7th Vienna School Part II

 

 

Outline:

 

1st Introduction: Renaissance of the Classic

2nd The most important representatives

3rd The first Gossen's law

4th The second Gossen's law

5th The problem of value-antinomy

6th The attribution problem

7th Principle of positive time preference

8th The Agio theory of interest

9th Power or economic law?

 

 

 

6th The attribution problem

 

We have noted above that the attribution problem is one of the most important problems of the Vienna School and we may add that it is also one of the most well thought out solution proposals, although, just as for David Ricardo 's theory of value, we will conclude that even the proposal of the Vienna School to solve the attribution problem cannot be considered as satisfactorily solved.

 

Here, the problem of attribution consists in the following: if we derive the value of a good from the utility that the final consumers experience as they consume that good, then the question arises of how to attribute this total value to the individual production factors that are involved in production.

 

In principle, two different methods can be used here. One can understand - as was later done by the Anglo-Saxon representatives - the value of the individual factors of production as a direct result of the market, whereby it is primarily the respectively realised market form that determines what remuneration the individual factors of production achieve. This is the path that particularly John Bates Clark has taken, but which we will analyse only in the second part of this seminar under the heading of microeconomic distribution theory.

 

But one can also attempt to clarify which part of the individual factors of production contributed to the achievement of the total value. This is the path taken by Karl Menger, Böhm-Bawerk as well as Friedrich von Wieser, which illuminates the problem of attribution from a welfare-theoretical perspective rather than from a positive, explanatory one. In this chapter, we want to confine ourselves to the presentation of these three authors, whereby each of them takes a slightly different path.

 

Let us begin with the attempt made by Karl Menger. With Karl Menger, the value of a production factor is determined by the so-called deductive method. Here, one begins with the total value that a good achieves on the market. The next step is to consider how the total value would be reduced if the production factor that is to be examined were to be deducted in thought. The difference between the initial total value and the remaining residual value after deducting a factor would then be the value that is attributed to that factor. If a good initially reaches the value 100 and if, when labour is deducted, only a value of 40 would be reached, then the value of the labour factor could justifiably be set as 100 - 40, thus 60.

 

In this context, it must be pointed out critically that if a production factor such as the labour factor is to be deducted in its entirety, no product could be produced, because to produce almost all goods all the production factors under discussion are always needed. Production takes place on a specific site, so that the soil factor is needed in any case; furthermore, labour is generally still used to produce the end products, so that without labour input no product is produced. Finally, capital is needed to pay off the workers immediately before the entrepreneur receives the funds to pay the employees by selling the finished products. Or else capital is needed to buy machines. Again, one will have to assume that without any capital no production would have been possible, the workers could not be paid immediately, and production could not have started at all without machines.

 

Thus, if we subtract a factor completely in our thoughts, we would have to assign the total value of the product to each factor and here we get into a logical contradiction. The sum of the charges for all the utilised factors of production cannot be greater than the total value, and more than that cannot be distributed. On the other side, with the proposed solution the value results to be three times the sales revenue, if we assume three factors of production (labour, land and capital).

 

The solution to the problem is, of course, to use the marginal analysis. The deduction of a production factor should just not refer to the factor in its entirety, but in the sense of the marginal analysis should always refer to a small (infinitely small?) unit. Just as in the market the price of a good refers to the marginal utility of the last demanded good, in the deductive method proposed by Karl Menger we also determine the remuneration of a production factor by asking how the value changes when the examined factor is reduced by one unit.

 

In such a marginal analysis, we can generally assume very well that, with only marginal deductions, the production of the good is still possible, and this is because in almost every production a certain degree of mutual substitutability of the factors of production is possible. If one worker drops out, another can step in; it is also conceivable that, by making a minor change in production technology, production can be maintained even with a smaller number of employees.

 

However, an important problem remains, which was not solved by Karl Menger. It remains completely unclear whether, with this approach, the total value of a good finally corresponds exactly to the sum of the in this way calculated remuneration of all production factors. It cannot be excluded that in this way the sum of the rewards may be greater or smaller than the total value of the good.

 

A solution to this problem was later proposed by the neoclassicists, who took the first path mentioned above (immediate market solution), in the so-called exhaustion theorem. This proof was provided among others by Philip-Henry Wicksteed. With this theorem also, we will not deal until the second part of the history of teaching in connection with microeconomic distribution theory.

 

Now we turn to the method proposed by Eugen von Böhm-Bawerk to solve the problem of attribution. Böhm-Bawerk also starts with the same approach as Menger, i.e. he starts from the total value of the good and reduces a production factor marginally by one unit. Differently than Karl Menger, however, Eugen von Böhm-Bawerk determines the value of this deducted production factor by asking how much this factor would increase the total value in another use.

 

Since of course in general not only one but several uses of a production factor are known, it is still necessary to clarify in which usage the deducted production factor should be applied. The answer is clear: We can sort the individual types of use (and these are productions of goods) according to their value. We assume that each factor was initially applied in the best possible use and that, after deducting it from the best possible use, this factor is directed to the second-best use.

 

Again, let us illustrate this connection with an example: The total value of the first good A examined is again 100 units. One unit is deducted from the production factor labour, so that the residual value of good A is 80. This released factor is now used in the production of good B (the second-best use). The value of good B had originally been 200, but now, due to the application of this factor, it had risen to 230.

 

In this case, the value of the deducted factor in the method of Böhm-Bawerk is 230 -200 = 30, whereas in the method of Mengers it would have been only 100 - 80 = 20.

 

Now, it is possible to combine the two methods, i.e. to run them one after the other, and to determine the value of the production factor in question depending on which method achieved the higher value. In our example, Böhm-Bawerk would be chosen and the value of the factor in question would be 30.

 

Basically, both methods are subject to the same criticism, so that it is sufficient at this point to refer to the criticism made against Menger's method. Since the third method to be presented for solving the attribution problem is the method of Friedrich Wieser, which begins with a criticism of the methods already discussed, we can immediately continue our analysis by presenting the solution of Friedrich von Wieser.

 

Let us finally turn to the third variant of the attribution problem, which was proposed by Friedrich von Wieser. He opposes the solution attempts of Karl Menger and Eugen von Böhm-Bawerk, since they would only be able to determine the respectively second-best solution. However, the payment for the best possible usage was of interest, and this would always yield a higher value than the second-best alternative.

 

In reality, the actual values of the individual factors of production could only be determined by means of a simultaneous system of equations. Here, this system of equations would show the correct values of all production factors in their best usage.

 

How do we have to imagine this? In an example, we will start from the simplest possible model. We consider two goods 1 and 2, which achieve a value (a price) W1 and W2 per unit of goods, furthermore two production factors: A for employees and K for capital input, where WA1 indicates the remuneration the employee receives for the production of good 1 and WA2 indicates the remuneration the employee receives for the production of good 2. Finally, WK1 and WK2 would express the corresponding interest rates for the production of good 1 and good 2 respectively.

 

Thus, we have 6 unknowns (W1, W2, WA1, WA2, WK1, WK2) and therefore we also need 6 equations independent of each other to determine the assigned values of the individual factors of production.

 

First, we have two equations that determine the value of goods 1 and 2. According to the approach of the theory of marginal utility, the values of goods can be derived from their marginal utility (GN1, GN2), the respective marginal utilities are considered as known and given:

 

                                                                   1) W1 = GN1

                                                                                                                2) W2 = GN2

 

Next, we have two equations that define that the value of the goods is completely divided between the two factors of production, i.e. that the value of a good is always equal to the sum of the remunerations of the two factors of production:

 

                                                                   3) W1 = WA1 + WK1

                                                                   4) W2 = WA2 + WK2

 

Eventually, the law of (price) indifference applies. According to this law, all employees with the same quality of work receive the same wage rate. In the same way, the interest rates for the same qualities of the capital brought in (same risk) are also equal:

 

 

                                                                   5) WA1 = WA2

                                                                   6) WK1 = WK2

 

 

Thus, we have 6 independent equations for 6 unknowns, so that in principle all 6 unknowns and thus also the values of the production factors can be determined clearly.

 

But in my opinion, Friedrich von Wieser's criticism of Karl Menger and Eugen von Böhm-Bawerk should not be overestimated. Of course, it is basically correct that the first value is always higher than the second-best. However, the school of marginal utility uses the marginal analysis, which actually assumes infinitely small steps. If, however, smaller and smaller input quantities are changed and respectively the changed input quantities therefore approach zero, then the differences between the first use and the second-best use will necessarily also approach zero. The difference between the two values can then be neglected.

 

The extent to which Friedrich von Wieser's criticism appears convincing depends first and foremost on what we aim to achieve with the presentation of the attribution methods. If we were endeavouring to use this approach to provide the head of a state planning authority in a state-planned economy with a formula for determining the respective rates of remuneration, then Wieser's criticism would be quite justified. In the harsh reality we always have to expect finite values. Instead of differential quotients, we are always dealing with difference quotients.

 

However, if we merely want to describe the operation of a functioning market economy, then it is sufficient to show the value for which the rate of remuneration of a production factor is heading. In any case, we cannot expect that these calculated equilibrium values will ever be reached; long in advance of the time when this equilibrium value would be reached, the data and along with it the equilibrium values have already changed.

 

 

7th Principle of positive time preference

 

The principle of positive time preference was developed by Eugen von Böhm-Bawerk within the framework of his capital theory respectively interest theory. Böhm-Bawerk asked himself the question what the reasons are for paying interest on loans and on which determinants the level of the interest rate depends. Böhm-Bawerk was of the opinion that people in general and systematically underestimated the needs of the future.

 

In developing this thesis of the positive time preference, Böhm-Bawerk is primarily concerned with finding out the determinants of interest formation. This is a factual problem. In these considerations, however, the question of the extent to which the payment of an interest rate can be justified morally always plays a certain role. As is well known, in the Middle Ages there was an interest ban, according to which no interest could be demanded for the lending of money. Two convictions played a role here. On the one hand, someone needed a loan especially if he or she was in need, e.g. due to illness, and therefore did not have a normal income. Here, it should be prevented that the need of individual human beings is exploited so as to further increase their misery. Investment loans were rather the exception at that time. On the other hand, the lending of money was not seen as an actual service that should be rewarded in the same way as labour.

 

Interest rate prohibitions existed and still exist in modern times. On the one hand, in the communist states it was forbidden to charge interest on loans; the payment of interest was regarded as a remnant of the hated capitalist society that they sought to eradicate. On the other hand, there are also prohibitions on interest in strictly Islamic states where the Sharia is applied.

 

According to the Vienna School, the value of a good is determined by the utility increase that a good provides by consumption. However, an increase in welfare in the sense of a utility increase cannot only be achieved by the input of labour. Everyone who supplies a scarce good contributes to the increase in prosperity.

 

In this sense, an offer of capital also represents a service that should be remunerated. In connection with the supply of capital, two things should be noted here. Firstly, capital can be used to transform parts of income from the present into the future or from the future into the present. To the extent that the price level increases year after year, the real value of the capital deteriorates, in this case the interest serves only to compensate for this loss. In fact, the interest rate for fixed-interest securities and also for savings accounts is, in the long term, roughly equivalent to the rate of inflation.

 

Other applies in the case that a risk is associated with the granting of the loan. Here the interest rate normally increases with the level of risk. Since the acceptance of risks constitutes a scarce commodity, it is also justified that a remuneration, an interest income is granted for this. In a functioning market economy, however, the person who takes a risk is liable for the damage incurred.

 

Let us now ask ourselves how realistic the assumption is that future needs will generally be assessed lower. We begin these considerations by examining to what extent the demand for future goods would be realised if we did not have to expect any positive time preference.

 

To this, we want to assume only two periods in a simple model: Period 1, which corresponds to the present and period 2, which lies in the future. The lack of a positive time preference is now reflected in the fact that the marginal utility curve of the future has the same course as the marginal utility curve of the present. This would mean that in a two-quadrant model, starting from the coordinate origin, the current income is drawn on the abscissa to the right while the future income is drawn to the left. The ordinate measures the marginal utility of both the present and the future.

 

 

Clearly, if we want to maximise the utility of both periods, we can only achieve this by ensuring that the income of the future period is equal to the income of the current period. So if we expect future income to be higher than the current income (thus assuming economic growth), we can increase the total utility of both periods by taking a loan today, thereby increasing our current income, and repaying the loan in the future period.

 

Since the income in the future period is assumed to be greater than that of the present, the loss of utility in the future period is less than the increase in utility in the present period. Thus, on balance, the total utility of both periods increases, and this applies as long as the future income is greater than the present income. The maximum utility is thus reached as soon as the available income is the same in both periods.

 

Of course, the same considerations apply mutatis mutandis in the case that we expect a lower income for the future period than today. Without a positive time preference, a household tends in its own interest to achieve the same level of income for all periods, thus in this case to save.

 

Now, in our previous considerations we have implied that we are clearly informed about how income will develop in the future. But precisely this assumption does not correspond to reality. There is great uncertainty about how economic conditions will develop in general, but also for our own situation. We may hope and expect that our income situation will improve year after year, but the further we look into the future, the more uncertain we are about how our circumstances will develop actually.

 

If there are no reasonably reliable forecasts about how our income will develop, it would be rational to assume a constant level of income. Both conditions, an increase and a decrease in income are equally likely in this case.

 

Nevertheless, it might be considered desirable to build up certain reserves in case of uncertainty about future developments, i.e. to save parts of the present income, so that when major losses of income occur in the future, one can fall back on these reserves and maintain to some extent the prosperity achieved so far.

 

However, there are also exceptional situations in which there is no positive time preference, even though all current efforts are aimed at promoting the present welfare. If the prosperity achieved so far is hardly sufficient to achieve a minimum subsistence level for today's period, it is not irrational to not make provisions for tomorrow, since there would be no tomorrow at all if one did not do everything possible to survive at least in the present period. Saving and making provisions for the future presupposes a minimum standard of prosperity; those who do not even reach the physical subsistence level today are not in a position to save parts of their income, even if prosperity in the future period would even deteriorate in comparison to today.

 

In our previous considerations we tacitly assumed that the structure of demand is not subject to change and that therefore the marginal utility curves of today's and tomorrow's period - without any lower estimation - run identically. In reality, however, we have to expect that in the course of the development of the single individuals, demand will also be subject to change. The needs change with age. It is quite conceivable, for example, that there will be a certain shift in the structure of needs in old age and that this shift will result in a focus on those needs that require a lower input of material goods. Even if, as a result of this shift, less provision is made for old age than if the structure of needs remained constant, it is still not possible to say that this behaviour is the result of a positive time preference. Lower estimation always implies that the real need in the future will be higher than assumed.

 

After having clarified the behaviour of a household that does not know any positive time preference, we will discuss the question of how a positive time preference is manifested and to what circumstances such behaviour is attributable. Whenever the utility of consumption is estimated to be lower in the future simply because this consumption takes place in future periods, we want to speak of a positive time preference. Here, we assume that the person concerned assesses today the utility of consumption in a future period as less than if he had already consumed this good today, but that when the future period is reached, that is, when it has become the present, the utility of this consumption is assessed as high as in the present period.

 

With reference to our 2-quadrant diagram, the positive time preference could be understood as a downward shift of the curve of the future marginal utility:

 

 

 

 

There are two ways in which a positive time preference can be manifested. Either the time horizon that determines the planning of a budget is limited, in this case periods of the more distant future are not considered in the budgets at all. Or else, all future periods are considered in the planning process, but the evaluation of the is lower the more distant the period is in the future.

 

One can assume that the extent of a lower estimation itself depends in turn on the prosperity achieved so far. The richer someone becomes, the more he is able to consider the needs of future periods in his planning. However, the question of the positive time preference does not only depend on the prosperity achieved so far. Individuals generally differ in the extent to which they shy away from risks or even seek them.

 

Even if the individual strives to behave rationally as far as possible, he may still assess future needs as lower. We speak of rational behaviour whenever the individual becomes aware of the aims he is pursuing before an action is taken, which options are open to him to realise these aims, and finally what costs are associated with certain alternatives. He behaves rationally to the extent that he chooses the alternative that is associated with the highest utility or the lowest costs. In this context, not only the costs can be recorded, which can be measured in monetary terms, but also those costs that are incurred by foregoing the utility that could have been achieved with the second-best alternative.

 

In this sense, a behaviour is still to be classified as rational if the actor becomes aware of the aims and possible alternatives before making his decision, but considers that the utility of future periods must be discounted the more the period in which this utility occurs lies in the future.

 

If we take the case described above, that the marginal utility of those needs that involve an intensive use of material goods decreases as age increases, this variant can also be illustrated in our 2-quadrant diagram by moving the curve of the future marginal utility downwards.

 

If we assume that people in general assess their future needs too low, the question arises whether these people should not be forced to make certain decisions, thus the state should act meritoriously, i.e. with good intentions. Indeed, if people are forced to make provision for future periods, thus when people are forced to behave in a way that they would have chosen by themselves if they had made a normal assessment of their future needs, the utility of these citizens can be increased in this way.

 

Admittedly, in making such an assessment we deliberately refrain from considering that the fact that a citizen is free to make his own decisions can itself be regarded as a source of utility. This view is based on the assumption that people should by their very nature determine their own destinies and that such a high value is placed on this self-determination that self-determination is still preferable to externally determined action, even if people make incorrect decisions in individual cases.

 

Furthermore, at an affirmation of meritorious intentions of the state, we assume that the state has better knowledge than the concerned citizens themselves. But why should state officials have better knowledge of what is good and what is not good for the people individually? After all, if such knowledge exists, why can't this simply be provided free of charge to the concerned citizens?

 

But even if the state would have this better knowledge, who guarantees that the state will always use this knowledge in favour of the concerned citizens? We have to reckon with the fact that politicians always pursue also their own interests, i.e. that they do not act exclusively altruistically, and furthermore we have to assume that the own interests of politicians often conflict with the interests of the citizens. In this respect, it must be feared that the politicians only pretend to safeguard the interests of the citizens, whereas they only act for their own interests actually.

 

In this regard, it is not of decisive importance that politicians primarily pursue their own interests. As liberalism has shown, managers generally pursue their own interests primarily, the entrepreneurs try to maximise their profits, and politicians in a representative democracy try to maximise votes in order to emerge victorious in the elections.

 

This fact alone does not tell us anything about the extent to which the common interest is given a chance. On the one side, there are orders that coordinate interests in such a way that politicians emerge as winners in elections precisely when they are pursuing their own interests. In a functioning democracy, a politician will get the majority of the votes just when he meets the wishes of the voters.

 

Conversely, it cannot be assumed that politicians, precisely when they are expected to have the public welfare permanently and exclusively in mind when making political decisions, will actually take the decisions that best suit the public welfare. There is always the danger that even in such systems, politicians are actually acting in their own interest and are only pretending to be committed to the public welfare. Above all, there is the danger that precisely because not the most politically capable persons were chosen, but were asked merely for their moral integrity, that solutions are favoured actually that are ultimately detrimental to the public welfare.

 

 

8th The Agio theory of interest

 

As mentioned in the previous section, Böhm-Bawerk developed the principle of the positive time preference within the framework of his capital theory respectively interest theory. In this context, Böhm-Bawerk raised the question of what the reasons are for the fact that interest is paid on loans and on which determinants the level of the interest rate depends.

 

For Böhm-Bawerk, three factors are responsible for the fact that a price, the interest, must be paid for loans. Firstly, demand and supply generally differ in present and future, so that an agio is required to compensate for this difference between present needs and future needs in demand and supply.

 

Secondly, Böhm-Bawerk takes the view that people broadly and systematically would underestimate the needs of the future. This hypothesis then entered the economic literature as the principle of positive time preference and was already discussed in the previous section.

 

Thirdly, the present goods are in a better position to meet the current needs, while the future goods must first mature over time in order to be able to meet the needs of future periods just as the present goods do today.

 

At the centre of this third argument is the thesis that the productivity and efficiency of production could be decisively increased by the fact that people took roundabout production methods, i.e. dedicated a part of today's economic activity not to the direct production of goods that can be consumed today, but to the creation of means of production, which themselves in turn enable economic agents to produce more goods in total from the given resources.

 

This thesis of the roundabout methods of production is usually explained on the basis of fishing. At a very early and primitive historical stage, fishermen caught the fish needed for their nutrition with their bare hands. Then one day a fisherman had the idea of first braiding nets to increase the catch in future periods with the help of these nets. So here a roundabout way of production was taken. As long as a part of the labour force was used to make nets, the amount of fish caught would decrease. But as soon as the nets were ready, i.e. fully developed and used in fishing, the amount of harvested fish increased considerably.

 

In this way, productive activity can be divided into several stages of order. In the last place is the stage of production of consumer goods, which as such can be consumed directly. Next is the means of production (e.g. facilities, nets in the fisherman's example), which are needed to produce the consumer goods. In third place are the means of production that are required for the production of these facilities, etcetera. The last stage of the hierarchy refers to the extraction of raw materials that are required for production, as well as facilities and measures to promote and maintain the workforce.

 

The employees now demand the consumer goods (present goods) and offer their labour force as a future good, which is on the last stage of order. The interest rate is set in such a way that with existing wages the stock of present goods is sufficient to pay all employees. This stock is the smaller the more roundabout ways of production are taken.

 

The interest rate results from the exchange of present and future goods, it is a part of the price that must be paid for the present goods.

 

 

 

9th Power or economic law?

 

In his famous essay 'Macht oder ökonomisches Gesetz?' (Power or Economic Law?) published in 1914, Eugen von Böhm-Bawerk turned against the thesis supported particularly by Mikhail I. Tugan-Baranovsky and others, that wage formation is not determined by the relationship between supply and demand, but solely by power factors.

 

Even before Tugan-Baranovsky, this thesis of the influence of power on wage formation had been formulated repeatedly. One of the first representatives of wage-related theories of power was J. Sismonde de Simondi. If the labour market was left to itself, political pressure would be exerted on wages at all times. After all, the employees did not have the same starting conditions as the entrepreneurs. Similar considerations can be found yet in the works of Johann K. Rodbertus, Ludwig Joseph Brentano, Wilhelm Lexis, Adolf Wagner, Karl Diehl, Sidney James, and Beatrice Webb.

 

The probably most radical variant of these ideas, however, was presented by Mikhail I. Tugan-Baranovsky. He strictly refused to consider wages as a value phenomenon. For him, the wage is not an economic category, but a social and political one. The level of wages does not depend on the ratio of supply and demand but was determined by the respective social power relations.

 

Tugan-Baranovsky conceded, however, that economic circumstances could have an influence insofar as, on the one hand, there was an upper limit to the level of wages within the productivity of labour and, on the other hand, the wage rate could not fall below the subsistence level of employees.

 

Against these views, Böhm-Bawerk formulated the thesis that the economic law would prevail in the long term even where external influences of power were visible. He justified this thesis as follows. If the trade unions succeeded in the short term, by threatening or carrying out strikes, in forcing a wage rate above the level that the market would permit - i.e. above the marginal productivity of labour - then in the long term the entrepreneurs would substitute labour with capital and withdraw the capital from the concerned branches of industry in order to invest it in other branches that were not affected by this wage increase.

 

The demand for labour was declining in the course of these structural shifts and employees are now forced to offer their labour at a lower wage again. The wage rate would thus in the long term adjust to the level that the market - the economic conditions - would determine.

 

Böhm-Bawerk made certain concessions in two respects regarding the wage-related theory of power. He conceded that the unions could succeed in raising the wage rate above the level of an equilibrium wage in the short term by threats to strike action. In the long term, however, this wage increase would - as shown - be reversed again. Thus, it was recognised that the trade unions would be able to gain a wage advantage - even if only once and not for a long time.

 

A second concession made by Böhm-Bawerk to the wage-related power theory was this: he conceded that power factors could then certainly have a long-term and definitive influence on wage levels, provided that these power relations would affect the economic factors themselves. In this way, these factors became part of the determinants of supply and demand.

 

However, these concessions seriously weakened the position of Böhm-Bawerk. In the dispute between Böhm-Bawerk and Tugan-Baranovsky, two questions are to be distinguished: What are the immediate determinants of the wage and what ultimately determines the wage level? The first question relates to the modus procedendi of wage formation, i.e. to the respectively applied calculation. The second question relates to the problem of which factors ultimately influence the wage level.

 

Böhm-Bawerk was focused on the first question, i.e. on the modus procedendi. He tried to show that the wage rate depended on the course of the supply curve and demand curve of the labour market and that only those factors that influence the position of these two curves determined the wage level.

 

Tugan-Baranovsky, by contrast, was interested in the second question; he was concerned with proving that social and political power relations were the ultimate factors which determine wage levels.

 

By all appearances, Böhm-Bawerk emerged victorious from this debate. He was able to show that even wage increases that were forced by the use of power will have to be reversed in the long run, since in the long run the market position of the employees will deteriorate in the course of the mechanisation of production. Regarding the final determinants of wage formation, Böhm-Bawerks' thesis corresponded more to reality than the theses of Tugan-Baranovsky.

 

This observation is however not necessarily valid regarding the question of the modus procedendi of the wage formation. In our society, wages are mainly determined by collective bargaining. However, the social partners follow a political calculation rather than an economic one. The calculation of the collective bargaining partners - above all the trade unions - is not only oriented to economic but also to political factors. Therefore, we must so to speak turn the Böhm-Bawerk thesis upside down: the economic parameters can only have an effect on wage formation to the extent that they are included in the political calculations of the collective bargaining partners.

 

If the economic variables were the sole final determinants of wage levels, the question of whether wages are set in a more economic or political calculation would be of a purely academic nature. We would have to come to the same conclusion, regardless of whether we tried to simulate collective bargaining in an economic or a political model.

 

We must assume, however, that wage levels are ultimately determined by factors other than economic factors. But in this case, the modus procedendi of wage formation becomes a problem. It is in fact a question of how the various final determinants are channelled - within a more economic or more political calculation - in other words, what importance is given to economic factors in wage formation.