Abstract
Classical economists believed that economic value, which is the basis for all discussions pertaining to markets and prices, was determined by the costs of the factors needed to produce the good in question. Economic expansion would require capitalists to pay higher wages to workers because of diminishing productivity in agricultural production, and, as wages rose, capitalist profits would necessarily fall. According to Ricardo, over time this process would lead society to an undesirable stationary state. John Stuart Mill’s extension of the classical labor theory of value provides for a theory of distribution that is separate from the fixed laws of production. Once the theories of production and distribution became disentangled, economists were able to envision ways to influence distributional outcomes that could alleviate the suffering of the majority of the population. We explore the classical labor theory of value and the implications it produces for a theory of distribution. In particular, we discuss Mill’s unique contribution to classical value theory and argue that Mill, through his economic argument in favor of organized labor, actually foresaw the modern literature on uncertainty and information. We illustrate this contribution by way of an example that captures the distributional gains that workers enjoy from repeated negotiations between unions and employers.
Similar content being viewed by others
Notes
According to W. S. Jevons (1881), Cantillon wrote the first modern, systematic treatise on economics. Cairnes’s book signaled the end of classical economics because he wrote it as a defense of the new paradigm in economics that emerged in 1871, the “marginalist revolution.”
Sowell (1994), p. 29
This section is based on Eltis (2000), pp. 186–198.
Mill (1987), Book V, Chapter X, pp. 936–937.
The modern literature on this topic begins with Stigler’s seminal paper (1962). Also see (for example) Bhaskar, et. al. (2002), Prendergast (2002), and Bai and Wang (2003). Mill’s analysis of labor negotiations bears some resemblance to the “lemons problem” (Akerlof 1970), where labor may be subjected to a “loss in resale value” due to asymmetric information about product quality (Dixit and Pindyck 1994, p. 249). The key difference between Mill and Akerlof is that in labor negotiations we have an uninformed seller making an offer to an informed buyer rather than an informed seller making an offer to an uninformed buyer.
This was Mill’s term for “haggling.”
References
Akerlof, G. A. (1970). The Market for “Lemons”: quality uncertainty and the market mechanism. Quarterly Journal of Economics, 84(3), 488–500.
Bai, C., & Wang, Y. (2003). Uncertainty in labor productivity and specific human capital investment. Journal of Labor Economics, 21(3), 651–675.
Bhaskar, V., Manning, A., & To, T. (2002). Oligopsony and monopsonistic competition in labor markets. Journal of Economic Perspectives, 16(2), 155–174.
Cairnes, J. E. (1874). Some leading principles of political economy newly expounded. New York: Harper & Brothers.
Cantillon, R. (1964). Essai sur lan Nature du Commerce en General. New York: Augustus M. Kelley Publishers.
Dixit, A. K., & Pinkyck, R. S. (1994). Investment under uncertainty. Princeton: Princeton University Press.
Eltis, W. (2000). The classical theory of economic growth (2nd ed.). Hampshire: Palgrave.
Gibbons, R. (1992). Game theory for applied economists. Princeton: Princeton University Press.
Jevons, W. S. (1881). Richard Cantillon and the Nationality of Political Economy. Contemporary Review.
King, J. T., & Yanochik, M. A. (2011). John Stuart Mill and the economic rationale for organized labor. The American Economist, 56(2), 28–34.
Mill, J. S. (1987). Principles of political economy. Fairfield: Augustus M. Kelley Publishers.
Prendergast, C. (2002). Uncertainty and Incentives. Journal of Labor Economics, 20(2), S115–S137.
Sowell, T. (1994). Classical economics reconsidered. Princeton: Princeton University Press.
Stigler, G. (1962). Information in the Labor Market. The Journal of Political Economy, 70(5), 94–105.
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Yanochik, M.A., King, J.T. The Classical Bargaining Model for Organized Labor. Atl Econ J 43, 375–382 (2015). https://doi.org/10.1007/s11293-015-9463-5
Published:
Issue Date:
DOI: https://doi.org/10.1007/s11293-015-9463-5