Tuesday, November 11, 2008

Falling Real Price of Labor

Another letter to the Wall Street Journal, this one regarding the decline in the "real" price of labor (i.e., "wages"), and what could be done about it other than complain.

In his "Ahead of the Tape" column in Friday's Wall Street Journal, Mr. Mark Gongloff directs attention to the falling cost of labor as the economic situation worsens and the number of unemployed increases. ("Cost of Labor Is the Latest Shoe to Drop," WSJ, 11/07/08, C1.) The irony is that, while social reformers and workers have excoriated the laws of supply and demand for centuries, there is a "simple" way to make such economic laws work for the advantage of everyone, instead of to the disadvantage of the majority.

The laws of supply and demand, like other economic laws, are based on observed human nature, and thus the "natural law." When something is in short supply, people tend to value it more highly than that which is common. When a thing is plentiful, people tend to value it less than that which is insufficient. Further, no one willingly pays more than he or she believes something to be worth, or accepts less, in an exchange.

Workers, unions, and politicians concerned with the falling price of labor need to develop a means of raising the price of labor legitimately, without coercion, and without State intervention to set and maintain artificial prices. There is a method available, and was briefly outlined in Alexis de Tocqueville's sociological study of the Jacksonian era, Democracy in America:
In the end the interest of the working class must prevail; for the high wages which they have already obtained make them every day less dependent on their masters; and as they grow more independent, they have greater facilities for obtaining a further increase of wages. I shall take for example that branch of productive industry which is still at the present day the most generally followed in France, and in almost all the countries of the world - I mean the cultivation of the soil. In France most of those who labor for hire in agriculture, are themselves owners of certain plots of ground, which just enable them to subsist without working for anyone else. When these laborers come to offer their services to a neighboring landowner or farmer, if he refuses them a certain rate of wages, they retire to their own small property and await another opportunity. (Vol. II, Book 3, Ch. VII)
De Tocqueville's "mistake" was to presume that the only way workers could save and acquire a capital stake is to cut consumption, save, then invest. As Dr. Harold Moulton proved in his 1935 treatise, The Formation of Capital, that is not the case. Money can be - and was - created by the commercial banking system to finance investment in projects that generated sufficient income to repay the original loans and thereafter furnish income for the new owner of capital. As long as money isn't created for speculation, or government or consumer spending, the effect is non-inflationary, and results in an asset-backed currency.

When we add the thought of Louis O. Kelso and Mortimer J. Adler from The Capitalist Manifesto (1958) and The New Capitalists (1961), we provide the "missing link" between de Tocqueville and Moulton. Kelso (best known as the inventor of the ESOP, "Employee Stock Ownership Plan"), advocated ordinary workers gaining access to the means of acquiring and possessing capital, which translates into democratic access to newly-created money and credit for financially feasible investment (again, not for government or consumer spending, or for speculation, or in ways that concentrate ownership of the newly-formed capital).

The clue is in the subtitle of The New Capitalists: "How to Free Economic Growth from the Slavery of Savings." Creating new money by extending credit for capital investment in ways that make owners of capital out of people who formerly owned little or nothing in the way of income-generating assets, an economy regains its vitality, and growth is fostered in financially responsible ways without undue State action or interference.

A program that meets these criteria is Capital Homesteading for Every Citizen, from the book with the same title. Rather than bewailing the falling price of labor, workers, unions, and politicians should be investigating ways to make the laws of supply and demand work for them, rather than against them.

Donations to CESJ support our Capital Homesteading projects and Just Third Way initiatives, and are tax deductible in the United States under IRC § 501(c)(3).





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