Interview with John O'Donnell on PowerTradingRadio.com

Yesterday, April 29, I had the pleasure of being interviewed for half an hour by John O'Donnell on www.PowerTradingRadio.com. The interview was wide ranging, covering economic inequality, the 99% and the 1%, and the fact that the wealth of the 1% is the source both of the supply of the products that the 99% buys and the demand for the labor that the 99% sells, and thus operates in the self-interest of everyone.

We also discussed the fact that under capitalism the thinking and planning of all the millions of individuals and business firms, harmonized and integrated through the price system, constitutes the planning of the economic system. In contrast, socialism cannot plan, because it attempts to substitute the thinking and planning of the handful of members of the Central Planning Board for the necessary thinking and planning of everyone under the price system.

And we discussed the fact that contrary to Adam Smith and Karl Marx, profits, not wages, are the original and primary form of labor income, a subject which I gave an introduction to in my post of February 21 of this year, and fully explain in my book Capitalism in Part C of Chapter 11 (pp. 473-500).

Labor Unions Are Anti-Labor

Many Americans, perhaps a substantial majority, still believe that, irrespective of any problems they may have caused, labor unions are fundamentally an institution that exists in the vital self-interests of wage earners. Indeed, that it is labor unions that stand between the average wage earner and a life of subsistence wages, exhausting hours of work, and horrific working conditions.

Nevertheless, labor unions (and the public at large) have a profoundly flawed understanding of how real wages and the general standard of living are increased. For the individual, the simplest, most direct and obvious method for improving his standard of living is to go out and earn more money. People observe this behavior of individuals and assume that it is also feasible for labor unions to raise the standard of living of wage earners throughout the economic system simply by increasing the money that wage earners are paid.

This is an enormous error.

The goal of earning higher money wages is perfectly rational and socially beneficial when pursued by individuals. But it is contrary to purpose, highly destructive, and downright antisocial when pursued by labor unions.

When pursued by an individual, the goal of earning more money almost always requires that he increase the supply of goods or services that he produces. This increase in the supply of goods or services not only serves to increase the money earned by this particular individual but, at the same time, it also serves to increase the overall supply of goods and services in the economic system. This, in turn, serves, however slightly in most cases, to reduce the prices paid by the buyers of the goods or services whose supply has been increased. (There are numerous cases in which the increase in supply accompanying the earning of more money is quite substantial, as when productive geniuses revolutionize entire industries. In these cases, however, the individuals concerned will almost certainly not be wage earners but businessmen and capitalists, and the increased money incomes in question will be profits, not wages.)

What is crucial to realize is that the reduction in prices that results from additional production and supply serves to raise the real wages of all those wage earners throughout the economic system who are buyers of the goods or services concerned. Real wages are the goods and services that wage earners are able to buy with the money they earn. They are always the reflection of the relationship between money wages on the one side and the prices of goods and services on the other. Increases in production and supply raise real wages by virtue of reducing prices and thus enabling any given amount of money wages to buy more. In this way, they correspondingly raise the wage earner’s standard of living.

Labor unions and the general public almost totally ignore the essential role played by falling prices in achieving rising real wages. They see only the rise in money wages as worthy of consideration. Indeed, in our environment of chronic inflation, prices that actually do fall are relatively rare.

Nevertheless, the only thing that can explain a rise in real wages throughout the economic system is a fall in prices relative to wages. And the only thing that achieves this is an increase in production per worker. More production per worker—a higher productivity of labor—serves to increase the supply of goods and services produced relative to the supply of labor that produces them. In this way, it reduces prices relative to wages and thereby raises real wages and the general standard of living.

What raises money wages throughout the economic system is not what is responsible for the rise in real wages. That is essentially just the increase in the quantity of money and resulting increase in the overall volume of spending in the economic system. In the absence of a rising productivity of labor, the increase in money and spending would operate to raise prices by as much or more than it raised wages. This outcome is prevented only by the fact that at the same time that the quantity of money and volume of spending are increasing, the output per worker is also increasing, with the result that prices rise by less than wages. A fall in prices is still present in the form of prices being lower than they would have been had only an increase in the quantity of money and volume of spending been operative.

With relatively minor exceptions, real wages throughout the economic system simply do not rise from the side of higher money wages. Essentially, they rise only from the side of a greater supply of goods and services relative to the supply of labor and thus from prices being lower relative to wages. The truth is that the means by which the standard of living of the individual wage earner and the individual businessman and capitalist is increased, and the means by which that of the average wage earner in the economic system is increased, are very different. For the individual, it is the earning of more money. For the average wage earner in the economic system, it is the payment of lower prices.

What this discussion shows is that the increase in money wages that labor unions seek is not at all the source of rising real wages and that the source of rising real wages is in fact a rising productivity of labor, which always operates from the side of falling prices, not rising money wages. The plain fact is that in their concentration on increasing money wages, labor unions demonstrate that they are utterly ignorant of the process by which real wages and the standard of living are increased. Indeed, their efforts to raise money wages are profoundly opposed to the goal of raising real wages and the standard of living.

When the unions seek to raise the standard of living of their members by means of raising their money wages, their policy inevitably reduces to the attempt to make the labor of their members artificially scarce. That is their only means of raising the wages of their members. The unions do not have much actual power over the demand for labor. But they often achieve considerable power over the supply of labor. And their actual technique for raising wages is to make the supply of labor, at least in the particular industry or occupation that a given union is concerned with, as scarce as possible.

 Thus, whenever they can, unions attempt to gain con­trol over entry into the labor market. They seek to impose apprenticeship programs, or to have licensing require­ments imposed by the government. Such measures are for the purpose of holding down the supply of labor in the field and thereby enabling those fortunate enough to be admitted to it, to earn higher incomes. Even when the unions do not succeed in directly reducing the supply of labor, the imposition of their above-market wage demands still has the effect of reducing the number of jobs offered in the field and thus the supply of labor in the field that is able to find work.

If the unions were confined to just one or a small number of industries, and did not have the power to determine wage rates in the rest of the economic system, their achievement of higher wages in particular indus­tries would not cause unemployment in the economic system as a whole. The workers displaced from the unionized industries would be able to find work—at lower wages—in the nonunion industries. The effect of unions in these circumstances would be the creation of an artificial inequality of wages—higher wages in the unionized fields, based on an artificially imposed scar­city of labor in those fields, accompanied by correspond­ingly lower wages in the nonunion fields, based on an artificially imposed oversupply of labor in those fields.

The artificial wage increases imposed by the labor unions result in unemployment when above-market wages are imposed throughout the economic sys­tem. This situation exists when it is possible for unions to be formed easily. If, as in the present-day United States, all that is required is for a majority of workers in an establishment to decide that they wish to be represented by a union, then the wages imposed by the unions will be effective even in the nonunion fields.

Employers in the nonunion fields will feel compelled to offer their workers wages comparable to what the union workers are receiving—indeed, possi­bly even still higher wages—in order to ensure that they do not unionize. The nonunion employers will be likely to believe that if they do not pay wages comparable to union wages, then they will be faced with a union and, as a result, not only union wages, but also the loss of major management prerogatives concerning the efficiency of production, and thus experience an even greater increase in costs than is incurred merely by matching union wages.

In this case, artificially high wages create unemployment in virtually every line of work, and leave no avenue open for workers displaced from any one branch of production to find work in another, save by displacing still other workers, who then cannot find work. Even if the wage increases caused by the unions are not universal, they will still certainly result in unemployment if they take place alongside the existence of minimum-wage laws and public welfare assistance. Widespread wage increases closing large numbers of workers out of numerous occupations put extreme pres­sure on the wage rates of whatever areas of the economic system may still remain open. These limited areas could absorb the overflow of workers from other lines at low enough wage rates. But minimum-wage laws prevent wage rates in these remaining lines from going low enough to absorb these workers. So too does the exis­tence of public welfare assistance, inasmuch as people are not willing to work at such low wages if they can obtain a comparable or higher income without working.

In these ways, labor unions cause unemployment—and unnecessarily low wages for those who work in whatever lines may remain open to free competition. Indeed, they cause unnecessarily low wage rates even for workers in unionized fields insofar as there are workers in some unionized fields who have been closed out of employment at higher wages in other unionized fields (for example, unionized auto workers who might have worked at higher pay as electricians or plumbers had they not been excluded by unions in those fields).

From the perspective of most of those lucky enough to keep their jobs, the most serious consequence of the unions is the holding down or outright reduction of the productivity of labor. With few exceptions, the labor unions openly combat the rise in the productivity of labor. They do so virtually as a matter of principle. They oppose the introduction of labor-saving machinery on the grounds that it causes unemployment. They oppose competition among workers. As Henry Hazlitt pointed out, they force employers to tolerate feather­bedding practices, such as the classic requirement that firemen, whose function was to shovel coal on steam locomotives, be retained on diesel locomotives. They impose make­work schemes, such as requiring that pipe delivered to construction sites with screw thread already on it, have its ends cut off and new screw thread cut on the site. They impose narrow work classifications, and require that specialists be employed at a day’s pay to perform work that others could easily do—for example, requiring the employment of a plasterer to repair the incidental dam­age done to a wall by an electrician, which the electrician himself could easily repair. (See Henry Hazlitt, Economics In One Lesson, chaps. VII and VIII.)

To anyone who understands the role of the productivity of labor in raising real wages, it should be obvious that the unions’ policy of combatting the rise in the productivity of labor renders them in fact a leading enemy of the rise in real wages. However radical this conclusion may seem, however much at odds it is with the prevailing view of the unions as the leading source of the rise in real wages over the last hundred and fifty years or more, the fact is that in combatting the rise in the productivity of labor, the unions actively combat the rise in real wages!

The unions are almost certainly unaware of this fact. That is because all that they see and are concerned with is the money wages of their members. They do not care at all about the destructive effect of their actions on the prices of the goods or services their members help to produce and thus on the real wages of all those workers throughout the economic system who are buyers of those goods and services.

In this, their behavior is profoundly antisocial. It is, of course, also antisocial in its indifference to the destruction of employment opportunities in the unionized fields and the consequent reduction of wages in the lines into which the workers displaced by the policy of above-market wages must crowd.

In sum, far from being responsible for improvements in the standard of living of the average worker, labor unions operate in more or less total ignorance of what actually raises the average worker’s standard of living. In consequence of their ignorance, they are responsible for artificial inequalities in wage rates, for unemployment, and for holding down real wages and the av­erage worker’s standard of living. All of these destructive, antisocial consequences derive from the fact that while individuals increase the money they earn through increasing production and the overall supply of goods and services, thereby reducing prices and raising real wages throughout the economic system, labor unions increase the money paid to their members by exactly the opposite means. They reduce the supply and productivity of labor and so reduce the supply and raise the prices of the goods and services their members help to produce, thereby reducing real wages throughout the economic system.

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This article is an adaptation and abridgement of material that appears on pages 655 to 658 of the author’s book Capitalism.

 

Copyright © 2014 by George Reisman. George Reisman, Ph.D. is Pepperdine University Professor Emeritus of Economics and the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996). See his Amazon.com author's page for additional titles by him.  His website is www.capitalism.net and his blog is georgereismansblog.blogspot.com.  Follow him on Twitter. 

 

 

Smith, Marx, and Piketty: Reisman’s New York Times Comments on Steven Erlanger’s Article “Taking on Adam Smith (and Karl Marx)"

I made the following comments in response to a New York Times article by Steven Erlanger titled “Taking On Adam Smith (and Karl Marx),” which appeared yesterday. Erlanger’s article is essentially a review of the book Capital in the Twenty-First Century by Thomas Piketty, who appears to be the current rage among much of the economics profession. His book was dubbed by Krugman as “one of the watershed books in economic thinking.”

COMMENT 1 (at http://nyti.ms/1lv1FH5):

Mr. Erlanger’s article is titled “Taking on Adam Smith (and Karl Marx).” Allow me to suggest a different perspective than Mr. Piketty’s from which these two figures can be taken on. Namely, the fact that both of them make the same profound error.

This is the belief that the original and primary form of labor income is wages, with profits appearing only later, with the emergence of capitalists and their capitals, as an unearned, unjust deduction from wages.

The truth is that the income of workers producing and selling such things as pairs of shoes and loaves of bread in Smith’s “original state of things,” or in Marx’s equivalent “simple circulation,” is not wages. It is sales revenue. And precisely because there are no capitalists and thus no expenditure of money for the purpose of bringing in the sales revenues, there are no money costs to deduct from those sales revenues. Thus, the whole of the sales revenues is profit. Profit is the original and primary form of labor income.

What capitalists and their buying for the sake of selling are responsible for is not the existence of profit, but the existence of wages and the other costs of production, and thus a reduction in the proportion of sales revenues that is profit.

And just as Columbus, and not his crew, is given primary responsibility for the discovery of America, so it is businessmen and capitalists who are the primary producers in modern conditions. Profit is the income of their, mainly intellectual labor.

COMMENT 2 (at http://nyti.ms/1mqlXmh):

The wealth of the rich is not the cause of the poverty of the poor, but rather of making the poor less poor, indeed, rich. The wealth of the rich is invested in means of production, which are the foundation of the supply of products available to everyone through purchase. Their wealth—their capital—is also the source of the demand for labor and thus of wages. The greater is the capital of the rich, the larger is the supply of products and the demand for labor, i.e., the higher are real wages and the general standard of living. Where would you rather live and work? In a society whose means of production were a few goat farms, accompanied by a correspondingly small demand for labor, or in a society filled with multi-billion dollar corporations producing a corresponding supply of products and competing for your labor?

Over the last generation or more, economic progress has greatly slowed, and many people are economically worse off than they used to be. Why should that be a surprise? Producers are laboring under the ever-growing oppression of government regulation: now 700,000 accumulated pages just at the federal level.

Massive credit expansion entering the stock and real estate markets has created artificial inequality as it drives up the prices of stocks and real estate, which are owned predominantly by the rich. It has also caused massive losses of capital through such things as the construction of millions of homes whose buyers could not afford to pay for them.

COMMENT 3 (at http://nyti.ms/1lvZN0B):

Contrary to Mr. Piketty, the fact that the rate of return on capital is higher than the rate of economic progress does not at all imply that the fortunes of the rich will increase more rapidly than the overall size of the economic system.

The fortunes of the rich can grow only to the extent that they save and invest out of their relatively high rate of return. But to the extent that they do so, economic progress tends to increase and the rate of return tends to decrease.

Economic progress tends to increase insofar as the savings result in a larger supply of capital goods, which serves to increase production, including the further production of capital goods. The rate of return on capital tends to fall because the larger expenditure for capital goods (and labor) shows up both as larger accumulations of capital and as an increase in the aggregate amount of costs of production in the economic system, which serves to reduce the aggregate amount of profit.

Our problems today result largely from government policies that serve to hold down saving and the demand for capital goods. Among these policies are the corporate and progressive personal income taxes, the estate tax, chronic budget deficits, the social security system, and inflation of the money supply. To the extent that these policies can be reduced, the demand for and production and supply of capital goods will increase, thereby restoring economic progress, and the aggregate amount and average rate of profit will fall.      

 

The Road to a Geriatric Holocaust and How to Get Off It: Reisman's Comments on New York Times Article "Cost of Treatment May Influence Doctors"

On April 18, the National (print) edition of The New York Times published a front-page article titled "Cost of Treatment May Influence Doctors." The article reveals a growing acceptance in the medical profession of the belief that it is proper for doctors to practice medicine with only one eye on the patient because the other eye must be attentive to the impact of the patient’s treatment on the government’s budget.

Comment 1at http://nyti.ms/1ngD4JY:   

Prior to WW II, the principle operative in medical care in the United States was essentially that a patient was entitled to all the medical care he could afford to buy from willing providers. Lack of ability to pay could be made good only by private charity, often provided by doctors and hospitals.

Starting in WW II, with the government’s exemption of employer-provided medical insurance from wartime wage controls, the principle became ascendant that a patient was entitled simply to all the medical care he needed, without consideration of his ability to pay.

Now, it appears, we have come full circle, and the ability to pay is once again to be an essential element in the provision of medical care. Only now, it is not the individual’s ability to pay, but the State’s ability to pay.

This is a very dangerous situation, for it means that it is now up to the State to determine who lives and who dies. It is particularly dangerous for the elderly.

If one looks at medical care for the elderly from the perspective of the government’s finances, it is obvious that their care is a major expense to the government, while their limited ability to work prevents them from contributing very much in the way of tax revenue.

The horrifying truth is that we have created a situation in which the government’s finances would be improved to the extent that the elderly simply did not receive care, and further improved as they then died off, which would reduce the government’s Social Security payments.

Comment 2 at http://nyti.ms/1jjP1Ie:

The ever-rising cost of medical care certainly does need to be restrained. But asking doctors to treat patients with one eye on the government's budget is not the way to do it.

Medical care can be made more affordable to the extent that the supply of it can be increased, while the demand for it is decreased. We can increase the supply of medical care by abolishing or at least greatly liberalizing medical licensing requirements. We can reduce the demand for medical care by eliminating as far as possible the interference that makes it appear to be costless to the individual or far less costly than it actually is.

It is true that if medical licensing requirements were reduced, less capable people would be performing tasks that today only more capable people perform.  That would be the medical equivalent of an automobile market in which people are allowed to buy not only a Cadillac or a Lexus, but also a Chevrolet or Toyota. We need to open up the medical market to competition, particularly at the low end.

The cost of drugs could be reduced by opening up their production to competition—from imports and from new drugs. The latter could be accomplished by sharply reducing the FDA's power to restrain the introduction of new drugs.

Some Answers to Global Warming Propaganda: Reisman's Comments on NY Times Article "Political Rifts Slow U.S. Effort on Climate Laws"

 

On April 15, the National (print) edition of The New York Times published an article titled "Political Rifts Slow U.S. Effort on Climate Laws." The article was inspired by the latest report of the United Nations Intergovernmental Panel on Climate Change (IPCC) and naively and uncritically accepted the findings of that report as true.

Because The Times limits comments to 1500 characters, including spaces between words, I had to submit two, separate comments. And even then, I could not include some essential points, though I've included them here, following the end of my first comment.

The comments can be found on The Times' website, be clicking the respective links that follow the headings "Comment 1" and "Comment 2."

COMMENT 1 at http://nyti.ms/1eEJJuM:

It's remarkable that the author of this article, and the authors of the IPCC report that inspired it, can be concerned about the destructive effects on food production and other essentials of human well-being that will allegedly result from global warming, but do not give the slightest thought to the destructive effects on human well-being of forcibly imposing drastic reductions in CO2 emissions. These emissions are a by-product of such things as the use of tractors and harvesters in food production and of refrigerators and freezers in food preservation. They are the result of people driving automobiles, lighting, heating, and air conditioning their homes, and using electricity to power their machinery and appliances. In short, CO2 emissions are a by-product of producing and enjoying the material goods that distinguish a modern standard of living from that of the Third World.

Preventing government imposed reductions in the use of fossil fuels is not something that is merely in the narrow self-interest of the oil and coal industries. Rather it is in the self-interest of the hundreds of millions of average people who vitally depend on the products of these industries.

Perhaps there will someday be economical substitutes for fossil fuels. Until then, substantially reducing the use of fossil fuels means imposing the certainty of a drastic decline in the standard of living of the average person in order to avoid what is at most the possibility of some seriously bad weather.

[The following two paragraphs were not included in my Times comment because of lack of space, i.e., they would have exceeded the 1500 character limit.]

And if we need such things as massive sea walls to avoid such effects of that bad weather as the flooding of coastal areas, we had better be sure that we have the largest possible modern industrial base available to construct them.

It’s equally remarkable that those who fear global warming have given virtually no consideration to non-destructive ways of dealing with it, assuming that the threat is real in the first place. Why aren’t major prizes being offered for the development of low-cost, effective methods of removing large quantities of CO2 from the atmosphere? For example, is it beyond us to develop plant species that will absorb vast multiples of the CO2 that plants normally absorb? Why is the only possible solution thought to be the destruction of modern economic life?

COMMENT 2 at http://nyti.ms/1eEJrEl:

If global warming is a real threat, why haven’t politicians the world over made the negotiation of treaties for free immigration a top priority? If it’s a serious threat, and people will not willingly deal with it by committing economic suicide in the form of depriving themselves of the massive amounts of energy that would be lost through such measures as imposing a 70 percent reduction in CO2 emissions, then preparations should be starting now to allow for the future migration of hundreds of millions of Indians and Chinese into what will then be an inhabitable Siberia. The United States, Mexico, and the countries of Central America, should likewise be negotiating for free immigration into what will then be an inhabitable central Canada. Greenland should be declared open to all comers. Whatever the problems it may cause, global warming, if it really comes, will also be accompanied by vast new economic opportunities if not blocked by government migration barriers.

Or are we to fear that the “sin” of enjoying a modern standard of living must end in nothing less than a version of hellfire and brimstone—in the form of the recreation on Earth of the climate conditions on the planet Venus?

If so, what is the proof? Is it the direct observation of another planet Earth that turned into a Venus? Or is it strings of assumptions and inferences? And how can the Earth have had ice ages accompanied by more than10 times the CO2 that it is supposedly on track to experience now?