The Iron Law of Wages, Malthusian Belts, and

A [very] Modest Proposal

Review:

1) Why did the Industrial Revolution start in England?

2) What is the Division of Labor?3) What is the Invisible Hand?4) What is Laissez Faire?

Adam Smith Says:

“The whole annual produce of … every country ... naturally divides itself into three parts; the rent of the land, the wages of labour, and the profits of [capital].”

-The Wealth of Nations, 1776

Translation:

“According to Adam Smith, three things go into making new products. These are called factors of production.”

-Mr. Weiss, 2007

When a product gets sold, everyone gets a piece of the action…

The Landlord (Land) <------------------gets paid Rent.

The Worker (Labor) gets paid Wages.------------>

<------The Factory Owner (Capital) makes a Profit.

Who do you think gets most of the money?Who do you think did most of the work?

REMEMBER THE GAME WITH NO FABULOUS PRIZES???

WHO WANTS TO BE A FACTORY WORKER?

IS THIS FAIR???

But Wait! Do you remember what determines prices???

Q: If a diamond is just a shiny rock, then why are diamonds expensive and regular rocks are “dirt cheap”?

POP QUIZ!

POP QUIZ!A: Because diamonds are rare and lots of people with money want to buy them, but rocks are everywhere and no one with money wants to buy them!

Diamonds have a small supply and a high demand.

Rocks have a large supply and a low demand.

According to laissez faire economists, supply and demand determines wages just like prices, since a paycheck is just the price of someone’s labor…

SOOO…..

Q: If the factory owner is a person just like the factory workers, why does the owner make most of the money while the worker is left, “dead broke”?

POP QUIZ!

A: Because the factory is rare and a lot of people want to own it, but there are millions of workers and only a few people who want to “buy” their labor.

Capital has a small supply and a high demand.

Labor has a large supply and a low demand

POP QUIZ!

Is this fair???

Are we just supposed to “leave it alone”???

How can we help the working class without making it worse???

Can you really leave something like this alone?

If the price of labor is too low, why can’t we just pass a law saying the factory owners have to pay the workers more?

How many people would want to work?

How many jobs would be left for them?

Laissez Faire tells us that the only way to raise the workers’ wages is to increase demand for workers or decrease their supply.

But how can you do that???

Either build more factories or have fewer children…

David Ricardo, A Jewish British Economist, published a theory called the Iron Law of Wages.

He said that the only way to increase the workers’ wages was to grow the economy faster than the population.

Demand for workers has to grow faster than supply of workers.

But another British Economist, Thomas Malthus, thought this was impossible.

He saw that the Population Explosion was moving even faster than the Agricultural Revolution. As long as the number of people was growing faster than the amount of food to feed them, poor people would always have a miserable life.

But is there nothing we can do?

Irish author Jonathan Swift had an idea…

Summary:According to Laissez Faire economics,

1) When something is sold, the money goes to the three factors of production: land, labor, and capital.

2) The landlord gets rent, the worker gets wages, and the factory owner makes a profit.

3) The factory owner makes much more than the worker, because supply of capital is small and demand is high, while supply of labor is large and demand is relatively low.

4) You can’t just fix the problem by passing a law without causing major unemployment. (Supply and Demand)

5) The only way to raise the workers’ wages is to grow the economy faster than the population, so that demand for workers gets bigger than the supply. (Ridardo’s Iron Law of Wages)

6) The only way to do this is to build more factories and have fewer children. (Malthus)