Are Marginal Products Created ex Nihilo?

This is Chapter 5 from my book: Ellerman, David. 1995. Intellectual Trespassing as a Way of Life: Essays in Philosophy, Economics, and Mathematics. Lanham MD: Rowman & Littlefield.

When an orthodox economist considers the principle of people getting the fruits of labor, he or she will invariably interpret it in terms of marginal productivity.  The orthodox claim is that under the conditions of competitive equilibrium, each unit of labor “gets what it produces.”  Well-meaning capitalist liberals emphasize that actual capitalism may be neither competitive nor in equilibrium, and in any case, there are enormous difficulties in measuring the “marginal product of each factor of production.”  In other words, they accept that interpretation of marginal productivity theory in principle but fuss about its applicability in practice.

We have argued that competitive capitalism does not even remotely satisfy in principle the norm of people getting the fruits of their labor.  The orthodox view of marginal products is flawed on several counts.  In previous essays, it was noted that the fallacy of personification was involved in imputing responsible agency to the nonhuman actors.  Tools and machines do not “produce” their marginal product or anything else.  Tools and machines are used by people to produce the outputs.  We have also noted that shares in the product are not actually imputed or assigned to the various factor suppliers.  One legal party appropriates the whole product of a firm, 100 percent of the output assets and 100 percent of the input liabilities.

There is another flaw in the orthodox treatment of MP theory that is of interest.  The ideological baggage being carried by MP theory forces it to be presented in a factually implausible way.  The factually implausible part of the orthodox view is the picture of a unit of a factor as producing its marginal product ex nihilo (even assuming we personify the factors with responsible agency).  Other factors must be used, and when the value of these used-up factors is subtracted from the value of the marginal product, the result will no longer equal the value of the unit of the factor.

In this essay, we give the mathematically equivalent presentation of MP theory, which is based on the more plausible picture that a unit of labor can only produce more of the outputs by using up more of the other inputs.  The “problem” with this version of MP theory is that it does not lend itself to the ideologically appealing picture of each unit of a factor as producing its marginal product.  Thus we have a central example about how the ideological baggage being towed by orthodox economics affects even the mathematical presentation of the standard theories.

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