Friday, November 22, 2013

Department of Shaky Logic

Prof. Iglesias concludes that free trade makes workers better off.  Because the SHARE of total income going to labor is falling.  Here is his "logic."

Presumably, having labor have a bigger share of income makes workers better off, right?  The simple solution would be to destroy all capital.  Just blow it up, burn it, return to the stone age.  Then labor would have 100% of national income, because land would be basically worthless, also.

Of course, this is a problem.  Because (1) capital is a good thing, and raises the marginal product, and therefore the wages of labor, while at the same time (it's just accounting) reducing the TOTAL share of income labor receives, and (2) lower prices from higher productivity more than make up for the "decline" in labor's share of income.  The REAL wage skyrockets, and workers are clearly better off.


Pelsmin said...

But isn't all capital just labor anyway? I mean, a few layers added on, of course, but what is the cost of capital besides land and labor?

Take a classic piece of capital: a Caterpillar tractor. Say it costs $100,000. For what? After the metal ore and oil that started out in the land, it's just people turning metal into parts, people assembling parts into machines, people delivering machines to your farm. What else are you paying $100,000 for besides salaries of people making your tractor or making the things that were needed to enable them to make it, like tools and factories.

Capital is just other people's labor applied in a more efficient way, in a remote place, to getting the local work done.

kebko said...


Labor was the cost to build it.
Capital is the risk that it will be useful. If the tractor never digs a single trench, labor still gets paid. Capital is the difference between cost and value. When value is known immediately, capital earns little or nothing.

Pelsmin said...

Interesting point -- never thought of it that way -- but I'm not sure it's right.

For instance, labor is often deployed despite risk as to whether it will be useful. If you pay workers to make sandwiches but no-one buys them before they spoil, how is that labor capital?

Tom said...

Pelsmin said "isn't all capital just labor anyway?"

If "capital" is to have any meaning, one must consider its usage. First, of course, capital is labor "saved up". But there is more. A ton of wheat, grown in summer, to be eaten in winter is not capital. The same ton of wheat that is used to provision a trading voyage, IS capital. You are going to eat it, either way. But in the "saved for later" model, that is all there is. The second model gives the wheat the opportunity to increase in value: the voyage might return many times the value on your investment. Of course, you could also go broke. Good judgement --and luck-- required.

kebko said...


The sandwich labor isn't capital. The "capital" was whoever paid the people to make the sandwiches. And, in this case, she earned a loss. This is why capital tends to earn an income, because it is taking risk.

In simple terms, the person that buys the $100,000 caterpillar (which mostly pays the labor to build it and also pays some for the capital that funded it), and then pays $100,000 in labor to dig a trench, hopes to have a trench that is worth $400,000. If it is worth $400,000, then we are more wealthy in the aggregate, and $200,000 of that wealth goes to the capitalist, which makes up for her loss in the sandwich biz.