Wednesday, April 26, 2006

The Real Friends and Enemies of Wage Earners: An Intellectual Challenge to the Left

The reaction to my article on the United Automobile Workers and GM , confirms how many people—namely, "liberals," "moderates," socialists, communists, syndicalists, "mutualists" and others—believe that businessmen and capitalists are the enemy, and labor unions and labor legislation, the friend, of wage earners. This is an enormous error, with devastating consequences. The integration of Austrian and Classical economics carried out in Chapters 11 and 14 of my book Capitalism: A Treatise on Economics proves the exact opposite of this belief. It proves that businessmen and capitalists are the friend, and labor unions and labor legislation, the enemy, of wage earners.

Here, in briefest essence, is how.

The greater is the respect for the property rights and economic freedom of businessmen and capitalists, the greater is the degree of saving in the economic system and thus the higher is the demand for labor relative to the demand for consumers’ goods and thus the higher are wages relative to profits. At the same time, the greater is the demand for capital goods relative to the demand for consumers’ goods, and the greater are the incentives to develop and introduce improved products and methods of production. The result of this combination is continuing capital accumulation and a rising productivity of labor.

The effect of the progressive rise in the productivity of labor achieved under capitalism is a progressively increasing supply of consumers’ goods relative to the supply of labor and thus progressively falling prices of consumers’ goods relative to wage rates. (In the face of an increasing quantity of money and rising monetary demand for both labor and consumers’ goods, the result is wages rising faster than prices. Either way, the result is rising real wages.)

The rise in real wages, the result of the saving and innovation of businessmen and capitalists, and of wage earners who become businessmen and capitalists, is a growing ability of wage earners to afford to work shorter hours, and to dispense with the labor of their children, and also increasingly to afford improvements in working conditions of the kind that do not pay for themselves through increased productive efficiency. In this way, the saving and innovation of businessmen and capitalists are what are in fact responsible for all of the improvements in the conditions of wage earners typically, and utterly mistakenly, attributed to labor unions and labor legislation.

Labor unions do not even know how to raise real wages. All they are concerned with is raising the money wages and protecting the jobs of the members of their particular union. Since labor unions do not control the quantity of money or volume of spending in the economic system, the only way that they can raise the money wages of their members is by artificially reducing the supply of labor in their field. But the effect of this is to correspondingly increase the supply of labor and reduce wage rates in other fields. In other words the success of any given union is obtained at the expense of the loss of wage earners in the rest of the economic system. And the losses necessarily outweigh the gains, because an essential aspect of the process is workers being forced into jobs requiring less skill and ability than the jobs from which they are expelled.

If the unions, or the unions plus minimum-wage laws, succeed in raising wage rates throughout the economic system, the effect is corresponding unemployment in the economic system, as well as higher prices because of higher costs and reduced production. If the unions can succeed in having the government and its central bank increase the quantity of money in pace with their wage demands, the unemployment may be avoided but the effect is still rising prices along with the rising wages, and no rise in real wages. Moreover, the undermining of capital accumulation that results from the policy of inflation serves to reduce and, if great enough, reverse the rise in the productivity of labor and real wages.

The efforts of unions to protect the jobs of their members is a policy of actively combating the rise in real wages of workers throughout the rest of the economic system. As should be clear from what has already been said, the way real wages rise is not from the side of the average worker earning more money. Earning more money is the result merely of the increase in the quantity of money, or of the reduction in the supply of labor available in the market by forcing part of it into unemployment.

Real wages rise as the result of capital accumulation and the rise in the productivity of labor, which operates to make prices fall relative to wage rates. In combating the rise in the productivity of labor, unions actively combat the rise in real wages. Thus, for example, when the printing unions opposed computerized typesetting, and thus the resulting lower costs and lower prices of printed matter, they were combating the rise in real wages of workers throughout the economic system who otherwise would have obtained printed matter for less money and had correspondingly more money to spare for other things (which workers displaced from printing could have helped to produce). Identically the same thing is true any time any union opposes labor saving improvements: both the buying power of wage earners throughout the economic system and the supply of goods for them to buy are held down.

Yes, a union may behave this way out of fear of the difficulties its workers will have in finding new jobs. But those difficulties would be far less if money wage rates in the economic system were lower and thus the quantity of labor demanded were greater. And what would make that possible is the absence of coercively imposed union pay-scales and of minimum wage laws.

Yes, there are times when employers treat their employees disrespectfully, indeed, may even treat them as essentially valueless. But what causes such conditions is an excess of the supply of labor available over the quantity of labor demanded. In such conditions an employer need not fear the loss of an employee because he can be immediately replaced from the ranks of the unemployed, and the employee will be ready to accept abuse out of fear that he will not be able to find another job.

But what causes this situation is wage rates held too high relative to the demand for labor. It arises under a system of fractional reserve banking, when credit expansion is followed by financial contraction and wage rates have not yet fallen to the point required by the contraction. Let wages rates fall and the quantity of labor demanded increase to equal the supply available. At that point, the scarcity of labor will be felt and the employee will cease to be instantly replaceable from the ranks of the unemployed. Plus, he will be able to find other jobs, and thus not be prepared to accept abuse. The solution is again a free market. And ironically, to the extent that labor unions and minimum wage laws prevent the adjustment of wage rates to the demand for labor and thus the market’s natural achievement of essentially full employment, they are responsible for the bad treatment of workers that their supporters complain of. (Be sure to watch for the mirror image of the phenomenon of someone being treated as valueless, the next time price controls are imposed on gasoline. Then, as in the early ’seventies, there will be a shortage of gasoline and surplus of customers, who will appear to be economically valueless because instantaneously replaceable from a waiting line, and ready to accept abuse because of no where else to go to be supplied.)

The fall in wage rates needed to eliminate unemployment serves to increase production at the same time that it reduces the costs of production. It thus serves to bring down prices. It also eliminates the burden of supporting the unemployed. As a result, it is almost certain that it soon results in a rise in real take-home wages.

There are people who produce so little per hour that they must work many hours to provide for their minimum necessities, and even use the labor of their children as a source of additional earnings. It is of no more help to such people to compel them to work less, and to do without the labor of their children, than it would be to compel Robinson Crusoe to work less or Swiss Family Robinson to work less and to do without the labor of its children. Crusoe and the Robinson family do the work they do because that is what they need to do to live. Compelling them to work less is to compel poor people to be poorer than they need to be. It is the same in the conditions of society. It is no consolation that those who cause the greater poverty of the poor say that they have good intentions and want to help. They cause harm and need to learn to stop.

As shown, what actually reduced the working day and abolished child labor was not destructive state interference but the dramatic and progressive rise in the productivity of labor brought about by businessmen and capitalists. That raised real wages and made it possible for more and more workers to be able to afford to accept the comparatively lower earnings of jobs with shorter hours and to eliminate the need to send their children to work. As a growing proportion of wage earners came to prefer shorter hours, the effect was the same as a growing proportion of workers coming to prefer any one set of occupations over another, namely, a fall in the wages of the preferred occupations relative to the wages in the occupations not preferred. Thus, the wages of jobs with shorter hours incur a discount, while the wages of jobs with longer hours gain a premium. This makes it profitable for employers to shorten the hours of work. This is how the free market shortens hours.

My challenge to the left is to read and study these ideas at length and in depth in my book Capitalism: A Treatise on Economics, Chapters 11 and 14 in particular. I say to the left, take the risk of giving up the fallacies you presently regard as knowledge, in order to gain the satisfaction of having actual knowledge. Stop supporting the enemies of economic progress and the harm they do to wage earners and give your support to the actual friends of economic progress and of wage earners. The transformation of you leftist intellectuals into advocates of capitalism would actually help greatly to change the direction of the world and, if it is the overcoming of poverty that you want, move it in the direction in which you say you want it to go.

This article is copyright © 2006, by George Reisman. Permission is hereby granted to reproduce and distribute it electronically and in print, other than as part of a book and provided that mention of the author’s web site is included. (Email notification is requested.) All other rights reserved. George Reisman is the author of Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996) and is Pepperdine University Professor Emeritus of Economics.

You Can Earn College Credit for Studying the Works of George Reisman and Ayn Rand! Click here for Details.