- 31 May 2021 21:40
#15175095
The Neoclassical school has dominated microeconomics for 150 years and is called “mainstream”. Its theorems are well known by all students of economics. They are considered as the economic truth by the economic profession.
Topics in microeconomics are for instance: consumption, market equilibrium, production, earning of the factors of production (mainly capital and labour). In this article, I am focusing on this last topic: earnings. A theorem, among the most important ones, states the rule which explains how remunerations are determined. Provided certain conditions, as perfect competition, the earning of a factor (for instance, interest, wage, rent) is equal to the value of the marginal product of this factor. Factor prices are settled on the ad hoc markets, but supply and demand play in such a way that equilibrium price obeys this law sometimes named “law of marginal productivity “.
The said law is dependent on an assumption relative to marginal product. More there are units of a factor, less is its marginal product, i.e. the supplement of product brought by the fact that there is not one unit less, when the quantity of other factors is fixed.
So, this law settles a systematic relation between earnings and productivity.
Naturally, everything that is related to earnings is sensitive and can be politically controversial. This gives our law the important role to pronounce the economic truth in social debates. Political deductions of this law could be: do not complain about your pay; we cannot go against such a law without provoking wrath of the economic system. Allusion to productivity, badly understood, could also make you feel guilty.
But at bottom, is the law of marginal productivity so robust; does it occupy so high a place that criticism cannot reach it?
To answer this question, I have written the article “Does Marginal Productivity Mean Anything in Real Economic Life?”, published on the “MPRA” site. Access is given by the link:
Does Marginal Productivity Mean Anything in Real Economic Life?
Abstract
The equality between factor pay and marginal product is a major component of the neoclassical paradigm. The paper begins with a brief historical review of this principle. Follows a questioning about the relevance of this law as an argument in the social debates: does marginal product represent the very contribution of the agent and if so, is it a legitimate reference for the setting of remuneration? Our answer to the first part of the question is irresolute; to the second, it is negative.
But most of the article is devoted to analysing the economic realism of the said law, both empirically and theoretically. We review some statistical studies present in the literature, with particular attention for the debate regarding the regressions of Cobb and Douglas. Evidence does not strengthen the neoclassical law of retribution.
The paper analyses the factors that hinder either the determinateness of marginal product or the equalisation between it and factor's remuneration. Are analysed: - the restrictions inherent in the law of marginal productivity: constant returns to scale and perfect competition - an alternative explanation of interest: the Austrian theory - incentive wage theories: efficiency wage and tournament theory.
The article then considers the particular case of the CEO's remuneration.
John Bates Clark, initiator of the theory
Topics in microeconomics are for instance: consumption, market equilibrium, production, earning of the factors of production (mainly capital and labour). In this article, I am focusing on this last topic: earnings. A theorem, among the most important ones, states the rule which explains how remunerations are determined. Provided certain conditions, as perfect competition, the earning of a factor (for instance, interest, wage, rent) is equal to the value of the marginal product of this factor. Factor prices are settled on the ad hoc markets, but supply and demand play in such a way that equilibrium price obeys this law sometimes named “law of marginal productivity “.
The said law is dependent on an assumption relative to marginal product. More there are units of a factor, less is its marginal product, i.e. the supplement of product brought by the fact that there is not one unit less, when the quantity of other factors is fixed.
So, this law settles a systematic relation between earnings and productivity.
Naturally, everything that is related to earnings is sensitive and can be politically controversial. This gives our law the important role to pronounce the economic truth in social debates. Political deductions of this law could be: do not complain about your pay; we cannot go against such a law without provoking wrath of the economic system. Allusion to productivity, badly understood, could also make you feel guilty.
But at bottom, is the law of marginal productivity so robust; does it occupy so high a place that criticism cannot reach it?
To answer this question, I have written the article “Does Marginal Productivity Mean Anything in Real Economic Life?”, published on the “MPRA” site. Access is given by the link:
Does Marginal Productivity Mean Anything in Real Economic Life?
Abstract
The equality between factor pay and marginal product is a major component of the neoclassical paradigm. The paper begins with a brief historical review of this principle. Follows a questioning about the relevance of this law as an argument in the social debates: does marginal product represent the very contribution of the agent and if so, is it a legitimate reference for the setting of remuneration? Our answer to the first part of the question is irresolute; to the second, it is negative.
But most of the article is devoted to analysing the economic realism of the said law, both empirically and theoretically. We review some statistical studies present in the literature, with particular attention for the debate regarding the regressions of Cobb and Douglas. Evidence does not strengthen the neoclassical law of retribution.
The paper analyses the factors that hinder either the determinateness of marginal product or the equalisation between it and factor's remuneration. Are analysed: - the restrictions inherent in the law of marginal productivity: constant returns to scale and perfect competition - an alternative explanation of interest: the Austrian theory - incentive wage theories: efficiency wage and tournament theory.
The article then considers the particular case of the CEO's remuneration.
John Bates Clark, initiator of the theory
Paul Jael