Is the Market Wage the Just Wage? (Just Wages Series)

Peter Boettke, Rosolino Candela, and Kaitlyn Woltz’s post is the second in our four-part series on “Just Wages.” It offers a reassessment of factor pricing and distributive justice. 

Does the market generate just wages? This question has plagued the minds of those concerned with justice for centuries (Aquinas, 1485). In his recent (open-access) article, “On the Very Idea of a Just Wage,” Joseph Heath argues that the market does not generate just wages. Instead, he argues that factor pricing is irrelevant to normative issues like distributive justice. Heath argues that market forces will produce efficient wages, but not just wages.

We challenge Heath’s argument, arguing that his conclusion, while not invalid, is misplaced. His critique is of a model of the market and not the market itself. In particular, his critique is of equilibrium models of the market. In equilibrium models, the factors of production—specifically laborers—are already paid according to their marginal contribution to overall production. Laborers automatically receive a wage that exactly matches their contribution to production. In this understanding of the market, prices serve as sufficient statistics, instantly communicating the relative scarcity of labor. The process by which prices (and wages) come to communicate the relative scarcity of resources is lost. For this reason, Heath’s critique of equilibrium models is important as it identifies that these models miss the existence of monopoly privileges and other institutional impediments that prevent the least well-off in society from realizing their productive potential.

We argue that an understanding of the market as a process is necessary for judging whether the prevailing wages in the market are tending toward what is popularly considered just. Understanding the market as a process brings those institutions that provide the framework for the operation of the market to the foreground. Within an institutional framework of property, contract, and consent—Hume’s system of natural liberty—imperfections in the market (such as monopoly power) will be expunged by market actors searching for greater returns. An institutional framework of property, contract, and consent facilitates a process of discovering and correcting imperfections in the market. In this process, prices that communicate information about society’s valuation of goods, services, and factors of production arise from arbitrage activity. In this way, the market process will realize the marginal productivity of workers. In other words, market wages will tend toward just wages.

This process view of the market undergirded the implicit theory of distributive justice held by classical political economists and early neoclassical economists—notably Adam Smith, David Hume, Carl Menger, Ludwig von Mises, and F. A. Hayek—that Heath overlooks. These classical economists understood the dynamic discovery process that takes place in the market context when an institutional framework of property, contract, and consent exists. Driven by profits, entrepreneurs discover the most valued use of land, labor, and capital. Through arbitrage, this process generates a tendency in factor pricing to match the factors marginal contribution to production. As a result, a pattern of income distribution arises that matches with the contribution of various factors to the overall production in the economy. In other words, market wages—and prices—tend toward just wages.

Our argument implies that we need to be careful in how we build models of the market. If perfection is built into the model, like the equilibrium model Heath critiques, then we squeeze out the imperfections we are trying to explain—namely those institutions that emerge to correct imperfections like monopoly power. The justice of the market process cannot be analyzed in an institutional vacuum. Heath’s focus on equilibrium models causes him to make this mistake. By conducting his analysis in an institutional vacuum, he ignores the more fundamental comparative institutional question: under which institutional conditions can a just wage be discovered through the market process? Drawing from classical political economists and early neoclassical economists, our answer is that within a framework of property, contract, and consent the market process will realize the marginal productivity of workers. An institutional framework of property, contract, and consent facilitates the process of discovering and correcting imperfections in the market, leading to the realization of just wages.

Peter Boettke is University Professor of Economics and Philosophy at George Mason University and the Director of the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University.

Rosolino Candela is an Associate Director of Academic and Student Programs and a Senior Fellow with the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University. He is currently working on a book project (with Peter Boettke) entitled Price Theory as Prophylactic Against Popular Fallacies, under contract with Palgrave Macmillan.

Kaitlyn Woltz is a PhD Student in the Department of Economics at George Mason University, a PhD Fellow with the Mercatus Center, and a Graduate Fellow with the F. A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics. Her current research focuses on the political economy of inmate-produced media.