The lead article in today’s New York Times/Pravda is titled “Real Wages Fail to Match a Rise in Productivity.” The piece is a denunciation of capitalism and its offshoot “globalization” for allowing such a thing to happen. In the print edition of the newspaper, the subhead ominously declares, “POLITICAL FALLOUT IS SEEN.”
As the means of providing a thinly veiled statement of the doctrine of class warfare, the article quotes the publisher of “a nonpartisan political newsletter”:
“There are two economies out there,” Mr. Cook, the political analyst, said. “One has been just white hot, going great guns. Those are the people who have benefited from globalization, technology, greater productivity and higher corporate earnings.
“And then there’s the working stiffs,” he added, “who just don’t feel like they’re getting ahead despite the fact that they’re working very hard. And there are a lot more people in that group than the other group.”
The main “expert” cited in the article is an economic illiterate employed by the Economic Policy Institute, a leftist “research group.” He opines, “`If I had to sum it up,’ . . . `it comes down to bargaining power and the lack of ability of many in the work force to claim their fair share of growth.’” Apparently, this “expert” believes, as does the Times and the left in general, that the relationship between profits and wages is determined by some form of “bargaining” and that whatever goes to profits is at the expense of what goes to wages and wage earners.
The fact, of course, is that the number of workers employers seek to employ is determined by the wage rates that they must pay, and is the larger, the lower are wage rates, and the smaller, the higher are wage rates. (This relationship goes under the name “demand” and is typically illustrated by means of a downward sloping line called a “demand curve.” The Times and its “experts” should attempt to make themselves familiar with the concept.) In a free market, wage rates must simultaneously be low enough on the demand curve for labor, to make possible the employment of all those able and willing to work and high enough to limit the amount of labor sought by employers to the supply of labor available.
Attempts to force wage rates higher, through “bargaining,” i.e., the coercive “collective bargaining” of monopoly labor unions serve only to cause unemployment, by reducing the quantity of labor demanded below the supply available.
Often, the unemployment caused in this way in a given line of work, can be offset by expanded employment in other lines of work. For example, skilled electricians and carpenters who are prevented from working as electricians or carpenters because of the artificially high wages imposed by their respective unions, may very well end up being employed in other, lesser lines of work. But when they are, wage rates in those lesser lines have had to fall, in order to absorb the increase in the supply of labor resulting from the reduction in jobs offered in the unionized lines. Or, if these lines are unionized too, or if their wage rates simply follow union scales, and so cannot fall when the available supply of labor increases, then the employment of the displaced electricians and carpenters shifts the unemployment to other workers.
In sum, the formula of the Times and the rest of the economically ignorant left for raising wages relative to profits is to cause either unemployment or arbitrary inequalities in wage rates among different occupations. In both cases, the further result is less production, higher prices, and a lower standard of living.
This is not the place to address the numerous further fallacies that center on the belief that what goes to businessmen and capitalists as profits in a free economy is at the expense of what goes to wage earners as wages. Those fallacies must be the subject of future articles.
I remind readers that what actually does help to explain the rise in profits at the expense of wages in today’s highly interventionist economy is environmental legislation. In essence, this has served to create an artificial scarcity of land and natural resources relative to labor and to elevate the income derived from their ownership—income which the classical economists called land rent—relative to wages. Land rent, of course, appears in the economic statistics as profit. (For further details, please see my July 24 article “How Environmentalism Raises Profits at the Expense of Wages.”)
Government budget deficits are also a factor. Such deficits represent government spending that is financed with funds raised at the expense of private capital spending, which spending includes both wage payments and expenditures for capital goods. The effect of the deficits is not only that wage payments in the economic system are smaller, but also that profits in the economic system are artificially increased. This last occurs because while business sales revenues in the economic system remain the same, with government spending taking the place of private spending, the costs that business firms deduct from their sales revenues end up being less than they otherwise would have been. Costs are less because the expenditure that gives rise to costs—i.e., precisely the spending for labor and capital goods by business—is less. The deficits take funds away from business spending and thus later on from the costs that reflect prior business spending. In this way, their effect is to make profits higher as well as making wages lower.
Whoever wants to raise the wages of the average worker should not be advocating monopoly labor unionism and the unemployment and higher prices that it causes, but the repeal of environmental legislation, which raises land rents at the expense of wages. And, of course, in addition, he should be advocating the end of government budget deficits and the repeal of all other legislation that stands in the way of saving and capital accumulation or otherwise undermines the productivity of labor. Saving and capital accumulation both raise the demand for labor, and thus wage rates, and also serve to increase the supply of consumers’ goods and thereby reduce their prices. (They increase the supply of consumers’ goods by equipping the average worker with more and better capital goods, which increases his ability to produce.)
The principal obstacle in the way of saving and capital accumulation and thus the rise in real wages is government welfare-state spending. It is what necessitates the taxes, budget deficits, and inflation of the money supply that deprives business of the funds with which to pay wages and buy capital goods. (Inflation can provide everyone with more money. But it cannot provide enough additional money to enable business firms to replace their assets after paying taxes on the overstated profits that it causes.)
Finally, whoever wants to raise the wages of the average worker must oppose the massive and ever-growing body of government regulation that serves to raise costs of production. Contrary to the naive view of the left, increases in costs do not come for very long at the expense of profits. If they did, profits would long since have disappeared. Instead the general rate of profit remains more or less the same. Increases in cost serve either to raise prices or to reduce wage rates, or both. They are the enemy of the standard of living of the average person. Ignorant fanatics who are responsible for causing them in the pursuit of this or that allegedly benevolent social reform—whether it be safety legislation, day care, maternity leave, or whatever—are in fact the enemies of the average worker. In the last analysis, they cause him to earn less and pay more.
When it comes to economic understanding, the mentality of The New York Times and of the left in general is one of soft, mushy ignorance encased in an impenetrable shell of super-hardened self-righteous ignorance. It is on the basis of such a mentality that it seeks to foment class warfare.
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 www.capitalism.net 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.
{ 12 comments }
Never ceases to amaze me how often people choose to ignore the Law of supply and demand.
Must be the same reason some people take drugs.
Colorful castles floating around in the sky are just way cooler to look at than boring, harsh reality I guess. So let’s all just dream and throw insults against those big bad bosses.
Needless to say, looking at reality is much better in the long term, because knowledge where you’re going gives you the ability to react (long-term planning).
During the industrial revolution, there was a period where costs went straight down every year for about 60 years in a row. This caused profit margins to go down and pay to go down. But the people were sill way better off, because overall their costs went down way faster than their pay.
IMHO, this is what’s happening today because of golbalisation, and because of technology (eg. only a few years ago a 10GB hard drive cost over 10K). Unfortunately today, we do not have a gold standard so our paycheck is watered down faster than our costs, and our fiat credit system has placed us heavially in debt – which is the most awfull thing you can do in a period of prolonged profit and pay decreases.
In sum, no matter what the fed does we are going to have suvere stagflation for many many decades. In fact, unless the fed stops loaning new dollars out into curculation, the USD probably won’t survive as a currency for more than a few more years.
The problem for the so-called “working class stiffs” is a psychological attachment to their current economic strategy. They don’t like and seek to stifle change. This is inherently in conflict with free market action seeking precisely to manifest “both benefit” change and ever-more reduce scarcity. Agriculture has such extremely low prices because humanity has become so very sophisticated and capable at food production. In recent decades, this has also proven true for manufacturing. Speaking in aggregate, we’re so good at making so many manufactured goods for so many people with so little effort and cost, that finally more people are more free to address the more complex problems of scarcity, such as what to make (design) and how to make it (private organization of capital) — the metaproblems, as it were.
But the “working class stiffs” see this as a crisis rather than an opportunity, probably because of associated socialization by their State compulsory education in childhood. So the saying goes, “When the winds of change are blowing, some people build shelters while others build windmills.”
“The support for this acceptability is provided by the fact that this good is more marketable than any other good.”
It is a fiction that “money” is a marketable good. If I have the only food in town it doesn’t matter how much money you have unless you also out gun me.
Money was invented as a convenience. If double entry book keeping and computer records had been invented first then no one would have bothered with money.
What does “money” actually do? Two things. It provides a conversion factor between labor, consumer goods, and assets. It is a book keeping (paper) substitute (a memory device).
I propose that the money system be scrapped and that goods and services be valued in the one universal quantity – the work hour. The basic unit would be the work produced by one person with one shovel in one hour. Time and assets would be valued as a fraction or multiple of a WH.
Second, the nature of the stock market has changed. It has become a “my computer can beat your computer” crap shoot and has little to do with investing in production facilities except in the minor case of IPOs.
Billwald:”The basic unit would be the work produced by one person with one shovel in one hour.”
A few questions:
1) To set the rate, who you gonna use to swing the shovel, a young, athletic man, a woman, or an old codger? An energetic guy or a slacker? How about an accountant or an economist?
2) Why use a shovel? Why not their bare hands? Or a backhoe?
3) Once you establish the size of hole that one hour of swinging a shovel produces, how do you translate that into the price of a programmer’s labor, or an investment banker’s labor?
Money was invented as a convenience. If double entry book keeping and computer records had been invented first then no one would have bothered with money.
What information would be listed in those ledgers? What would it be keeping a balance of?
What does “money” actually do? Two things. It provides a conversion factor between labor, consumer goods, and assets. It is a book keeping (paper) substitute (a memory device).
Not to burst your bubble, but what money “does” is exactly for the reason it was adopted by society- for the sake of making exchange easier.
The bookkeeping function arises because one of money’s special characteristics is that by definition it’s a fungible good, where the specific units are alike, quanified by weight, and can be subsituted for one another (gadzooks -indiffernce as a factor in the origination of money!). If it weren’t that way, a liability of three rothbardians could not be balanced with an asset of three misesians, even though they would both be Austrian moneys.
Congratulations on your belated contributions to monetary theory.
Deficits increase profits because, while a company’s revenues remain the same, the money it spends on labor and capital goods are lower.
I am not sure I understand. If it were possible for a firm to keep its revenues the same and lower its expenditures, why should it wait for the government to go into deficit? Why wouldn’t it do it of its own volition? In other words, wouldn’t the artificially lowered spending also lower the revenues, e.g., by preventing expansion of the business or even forcing it to contract?
And what about the profits of the firms who supply capital goods to our company? If the demand for their products goes down, their revenues will shrink, and unless their costs shrink even more (why should they?), their profits will be decreased.
Or is Reisman talking about aggregate revenues and aggregate costs? But even then I don’t see how this is different.
“I am not sure I understand. If it were possible for a firm to keep its revenues the same and lower its expenditures, why should it wait for the government to go into deficit?”
Because its competitors would expand their capital outlays and beat them, without the deficit.
If capital is artificially made scarce by fiat, the owners of capital receive an undue return, because they no longer have to expend as much capital to compete. Demand has not decreased, but supply has. (supply is a complicated thing to understand – it’s more than simply the stock of existing goods – it’s more like the inverse of the marginal cost of a good, though that’s not exactly it either I think.)
It is the expansion and complexification of capital that increases wages and lowers profits (proportionately, though both increase absolutely).
In this article, Mr. Reisman hits dead on.
> Because its competitors would expand their capital outlays and beat them, without the deficit.
If the revenues are the same and the expenses are lower, then profits rise. If a company improves internal efficiency and lowers its costs, it’s a benefit to it. Competitors would be beaten as a result of this; they would lose, not win. Right? I think your explanation is that a company cannot lower its expenditures on capital goods regardless of how well it transforms them into its outputs without lowering its profits, because that would represent a contraction of the business.
OK, so there is lower supply of capital goods for every company, and so “they no longer have to expend as much capital to compete.” But why would the aggregate revenues remain the same? Suppose in a reductio that the supply of capital has gone down to 0. Will the “business sales revenues in the economic system remain the same” (Reisman)? Or will all businesses disappear? Is it simply because people will spend the same amount of money on whatever the producers make, even though what they make will be different (less), of different (lower) qualities and (higher) prices because of the deficit?
So in that case, I think Reisman’s conclusion follow. I appreciate the help.
This effect, however, has to be temporary, because profits tend to disappear as the economy moves towards equilibrium.
Riddle me this republicans, As an out of work union electrician I have noticed something about your supposed “free market” and “trickle down economics” Smugly you sit writing on a computer powered by a receptacle you could never wire up ,under an electric light you could never install and spit out hypocritical ramblings . Things like ” well they must like working for an employer otherwise they wouldn’t do it”. There is no free market without removal of monopolies. Your so cozy in your insulated world you don’t even see the blocks put in the way of free market ideas by monopolies and monopolistic intent. You love to wave the flag with one hand then lower your prices temporarily to get rid of competition with the other. Ask any owner of a mom and pop hardware store about home depos’ business practices. What if I wanted to start an airline?What if I had a better paper towel? How can I bring it to market with out being rich to start or selling shares and my controlling interest. Ask yourself why did Reagan remove working solar panels from the roof of the white house in 1980? Do you think all of us are being fooled all the time? Sorry gotta go ,I have work in Malibu where I’ll charge the owner quadruple if he wants electricity tonight.
Ah, another great libertarian, Ronald Reagan. Here, Steve, for when you get back, assuming you’re not really just some Union hack:
http://www.youtube.com/watch?v=8C4gRRk2i-M
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