Wednesday, July 5, 2017

Democracy (and Wages) in America

On Monday we looked at how the wage system operated in nineteenth century America prior to the Civil War.  We noted that when times were good and workers in demand, wages tended to rise.  When times were bad and workers had to take what they could get, wages tended to fall.  We concluded that trying to induce prosperity by raising wages puts the cart before the horse; high wages don’t bring prosperity, prosperity brings high wages.

Adam Smith, author of The Wealth of Nations
Trying to circumvent the system by manipulating wages artificially is more than illogical, though.  It’s an example of what Adam Smith was talking about in his “invisible hand” argument.  As he said,
By preferring the support of domestic to that of foreign industry, he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.
Translation: by working within the system, someone benefits not only himself, but everyone involved in the system — assuming that the system is based on sound principles and operates justly — even if he intends only his own good.  If, however, someone circumvents the system (as by raising wages with no increase in production or in the market cost of labor), things can start to unravel rather quickly — even if he intends the greatest good.  Why?  Because raising wages doesn’t cause prosperity, prosperity causes a raise in wages.  Raising wages to cause prosperity throws a sabot into the works.
Fabianism: wages the only legitimate income
But let’s consider the possibility that we’re looking at the wrong thing here.  Are we concerned with getting enough wages to workers . . . or getting enough income to people?  A somewhat different question . . . unless you assume as a given that “wages” and “income” are always and in every case the same, as in fact some of the Fabian socialists claimed.
Once we start looking at the correct relationship between wages and prosperity, however, we see that what we’re really looking at is income and prosperity.  If we want to increase income, we must make people prosperous, that is, productive.  We don’t make people productive by increasing income.
Just the opposite, in fact.  What some people have called the “strike-conflict model of industrial relations” is geared toward getting as much income for as little production as possible.  “Featherbedding” is the perfect situation for the strike-conflict model: someone draws a wage for no production at all.
So how do you raise wages without conflict?  Obviously, by making people productive, thereby putting employers and employed on a more or less equal footing.  Alexis de Tocqueville noted the correct relationship of cause and effect in the matter of wages.  As he noted in the second volume of Democracy in America,
Alexis de Tocqueville
Most of the remarks which I have already made in speaking of servants and masters, may be applied to masters and workmen. As the gradations of the social scale come to be less observed, whilst the great sink the humble rise, and as poverty as well as opulence ceases to be hereditary, the distance both in reality and in opinion, which heretofore separated the workman from the master, is lessened every day. The workman conceives a more lofty opinion of his rights, of his future, of himself; he is filled with new ambition and with new desires, he is harassed by new wants. Every instant he views with longing eyes the profits of his employer; and in order to share them, he strives to dispose of his labor at a higher rate, and he generally succeeds at length in the attempt. In democratic countries, as well as elsewhere, most of the branches of productive industry are carried on at a small cost, by men little removed by their wealth or education above the level of those whom they employ. These manufacturing speculators are extremely numerous; their interests differ; they cannot therefore easily concert or combine their exertions. On the other hand the workmen have almost always some sure resources, which enable them to refuse to work when they cannot get what they conceive to be the fair price of their labor. In the constant struggle for wages which is going on between these two classes, their strength is divided, and success alternates from one to the other. It is even probable that 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.
Farmer and wage worker
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.
I think that, upon the whole, it may be asserted that a slow and gradual rise of wages is one of the general laws of democratic communities. In proportion as social conditions become more equal, wages rise; and as wages are higher, social conditions become more equal.  (Alexis de Tocqueville, “Influence of Democracy on Wages,” Democracy in America, II.3.vii.)
De Tocqueville does go on to warn, however, that when employers grow rich and powerful and are able to combine against the workers, wages tend to fall.  You then have the paradox of public prosperity in which only some people participate — and the gap grows wider and wider as ownership of capital replaces ownership of labor as the principal means of being productive.
So, ultimately, wages, high or low, are not the main thing here.  It’s income, not the specific mechanism — and income depends on becoming productive, which in a modern economy means owning both labor and capital.  As the late Walter Reuther explained,
Reuther: raising wages increases costs and concentrates wealth
Profit sharing in the form of stock distributions to workers would help to democratize the ownership of America’s vast corporate wealth which is today appallingly undemocratic and unhealthy.  The Federal Reserve Board recently published data from which it is possible to estimate the degree of concentration in the ownership of publicly traded stock held by individuals and families as of December 1962. Preliminary analysis of these data indicates that, despite all the talk of a “people’s capitalism” in the United States, little more than one percent of all consumer units owned approximately 70 percent of all such stock.  Fewer than 8 percent of all consumer units owned approximately 97 percent—which means, conversely, that the total direct ownership interest of more than 92 percent of America’s consumer units in the corporation-operated productive wealth of this country was approximately 3 percent.  Profit sharing in a form that would help to correct this shocking maldistribution would be highly desirable for that reason alone. . . . If workers had definite assurance of equitable shares in the profits of the corporations that employ them, they would see less need to seek an equitable balance between their gains and soaring profits through augmented increases in basic wage rates. This would be a desirable result from the standpoint of stabilization policy because profit sharing does not increase costs. Since profits are a residual, after all costs have been met, and since their size is not determinable until after customers have paid the prices charged for the firm’s products, profit sharing as such cannot be said to have any inflationary impact upon costs and prices. [Testimony before the Joint Economic Committee of Congress on the President’s Economic Report, February 20, 1967.]
Clearly there needs to be a way of equalizing economic opportunity without injustice.  Capital Homesteading, a proposal applying the principles of the Just Third Way, is one possibility that needs to be considered seriously.

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