Iron Law of Wages

Abstract

The ‘iron (or brazen) law of wages’ is a term invented by Ferdinand Lassalle (1862) to describe the inexorable tendency of real wages under capitalism to adhere to a level just sufficient to afford the bare necessities of life. This law, he claimed, was not just a socialist indictment of capitalism but was authorized by leading ‘bourgeois’ economists such as Malthus and Ricardo. He failed to point out, however, that in Malthus and Ricardo the so-called ‘subsistence’ theory of wages was predicated on a theory of population growth according to which the supply of labour responds automatically to any gap between the going ‘market price’ and ‘natural price’ of labour, the latter being defined as a real wage sufficient to reproduce a working population of given size and composition. Lassalle, however, being a socialist, followed Marx in rejecting the Malthusian theory of population; what ensured the ‘iron law of wages’ for Lassalle, as for Marx, was the tendency for any rise in real wages to generate unemployment, thus setting in motion forces that reversed the rise. This threw the entire weight of argument for equilibrium adjustments in the labour market on the side of employers’ demand; it provided no explanation of the supply of labour and thus failed to furnish a determinate theory of wages in long-run equilibrium. Ironically, therefore, there may be an ‘iron law of wages’ in Malthus and Ricardo, but there is certainly no such iron law in socialist economics. The question whether Malthus and particularly Ricardo can be said to have held the iron law or subsistence theory of wages was a favourite debating question in the latter half of the 19th century (see, for example, Marshall 1890, pp. 508–9). There is no doubt that they held the view that real wages tend to fluctuate around a natural point of ‘gravity’, namely, the minimum level of food and other necessities required for existence. But, in the first place, these fluctuations, depending as they did upon decisions to marry and to have children, involved a lag of at least 15–18 years, a point which Malthus (but not Ricardo) conceded explicitly. In the second place, the minimum-of-existence level of ‘natural wages’ was admitted to be a matter of custom and habit and therefore subject to a secular upward drift. It was therefore perfectly possible to argue for the existence of something like a normal long-run supply price of labour – a constant real wage, everything else being the same – while at the same time granting that the ‘market price’ of labour fluctuated around an ever-rising trend. In short, rising living standards under capitalism do not violate the iron law of wages, understood as a theory about the long-run equilibrium price of labour. But that is only to say that the iron law or subsistence theory of wages amounts for all practical purposes to accepting customary wages as an institutional datum (Schumpeter 1954, p. 665).