The Classical Bargaining Model for Organized Labor

Classical economists believed that economic value, which is the basis for all discussions pertaining to markets and prices, was determined by the costs of the factors needed to produce the good in question. Economic expansion would require capitalists to pay higher wages to workers because of diminishing productivity in agricultural production, and, as wages rose, capitalist profits would necessarily fall. According to Ricardo, over time this process would lead society to an undesirable stationary state. John Stuart Mill’s extension of the classical labor theory of value provides for a theory of distribution that is separate from the fixed laws of production. Once the theories of production and distribution became disentangled, economists were able to envision ways to influence distributional outcomes that could alleviate the suffering of the majority of the population. We explore the classical labor theory of value and the implications it produces for a theory of distribution. In particular, we discuss Mill’s unique contribution to classical value theory and argue that Mill, through his economic argument in favor of organized labor, actually foresaw the modern literature on uncertainty and information. We illustrate this contribution by way of an example that captures the distributional gains that workers enjoy from repeated negotiations between unions and employers.