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The iron law of wages is a proposed law of
economics Economics () is a social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and interact ...

economics
that asserts that
real wages US net productivity compared to real wages. Real wages are wages adjusted for inflation In economics Economics () is the social science that studies how people interact with value; in particular, the Production (economics), produc ...
always tend, in the
long runIn economics the long run is a theoretical concept in which all markets are in economic equilibrium, equilibrium, and all prices and quantities have fully adjusted and are in equilibrium. The long run contrasts with the short run, in which there are ...
, toward the minimum wage necessary to sustain the life of the worker. The theory was first named by
Ferdinand Lassalle Ferdinand Lassalle (; 11 April 1825 – 31 August 1864) was a Prussia Prussia, , Old Prussian Distribution of the Baltic tribes, circa 1200 CE (boundaries are approximate). Old Prussian was a Western Baltic language belonging to t ...

Ferdinand Lassalle
in the mid-nineteenth century.
Karl Marx Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher A philosopher is someone who practices philosophy Philosophy (from , ) is the study of general and fundamental questions, such as those about reason, M ...

Karl Marx
and
Friedrich Engels Friedrich Engels ( ,"Engels"
''
attribute the doctrine to Lassalle (notably in Marx's 1875 ''
Critique of the Gotha Program The ''Critique of the Gotha Programme'' (german: Kritik des Gothaer Programms) is a document based on a letter by Karl Marx Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher A philosopher is someone who practice ...
''), the idea to
Thomas Malthus Thomas Robert Malthus (; 13/14 February 1766 – 23 December 1834) was an English cleric Clergy are formal leaders within established religion Religion is a social system, social-cultural system of designated religious behaviour, be ...

Thomas Malthus
's ''
An Essay on the Principle of Population The book ''An Essay on the Principle of Population'' was first published anonymously in 1798, but the author was soon identified as Thomas Robert Malthus Thomas Robert Malthus (; 13/14 February 1766 – 23 December 1834) was an English cler ...

An Essay on the Principle of Population
,'' and the terminology to
Goethe Johann Wolfgang von Goethe (28 August 1749 – 22 March 1832) was a German poet, playwright, novelist, scientist, statesman, theatre director, critic, and amateur artist. His works include: four novels; epic poetry, epic and lyric poetry; prose ...

Goethe
's "great, eternal iron laws" in '' Das Göttliche''. It was coined in reference to the views of classical economists such as
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, one of the most influential of the classical economists along with Thomas Malthus Thomas Robert Malthus (; 13/14 February 1766 – 23 December 1834) w ...

David Ricardo
's law of rent, and the competing population theory of
Thomas Malthus Thomas Robert Malthus (; 13/14 February 1766 – 23 December 1834) was an English cleric Clergy are formal leaders within established religion Religion is a social system, social-cultural system of designated religious behaviour, be ...

Thomas Malthus
. It held that the market price of labor (which tends toward the minimum required for the subsistence of the laborers) would always, or almost always, reduce as the working population increased and vice versa. Ricardo believed that this happened only under particular conditions.


Lassalle

According to Alexander Gray,
Ferdinand Lassalle Ferdinand Lassalle (; 11 April 1825 – 31 August 1864) was a Prussia Prussia, , Old Prussian Distribution of the Baltic tribes, circa 1200 CE (boundaries are approximate). Old Prussian was a Western Baltic language belonging to t ...

Ferdinand Lassalle
"gets the credit of having invented" the phrase the "iron law of wages", as Lassalle wrote about ''"das eiserne und grausame Gesetz"'' (the iron and cruel law). According to Lassalle, wages cannot fall below subsistence wage level because without subsistence, laborers will be unable to work. However, competition among laborers for employment will drive wages down to this minimal level. This follows from Malthus' demographic theory, according to which population rises when wages are above the "subsistence wage" and falls when wages are below subsistence. Assuming the demand for labor to be a given monotonically decreasing function of the real wage rate, the theory then predicted that, in the long-run equilibrium of the system, labor supply (i.e. population) will rise or fall to the number of workers needed at the subsistence wage. The justification for this was that when wages are higher, the supply of labor will increase relative to demand, creating an excess supply and thus depressing market real wages; when wages are lower, labor supply will fall, increasing market real wages. This would create a dynamic convergence towards a subsistence-wage equilibrium with constant population, in accordance with
supply and demand In microeconomics Microeconomics is a branch of that studies the behavior of individuals and in making decisions regarding the allocation of and the interactions among these individuals and firms. Microeconomics focuses on the study ...

supply and demand
theory. As Ricardo noticed, this prediction would not come true as long as new
investment Investment is the dedication of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance Finance is the study of financial institution ...

investment
, technology, or some other factor causes the demand for labor to increase faster than population: in that case, both real wages and population would increase over time. The
demographic transition In demography Demography (from prefix ''demo-'' from Ancient Greek δῆμος (''dēmos'') meaning 'the people', and ''-graphy'' from γράφω (''graphō'') meaning 'writing, description or measurement') is the statistics, statistical s ...
(a transition from high birth and death rates to low birth and death rates as a country industrializes) changed this dynamic in most of the developed world, leading to wages much higher than the subsistence wage. Even in countries which still have rapidly expanding populations, the need for skilled labor in certain occupations causes some wages to rise much faster than in others. To answer the question of why wages might fall towards a subsistence level, Ricardo put forth the law of rent. Ricardo and Malthus debated this concept in a lengthy personal correspondence.


Ricardo

The content of the iron law of wages has been attributed to economists writing earlier than Lassalle. For example, Antonella Stirati notes that
Joseph Schumpeter Joseph Alois Schumpeter (; February 8, 1883 – January 8, 1950) was an Austrian political economist. He was born in Moravia Moravia ( , also , ; cs, Morava ; german: link=no, Mähren ; pl, Morawy ; szl, Morawijo; la, Moravia) is a h ...
claimed that Anne-Robert-Jacques Turgot first formulated the concept. Some (e.g.,
John Kenneth Galbraith John Kenneth Galbraith (October 15, 1908 – April 29, 2006), also known as Ken Galbraith, was a Canadian-American economist, diplomat, public official, and intellectual An intellectual is a person who engages in critical thinking Cr ...

John Kenneth Galbraith
) attribute the idea to David Ricardo. According to Terry Peach, economists interpreting Ricardo as having a more flexible view of wages include Haney (1924), J. R. Hicks (1973), Frank Knight (1935), Ramsay (1836), George Stigler (1952), and Paul Samuelson (1979). She sees Ricardo, for example, as being closer to the more flexible views of population characteristic of economists prior to Malthus. The theorist
Henry George Henry George (September 2, 1839 – October 29, 1897) was an American political economist and journalist. His writing was immensely popular in 19th-century America and sparked several reform movements of the Progressive Era. He inspired the econ ...

Henry George
noticed that Ricardo's Law of Rent did not imply that a reduction of wages to subsistence is an immutable fact, but that it instead points the way towards reforms that could greatly increase real wages, such as a
land value tax A land value tax (LVT) is a levy on the value of land Land is the solid surface of Earth that is not permanently submerged in water. Most but not all land is situated at elevations above sea level (variable over geologic time frames) and c ...
. Ricardo drew a distinction between a natural price and a
market price A price is the (usually not negative) quantity Quantity is a property that can exist as a multitude or magnitude, which illustrate discontinuity and continuity. Quantities can be compared in terms of "more", "less", or "equal", or b ...
. For Ricardo, the natural price of labor was the cost of maintaining the laborer. However, Ricardo believed that the market price of labor or the actual wages paid could exceed the natural wage level indefinitely due to countervailing economic tendencies: Ricardo also claimed that the natural wage was not necessarily what was needed to physically sustain the laborer, but could be much higher depending on the "habits and customs" of a nation:


Criticism

Socialist critics of Lassalle and of the alleged iron law of wages, such as
Karl Marx Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher A philosopher is someone who practices philosophy Philosophy (from , ) is the study of general and fundamental questions, such as those about reason, M ...

Karl Marx
, argued that although there was a ''tendency'' for wages to fall to subsistence levels, there were also tendencies which worked in opposing directions. Marx criticized the
Malthusian Malthusianism is the idea that population growth is potentially exponential while the growth of the food supply Food security is a measure of the availability of food and individuals' Economic inequality, ability to access it. According the Comm ...
basis for the iron law of wages. According to Malthus, humanity is largely destined to live in poverty because an increase in productive capacity results in an increase in population. Marx criticized Lassalle for misunderstanding
David Ricardo David Ricardo (18 April 1772 – 11 September 1823) was a British political economist, one of the most influential of the classical economists along with Thomas Malthus Thomas Robert Malthus (; 13/14 February 1766 – 23 December 1834) w ...

David Ricardo
. Marx also noted that the foundation of what he called "modern political economy" needs, for the theory of value, only for wages to be a given magnitude. He did so in praising the
Physiocrats , a physician who is considered the founding father of physiocracy, published the "Tableau économique" (Economic Table) in 1758 Image:Pierre Samuel du Pont de Nemours (1739-1817).png, Pierre Samuel du Pont de Nemours, a prominent physiocrat. In ...
.Marx, Karl (1963, 1969) ''
Theories of Surplus Value ''Theories of Surplus Value'' (german: Theorien über den Mehrwert) is a draft manuscript written by Karl Marx Karl Heinrich Marx (; 5 May 1818 – 14 March 1883) was a German philosopher, economist, historian, sociologist, political theoris ...
'', Part I, Chapter II, Progress Publishers


References

{{DEFAULTSORT:Iron law of wages Economics laws Classical economics Labour economics Ferdinand Lassalle