Sometimes I hear people say something like “The wealthy worked hard for that money, and free markets determined what they do is of such high value.”
Such statements raise a question for economists. Can value be measured to show that wages reflect individual productive value?
It is an old question that goes back into the 19th century when British and European philosophers and economists applied science reasoning to the craft industries of the day: wheelwrights, blacksmiths, shoemakers and so on.
These economic philosophers suggested that if a shoemaker works 8 hours a day producing 5 pairs of shoes and then sells them at $10.00 each, he produces $50 worth of value.
Then they had the shoemaker hire a helper to specialize in cutting leather while the shoemaker sews and assembles the final product. Together they make 9 pairs of shoes a day.
We can see right away the shoemaker’s shop went from 5 pairs a day to 9 pairs a day so the helper added 4 more pairs to the total produced in a day. His production can be measured in money terms when the product is sold.
Craft industries would be expected to have small local markets so it might be necessary to lower the price to sell 4 more pairs of shoes a day. If the price is lowered to $8 a pair to sell 9 pairs per day instead of 5, then the revenue jumps to $72. With that knowledge we can see the new hire’s work added $22 = $72-$50 of value a day to the firm.
If the hired helper is paid what he is worth to the firm it will be $22. It is a maximum because if pay exceeds $22 the firm’s net revenue will drop below $50 and the shoemaker would do better without the helper. The wage could be less than $22 depending on how many other people apply for the job and how many other shoemakers compete for hired help.
It might be a surprise to learn I have condensed and summarized what continues to be part of current study in economics courses throughout U.S. colleges. It uses the scientific method because only one thing changes, labor time, while everything else remains constant. The additional product of labor can be precisely determined as part of the experiment. Economists continue to use examples like the shoemaker because it applies science to wages and they want people to believe that today’s wages reflect individual productive value as part of science, and not politics or favoritism.
For those who are comfortable transferring the fable of the shoemaker to the wages and incomes in today’s economy, including the wealthy, they will feel comfortable that the wealthy earn what they produce. For some of us though, it is all bluff.