According to Lassalle, wages cannot fall below subsistence level because without subsistence, laborers will be unable to work for long. However, competition among laborers for employment will drive wages down to this minimal level. This followed from Malthus' demographic theory, according to which the growth rate of population was an increasing function of wages, reaching a zero for a unique positive value of the real wages rate, called the subsistence wage. Assuming the demand for labor to be a given monotonically decreasing function of the real wages rate, the theory then predicted that, in the long-run equilibrium of the system, labor supply (i.e. population) will be equated to the numbers demanded 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.
As David Ricardo first noticed, this prediction would not come true as long as a new investment or some other factor caused the demand for labor to increase at least as fast as population: in that case the equality between labor demanded and supplied could in fact be kept with real wages higher than the subsistence level, and hence an increasing population. In most of his analysis, however, Ricardo kept Malthus' theory as a simplifying assumption.
During the mid-1800s, when Lassalle articulated his theory, wages for both manufacturing laborers and agricultural workers were in large part quite close to subsistence level.
Furthermore, not only did Ricardo believe that the market price of labor could long exceed the subsistence or natural wage, he also claimed that the natural wage was not what was needed to physically sustain the laborer, but depended on "habits and customs":
Socialist critics of Lasalle and of the alleged Iron Law of Wages, such as 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 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 also criticized Lasalle for misunderstanding David Ricardo.
Ludwig von Mises argues that if one adopts this reasoning in order to demonstrate that in the long run no rise in the average wage rate above the minimum is possible, one must also imply that no fall in the average rate can occur.
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