April 30, 2023

by Stephen Stofka

Last week’s letter was about marginal loss and marginal value. This week I’ll continue exploring another topic in marginal thinking – the marginal disutility of labor. I will touch on the influence of John Stuart Mill, Karl Marx and Thorstein Veblen and revisit John Bates Clark from last week. I will finish up with Keynes, a seminal figure who voiced disapproval of some earlier economic ideas but incorporated portions of that thought into his General Theory.

What is the marginal disutility of labor? Disutility is a synonym for harm. There are two choices in each period of time: work and leisure. Leisure should be understood as non-work, not an activity like resting in a lounge chair on the beach. If the next period of work causes harm we will choose leisure, a rest from work. This idea became popular in the late 19^th century as neoclassical economists adopted utilitarian ideas contained in John Stuart Mill’s Principles of Political Economics. Mill claimed that values were subjective, based on scarcity and the costs of production (Heilbroner, 1997). Mill rejected the claim by classical economists like Ricardo and Smith that there was some natural law of distribution of the gains from production. Mill wrote that distribution of gains was based on customs and morals peculiar to each society.

That was a bit too arbitrary and subjective for some neoclassical economists like Jevons and Menger. The neoclassical economists wanted to divorce politics from economics, to cut out the “Political” in the title of Mills book. They developed the concept of a marginal productivity of labor idea to accompany the marginal disutility of labor. Under this schema, every worker was paid their marginal product, their contribution to production. Neoclassical economists became preoccupied with equilibrium in a static world.

I wrote about John Bates Clark last week and I will mention him again. A neoclassical economist himself, his book The Distribution of Wealth reminded readers that most neoclassical ideas only made sense in a fictional world where labor and capital were free to go wherever they would earn the most return. It is a world without friction or gravity like Newton’s mechanical world of motion. The simplification helped Newton identify the interplay of forces on an object in motion.

Clark went down the rabbit hole himself and he defined and reconciled two sets of laws, the static and dynamic. In his theory, there were static laws of equilibrium between scarcity and wants. This was a system seeking rest like the swing of a pendulum as it gradually comes to rest at the lowest point of an arc. He identified five forces that disrupted the static laws. These were population, capital, technological improvements, the types of businesses and the wants of consumers. Each of these were increasing, a dynamism that interfered with any resolution.

At this point in the story, I will return to The Worldly Philosophers by Robert Heilbroner (1997).  One of Clark’s pupils was Thorstein Veblen, a Norwegian who would become one of the leading voices of what is called American Institutionalism. That school of economists proposed a class of socio-economic engineers who would optimize the institutions that dictated the distribution of property to make production more efficient. Marx had also insisted that production and distribution could not be separated. Veblen’s ideas were a rational system implemented by a trained intellectual elite. Marx envisioned a reactionary movement like the upheavals that swept Europe in the 1840s. Despite the stark differences between Veblen and Marx, the neoclassicals depicted Veblen as another Marxist philosopher and marginalized that school of thought.

John Maynard Keynes rejected the notion of the marginal disutility of labor because it failed to explain how millions of workers were idle regardless of their asking wage. Employers were not hiring because the expectation of sales was so low. Sales remained low because workers were not employed, a problem that Henry Ford had solved two decades earlier. Ford needed more people to buy his cars but even his own workers could not afford the cars. So he paid them more money. That solution was more difficult to deploy throughout an entire economy, however. Only a government had enough fiscal power to put a large number of people back to work, to increase what Keynes called effective demand.

In his General Theory Keynes introduced the same idea of the economist engineer but did not mention Veblen. Heilbroner thought it was because the neoclassicals had successfully stereotyped Veblen as a Marxist, a socialist without respect for private property. Keynes was essentially a conservative in the camp of Edmund Burke, someone who wanted to preserve the capitalist system based on private property. Despite the difference in intentions, Keynes introduced top down economic engineering at a time when people were desperate for solutions that would preserve existing institutions.

Our society today is based on these ideas and the institutional norms those ideas spawned. As the debate over raising the debt nears a critical standoff sometime this June, we will be able to see the clash of ideas tangled with the posturing and struggle for political dominance.     

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Photo by Mykola Makhlai on Unsplash

Heilbroner, R. L. (1997). Teachings from the worldly philosophy. New York, NY: Norton & Company.

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