The Communist Party of Cuba has seen the light; it has just announced that from now on wages in Cuba will not be determined by the government, which kept them nearly equal, but by workers’ productivity. Of course, since it was the Party itself that made this change, ideologically this is as momentous as the fall of the Berlin Wall.
That this is an ideological defeat for equality and for communism there can be no doubt. As economist David Ricardo explained some two hundred years ago, the very idea of "worker productivity" is a hollow concept. Not only can a worker’s productivity not be measured, it cannot even be defined.
Ricardo pointed out that production is normally performed by workers who work not with their bare hands but with machines, producing not a whole product but instead performing only one step in a production process that has many. Therefore, Ricardo explained, a worker’s productivity cannot be separated either from the productivity of the machine that she works with, or from the productivity of the rest of the workers in the production process. When a skyscraper goes up, how much of a building would there be with only a crane operator but no crane, or with only a crane and operator but no workers to pour the concrete? The workers and machines together form a team, and measuring the productivity of the team is easy: In the case of construction it may be one or two buildings a year, for instance. But measuring the productivity of an individual worker or a particular piece of machinery is impossible, because a worker by herself or a machine by itself would not be able to produce anything at all.
What determines wages, then? According to Ricardo the team gets paid the value of the product that it has produced, but the division of this pay among the different members of the team is determined not by each member’s productivity, but by each member’s bargaining power. Workers’ bargaining power is determined by the strength of unions, the minimum wage law and unemployment insurance. Shareholders’ bargaining power is determined by the strength of the laws that permit them to control executive compensation. Pay is determined not by objective measures of productivity but by power.
Since Ricardo’s explanation is so obvious, where does the notion that in a market system wages are determined by workers’ productivity come from? It was invented by a Columbia University professor of economics, John Bates Clark, in a book published in 1899 called "The Distribution of Wealth: A Theory of Wages, Interest and Profits." Clark of course knew Ricardo’s theory of wages, but he was more of a man with a social mission than a scientist. His mission? To end the class war between employers and workers that raged at the time. Events such as the Haymarket Massacre of 1886 and the hanging of eight labor leaders that followed led Clark to believe that the spectre of socialism was haunting the US. In the introduction to his book he explained:
"The indictment that hangs over society is that of "exploiting labor." "Workmen" it is said, "are regularly robbed of what they produce. This is done within the forms of law, and by the natural working of competition." If this charge were proved, every right-minded man should become a socialist."
Clark took it upon himself to prove that the charge of exploitation was wrong and his "proof" could not have been simpler. He simply stated that in spite of the fact that workers use machines and in spite of the fact that production involves many steps, the productivity of the individual worker is measurable, and it is this productivity that determines the worker’s wage. Not only do workers get all they deserve, but if the wage were to be raised employers would have no choice but to fire them. No employer can pay out more than the worker puts in.
The evidence that Clark’s theory is wrong is all around us. A taxi requires a driver and a taxi driver requires a taxi. What is the productivity of the taxi without the driver or of the driver without the taxi? The pay of the two together is determined by their productivity, but what the share of the taxi-owner or of the taxi driver is, is determined by their bargaining power.
In 1941, Wassily Leontief, a Nobel Prize winning economist, tried to alert economists to the fallacy of Clark’s theory. He pointed out that team production is "no less than a formal rejection of the marginal productivity theory. The marginal productivity of any [factor of production] … is zero." Like Ricardo before him, Leontief was never challenged. Instead he was simply ignored. And Clark’s soothing tale that wages are determined by workers’ productivity is still being taught as a rock-solid scientific theory by economists all over the globe.
Since productivity is not measurable, how is the Communist Party of Cuba likely to implement its plan to pay workers according to their productivity? Having fallen for the fallacy that the wages in market economies are determined by productivity, the Party will probably observe the pay differentials that exist in the West and implement them at home. What’s in store for Cuba is the standard menu that comes with wage inequality, including poor public education but first-rate private schools, insufficient or no health care for the majority but excellent medical care for CEOs and government officials, a substantial increase in the length of the working day, with fewer vacations and job insecurity to boot.
MOSHE ADLER is the Director of Public Interest Economics. He can be reached at email@example.com.