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.
