Chapter V “LABOR UNITS” AND “WAGE UNITS”

We come now to a short chapter of Keynes’s called “The Choice of Units.” It is less than nine pages long; but it repays close analysis because it strikingly illustrates the inconsistencies in his thinking, as well as the loose, shifting, and sometimes self-contradictory concepts that he considered basic.

He begins by pointing out that the units in terms of which economists commonly work are unsatisfactory. He illustrates this by “the concepts of the National Dividend, the stock of real capital and the general price-level” (p. 37). The national dividend, for example, as defined by Alfred Marshall and A. C. Pigou, measures “the volume of current output or real income and not the value of output or money-income” (p. 38). On this basis, Keynes goes on, an attempt is made to erect “a quantitative science.” But it is “a grave objection to this definition for such a purpose that the community’s output of goods and services is a non-homogeneous complex which cannot be measured, strictly speaking, except in certain special cases, as for example when all the items of one output are included in the same proportion in another output.”

This objection to the attempt to measure the national dividend (or, as Americans would call it, the national income) in “real” terms is perfectly valid as far as it goes. So, too, are Keynes’s further objections to the way Pigou attempts to deal with the factor of obsolescence. As Keynes points out, when Pigou deducts for obsolescence, where there has been no change in the physical quantity of the factories or equipment under consideration, he “is covertly introducing changes in value” (p. 39). (Keynes’s italics.) Keynes goes on to make the further objection that Pigou is unable, in real terms, “to evaluate new equipment against old when, owing to changes in technique, the two are not identical.” And Keynes concludes that though Pigou is aiming at “the right and appropriate concept for economic analysis... until a satisfactory system of units has been adopted, its precise definition is an impossible task.” He adds that the attempt to compare “real” outputs of non-homogeneous commodities or equipment presents “conundrums which permit, one can confidently say, of no solution.”

These criticisms of the “quantitative indeterminacy” (p. 39) of such concepts as “the national income” and “the general price-level” must be accepted as correct. Keynes adds that such concepts properly belong only in “the field of historical and statistical description... for which perfect precision... is neither usual nor necessary”:

To say that net output today is greater, but the price-level lower, than ten years ago or one year ago, is a proposition of a similar character to the statement that Queen Victoria was a better queen but not a happier woman than Queen Elizabeth —a proposition not without meaning and not without interest, but unsuitable as material for the differential calculus. Our precision will be a mock precision if we try to use such partly vague and non-quantitative concepts as the basis of a quantitative analysis (p. 40).

Having made all these perfectly valid criticisms, Keynes does an astonishing thing. After pointing out that we cannot add non-homogeneous commodities or non-homogeneous capital equipment together to get any meaningful total in “real” terms (but only in terms of monetary value) he blandly assumes that we can add non-homogeneous labor together to get a meaningful total of “real” “labor-units.”

Surely it ought to be clear that the labor of different individual workers is not only as non-homogeneous as commodities or capital equipment, but infinitely more so. True, it is not possible to add a ton of sand to a ton of gold watches and get a total that is meaningful in any other sense than as a weight, which is of no economic significance. But it is quite legitimate to add together millions of bushels of wheat of the same commercial grade, or millions of pounds of cotton of the same grade, to get a total that is significant economically.

When we try to add “labor-units” together in “real” terms, however, we are completely without any common standard of measurement. How can we add an hour’s labor of a great surgeon to an hour’s labor of a shoe clerk? How can we add an hour’s work of a Yehudi Menuhin to an hour’s work of a bricklayer? From a strictly scientific standpoint, even an hour’s labor by a file clerk is never strictly equal in “real” terms to that of another file clerk. Differences in speed, accuracy, and intelligence must be taken into account. There may even be significant differences, in “real” terms, between the first hour’s work of the same file clerk in the morning and his last hour’s work in the afternoon.

None of these problems seems to give Keynes the slightest concern. Oblivious of all he has written a few pages back about the “mock precision” of attempts to add commodities in real terms, he writes:

In dealing with the theory of employment I propose, therefore, to make use of only two fundamental units of quantity, namely, quantities of money-value and quantities of employment. The first of these is strictly homogeneous, and the second can be made so. For, insofar as different grades and kinds of labor and salaried assistance enjoy a more or less fixed relative remuneration, the quantity of employment can be sufficiently defined for our purpose by taking an hour’s employment of ordinary labor as our unit and weighting an hour’s employment of special labor in proportion to its remuneration;i.e., an hour of special labor remunerated at double ordinary rates will count as two units. (My italics, p. 41.)

That an eminent economist should be capable of using such a concept and writing such a paragraph in 1936 seems incredible. This is precisely the concept that Karl Marx used in his attempt to establish his famous labor theory of value in “Das Kapital” in 1867. This concept was demolished unanswerably by Böhm-Bawerk in 1896.

Marx attributed all the value of commodities to the labor that went into them. When asked what he meant by this labor, and how he measured it, he called it “simple average labor”:

Skilled labor [he wrote] counts only as intensified, or rather multiplied, simple labor, so that a smaller quantity of skilled labor is equal to a larger quantity of simple labor. Experience shows that skilled labor can always be reduced in this way to the terms of simple labor. No matter that a commodity may be the product of the most highly skilled labor, its value can be equated with that of the product of simple labor, so that it represents merely a definite amount of simple labor.¹

Böhm-Bawerk travestied this in a passage in his Karl Marx and the Close of His System, (English ed., 1898, p. 162):

With the very same reasoning one could affirm and argue the proposition that the quantity of material contained in commodities constitutes the principle and measure of exchange value—that commodities exchange in proportion to the quantity of material incorporated in them. Ten pounds of material in one kind of commodity exchange against ten pounds of material in another kind of commodity. If the natural objection were raised that this statement was obviously false because ten pounds of gold do not exchange against ten pounds of iron but against 40,000 pounds, or against a still greater number of pounds of coal, we may reply after the manner of Marx, that it is the amount of common average material that affects the formation of value, that acts as unit of measurement. Skillfully wrought, costly material of special quality counts only as compound or rather multiplied common material, so that a small quantity of material fashioned with skill is equal to a larger quantity of common material. That this reduction is constantly made experience shows. A commodity may be of the most exquisite material; its value makes it equal to commodities formed of common material, and therefore represents only a particular quantity of common material.

Keynes’s “quantity of employment” in terms of “labor-units” is as incapable of physical or “real” measurement as is Marx’s quantity of labor.

“It is my belief,” writes Keynes, “that much unnecessary complexity can be avoided if we limit ourselves strictly to the two units, money and labor, when we are dealing with the behavior of the economic system as a whole” (p. 43). Yet these supposedly independent units of quantity, namely, “quantities of money value” and “quantities of employment,” are both merely quantities of money value. If ten laborers each working for $8 a day are dismissed and two specialists each working for $40 a day are taken on, there is no change in the volume of employment, according to Keynes’s method of reckoning in the quotation on page 62. Keynes’s “quantity of employment” is not a quantity of employment. It is the quantity of money received by laborers who are employed.²

This interpretation is not shaken, but proved, by the very arguments that Keynes puts forward to defend his so-called “labor-unit.” He writes:

This assumption of homogeneity in the supply of labor is not upset by the obvious fact of great differences in the specialized skill of individual workers and in their suitability for different occupations. For, if the remuneration of the workers is proportional to their efficiency, the differences are dealt with by our having regarded individuals as contributing to the supply of labor in proportion to their remuneration. (My italics, pp. 41-42.)

If this remarkable assumption were valid, we should be equally justified in assuming homogeneity in the physical supply of goods and services. For if the market price of every article or service is proportional to its value, then “the differences are dealt with” by regarding each commodity or service as contributing to the total physical supply in proportion to its price!

We could follow Keynes through the still further logical legerdemain by which he seeks to defend his “labor-unit” concept. But this would be superfluous and tedious. The plain truth is that Keynes’s “labor-unit” concept is open not only to every objection that he himself makes to the quantitative measurement of commodities, of the national income, or of the level of prices, but to objections of an even more serious and fundamental nature. He leaps out of the frying pan into the fire. He rejects concepts with a limited usefulness in order to embrace a concept that is worthless for any purpose. After having explained to us that such things as “net real output and the general level of prices” are “unsuitable as material for the differential calculus,” he blandly proceeds to apply algebraic symbols and the differential calculus to his invalid concept of quantity of employment.

The chapter ends with some pretentious mathematical formulas and equations attempting to show that one of his nebulous and ill-defined “quantities” is a “function” of the other. It is a perfect example of “mock precision,” of an inappropriate and worthless application of mathematics to economic analysis.

¹ Karl Marx, Capital (Everyman’s edition), I, 13-14.

² Cf. Benjamin M. Anderson, Economics and the Public Welfare, p. 393. Also Frank H. Knight, The Canadian Journal of Economics and Political Science, February, 1937, p. 115: “What can anyone think he means by a physical unit of labor? Yet from beginning to end Mr. Keynes treats labor as a homogeneous fluid with a uniform price per unit.”