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NOTE 5. "Labor Units" and "Wage Units"

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Chapter 5. Labor Units and Wage Units

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We come now to a short chapter of Keynes's book called The Choice of Units.

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It is less than nine pages long, but it repays close analysis because it strikingly illustrates the inconsistencies in his thinking,

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Banking, as well as the loose, shifting, and sometimes self-contradictory concepts that

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he considered basic, he begins by pointing out that the units in terms of which economists

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commonly work are unsatisfactory.

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He illustrates this by the concepts of the national dividend, the stock of real capital,

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and the general price level, page 37.

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The national dividend, for example, as defined by Alfred Marshall and A. C. Pigot, measures

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the volume of current output or real income and not the value of output or money income,

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page 38.

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On this basis, Keynes goes on, an attempt is made to erect a quantitative science.

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But it is a grave objection to this definition for such a purpose that the community's output

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of goods and services is a non-homogeneous complex which cannot be measured, strictly

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speaking except in certain special cases, as for example when all the items of one output

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are included in the same proportion in another output.

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This objection to the attempt to measure the national dividend, or, as Americans would

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call it, the national income, in real terms, is perfectly valid as far as it goes.

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So too are Keynes's further objections to the way Pigot attempts to deal with the factor

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of obsolescence.

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As Keynes points out, when Pigot deducts for obsolescence where there has been no change

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in the physical quantity of the factories or equipment under consideration, he is covertly

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introducing changes in value.

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Page 39.

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Keynes goes on to make the further objection that Pigot is unable, in real terms, to evaluate

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New Equipment Against Old When, owing to changes in technique, the two are not identical.

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And Keynes concludes that, though Pigot is aiming at the right and appropriate concept

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for economic analysis, until a satisfactory system of units has been adopted, its precise

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definition is an impossible task.

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He adds that the attempt to compare real outputs of non-homogeneous commodities or equipment

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presents conundrums which permit, one can confidently say, of no solution.

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These criticisms of the quantitative indeterminancy, page 39, of such concepts as the national

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To say that net output today is greater, but the price level lower, then the general price level, must be accepted as correct.

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Keynes adds that such concepts properly belong only in the field of historical and statistical description,

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for which perfect precision is neither usual nor necessary.

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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 queen, than Queen Elizabeth.

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A proposition not without meaning, and not without interest, but unsuitable as material for the differential calculus.

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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.

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Page 40

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Having made all these perfectly valid criticisms, Keynes does an astonishing thing.

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After pointing out that we cannot add non-homogeneous commodities or non-homogeneous capital equipment

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together to get any meaningful total in real terms, but only in terms of monetary value,

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He blandly assumes that we can add non-homogeneous labor together to get a meaningful total of real labor units.

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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.

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True, it is not possible to add a ton of sand to a ton of gold watches and get a total that

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is meaningful in any other sense than as a weight, which is of no economic significance.

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But it is quite legitimate to add together millions of bushels of wheat of the same commercial

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When we try to add labor units together in real terms, however, we are completely without

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any common standard of measurement.

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How can we add an hour's labor of a great surgeon to an hour's labor of a shoe clerk?

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How can we add an hour's work of a Yahudi menuhin to an hour's work of a bricklayer?

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From a strictly scientific standpoint, even an hour's labor by a file clerk is never

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strictly equal in real terms to that of another file clerk.

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Differences in speed, accuracy and intelligence must be taken into account.

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There may even be significant differences in real terms between the first hour's work

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of the same file clerk in the morning and his last hour's work in the afternoon.

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None of these problems seem to give Keynes the slightest concern.

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Oblivious of all he has written a few pages back about the mock precision of attempts

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In order to add commodities and real terms, he writes,

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In dealing with the theory of employment I propose, therefore, to make use of only two

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fundamental units of quantity, namely, quantities of money value and quantities of employment.

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The first of these is strictly homogeneous, and the second can be made so, for in so far

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are as different grades and kinds of labor and salaried assistants enjoy a more or less

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fixed relative remuneration, the quantity of employment can be sufficiently defined

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for our purpose by taking an hour's employment of ordinary labor as our unit, and waiting

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an hour's employment of special labor in proportion to its remuneration, i.e. an hour

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More of special labor remunerated at double ordinary rates will count as two units.

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Page 41.

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That an eminent economist should be capable of using such a concept and writing such a

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paragraph in 1936 seems incredible.

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This is precisely the concept that Karl Marx used in his attempt to establish his famous

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labor theory of value in Das Kapital in 1867. This concept was demolished unanswerably by

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Boehm-Bawerk in 1896. Marx attributed all the value of commodities to the labor that

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went into them. When asked what he meant by this labor and how he measured it, he called

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called it simple average labor.

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Skilled labor, he wrote, counts only as intensified or rather multiplied simple labor, so that

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a smaller quantity of skilled labor is equal to a larger quantity of simple labor.

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Experience shows that skilled labor can always be reduced in this way to the terms of simple

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Simple Labor No matter that a commodity may be the product

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of the most highly skilled labor, its value can be equated with that of the product of

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simple labor so that it represents merely a definite amount of simple labor.

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Boehm-Bawerk travestied this in a passage in his Carl Marx and the Clothes of His System,

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English Edition, 1898, page 162.

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With the very same reasoning one could affirm and argue the proposition that the quantity

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of material contained in commodities constitutes the principle and measure of exchange value,

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that commodities exchange in proportion to the quantity of material incorporated in them.

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10 pounds of material in one kind of commodity exchange against 10 pounds of material in another kind of commodity.

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If the natural objection were raised that this statement was obviously false,

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because 10 pounds of gold do not exchange against 10 pounds of iron, but against 40,000 pounds,

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or against a still greater number of pounds of coal,

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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.

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Skillfully wrought, costly material of special quality counts only as compound, or rather, multiplied common material,

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so that a small quantity of material fashioned with skill is equal to a larger quantity of common material.

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that this reduction is constantly made experience shows.

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A commodity may be of the most exquisite material.

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Its value makes it equal to commodities formed of common material

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and therefore represents only a particular quantity of common material.

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Keynes's quantity of employment in terms of labor units

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is as inescapable of physical or real measurement as is Marx's quantity of labor.

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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,

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when we are dealing with the behavior of the economic system as a whole.

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Page 43 Yet these supposedly independent units of quantity,

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namely quantities of money value and quantities of employment, are both merely quantities

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of money value.

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If ten laborers each working for $8 a day are dismissed, and two specialists each working

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According for $40 a day are taken on, there is no change in the volume of employment according

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to Keynes's method of reckoning in the quotation on page 62.

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Keynes's quantity of employment is not a quantity of employment.

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It is the quantity of money received by laborers who are employed.

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This interpretation is not shaken but proved by the very arguments that Keynes puts forward

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to defend his so-called labor unit.

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He writes,

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This assumption of homogeneity in the supply of labor is not upset by the obvious fact

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of great differences in the specialized skill of individual workers and in their suitability

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for Different Occupations, for, if the remuneration of the workers is proportional to their efficiency,

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the differences are dealt with by our having regarded individuals as contributing to the

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supply of labor in proportion to their remuneration, pages 41 through 42.

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If this remarkable assumption were valid, we should be equally justified in assuming

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Homogeneity in the Physical Supply of Goods and Services

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For if the market price of every article or service is proportional to its value,

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then the differences are dealt with by regarding each commodity or service

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as contributing to the total physical supply in proportion to its price.

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We could follow Keynes through the still further logical ledger domain by which he seeks to defend his labor unit concept.

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But this would be superfluous and tedious.

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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,

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of the national income or of the level of prices, but to objections of an even more serious and fundamental nature.

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He leaps out of the frying pan into the fire.

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He rejects concepts with a limited usefulness in order to embrace a concept that is worthless for any purpose.

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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,

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he blandly proceeds to apply algebraic symbols and the differential calculus to his invalid concept of quantity of employment.

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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.

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It is a perfect example of mock precision of an inappropriate and worthless application of mathematics to economic analysis.