To back up the statement that the relationship of wages to prices is not linear, consider the case of an economy where there are no wages – where all the extraction of wealth, structuring and selling of goods and services is done by slave labour. Actually this is a fair approximation to the economy of the slave-owning states of North America, briefly the Confederate States of America, during the nineteenth century.
In such an economy goods and services still are made, still cost something to make available, still have a price, and are still consumed. But there is no consumer demand as we today would understand it, within a slave economy; the vast majority of the population cannot demand anything, make market choices, have consumer goals, or accumulate capital as savings. They get what they are given, which is little more than the bare minimum needed to keep them alive and working.
Such consumer demand as there is comes from the people who own the slaves, and the wealth, and the means of transformation of the wealth into goods. This demand is small and limited in range. The main money flow through the economy comes from other economies outside who purchase the goods, mainly primary produce, made by the slaves. Since the local market for most goods and services is too small to support local secondary and tertiary industries, these also are located in other economies. Local industries are mainly primary industries.
Full employment cannot be guaranteed because although labour has no money price, it still has a price in the limited subsistence goods required by the slave. With only a few large, basic local industries and all employment under the control of a few, there is no guarantee of enough work to justify feeding all the slaves, and no mechanism to adjust the economy to a state of full employment since there are no wages to manipulate.
A major reason the Confederate States of America lost the 1861-65 Civil War was that, being virtually isolated by blockades and sanctions, their economy could not provide for a long war effort against the industrial, diversified economy of the “Yankees”. Superior economies as well as great generals are needed to win a war.
It was said at the start of that civil war that the CSA could win if they did it quickly, but they were sure to lose a war that lasted longer than a year.
So to reiterate a point made earlier; wages must exist, they must not be too low, but they cannot go on increasing indefinitely without damage to economic activity and employment. There is an optimum proportion of wages to total money flow that cannot be determined theoretically in any situation, but is only achieved by practical freeze or boost measures taken after examination of the symptoms of distress shown by the economy, followed by correct diagnosis of the sense in which ratio distortion exists – towards wages or the other way.
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Posts in this Series
- Review of 1988 edition of Economics for a Round Earth
- Ends and Means
- Evolution Not Revolution
- Notes on Evolution Not Revolution
- Concepts and Terms – What is ‘wealth’?
- The Throughput Chain
- The Derivatives of Wealth
- Global Inequalities in Wealth
- Economic Growth Redefined
- Misconceptions in Practice
- Borrowing to Invest to Get Rich
- Environment versus Economic Progress
- Digression: Pollution Red Herrings
- Digression: Depletion and Inflation
- Value Inflation – the Trigger, not the Bullet
- Living Standard and Quality of Life
- Digression: Resource Consumption, Jobs, and Hands Off
- When the Boom comes
- The Effect of People’s Expectations
- Hard Work – Virtue or Vice?
- Who needs the Snail Darter?
- More Dollars for Conservation?
- Non-renewable Resources – Leave Them in the Ground?
- Digression: Fast Breeder Nuclear Fission Reactors
- Minerals in National Parks – Leave Them in the Ground?
- Population and Wealth
- Left, Right and The Environment
- Digression: “So Long As We Profit, Costs Elsewhere Aren’t Our Problem”?
- Limits to Growth?
- Solar Energy – a Special Case
- The Solar-Powered Car
- Money Supply, Throughput and Inflation
- Real and Money Wages: Living Standards
- Digression: Caution about “Increases” and “Decreases”
- The Idea of Proportionate Flows Applied to Wages: the Great Depression
- Deficit Financing
- The Optimum Proportionate Flow Condition
- Digression: Thrift versus Spendthrift
- Digression: the Private Motor Car – a Basic Necessity?
- The Idea of Proportionate Flows Applied to Wages – the Stagflation of the 1970’s and 80’s
- Excessive Wages Can Cost Jobs
- Fight Unemployment or Inflation First?
- Digression: Work and Jobs
- Other “Job Creation” Schemes
- Visual and Noise Pollution
- Digression: Renewal and Recycling of Resources; Wages and Jobs
- Ratio Distortion and Consumption
- Aggregate Demand – Components and Internal Ratio
- The Slave Economy
- Employment and the Steady State
- Consumer-Led Recovery
- Interest Rates and Ratio Distortion
- Demographic Trends and Living Standards
- Digression: Bad Economics Good for Conservation?
- Coping with Aging Populations
- Stabilising the Human Population
- Costs – What Really Costs Us and What Doesn’t?
- Digression: Other Comments on Statements in UN Report
- Discussion of Costs Resumed
- Budget Balancing Methods – Cost or Gain?
- Digression: Government Expenditure – Government Employees
- Expenditure on Weapons