THE Global Justice Movement Website

THE Global Justice Movement Website
This is the "Global Justice Movement" (dot org) we refer to in the title of this blog.

Monday, May 25, 2009

On Usury and Other Dishonest Profit, Part III

Much of the confusion surrounding the "sudden" spate of bankruptcies to which high wage and benefit packages seem to have made substantial contributions has to do with widespread misunderstanding of something called "Say's Law of Markets." Say's Law, named for a late 18th, early 19th century political economist, Jean-Baptiste Say, states what some economists regard as a "near tautology," but which embodies a profound reality in its seeming simplicity. That is, "product = income."

Once we think about this simple equation, we realize the truth of it. Every time a "production" (i.e., a good or service) is sold, it represents income for the seller. The raw materials or supplies used by the seller to produce a good or service also resulted in income for the producer of the raw materials or seller of the supplies, and so on down the line. Thus, everything that is sold in the aggregate generates the aggregate demand to purchase it. Say's Law of Markets can therefore be expanded by saying that "supply generates its own demand, and demand its own supply."

Unions often characterize wage and benefits packages as labor's fair share of production. This is incorrect. Unless a worker supplying labor is also an owner, he or she is not entitled to a share of production, fair or otherwise. The wage contract is an agreement by an employer to purchase a worker's labor. The wage contract does not entitle a worker to anything more, or the employer to anything less:
"Of these duties, the following bind the proletarian and the worker: fully and faithfully to perform the work which has been freely and equitably agreed upon; never to injure the property, nor to outrage the person, of an employer; never to resort to violence in defending their own cause, nor to engage in riot or disorder; and to have nothing to do with men of evil principles, who work upon the people with artful promises of great results, and excite foolish hopes which usually end in useless regrets and grievous loss. The following duties bind the wealthy owner and the employer: not to look upon their work people as their bondsmen, but to respect in every man his dignity as a person ennobled by Christian character. They are reminded that, according to natural reason and Christian philosophy, working for gain is creditable, not shameful, to a man, since it enables him to earn an honorable livelihood; but to misuse men as though they were things in the pursuit of gain, or to value them solely for their physical powers — that is truly shameful and inhuman. Again justice demands that, in dealing with the working man, religion and the good of his soul must be kept in mind. Hence, the employer is bound to see that the worker has time for his religious duties; that he be not exposed to corrupting influences and dangerous occasions; and that he be not led away to neglect his home and family, or to squander his earnings. Furthermore, the employer must never tax his work people beyond their strength, or employ them in work unsuited to their sex and age. His great and principal duty is to give every one what is just." (Rerum Novarum, § 20).
The cost of labor under a wage contract is an expense of doing business, and the worker is thereby compensated for his or her contribution. It is not an investment in the business on the part of the worker. A wage contract does not, therefore, entitle the worker to a share of the income generated by production after the payment of a wage. To make that claim is to fall into the trap against which Pope Pius XI warned when he stated,
"It is wholly false to ascribe to property alone or to labor alone whatever has been obtained through the combined effort of both, and it is wholly unjust for either, denying the efficacy of the other, to arrogate to itself whatever has been produced." (Quadragesimo Anno, § 53)
Further, asserting that the worker is due a fixed return from production, whether in the form of wages or benefits, is to put the worker in the position of a usurer. A borrower who must repay a fixed return on a loan, regardless whether the loan proceeds were invested in something that generated sufficient income to repay the loan, is paying usury, an unjust share of profits that may not even exist.

Similarly, an employer who pays a just, market-determined wage, and then is forced to pay an added fixed amount out of what would otherwise accrue to him or her as profits (if any) as additional compensation or into a defined benefit pension plan, is paying usury — and on the specious grounds that the worker is entitled to more than a just wage simply because he or she needs more, wants more, or can force the employer to pay more. This is binding not only on the employer: "the rich must religiously refrain from cutting down the workmen's earnings, whether by force, by fraud, or by usurious dealing," (Rerum Novarum, § 20), but on the workers when "by force, by fraud, or by usurious dealing" they cut down the employer's earnings by taking an unjust share of the profits.

What of the case in which an employer is paying a just, market-determined wage to workers who freely contracted for that wage without coercion, but they still need more in order to live in a manner befitting the demands of human dignity? The employer is, in that case, morally bound in charity — but not legally bound in justice — to pay the worker more: "It is a duty, not of justice (save in extreme cases), but of Christian charity — a duty not enforced by human law." (Rerum Novarum, § 21)

The unions, therefore, put themselves in the position of violating justice twice when raising wages and benefits above a free market-determined rate. They do this once by demanding a share of production to which they are not entitled, and once by using collective bargaining backed up by the coercive power of the State to demand more than what they are due in strict justice.

What of the "extreme cases" to which Pope Leo XIII refers? Unfortunately, the "extreme case" has become all-too-common today, especially in light of the declining value of human labor as an input to production. The consequence of this is that it is increasingly difficult for a worker, in competition with advancing technology and cheaper foreign labor, to generate an adequate and secure income through the sale of labor alone.

In that case, the worker has, in a sense, become the dependent of the employer. He or she is no longer an "independent other," capable of contracting freely — or of justly organizing with others to coerce higher wages and benefits. A worker who has no other recourse but to work for that employer, no other means of generating an income than the sale of his or her labor, and who is trapped within a system that inhibits or prevents the worker from supplementing his or her income in some just and equitable manner is, in substance, a slave without effective economic rights. When that is the case, the employer owes the worker enough for the worker and the worker's dependents to live on in a manner otherwise befitting human dignity.

We must specify "otherwise," for keeping an adult in a dependent relationship (e.g., treating him or her as a child or slave) when there is no justification such as mental incapacity or criminal acts, is an explicit offense against human dignity. The problem becomes what to do about the situation when an employer cannot pay a worker enough without one side or the other violating justice. Either the employer or the system violates justice by maintaining workers in a condition of unjustifiable dependency, or the workers or the system violate justice by forcing employers to pay usurious compensation unrelated to production — and without assuming any of the risks of ownership that would otherwise entitle workers to an equitable share of the profits . . . if any.

This sounds like an impossible situation — and it is . . . within the existing framework of economic analysis provided in large measure by Lord Keynes. The solution (assuming there is one) must lie outside the Keynesian paradigm, elsewhere, in a framework based on essential human dignity and that takes economic reality into consideration. We will look at such a framework, that of binary economics, beginning tomorrow.