting that competition among workers drives wages down to the minimum needed for survival. While the law draws from Malthusian demographics and Ricardo's economic theories, modern economists argue against its absoluteness, citing factors like efficiency wages and technological advancements. The debate continues, with critics like Marx offering alternative perspectives on labor and value.

Takeaways

• 😀 The iron law of wages posits that real wages will ultimately trend towards the minimum required for worker subsistence.
• 😀 The term was first introduced by Ferdinand Lassalle in the mid-19th century, later discussed by economists like Karl Marx and David Ricardo.
• 😀 Lassalle argued that competition among workers drives wages down to the subsistence level when labor supply exceeds demand.
• 😀 According to Ricardo, wages could exceed natural levels due to various economic factors, although market forces typically push them towards subsistence.
• 😀 The demographic transition from high to low birth and death rates has changed wage dynamics in industrialized nations, often resulting in higher real wages.
• 😀 Critics of the iron law of wages, including modern economists, assert that firms pay above subsistence wages to improve worker efficiency and retention.
• 😀 Socialist critics like Marx argued that while there is a tendency for wages to decline, there are also opposing forces that can elevate them.
• 😀 The concept has been attributed to earlier economists, and interpretations vary, reflecting a broader historical context.
• 😀 Policies such as land value tax have been proposed as potential reforms to increase real wages beyond subsistence levels.
• 😀 The ongoing debate around the iron law of wages highlights the complexities of labor economics and the influence of demographic and market changes.

Q & A

What is the iron law of wages?

The iron law of wages is an economic theory that states that real wages tend to gravitate toward the minimum wage necessary for the survival of workers.

Who first coined the term 'iron law of wages'?

The term was first named by Ferdinand Lassalle in the mid-19th century.

How did Karl Marx and Friedrich Engels relate to the iron law of wages?

Marx and Engels attributed the doctrine to Lassalle and discussed it in Marx's critique of the Gotha Programme in 1875.

What economic principle does the iron law of wages connect to?

It connects to Thomas Malthus's population theory and David Ricardo's law of rent, emphasizing the relationship between labor supply, demand, and wages.

What factors drive wages down to the subsistence level according to the theory?

Competition among laborers for employment drives wages down to the minimum subsistence level, particularly when the labor supply exceeds demand.

What criticism do modern economists have regarding the iron law of wages?

Many modern economists argue that firms often pay above subsistence levels to enhance efficiency and reduce turnover, contrary to the rigidity of the iron law.

How does the demographic transition affect the predictions of the iron law of wages?

The demographic transition, characterized by falling birth and death rates during industrialization, has led to real wages being much higher than subsistence levels in many developed countries.

What distinction did David Ricardo make regarding wages?

Ricardo distinguished between the natural price of labor (the cost to maintain a laborer) and the market price, which can exceed the natural wage due to various economic factors.

What is the law of rent as it relates to wages?

Ricardo's law of rent posits that the availability of land influences wages; it suggests that high rents can limit the ability of workers to earn above subsistence levels.

What alternative views did Henry George and others offer regarding the iron law of wages?

Henry George and others suggested that reforms, such as land value taxation, could increase real wages instead of accepting that wages must inevitably fall to subsistence levels.