Money Wages versus Real Wages
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Superphysics note: In Economic Superphysics, wages are under the 3rd Law of Value as Energy Flow
What is the actual statistical relationship between:
- changes in money-wages and
- changes in real wages?
In a particular industry, one would expect the change in real wages to be in the same direction as the change in money-wages.
But in the case of general wages, the change in real wages associated with a change in money-wages, is so far from being in the same direction. It is almost always in the opposite direction:
- when nominal-wages are rising, real wages are falling [inflation]
- when nominal-wages are falling, real wages are rising [deflation or recession]
This is because, in the short terms, falling nominal-wages and rising real wages accompany decreasing employment.
Workers are readier to accept wage-cuts when employment is falling off. Yet real wages can rise when jobs are cut when there is overemployment. The reduction of output increases the marginal return of capital equipment [when production is beyond optimum].
But this only happens when there is overemployment. The existing money-wage usually has unemployed people even during inflation. This causes real wages to fall. This means that the real prices of things is not an accurate indication of the marginal disutility of labour [workers refusing to work]. The second postulate does not hold good*.
*Superphysics Note: This happens in a recession. But both the inflation and unemployment is not the fault of the workers, but of the investment function.
Keynes’ Wacky Assumptions
But there is a more fundamental objection.
The second postulate flows from the idea that the real wages of workers depend on the wage bargains which workers make with the entrepreneurs. The bargains are actually made in terms of money. But the real wages acceptable to labour depend on the money-wage.
Nevertheless, it is the money-wage that determines the real wage*.
*Superphysics Note: Here, Keynes clearly corrupts the Classical Theory by imposing that nominal value as determininng real value
Thus, the classical theory assumes that workers can always reduce their real wage by accepting a reduction in money-wages*.
*Superphyics Note: The corruption done by Keynes on Classical Theory leads to absurd statements.
The postulate that there is a tendency for the real wage to come to equality with the marginal disutility of labour [workers refusing to work for slave wages] clearly presumes that workers can decide their real wages, but not the quantity of employment willing to work at this wage.
The traditional theory maintains that the real wage* is determined by the wage bargains between the entrepreneurs and the workers.
*Superphysics Note= Yes, workers determine their real wages by signing or not signing the employment contract. Money-wages (nominal values) are irrelevant. Workers will not work for 1,000,000 junk-cryptocoin unless that junk-cryptocoin can buy real goods.
Let us assume free competition amongst employers and no restrictive combination amongst workers. The workers can bring their real wages into conformity with the marginal disutility of the amount of employment offered by the employers at that wage.
If this is not true, then there is no longer any reason to expect a tendency towards equality between the real wage and the marginal disutility of labour [workers refusing to work].
The classical conclusions:
- apply to the whole body of workers. It does not mean that one worker can get employment by accepting a cut in money-wages which his fellows refuse.
- should equally be applicable to a closed and to an open system
- are not dependent on
- the characteristics of an open system or
- the effects of a reduction of money-wages in a single country on its foreign trade.
- are not based on indirect effects due to a lower wages-bill in terms of money having certain reactions on the banking system and the state of credit.
Classical conclusions are based on the belief that in a closed system a reduction in money-wages will be accompanied by a reduction in real wages*
*Superphysics Note: The Classical conclusions are based on a dynamic open system. It does not care about the money-wages that will render it as a closed system. The proper statement is that the reduction of money-wages is caused by a reduction in economic activity (sales), investments (liquidity), etc.
The general level of real wages depends on the money-wage bargains between the employers and the workers is obviously not true*.
The classical theory taught that:
*Superphysics Note= Here, Keynes blames phantoms. The proper statement is= Real wages depend on real-wage bargains, not money-wage bargains. No worker bargains with junk-cryptocoin that is worth nothing.
- prices are governed by marginal prime cost in terms of money*
- money-wages largely govern marginal prime cost
Thus if money-wages change, prices would change in almost the same proportion. It would leave the real wage and unemployment the same as before. Any small gain or loss to labour being at the expense or profit of other elements of marginal cost which have been left unaltered.
*Superphysics Note: The money-wages in the Classical theory are representations of real wages and do not represent themselves. They are always relative to consumer goods and never independent of them. A change in money-wages will not automatically mean a change in real prices because money-wages are an effect and not a cause.
They diverted from this idea by the settled conviction:
- that labour can determine its own real wage
- They think that labour can always determine what real wage corresponds to full employment, i.e. the maximum quantity of employment which is compatible with a given real wage
- that prices depend on the quantity of money
Thus, the second postulate of the classical theory has two objections:
1. The actual behaviour of labour
I assert that a fall in real wages due to inflation, with money-wages unaltered, does not cause the number of available job-seekers at the current reduced real wage to be less than the number actually employed prior to inflation.
If it does, then all those who are now unemployed at the current reduced real wage will stop working because of just a small inflation*. Yet this strange supposition is what Pigou’s Theory of Unemployment says.
*Superphysics Note: The current workers ask for a wage increase instead of quitting work
- The wage bargain directly determines the general level of real wages
There may be no method available to workers to make the general level of money-wages conform with the marginal disutility of the current volume of employment [workers refusing to work].
Workers have no way to reduce their real wage by making revised money bargains with the entrepreneurs*.
I argue that other forces determine the general level of real wages, not the workers bargaining.
*Superphysics Note: Here, Keynes strangely ignores the workers’ ability to negotiate wages and salaries