Sunday, October 9, 2011

The Labor Market Myth

The term "labor market" reminds Sandwichman of the apocryphal remark attributed to Gandhi when asked what he thought of Western Civilization: "it would be a good idea." I'm not so sure a labor market would be such a good idea, but I am convinced that what actually exists is not a market in any analytically coherent sense of the term. Jamie Galbraith expressed similar reservations in "Dangerous Metaphor: The Fiction of the Labor Market." As the preface explains:

Much economic policy is based on the theory that a market for labor exists and that it is this labor market that determines employment and wage levels..."

James K. Galbraith challenges this theory. He argues that there is no such thing as a market for labor; rather, what exists is a job structure — a set of status and pay relationships in the economy within and between firms and within and across industries.
The Sandwichman would go a step further. He's pretty sure that employment and working conditions constituted exhibit "A" in the emergence of the neoclassical theory of market failure. But they got stuffed in the closet, probably more out of cognitive dissonance than any malice or conscious ideological agenda. Here's an outline of the disappearance of Exhibit "A":

1. Sidgwick in "the system of natural liberty considered in relation to production" in Principles of Political Economy, 2nd edition, considered exceptions to the presumption of self-interest working toward public good.

2. Marshall introduced the notion of "external economies and diseconomies."

[3. Exhibit "A": Chapman's "Hours of Labour" was the first analytical demonstration of *market failure* under the standard assumptions of neoclassical analysis.]
3. Nothing to see here. Move along now.

4. Pigou recaps Chapman's theory in Part III of Economics of Welfare but doesn't credit it as the analytical milestone that it was.

5. Subsequent discussion of "externalities" and "market failure" cite Pigou, ignore Chapman; focus on part II of Economics of Welfare and ignore part III.

6. Part III of Economics of Welfare is where the failure rubber meets the market road and Chapter Seven, "The Hours of Labour" of part III is the hinge, the sweet spot.

7. Ronald Coase challenged the Pigouvian tradition with his "The Problem of Social Cost" except there's no Part III in that Pigouvian tradition -- there's no Chapter Seven. Labor has disappeared! (pssst -- it's been stuffed in the closet!)

8. Steven G. Medema has written a wonderful, eloquent, erudite history of the market failure/government failure debate, from before Adam Smith to after Ronald Coase. Professor Medema was not aware of Chapman's work.

9. J.R. Hicks was aware of Chapman's work. Lionel Robbins was aware of Chapman's work. Cecil Pigou was aware of Chapman's work. Alfred Marshall was aware of Chapman's work. John Maynard Keynes was aware of Chapman's work. Not only were they aware of it, Hicks, Robbins and Marshall explicitly referenced it as canonical. Pigou and Hicks paraphrased it.

10. Cognitive dissonance dictates that economists ignore the implications of Exhibit "A": that a competitive, self-adjusting "labor market" is theoretically impossible.

11. Employment is essentially -- I repeat, essentially -- administered and regulated. The only question is whether that administration is to be done with eyes open or shut -- out in the open or behind closed doors.

12. It is time to put the myth of "the labor market" to rest.

Jamie Galbraith:
The idea that people can readily be switched from one line of work to another would appear to stem from the idea that labor time is a commodity with a coherent meaning, and this notion is an extension of nineteenth-century abstractions about labor that have lost their slight purchase in real world conditions over the course of the present century.
There is little direct evidence that increased expenditures on education, infrastructure, and research help the measured performance of the economy in any definite way. The belief that they will do so is essentially an act of blind faith, an assertion mediated by the theology of the market. Once one moves away from belief in labor supply curves, the effects of supply-side policies on economic performance must be reexamined.


  1. Isn't capitalism comprised of the

    1) consumer goods and services market (predating capitalism)
    2) labour market
    3) capital market?

  2. Nick,

    It really depends on how far you want to stretch a metaphor and how useful that stretching is. In terms of the way that economists conceive of a market as supply and demand regulated and equalized by changes in price, the labor market is a failed metaphor. There are indeed some effects of supply and demand on price and of price on supply and demand, but these are largely secondary to other structural characteristics that have a much greater effect on supply, demand and price. There are also niches in what Galbraith calls the job structure that operate more overtly as markets. For example, day labor.

  3. Are you perhaps also referring to Prasch, who illustrated a zig-zagged supply curve instead of a straight line or a functional curve?

    Also, did you get my e-mail?

  4. Yes indeed. Prasch contributed a chapter on that to the same book my chapter on the lump of labor is in, Working Time: International trends, theory and policy perspectives.