—–Original Message—–
From: T
Sent: Mon 8/15/2016 10:59 AM
To: Walter Block
Subject: Real wages not rising with productivity question

Walter, In Gary North’s articles on Nixon closing the gold window, he showed a graph depicting (real) wage growth along with productivity. According to the graph, in 1973 wages didn’t rise along with increased productivity; they stagnated Could you refer me to an article you or someone else has written to explain this? Thanks. T

Dear T: We have a theory in economics that wages will equal discounted marginal revenue product. All economists, worthy of the name, would agree with that. Austrian economists alone would say there is an apodictic, necessary law that there is a tendency for wages to equal discounted marginal revenue product (productivity, for short), or that in equilibrium, or in the evenly rotating economy, wages will equal productivity. Why is this?

Well, suppose that my productivity is $9 per hour. If my wage is $15, the employer will lose money on hiring me ($6 per hour) and will tend to go bankrupt, so that can’t last in the long run. Now suppose my wage is $6 per hour. Then there is a tendency either that I’ll find a similar job with a higher wage, and/or, some other employer will offer me something more than $6, in which case I’ll quit my present job. For example, someone might offer me $6.01, in which case I’ll quit my job and take another (assuming away transactions costs); ditto for an offer of $6.02. Etc.

So, there is always a tendency for wages to equal productivity, but this only is necessarily true in the evenly rotating economy, or equilibrium.

Now, to answer your question. Gary North is a highly skilled economist-historian. I have not looked into what he wrote in any great depth (I’m sure if I did I’d agree with him) but he is not obviously wrong in what he says. Yes, “in 1973 wages didn’t rise along with increased productivity” but there is no necessity for them to do so. Almost always, it takes TIME for the market to adjust. I have no doubt that, eventually, after productivity rises (or falls) what wages will follow along. Mary had a little lamb. Wherever Mary went, the lamb was sure to go. But does it follow her one foot behind, always? Of course not. The distance between them varies. Sometimes, the lamb even gets ahead of Mary. It is only in the evenly rotating economy, or equilibrium, that Mary and the lamb are in the same exact spot. (Well of course, they can’t be in the same EXACT spot, but work with me here).

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