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Saturday, June 30, 2012

Sustainability as an element of market economy

Sustainability as an element of market economy

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LI-PAPER. In a free market participants according to their preferences compete for scarce resources.
Of course it makes sense from a business perspective, care to deal with scarce resources. In a free market, these are expensive, profit-oriented companies to increase their efficiency and, therefore, constantly strive for product and production innovations. Particularly successful organizations are those that are transparent to signals and information from their markets. Openness and innovation coupled with profit orientation ensure economic success and sustainability. Arbitrary or vague goals that perspective the focus on profit and value enhancement donate, however, more confusion, than that they promote sustainable development. Instead of political institutions to make companies, the policy should set appropriate conditions, by protecting property rights to scarce resources and competition play freely.
Experiments, the economic cycle - and therefore sustainable businesses - to invent new, are always associated with the risk that resourceful business leaders to shake off the obligation on income and capital appreciation reference to the interests of any stakeholders, thus undermining efficiency and sustainability of our economic system. Sustainable management requires not primarily political considerations and populism, but a consistent orientation to market signals, an open exchange with relevant partners - and always ready to novelty and innovation. In the spirit of maximizing profits and increasing value of the company.

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Friday, June 29, 2012


Foundation of Economic Education

The great monopoly problem mankind has to face today is not an outgrowth of the operation of the market economy. It is a product of purposive action on the part of governments. It is not one of the evils inherent in capitalism as the demagogues trumpet. It is, on the contrary, the fruit of policies hostile to capitalism and intent upon sabotaging and destroying its operation.

    —Ludwig von Mises, Human Action

  In the free society government keeps the peace, protects private property, and enforces contracts. Government must do these things effectively, and it must do nothing else; otherwise, the conditions indispensable to personal freedom in society are absent. Whether or not a free society is attainable no mortal man can know; the limits of our knowledge are too narrow. But one thing we do know: that until at least the advocates of the free society are fully aware of the conditions necessary to its existence, it can never come about. For they must ever be on guard against new movements, ideas, and principles which would endanger its realization. And on the other hand, they must be sharply aware of existing impediments so that they may direct their energies intelligently to the removal of the causes of current imperfections.

  I take up with considerable trepidation the task of arguing that government should quit trying to promote competition by means of the antitrust laws, especially since some proponents of the free society believe that vigorous enforcement of those laws is absolutely indispensable. Yet, antitrust laws are inconsistent with the basic principles of the free society, private property, and freedom of contract; they deprive persons of private property in some cases and outlaw certain contracts which would otherwise be valid. Moreover, they expand the role of government far beyond that envisaged by the theory of the free society and thus amount to an unconscious admission that the fundamental theory itself is incoherent; for antitrust policy implicitly accepts the Marxian premise that a laissez faire economy will result in the decay of competition and in the emergence of abusive monopoly. Finally, and this may be the most pressing reason for the present article, in their attempt to promote competition the antitrust laws may in fact be inhibiting it.

  Vague and Uncertain Laws

  One of the basic evils in the antitrust laws is the vagueness and uncertainty of their application. They have produced mainly confusion. Seventy some years ago the antitrust laws prevented the Great Northern Railway and the Northern Pacific from merging, although but a minor fragment of their respective lines overlapped in competition. But a few years later United States Steel was permitted to consolidate a vast preponderance of the steel production of the country under one management. Since then we have been off on another antimerger binge, and so Bethlehem and Youngstown have been enjoined from doing on a smaller scale what U.S. Steel did on a grand scale. Socony and other integrated oil companies were told that they might not buy up distress oil at prices set in competitive markets. But only a few years earlier the Appalachian Coals Association had been permitted to act as exclusive marketing agent for most of the coal production of an entire region. Forty years after its foresight, courage, and capital had been instrumental in developing the great General Motors productive complex, the du Pont Company was ordered to give up control of its G.M. stock because of a relatively picayune buyer-seller relationship between them. Only space limitations preclude an almost endless listing of equally contradictory and inequitable results of the unpredictable eruptions from the antitrust volcano. At present, the allegedly competitive policies of the Sherman Act are mocked by those patently anticompetitive components of the antitrust laws, the Robinson-Patman Act and the fair-trade laws.

  Thus, to the careful and honest observer the antitrust laws appear to be a charter of confusion, rather than the “charter of economic liberty” which oratory calls them. They have been transmogrified by the political vagaries to which their vagueness makes them susceptible into an insult to the idea that laws should apply equally to all. Some may regard these consequences as merely unfortunate incidents of a generally praiseworthy program. Yet we need continually to remind ourselves that law is for the benefit of the citizenry, rather than for the sport of government and of the legal profession. The main function of law is to provide people with clear and sound rules of the game, so that they may pursue their affairs with a minimum of doubt and uncertainty.

  While aggravating the existing uncertainties of life, the antitrust laws can make no demonstrable claim to improving competition, despite the contentions of enthusiastic trustbusters. I have heard it said that the result of breaking up large firms is to create competition among its fragments, and thus to contribute to social well-being. But a moment’s reflection will expose this as a bare and un-supportable assertion. Even though additional firms may be created by breaking up large businesses, the result is not necessarily in the social interest, nor does it necessarily create or improve competition. The social interest and competition are not automatically served by an increase in the number of firms. It is a commonplace that competition may be more vigorous and the service to society greater when an industry has few firms than when it has many. The question from the point of view of society is not how many firms there are, but how efficiently and progressively the firms—no matter how few or how numerous—utilize scarce resources in the service of the public. Maybe production will improve after a single large producer is split into fragments; but it is equally possible that it will not. No one can tell in advance, and it is also impossible to do so after the fact. The only thing that can be said with certainty about the breaking up of businesses is that government’s power has been used to deny property rights rather than to protect them. If we really believe that private property is the most valuable institution of the free society, and that in it lies the strength of the free society, then it is wrong to abrogate that institution on the basis of pure guesswork.

  Monopoly Unionism

  The antitrust approach to improving competition loses even more of its glamor when one understands that the most abusive and socially dangerous monopoly which exists today in this country is the direct product of special governmental privileges. Labor unions are today the most destructive monopolies in our system, and they are also the greatest beneficiaries of governmental special privileges.

  First and foremost, there is the virtual privilege of violence, which trade unions alone enjoy. Neither individuals nor other organizations are so privileged. Memory is strangely short as regards union violence, and yet every big union in America has used it habitually, in both organizing and “collective bargaining.”

  Of the men who resist union membership, many are beaten and some are killed. They have much more to fear than do persons who reject the blandishments of sellers of other goods or services. And this is true despite the fact that the right not to join a union is as firmly entrenched in legal theory and the theory of the free society as is the right to buy as one wishes or to refuse to buy when one so wishes.

  In 1959, the United Mine Workers engaged in one of its periodic purges of the nonunion mines which spring up continually owing to the uneconomic wage forced upon the organized mines by the UMW. An Associated Press dispatch, dated April 10, 1959, reported that “one nonunion operator has been killed, five union members charged in the fatal shooting, and three ramps damaged by dynamite since the strike began March 9. It has made idle more than 7,000 men over the union’s demands for a $34.25 a day wage, a $2.00 increase.” The grimmest aspect of the dispatch lay in the news that Governor A. B. Chandler of Kentucky was threatening—after a full month of terror and pillage by the union—to order National Guardsmen into the coal fields.

  This is no isolated case. On the contrary, violence and physical obstruction are standard features of most strikes, except where the struck employers “voluntarily” shut down their businesses, in accordance with the Reuther theory of enlightened management which I have described in Power Unlimited: The Corruption of Union Leadership (Ronald Press, 1959). A special dispatch to The New York Times, dated August 5, 1959, reported that “a siege was lifted today for 267 supervisory employees at the United States Steel Company's Fairless Works here. . . . From now on the supervisory personnel will be allowed to enter and leave the plant at will for maintenance.” The dispatch is silent concerning the probable consequence of any attempt by the steel companies to maintain production. But the fact that supervisors were besieged because of maintenance operations suggests that rank-and-file workers who attempted to engage in production would be mauled. It is not out of order to infer that the siege of the supervisors, otherwise a pretty silly act, was intended to get across that message.

  The careful student of industrial warfare will discern a pattern of violence which reveals an institutionalized, professional touch. Mass picketing, goon squads (or “flying squadrons” as they are known in the Auto Workers union), home demonstrations, paint bombs, and perhaps most egregious of all, the “passes” which striking unions issue to management personnel for limited purposes—these are the carefully tooled components of the ultimate monopoly power of unions.

  As a matter of fact, we have become so befuddled by, and so weary of, the terror, destruction, and waste of the unions' organizing wars that we view with relief and contentment one of the most prodigious contracts in restraint of trade ever executed—the celebrated “no-raiding pact” of the AFL-CIO. No division of markets by any industrial firm has ever achieved such proportions. The “noraiding pact” divides the whole organizable working force in accordance with the ideas of the union leaders who swing the most weight in the AFL-CIO. It determines which unions are “entitled” to which employees. The theory of modem labor relations law is that employees have a right to unions of their own choosing. Reversing that principle, the “no-raiding pact” asserts that the choice belongs to the union leadership. If any business group were so openly to dictate the choices of consumers, it would be prosecuted by sundry federal agencies and hailed before one or another, or perhaps many Congressional committees. It would not receive congratulatory telegrams from the chief politicians of the nation.

  Government Intervention

  The more one examines American labor law the more one becomes convinced of the validity of Professor Mises' theory that no abusive monopoly is possible in a market economy without the help of government in one form or another. If employers were permitted to band together peacefully in order to resist unionization, as unions are permitted to engage in coercive concerted activities in order to compel unionization, it is probable that the purely economic (nonviolent) pressures of unions would not be as effective as they have been in increasing the size and power of the big unions. But the government has taken from employers all power to resist unionization, by peaceful as well as by violent means. At the same time it has permitted unions to retain the most effective methods of economic coercion. And so picketing, boycotts, and other more subtle modes of compulsory unionism are in many instances as effective in compelling unwilling membership—in the absence of countervailing economic pressures from employers—as sheer physical violence.

  Monopoly unionism owes much, too, to direct and positive help from government. Consider the vigorous prohibition of company-assisted independent unions which has prevailed for over twenty years. Although such small unions might at times best serve the interests of employees, the early National Labor Relations Board practically outlawed all independent unions, and more recent decisions continue to favor the big affiliated unions.

  The Majority-Rule Principle

  But perhaps the most significant contribution of government to monopoly unionism is the ma-jority-rule principle which makes any union selected by a majority of votes in an “appropriate bargaining unit” the exclusive representative of all employees in that unit, including those who have not voted at all, as well as those who have expressly rejected the union as bargaining representative. Majority mle is a monopolistic principle; it is always to be contrasted with individual freedom of action. But it is particularly prone to monopolistic abuse in labor relations. Determination of the “appropriate bargaining unit” is left to the virtually unreviewable discretion of the National Labor Relations Board. And that agency has in numerous instances felt duty-bound to carve out the bargaining unit most favorable to the election of unions. Indeed, politicians might learn something about gerrymandering from studying the unit determinations of the Labor Board.

  Even if the gerrymandering could be eliminated, the majority-rule principle would remain a source of monopolistic abuse, based on monopoly power granted and enforced by government. A union may be certified exclusive representative in a 1,000-man bargaining unit on the basis of as few as 301 affirmative votes, for an election will be considered valid in such a unit when 600 employees participate. If a bare majority then votes in favor of the union, the remaining 699 are saddled with the union as their exclusive bargaining representative, whether or not they want it.

  Competitive Safeguards

  Society has nothing to fear from unions which without privileged compulsion negotiate labor contracts and perform other lawful and useful jobs for workers who have voluntarily engaged their services. For they are then but another of the consensual service associations or agencies which a free society breeds so prolifically. Moreover, the free society has demonstrated that its fundamental mechanism, free competition in open markets, is tough and resilient enough to defend against exploitation by any genuinely voluntary association. The critical problem arises when a man or an association destroys society’s chief defense mechanism by violent and coercive conduct, or when that mechanism is blacked out by special privilege from government. For then, without the checks and balances of free men vying against free men in civilized competition, society lies as prone to exploitation by the unscrupulous as a rich store would be without guards and burglar alarms.

  When the sources and components of union monopoly are understood, it becomes clear that the antitrust laws cannot cure the problem. The fundamental source is to be found in failures and errors of government which the most elaborately conceived antitrust laws could not cure. The basic job of government is to keep the peace. It has not kept the peace in labor relations. Local, state, and federal governments have all failed to prevent labor goons and massed picket lines from interfering with the freedom of action of nonunion employees and of employers in bargaining disputes. (See my book, The Kingsport Strike, Arlington House, 1967.) A similar failure in organizing campaigns has permitted unions which would be pygmies, if they represented only workers who wanted them, to become giants. The antitrust laws would equally clearly do nothing to remedy the monopolistic consequences of the positive aids granted by government to the big unions, such as the majority-rule principle and the virtual outlawry of small independent unions.

  I am convinced that the socially dangerous aspects of big unionism have been brought about by the errors and failures of government which we have been considering. Government has on the one hand been tolerating the violence and economic coercion by means of which the big unions have attained their present power, and it has, on the other hand, positively intervened in their support. Moreover for the last forty years or more, officers of the national administration have played a critical role in the key industrial disputes which have set the pattern of the so-called inflationary wage-cost push.

  The latter is a much more important fact than it may seem at first view. It suggests that the checks and balances of free enterprise are adequate to protect the public even from the artificially constructed compulsory labor monopolies which we now know. Moreover, it is not unreasonable to infer that those checks will work even more effectively if politicians not only stay out of negotiations but also enforce the laws against compulsory organization. These considerations suggest that the logical first step for those concerned about union power is to insist that government remove the present special privileges which unions enjoy and then wait patiently, to see if the program will work itself out without further government intervention.

  Government’s Limited Role, As Outlined by Mark Twain

  I believe that the same approach should be taken in respect to businesses suspected of monopolistic abuses. Rather than following the hit-or-miss political vagaries of the antitrust approach, it would be better to make sure that all special privileges, such as tariffs, exclusive franchises, and other governmental devices for blocking access to markets are withdrawn. Repeal of the tax laws which unfairly prevent high earners from amassing the capital necessary to compete with existing firms would also help much more than antitrust prosecutions do in promoting competition. In short, if government would confine itself to protecting property and contract rights, and if it would desist from impairing those rights, it would be doing all that government can do to promote competition. And we should not need to be greatly concerned about monopolies and contracts in restraint of trade. For, as Mark Twain’s account of the career of the river-boat pilots’ monopoly in the nineteenth century demonstrates, the free enterprise system is in itself fully capable of destroying all abusive restraints upon competition which are not supported and protected by government.

  In the years before the Civil War, Twain writes in Life on the Mississippi, the river steamboat pilots formed an association which was to become, as Twain put it, “the tightest monopoly in the world.” Having gone through many trials in building up its membership, a sudden increase in the demand for pilots gave the association its first break. It held members to their oath against working with any nonmember, and soon nonmembers began having difficulty getting berths. This difficulty was increased by the association pilots’ safety record, which grew out of an ingenious method evolved by the association for current reports on the ever-changing Mississippi channel. Since the information in these reports was confined to members of the association, and since nonmembers had no comparable navigation guide, the number of boats lost or damaged by the latter soon became obviously disproportionate. “One black day,” Twain writes, “every captain was formally ordered (by the underwriters) to immediately discharge his outsiders and take association pilots in their stead.”

  The association was then in the driver’s seat. It forbade all apprentices for five years and strictly controlled their number thereafter. It went into the insurance business, insuring not only the lives of members but steamboat losses as well. By United States law the signature of two licensed pilots was necessary before any new pilot could be made. “Now there was nobody outside of the association competent to sign,” says Twain and “consequently the making of pilots was at an end.” The association proceeded to force wages up to five hundred dollars per month on the Mississippi and to seven hundred dollars on some of its tributaries. Captains’ wages naturally had to climb to at least the level of the pilots’, and soon the increased costs had to be reflected in increased rates. Then society’s checks and balances went to work. This is Twain’s summation:

  “As I have remarked, the pilots’ association was now the compactest monopoly in the world, perhaps, and seemed simply indestructible. And yet the days of its glory were numbered. First, the new railroad . . . began to divert the passenger travel from the steamers; next the war came and almost entirely annihilated the steamboating industry during several years . . . then the treasurer of the St. Louis association put his hand into the till and walked off with every dollar of the ample fund; and finally, the railroads intruding everywhere, there was little for steamers to do but carry freights; so straightway some genius from the Atlantic coast introduced the plan of towing a dozen steamer cargoes down to New Orleans at the tail of a vulgar little tugboat; and behold, in the twinkling of an eye, as it were, the association and the noble science of piloting were things of the dead and pathetic past!”

  The moral: government’s job is done when it defends the right of competitive businessmen or workers to take over functions which are being abused by monopolistic groups. The deeper moral is that monopolistic abuses rarely survive without a basis in one form or another of special privilege granted by government. The long steel, auto, and other big strikes we have suffered would not have lasted nearly so long if government had effectively protected the right of the companies to keep their plants operating and the right of employees to continue working during the strike.

  Our economic system—the market economy or capitalism—is a system of consumers’ supremacy. The customer is sovereign; he is, says a popular slogan, “always right.” Businessmen are under the necessity of turning out what the consumers ask for and they must sell their wares at prices which the consumers can afford and are prepared to pay. A business operation is a manifest failure if the proceeds from the sales do not reimburse the businessman for all he has expended in producing the article. Thus the consumers in buying at a definite price determine also the height of the wages that are paid to all those engaged in the industries.

Thursday, June 28, 2012


Foundation of Economic Education

In discussions of wage rates, whether for individuals, firms, or for the entire economy, we hear a lot about the increasing productivity of the worker, and that wages must rise to reflect such increases. A large steel company recently has negotiated a contract with its workers which says, in effect, “If your productivity increases, your wages will keep pace.” Is this the way wages are or should be determined in an open society? Just what are the implications, if all wages were determined by this method?

How come that a boy today gets $3.00 or $4.00 for mowing the same lawn you did as a lad for 25 or 50 cents? Has the productivity of boys increased that much? True, a boy with a power mower can do the job faster; but when he’s finished, the total accomplishment is no greater than when done a generation ago. In fact, the job may have been done better then, if you consider the trimming which boys with power mowers tend to neglect.

  Or, take a haircut—$2.00 now compared to the quarter you paid for your first one! Electric clippers, to be sure; but again, you are interested in the finished job rather than the barber’s speed.

  So it goes, for one service after another—a cleaning woman, window washing and hanging screens, car waxing, house painting—whatever the service, you find it costs a lot more to get the job done than when you were a boy.

  When you think about it, you realize that inflation is a factor—a dollar doesn’t go as far as it once did. That might account for perhaps a doubling of the price, but what about the rest of the increase?

  Supply and Demand

  In a free market, wages are determined by competitive forces of supply and demand. A manufacturer, after very careful planning, concludes that he can make and sell so many of a particular item at a given price. He must assemble his resources, including his plant, his equipment, his managerial talent, and workers, and hope to recover the cost of these things from the price buyers will pay for the finished product.

  So, the manufacturer goes into the labor market to hire men to work for him. If his offered wage isn’t high enough to get the workers he needs, then he must either give up the project or figure how to recombine his resources in such a way that he can pay higher wages and still come out ahead. He may do this by simplifying his manufacturing processes, by introducing more or better machinery, or by innovations of some sort.

  The worker, on the other hand, will look after his interest, too, and will consider moving to a new job if it seems more attractive to him for reasons of higher pay, better working conditions, shorter days, more vacation, or whatever.

  But, suppose some manufacturer comes along with an item he can make and sell very profitably. It may be because of patents he holds, or special skills or processes that only he knows about. He may be able to afford to pay wages half again as high as the going wage in the area and still come out ahead. Shouldn’t he do this?

  In a free market, he is at liberty to pay the higher wage if he wishes. But if he has had some experience in manufacturing, he knows that competition is behind every tree and someone will figure out a way to put a competing product on the market that will undersell his, with his high labor costs, in which case he may find himself without his expected buyers. So, he probably will decide he should pay the going wage for his workers, or just enough more to fill his needs, and use most of his technological advantages to reduce prices to the buyer and build his market. If, in the early stages, he is able to gain a handsome profit for himself and his stockholders, he will have a cushion with which to meet the competition certain to come.

  All this has nothing to do with a particular businessman offering his workers production incentives. He may believe that his workers will produce more for him if he gives them every Wednesday afternoon off, or he may give them a share in the profits of the firm, or he may pay them on a piecework basis. That must be each employer’s decision; but most will offer a base wage rate not greatly different from the going wage in the area.

  Competition the Key

  But, what has all this to do with the cost of getting my lawn mowed, or a haircut, or hiring a woman to clean my house? Why have wages in the services increased over the years about as much as those in highly automated industries? In one instance, efficiency of doing the job may not have increased at all, while in the other, it may have increased tenfold.

  Competition is the answer. If you want a man to cut your hair, you must pay enough to keep him from going to work in a factory or at some other occupation. As a result, we have what may be referred to as a wage level for the entire economy. This is a somewhat mythical figure, not too meaningful because of the variability of individual skills. For example, consumers will pay a great deal more for the services of a skilled brain surgeon than for the services of a messenger.

  The calculation of a wage level for a country is a tremendously complicated procedure and not too satisfactory at best. Nevertheless, it is a useful if not precise tool in comparing the economy of one country with another. We know, for example, that the general level of wages is much higher in the United States than in India, which leads to certain conclusions about how wages may be improved in any economy.

  With a free market, in an advanced economy, most of the returns from production go to the workers—roughly 85 to 90 per cent. Competition forces this. If workers are supplied with good tools and equipment, they are more productive and their wage level is higher than it would be otherwise. This is a generalization regarding all workers. The general wage level is higher in a country where there is a relatively high investment in tools and equipment per worker. It is just that simple! In the United States, the investment per worker in tools may be $20,000, and it is not unheard of to find a particular business with an investment of $100,000 in tools and equipment per worker.

  The road, then, to a higher wage level is through savings and investment in the tools of production. There is no other.

  A high investment in tools and equipment benefits the barber, the cleaning woman, and all service employees, even though the investment is not directly for their work. Competition sees to this.

  A Negative Bonus

  However enlightened it may appear on the surface, the wages of an individual worker or for a group of workers cannot be tied to the productivity of their job or to the profitability of a particular firm. If this were the case, a highly skilled worker might find himself working for a negative “bonus” in a firm which, for some reason, happens to be operating at a loss.

  The same may be said for tying wages to a cost-of-living index. A fair wage, both to the worker and the employer, can only be established by bargaining between the two interested parties— the worker taking what appears to him to be the best he can get and the employer, all things considered, getting the best deal for himself.

  The lesson here is that while productivity of workers is highly important when considering a general wage level, productivity does not determine what the wage rate ought to be for any given firm or industry within the economy. The effect of general productivity on wages is automatic in a free market with competition. And all workers stand to gain when tools and capital are made available to some of them.

Wednesday, June 27, 2012

JOBS FOR ALL - Percy L. Greaves, Jr.

Foundation of Economic Education

As our society is organized, the normal way to get more of what we want is to take a job. Then we can use the dollars we earn to buy more of the things we want for ourselves and our loved ones. Without a job, or a business of our own, we would all have to grow our own food and make our own clothes as well as anything else we wanted. Taking a job where we can use tools supplied by savers is the easiest way for most of us to satisfy more of our wants.

  So most men want a job. To be without a job is most depressing. Continued unemployment, through no fault of one’s own, is probably the darkest future any man can face. Such longtime mass unemployment is one of the great curses of our age.

  The human misery, degradation, and moral temptation are not all. Besides these setbacks to the human spirit, there is the great unseen loss of the wealth the idle might have produced if they had been employed. This loss is shared by all. In a market economy every dollar holder can buy a share of the total wealth offered for sale. The greater the wealth produced and offered for sale, the more anyone can buy with each of his dollars. So we all have a stake in reducing unemployment and encouraging the production of more of the things men want most.

  Yet millions of able and willing men have recently remained unemployed for months on end. What is the answer?

  Let’s use our heads. When we want to sell something, we sell it to the highest bidder. He buys it for the lowest price he can. That is what happens at auctions every day. It happens at the com and cotton markets as well as the stock exchanges. Even the grocer with perishable fruits and vegetables reduces his prices until a highest bidder buys them.

  That way, the seller gets the highest anyone is willing to pay, while the buyer pays the lowest price any seller will freely accept. Both buyer and seller get the highest possible satisfaction from every transaction. That is the way of the free market.

  There is no reason why these same free market principles can’t be applied to the services of working men. It would be very simple, requiring only two things. First, let every job seeker choose that job which offers him what he considers the best returns he can get for the services he has to sell. Second, let every prospective employer choose those job seekers who offer what he considers the best services he can get for the wages he can pay. Competition would soon see to it that no one was paid too much or too little.

  Of course, such a simple solution would put an end to all privileges for those now overpaid. No union would then be able to hold up employers and consumers for more than they need pay in a free and competitive market. By forcing some wages above free market rates, some unions now get higher wages for their members than such workers would receive in a free society. But these forced higher wages for some mean that others must accept lower wages or unemployment (unless the government resorts to inflation). These lower wages and unemployment (as well as this pressure for inflation) would disappear if every man, including the unemployed, were free to compete for every job. As long as some of men’s wants remain unsatisfied, there will be enough jobs to go around.

  A free job market would provide “full employment” and greater production of the things men want most. Competition might drive down some dollar wage rates, but living standards would have to be higher. With more goods and services competing for every dollar, prices would be lower and everyone with a dollar would be entitled to a share of the increased production. Those now overpaid might temporarily suffer, but in the long run we would all be able to satisfy more of our wants.

  With a free market in jobs, every man would be free to take the best offer available. Every employer would also be free to hire the applicants that pleased him most. No one would remain long unemployed. There would be jobs for all, more wealth produced, and a greater satisfaction of everyone’s wants. What is more, the economic loss and dread of unemployment would evaporate.

Tuesday, June 26, 2012


Foundation of Economic Education

Most people today seem to think that producers and sellers set prices. Likewise, they seem to think that employers set wage rates. They think businessmen get rich by setting low wages for their employees and high prices for their products.

  This leads many to think that employers can be compelled by law or union pressure to raise workers’ wages at the expense of the owners of a business. This has been done in an increasing number of cases for a short period of time, but such wage increases cannot be maintained in the long run. Actually, it is impossible to raise every worker’s wages by law or union pressure. Every law or nonmarket pressure that raises wages for some, lowers them for others.

  In analyzing every economic proposal, it is necessary to examine all of its effects, not only the short-run effects, but also the long-run effects, and not only the effects on those whom the advocates seek to benefit but also the effects on those who have to pay the costs. All of these inevitable effects should be weighed before passing judgment on any attempt to interfere with free market processes.

  In a free market you are free to take any of many jobs open to you. Each man takes that one which, from his point of view, he considers best. When everyone is free to do this and no one is permitted to trample on the equal freedom of others to do so, when no one or no group can prevent others from taking jobs for which they and the potential employers reach mutually satisfactory agreements, then the Golden Rule will prevail. More workers will be producing more goods for others and everyone will have more for himself. The result will be ever-increasing production and human satisfaction. Of course, in a free market society, men will still make mistakes. But free market practices tend to reduce such mistakes by penalizing most those who make them.

  We may also have a few unfortunate people who need assistance from their fellow men. For such few cases, the free market not only encourages religious and other private charities but it also provides the means with which these charitable organizations can take care of the unfortunate. So these unfortunate few do not have to become a burden on the government. We are free to act voluntarily as good Christians and take care of our neighbors who are in trouble.

  In any society, in any group of men, there will also be some who will try to help themselves at the expense of others. There will be some who wish to steal, or misrepresent, or resort to force. To protect peaceful productive citizens against those who resort to such antisocial actions, governments are necessary, and very necessary.

  Consumers Determine Wage Rates

  There is today a popular idea that employers exploit the workers. This fallacy has been growing ever more popular since the days of Karl Marx. It was Marx’s idea that employers overworked employees, paying them much less than the money values of what they produced, while keeping the difference for themselves. According to this theory, rich employers get richer and richer while the poor workers get poorer and poorer. The time would come, Marx held, when the workers would break the chains which bound them to their employers and set up a socialist utopia. According to this idea, the poor worker is helpless in a market society. He has no choice. He must take the wage that is offered to him. There is no other employer who might bid for his services.

  Actually, of course, that is not so. In the absence of any social interference, workers tend to get the full value that consumers will pay for their contribution. It is the interferences by governments and the interferences by labor unions supported by public opinion, even without the strength of laws, that prevent all potential workers from getting those market values they could contribute to society.

  If the idea that unions help all workers is popular, then we are powerless to stop them from hampering the market competition. However, in an unhampered free market economy, competition tends to allocate to every factor of production, including workers, all that each contributes. It is the values that the ultimate consumers place on each particular contribution to total production that determine what businessmen can pay for that particular contribution.

  The same principles apply to the wages paid for labor that apply to the sums paid for raw materials or any other factor of production.

  In a free market, each employer seeks to hire as many workers as he profitably can. He hires employees up to the point at which it is no longer profitable for him to hire an additional worker because he cannot sell the product of that additional worker for the wage he must pay him. As he hires more workers, the wage rate tends to rise and as more units are produced, the market price he can get per unit tends to fall. This is the inevitable tendency of a free and unhampered market.

  The more workers you hire, the higher wage rate you will have to pay. And you must pay the higher wage to all who do similar work. As you produce and offer more goods on the market, you can only sell them at lower prices. Eventually you reach the marginal point, where you make no profit on the last man you hire. Wage rates are ultimately set by the marginal productivity of labor, that is the market value added to the product produced by the marginal employee, the last man hired. This is the way the free market would work, if there were no interferences. Unfortunately, the free market is something that we have never had completely at any time and may never have. However, the nearer we get to it, the better off we shall all be.

  Given the conditions which the employer faces, he must pay workers pretty much the values that consumers place on their contributions. If the employer pays a higher wage, he suffers a loss. If he does not then reduce his wage rate, his number of employees, and his production to what he can sell at a price that covers his costs, he will eventually be forced out of business. No businessman can long pay costs which he cannot get back from consumers.

  In the long run it is the consumers who pay the wages. The businessman is merely a middleman. He tries to make a profit as a middleman, buying raw materials, hiring workers, and selling the products to consumers. He makes his profit, if any, by holding what he pays for the factors of production below what consumers will pay for the final product. However, once a profit appears, competitors continually bid up what must be paid for each factor of production, including labor. There is always a tendency in a free market for profits to be squeezed and disappear. This includes any profits obtained by paying workers wages lower than the market value of their contributions.

  Free Competition Protects Workers

  It cannot be denied that employers would always like to pay lower than the market wages. In The Wealth of Nations, published in 1776, Adam Smith mentioned that whenever businessmen get together they try to set wages and hold them down. However, in the free market, they are unable to do so. It is just not possible for all employers to get together and agree to hold wage rates down for any length of time. Once one employer finds he can profit by breaking such an agreement he will probably do so. If none breaks the agreement and if you have a free market society wherein anybody can become an employer, new employers will soon appear, to take advantage of the situation by offering workers more.

  If the employer pays a wage lower than the market wage, that is less than the product of the worker can bring in the market, his profits will be such that he can expand his production and his number of employees. If he fails to do so and fails to raise his wage rates in doing so, he will invite new competition. In either case, market competition will raise the wage rates to the value produced by the marginal employee. And there is always a marginal employee.

  In most industries there are also marginal companies. These are the companies that are just breaking even. If their costs go up a little bit, they will suffer a loss. Then they will soon be out of business because money losers cannot stay in business indefinitely.

  No businessman in a free market society can long pay a worker a dollar an hour and sell his product for five dollars an hour. Why not? Because you and I and thousands of others like us would be very happy to go into that business, pay those men two dollars and sell their product for five dollars if we could. Others would soon offer to pay them three dollars, four dollars, or even four-fifty. In fact, large corporations would be very happy to make profits of just two cents an hour for every worker they employ. They are just not able to pay them much less than the market value of their product. The last one employed would not yield them any profit, particularly in a free society where anyone who thinks he sees a chance to make a profit can come in and bid away any employee who is paid less than the market value of his contribution.

  The frequent refutation is, “Yes, but most people do not have the capital to start a business.” Let’s remember there are many savers eager to invest their money where they can earn more. If they can be shown a situation where they can earn more, they will be happy to make the needed capital available. All you need to do is to show them where a profit higher than current interest rates can be made.

  Whenever there is a profit in a free market society, it attracts competition, and competition always reduces prices. This is how the market constantly allocates consumers a share of every increase or improvement in production.

  Savings Raise Wages

  The real secret of higher wages is increased savings per capita. Increased savings are a result of producing more than is consumed. If more goods and services are produced than consumed, then these unconsumed goods and services are available for making tools, factories and other things needed to help increase production. American living standards have gone up over the years because generation after generation our parents have provided their children with a better start in life than their parents had. The history of our country has largely been that the first generation of immigrants provided their children with an elementary school education, the next generation saved enough to provide their children with a high school education, and the third generation sent their children through college. Now, many are going on to graduate work. In this way, each generation provided the next generation with a higher standard of living. In each case, this higher education was the result of increased savings. The earlier generations just could not afford to provide their children with what most American children now have.

  When there are savings in a capitalistic system, people do not put them under a mattress. They do not dig a hole and hide them as people do in India or China where savers are afraid that if they put up a factory, the property would be seized. No, in a capitalistic society people invest their savings where they hope they will earn a return. In a capitalistic society, savings are not accumulated by the rich only. One of the great advantages of a capitalistic society is that low-income people can also invest their savings and earn a return on them. They can buy savings bonds. They can put their money in the savings banks. They can buy life insurance. Then, the banks and the life insurance companies make their savings available to businessmen and large corporations.

  As a matter of fact, it is the low-income people who are the great creditors of our day. They are the ones who are hurt the most by low interest rates. It is largely the higher-income people who are debtors and who benefit from low interest rates. They are stockholders and their corporations borrow the money saved by low-income people. One of the great advantages of the free market system is that it provides a way for low-income people to participate in the earnings that savings provide.

  Effect of New Savings

  Savings are, of course, the only real source of old age security and higher living standards. When new savings are invested, the very first thing they do, whether they are invested in a new company or in an expansion of an old company, is to bid up wages and the prices of raw materials. They bid up everything that is needed to expand production, including labor, and you cannot make anything without labor.

  Labor is one of the scarcest things in this world. There are many mines that are not mined because the available supplies of labor are worth more in other occupations. The same is true of farm lands. The same is true of every occupation. Every economic endeavor is limited by the high costs of labor. Labor is always scarce. The market allocates the scarce supplies of labor to the production of those goods and services for which consumers are expected to pay the highest prices. Other goods and services are not available because of this very shortage of labor.

  With new savings, there are employers or “entrepreneurs” who are constantly trying to employ more workers. They have to bid up wage rates for the limited quantities of labor available in the market place. The factor which helps labor most is the increased savings which permit employers to bid them away from their previously lower-paying jobs. After these savings are turned into new or larger factories, they must produce goods and services previously not available.

  The managers of these new expansions must determine what to produce. They try to find out what is not available that is next in importance on the value scales of consumers. They then expand the production of those things not sufficiently available that they think customers want most. They bring more production to the market. Each worker, working with more or better tools, produces more. If there has been no increase in the money supply, as more goods reach the market, the result must be lower prices. With lower prices for consumers’ goods, everyone can buy more with his limited money supply. The only way that a society can raise the real wages of all its workers is to increase the amount of savings available per worker.

  For example, American steel companies need an investment of some $20,000 per worker, for workers to get the high wages they are paid. In a market economy these high wages are shared by all. The barber, who has not changed his methods very much in the last century or two, competes in the labor market with steel workers, each of whom uses about $20,000 of equipment. Wage rates of all workers are thus set by the average savings available to help workers increase their production. These higher wages and lower prices must appear before the savers can get any of their money back, much less any interest or profit on their speculative investment.

  Profits may come, but they can only come later if buyers, of their own free will, decide that the new market offerings are better bargains than all other available goods and services. This is the secret of progressively higher living standards in a free market society. The secret of higher wages is more savings per available worker. A man with a modem expensive earth-moving machine can move far more earth than the strongest man using his hands or even a shovel. As more and better tools become available and as more goods are produced, there will be a higher standard of living for everyone who participates in the market economy.

  Effect of Present Union Policies

  Consider now the effect of present-day union policies upon our economy. The essence of labor union policies today is (1) to restrict production and (2) to prevent the unemployed, or those employed at lower wages, from improving their economic situation by underbidding union-imposed wage rates. We cannot improve the general welfare by following union policies that restrict production by making high wages higher for some workers, with the result that low wages are kept low or nonexistent for other workers.

  Whenever union workers get a raise above free market wage rates, this increase raises production costs, and as a result prices must be raised to consumers. With higher prices, fewer goods are sold. When fewer goods are sold, some of the workers are laid off and the laid-off workers must then compete for the lower-paying jobs. Their competition in these next lower-paying jobs drives some previously employed workers out of jobs. This forces their wage opportunities still lower. Such policies restrict production and keep men from working where they can produce the goods most wanted by society.

  Much of this is, of course, due to the popular fallacy that only an equal exchange is a fair exchange and that if one person, the employer, for example, gains, he must have done so at the expense of the worker. This is responsible for so much of the antagonism against the capitalist, against the investor, against the saver—the belief that his gain is unearned and that the capitalist or saver is getting something at the expense of the worker. This is Karl Marx’s exploitation theory. It is the theory of class warfare as opposed to the market theory of voluntary social cooperation.

  Marx put great stress on this. He believed that under the natural law of wages, employers worked the workers too long. Workers produced enough to support and reproduce themselves in, let us say, ten hours. Employers worked them eleven or twelve hours. According to this idea, what workers produced in the extra hour or two was taken and kept by the capitalists. So one of the chief policies of labor unions has been to demand shorter hours for the same pay. If you shorten hours for the same pay, you have less production. Less production does not provide a higher standard of living. If widely practiced, it must mean higher prices and a lower standard of living. Of course, when this happens as a result of free market processes, it means that market participants prefer to take some of their potential increased production in the form of more leisure.

  Another fallacy in this area is the argument that money wages must be raised in order to provide workers with the purchasing power to buy their production. Actually, higher living standards require more production, not more money. Workers can only buy what is produced. If production is reduced because fewer workers are hired, increasing money wages does not provide any more goods. This is an old fallacy. There is no way to increase the purchasing power of one worker by increasing his wages without at the same time decreasing the purchasing power of other workers.

  The employer has no power to set wages. He cannot in the long run pay more than the consumer will repay him. Nor can he long pay less than the market value of labor’s contribution. This Marxian idea simply does not stand up. Yet, today many people honestly and sincerely subscribe to this idea that employers have too much power. Their failure to understand free market economics permits them to believe that in a modem industrial society employers have great power while the poor workers are helpless. Actually, in a free market society it is ultimately the consumers who set prices and thus the wages that employers can and must pay.

  How Labor Unions Affect Wages

  Questioning the virtues of organized labor today is like questioning or attacking religion, monogamy, motherhood, or the home. In public opinion, the test of whether one is for or against labor or the workers or the poor in general is your attitude toward labor unions. One simply cannot argue that certain union policies hurt labor and expect to be taken seriously. The fact is, of course, that union policies have hurt workers in general and particularly those at the lower end of the income scale.

  The essence of present-day union wage policies is to reduce production and to keep the unemployed from finding work and the low-paid from competing for higher-paying jobs. Such policies are not going to raise the nation’s standard of living. We can never improve the general welfare by policies which reduce production. Unions make high wages higher for some, but they make costs higher for other people and thus reduce the goods and services that consumers, including workers, can buy in the market place.

  The unemployed, those at the bottom of the economic ladder, have no voice in union affairs or in setting wage rates. They are completely shut out. Union officers care very little about nonmembers or beginners trying to get started. There are cases in New York where a man cannot get into a union unless his father was in it before him. Since, under the law, only union members can work in certain trades, this has hurt Negroes trying to enter trades white unions have monopolized. If one’s father had to be in the union, how can a Negro ever get into that union? This has applied to other low-income minorities in times past. The unions do not help the relatively poor. They help the aristocrats of labor at the expense of low-income workers. They get privileges for their members at the expense of other workers or would-be workers and they raise prices for all consumers.

  Combinations of workers can only raise wages if they can raise the value or the quantity of the product that they produce. Now, of course, if the quantity produced is smaller, other things remaining the same, the value per unit is greater. However, the available quantity will satisfy fewer consumers and thus provide less human satisfaction. So, if the unions do not increase production, the only way they can raise the relative value of a unit of labor is to reduce the units of labor employed and the quantity of goods produced in that industry. Without the power to keep out other workers, unions can do little to raise the market value of what their members produce. This does not help either the workers excluded or consumers in general.

  We live in an age of mass production for mass consumption. If we do not have mass production, we cannot have mass consumption. So by reducing the amount of production, unions are not helping workers in general. By setting wages at higher than free market wage rates, unions reduce the amount that can be sold. They throw people out of the jobs where they could be most productive. What the unions gain for their own members results in a loss to those who are excluded from cooperating in the task, and it results in a loss to all consumers as they will have to pay higher prices per unit for a smaller quantity of goods and services. Every consumer who does not share the union’s gains will have to go without something he could have bought if the union gain had not raised prices.

  The control of wage rates is also the control of entry into a trade or industry. Such control also determines rates at which a company or industry expands or contracts. In a free society, if the wages in an industry were lower than those forced by unions, that industry would expand. When unions raise the wages of an industry, that industry either has to contract, or, if it stays the same size, it is prevented from expanding as it would if it could pay free market wages.

  Expanding means paying higher wages to attract the more workers needed. It also means producing more goods that consumers want most and lowering prices so the same wages will buy more. Of course, there is also a tendency toward the elimination of profits. Unions can protect their members from the competition of other workers merely by raising union wage rates, because then the employer cannot afford to employ any more. This is one of the inevitable results of the union seniority principle. Those with high seniority are not worried about those who lose jobs because of higher union wages.

  Effect of Union Policies on Savings

  One of the most important factors in the labor situation is the effect of union policies on employers, savers, and investors. Many think that wages can be raised at the expense of the employer or the investing owners, and thus higher wages need not hurt the consumer. They think you can just reduce profits a little bit more and that will take care of the higher wage costs. As we have tried to make clear, the way to raise the wages of workers is to increase the savings invested in tools that workers can use to increase their production.

  The accompanying table may help to give us a better understanding of some of the problems faced by workers and by those who try to make a living by employing people. Assume a steamship which cost $2 million to build and which is expected to last 20 years. The yearly depreciation and interest charge would then be $150,000. The owners assume an expected market revenue of $14,100 per week. It is expected to operate 50 weeks of the year. The people who are investing this $2 million considered it carefully in advance. If their forecast is correct, they expect their weekly costs will be:

      Depreciation and interest

      Labor wages

      Other operating costs


  and they hope for profits of $1,000 over and above the interest which they could get by lending the money out. The total of the items mentioned comes to $14,100.

        Steamship Costs $2 Million and Lasts 20 Years Yearly Depreciation and Interest Charge—$150,000 Market Revenue $14,100 per Week (50 weeks)

        Weekly Cost            Free Market Wage Rates             Union Forces Wages Up

                                                                                              10%             25%               50%

    Labor Wages                   $ 8,000                                $ 8,800          $10,000           $12,000

Other Operating Costs          2,100                                    2,100               2,100               2,100

Depreciation and Interest         3,000                                 3,000              2,000*             none*

 Profit                                     1,000                                      200                none                none

        *Amount available toward $3,000 expense.

  Of course, if they foresee future developments incorrectly, they will suffer a loss. But if they have foreseen future operations correctly, if they have calculated their labor and other costs correctly, and if they have estimated correctly what the public will pay for the service, then and then only will they earn the estimated profits. Then only will they earn the estimated profit and be able to replace the ship and continue to employ the workers after 20 years.

  In order to make this problem easy to understand, we shall assume that this ship is on a lake and cannot be moved to be used any place else. So once this investment is made, those who have turned their savings into a steamship cannot withdraw them. If a labor union has the power, either through public opinion or through the laws of the land, to raise wages above those prevailing in the market at the time, the investors will then be at the mercy of the unions.

  Now, we shall assume in the second column of figures that the union is able to threaten a strike or otherwise use its power to raise wages 10 per cent. This increases the cost of labor to $8,800 and reduces the profit, beyond the charge for interest, to $200. Under such a situation, the owners will continue operating. They will still get a small profit, smaller than they had calculated, yet more than they would have gotten if they had lent their money out at market rates of interest. They are still—you might say—ahead of the game.

  The union members, having found it easy to use their power to get this 10 per cent increase, are still not satisfied. They try it again. Let us assume that this time they increase wages to 25 per cent above free market wages. You see the results in the next column—a situation in which the workers are then getting a weekly total of $10,000 in wages. There are no longer any profits after interest. In fact, the employers are not covering their depreciation and interest. They are only getting two-thirds of this expense, or $2,000. Under such circumstances, they will still operate the steamship. If they stopped operating, they would get nothing for depreciation and interest. $2,000 is better than nothing. Everyone prefers a little something to nothing. We even prefer a small loss to a larger loss. At this rate, when the ship is worn out, the owners will not be able to replace it. They will not have depreciated enough. So, of course, when the ship is worn out, this business will be ended and the men will lose their jobs.

  But assume the union workers do not see this. Suppose they go on and ask for a further increase. This time we assume they seek a total increase of 50 per cent. Then you find the situation in the last column where you have arrived at the margin. The owners receive nothing for their capital, no allowance at all for depreciation or interest on their capital. The operating income would just cover the wages of the workers and other operating costs. Then, it no longer pays the investors to operate their steamship. They have reached the point where they would be operating the ship for nothing. This they do not care to do. So the operation comes to an end and the men lose their jobs. They have killed a good thing.

  Savers Can Be Scared Away

  All this is not very far from reality. For many years, from 1837 to 1947, we had in the United States the old Fall River Line. It was a steamship line that provided overnight boat service between the beautiful harbor of New York and Fall River, Massachusetts, a short train ride from Boston. It was a trip that many people enjoyed and a cheap way to ship freight. The unions kept raising the wages of their members until the steamship line was forced out of business.

  There are lessons to be learned from this illustration. Businessmen can get caught. Investors can get caught. Savers can get caught. Once they put their money into particular forms of capital they are caught.  When unions can raise wages to the point that business income covers only part of the depreciation and interest expenses, the investors will still operate their business, because any income is better than writing off the investment as a complete loss. But what is the effect of this on potential investors? Would you, if you had any savings and saw this happening, try to go into competition or start a similar service elsewhere?

  This is the problem that workers face. Yes, unions can temporarily raise some workers’ incomes. But they also reduce the competition for workers and in the long run they reduce the number of high-paying jobs available. In real life, tools, machines, and other capital goods wear out or become obsolete one by one. They do not all go to pieces at one time. A typewriter wears out and it is replaced. Some small machinery wears out from time to time, but whole factories seldom wear out all at once. Unions can push wages up so long as it still pays to replace the worn-out parts and continue operations. This permits businesses already established to stay in operation, but it greatly discourages the starting of new businesses.

  These union policies thus tend to stifle the very thing that encourages competition for workers and raises wages. If we are to have higher real wages, higher real income, that is, more goods and services, we must have more savings and more businesses competing for the workers. This union policy, of forcing wage rates above those that would prevail in a free competitive market, reduces the savings and the number of employers who compete for workers. Under such policies, people with savings will tend to put them under the mattress or send them out of the country.

  There are many people in many parts of the world who are sending their savings outside of their country, just because of such conditions. They no longer feel that it is safe to invest savings in their own country. Other people stop saving. Why save, if your savings are going to be confiscated? Why not spend, live high, and have a good time while you are here? Still others will put their savings in government bonds in the belief that they will be safer there than invested in private enterprises. But the money will then be spent to buy votes and the interest on the government’s debt will become an added burden on the taxpayers and on the workers too. So we see that if union wages are forced up above free market wage rates, they end by killing the goose that lays the golden eggs of higher wages for all, that is, the increased invested savings that provide higher and higher standards of living for all.

  Only Savings Can Reduce Economic Hardships

  The reason why we have so much starvation in so many countries, in India for instance, is because private property is not protected. Investments are not protected. After India became independent of England, Nehru said that India needed and wanted foreign capital. It is true, he admitted, that India was going to be socialist but he added, if you will put your capital in India, we will promise not to confiscate it “for at least ten years.” How much money would you or any sane person invest in India under such conditions?

  If workers want to raise their wages, they must adopt policies which will encourage savings. We have had this problem in the Western world for a good many years now, for most of this century. However, as union wages have gone up in the more productive industries, which unions can most easily organize, and in what we call bottleneck industries, like transportation, the unions can shut down other industries. They raise the wages of some, but raising wages raises the prices, and with higher prices fewer articles are sold, which means fewer men are employed in the organized industries. The workers kept from jobs in these industries must then compete in some other lower-paying industry. This drives those wages down unless those workers too are organized into politically privileged unions. Then more workers are thrown into competition with still lower-paid workers, until some of them are, by these very “pro labor” policies, forced to work for wages on which they cannot keep body and soul together. Then we feel sorry for them.

  The popular remedy today for such very low wages is a minimum wage law. The minimum wage law says that you cannot employ a man unless you pay him a specified minimum wage. In the United States, this is now $1.60 an hour. We still do not have a dictatorship. Until we do, employers will only employ people if they can hope to get the $1.60 back from consumers. If the consumer says a man’s contribution is only worth $1.50, the employer is not going to pay him $1.60.

  The employer is only an agent of the consumer. So the man becomes legally unemployable. It is now illegal for anyone to hire him. He cannot legally earn what he could in a free market, which is to say, the highest amount any consumer will pay for his contribution. So unemployment insurance was invented to take care of these people. When unemployment insurance payments expire, the popular remedy is relief or welfare payments, which become a burden on taxpayers who are, of course, in the long run, the workers. The only possible outcome of such policies is higher prices, higher taxes, less production, and more poverty.

  People with the best of intentions and the least economic understanding constantly try to help the people on the bottom of the economic ladder by governmental intervention. We have had the National Recovery Act, which was supposed to help both business and labor by letting them organize with government help to set high prices and high wages. We had the Agriculture Adjustment Act. We had the Securities and Exchange Act. We had many such acts with nice sounding names and preambles expressing the best intentions.

  The real question always is: Are such laws a sound means for obtaining the desired or specified ends?

  The National Recovery Act did not produce national recovery. The Agriculture Adjustment Act did not adjust agriculture to consumers’ wishes. We have had surplus after surplus. We have given billions of taxpayers’ dollars to the farmers and after thirty-five years still do. The so-called farm problem is still with us. Only one such law has lived up to its name. The Unemployment Insurance Act has guaranteed that we will have unemployment.

  These interventions did not increase production. In a free market society everybody can get a job at the highest wage the consumers will pay for his contribution. He cannot long get any higher wage; and nothing that government can do will change this situation or improve it. But many workers and voters believe unions can raise the wages of all workers.

  Governments, of course, have to do what is popular; they cannot do what is unpopular. Today it is popular to think that no worker’s wages should ever be allowed to fluctuate downwards. Wage rates, it is thought, should only move upward. So our laws and labor unions attempt to prevent any reductions in money wages.

  The market system permits consumers to change their wishes and wants. When these shift, employers have to change the things they produce to satisfy the customers. The way this happens in a free market is that the prices of things no longer wanted in such large quantities go down, while the prices of things for which demand has increased go up. Businessmen switch from producing losing lines of goods to producing goods on which they hope to make a profit. They stop producing goods that can only be sold at a loss. When the demand changes, they make fewer candles, for instance, and switch to producing electric bulbs and lamps. And so it is that workers must switch to different industries.

  Nowadays, we no longer permit any wages to fall. So if employers can no longer pay the union-demanded wages, they must cease operations altogether and fire everybody, including those who might be satisfied with slightly lower wages until they can find better-paying jobs.

  Employers and Employees Not Enemies

  In real life, workers and investors in the same company are not competitors. Production and marketing are not class warfare. Savers, employers, and employees of the same company are team workers. A demand for a Ford automobile is a demand for a Ford factory and for Ford workers. All those needed to produce the factory and the autos are a team. Anything which helps an automobile company helps all those who are on the team, either as investors or workers. The ultimate demand of consumers is for a team combination and it is this free combination that is going to help all of us have more of the things we want most.

  The demand for workers at higher wages should come from those putting increased investments to work. New investments always seek new workers. Then all other employers have to pay the new higher wages, because no employer can keep workers if a competitor is offering higher wages. Present union policies cannot raise the wages of all workers. They lead only to higher prices and lower production.

  If we are going to stop the ever upward wage-price spiral before there is a complete collapse in the value of the monetary unit, we must create a climate that will lead to the repeal of all laws which permit unions to exclude qualified workers from competing for jobs in union-organized industries. We must stop subsidizing unemployment and permit wages to be set by free market competition in the service of consumers.

  This is not the policy in most countries of the world. Under present policies, workers are getting higher money wages which are lower real wages because the value of the monetary unit is constantly being diluted. We are going into progressive inflation. Savers are being liquidated. Their property is being confiscated. New savers are scared away.

  Politicians are constantly afraid, and rightly so, of doing things which are unpopular. They endorse popular spending measures, but they shun the resulting costs; and to stay popular they have resorted to inflation. This is the so-called Keynesian policy. It is set forth in John Maynard Keynes’ book, The General Theory of Employment, Interest and Money. The key sentence is: “A movement by employers to revise money wage bargains downwards will be more strongly resisted than a gradual and automatic lowering of real wages as a result of rising prices.”

  This was the policy endorsed by Keynes. It is the policy of most governments in the Western world today. Keynes knew, as every economist does, that the only way that you can employ more people is to lower the wage rate. But ever since World War I this had become politically difficult in Great Britain. Powerful British labor unions, with the help of the Fabian Socialists, had built up public pressures which opposed any lowering of any money wages. British politicians of all parties were afraid to resist this popular union policy. So in 1931, when the number of unemployed became unbearable, the politicians in office preferred to lower wages by devaluing the British pound. The workers kept their puffed-up pound wages but their pounds bought less.

  In 1936, Keynes gave this political policy academic sanction in the book and sentence just quoted. Since then, most Western nations have adopted this “Full Employment” policy. In essence, when unemployment is considered too high, wages are lowered by lowering the value of the monetary unit. This is done by increasing the quantity of the monetary units. We have gotten into a situation of ever-rising wages and prices with more and more workers paid less than they would earn in a free market.

  Neither union leaders nor union workers are stupid people. Keynes and the British politicians were able to fool the employees in England when they first tried this scheme in 1931. They changed all the index numbers, making it difficult to document the price rises reflecting the lower purchasing power of the pound. But now every union has a statistician, who can see from the official cost of living indices that prices are going up. And when they go up, the unions demand still higher wages. This system of Keynes’ has just about reached the end of the road. You can no longer fool the workers by lowering the value of the monetary unit. They are now wise to what is happening and they are not going to take it much longer.

  The only final answer to this problem is more economic education showing that the only way to keep raising wages permanently is to increase production and the way to do this is to encourage savings. For it is only increased savings that can provide workers with more and better education and more and better tools with which they can produce and buy more and better products that they want most.

  Life is an unfinished series of wanting things. From the day we are born to the day we die, we want things we don’t have. If we didn’t, we wouldn’t be normal human beings. We would have no reason to eat, work, or get married. All life is a struggle to satisfy more of our wants.