Systems Matter Part 12: Wages

Thank you for all your kind responses to our taking the time to simply review the heritage we have in our free enterprise system. Systems do matter. I am amazed at how many people in the United States have no foggy idea how our system works, why it has allowed us to experience more wealth than any other country in history, or how it compares with less efficient systems used in other nations of the world. We just presume that the benefits have always been here and will always actively remain in place to keep us wealthy. That is not true. 

In the more than 150 countries where I have traveled and worked, I have listened to the heart cry of the people who would give almost anything to enjoy the cultural and economic advantages we enjoy. But almost as sad is the realization, when I return home again, that our own citizens know so little about our country, cannot explain how our systems came to be, or are unable to relate to how easily we could, and are, losing those economic and cultural advantages. 

Our people have no basis for comprehending that each time government entities impose another layer of regulations limiting our historic freedoms of economic and cultural choices, and each time there is imposed another impediment of higher taxation, fees, duties, and permits, we lose to the same degree the magic and efficiency of free enterprise, and eventually we lose the wealth and strength of our nation. 

The key to wealth of a nation is new production and growth and the ability to increase income. Everybody has to end up better off. Our economic system has always been based on freedom of economic and cultural choice. Our national success has existed largely because of our system of free enterprise. 

In the last few sessions, we have discussed the highly efficient way that the free enterprise system freely collects, measures, and distributes signals and information of all kinds to the necessary decision makers within the economic system. No centralized system of committees or Marxist Gosplan could ever come close to matching such efficiency or accuracy. The basic signaling components of the system include prices, profits, losses, and wages. 

We will now focus our discussion on the concept of

  • Wages: The compensation resulting from the labor of a person is usually referred to as wages. In the beginning, the whole result of labor belonged to the laborer. But eventually the laborer had to deal with a landlord because he didn’t own the land. The amount of rent payable to the landlord for the use of the land then had to be subtracted from the laborer’s gross compensation. The laborer eventually had to subtract out additional amounts for capital improvements, like tools, transportation equipment, and, perhaps, livestock.
The person who tills the land doesn’t usually have the means to cover his living expenses until he harvests and sells a crop, so he hires out to a landowner who agrees to advance him enough to cover his necessities during the year. Now, the landowner or farmer who employs him has no interest in doing so unless the capital he has put out is returned to him, plus a profit. That profit becomes another deduction that the laborer has to recognize from the production of his labor on the land. That scene and sequence is played out in nearly every other example of manufacturing or industry. The workman needs someone to cover his necessities until the product is manufactured and sold. 

The laborer ends up with his share of the endeavors, and that becomes his profit. The owner subtracts all the costs of the endeavors from the amount he receives from the sale of the goods. That amount becomes his profit. Adam Smith wisely perceived that 
“A man must always live by his work, and his wages must at least be sufficient to maintain him.”(1) 
“What are the common wages of labor, depends everywhere upon the contract usually made between those two parties, whose interests are by no means the same. The workmen desire to get as much, the masters to give as little as possible. The former are disposed to combine in order to raise, the latter in order to lower the wages of labor.”(2)

Ultimately, wages are dependent upon productivity. There is a positive correlation between the value of what is produced and the wage paid to produce it. The information from those signals moves silently and quickly. A firm that pays a wage that exceeds the value that the laborer produces is quickly out of business.

But what signal tells the firm that it is paying too little or less than the value that the laborer has produced? It is the beautiful and efficient concept called competition. This concept is also foreign to the Marxist socialist system. But the free enterprise system operates here in fairness so that in the system everybody ends up better off.

If a business is paying a worker ten dollars per hour, but the worker is producing goods in excess of twenty-five dollars per hour, another like-kind business is going to snatch up that worker and offer to pay him nearly twice as much as he is presently earning. Guess what the worker is going to do? Wages in a competitive market reflect the productivity of the labor.

Two of the factors that triggered the ranting and raving of Karl Marx and Friedrick Engles were profit and capital. They believed that there should be no such thing as profit. If the workers owned everything, produced everything, and distributed everything, then there would be no need for profit, and all the workers would have more. They also totally misunderstood the concept of capital, and wished to eliminate every capitalist and everything having to do with capitalism.

Communism tries hard to fan the hatred between the classes. The workers were pitted against owners. Capital has to do with more than just money; it simply has to do with “stuff.” Economists refer to human capital, for example, as the additional sets of skills and experiences that a worker brings to the marketplace. Human capital can be increased by a person through years of experience in a certain field, through additional formal education, or advanced training.

As related to wages, any kind of capital, including human capital, that supports the worker increases his ability to produce at a higher level, thus increases his likelihood of a higher wage. The higher level of productivity that comes with a construction worker who has appropriate tools for the job increases his wage earning value in the marketplace. Marx simply didn’t get the concept that the stock of capital that supports the worker increases his productivity and his possibility for increased wages. Terms like, capital, capitalist, and capitalism really should have had nothing to do with the argument of class struggle or revolutionary war cries. That mantra was a political spin needed to fan the flames of the Bolshevik Revolution

Business owners find that by investing capital into their ventures they can greatly boost the efficiency and profitability of their enterprise. The capital infusion increases the productivity and the higher productivity leads to higher wages. The higher productivity can also result in higher distribution possibilities that can increase profits and allow for additional infusions of capital. Everybody ends up better off.

When impediments are placed on the businesses through additional regulations, restrictions, or higher taxes, there is less growth, fewer profits, less money for capital infusion, less productivity, fewer increases in wages, fewer distribution possibilities, and fewer wealth possibilities for both the individuals and the nation.

Wages and the economic subsets of competitioncapital, and production, along with the other components of prices, profits, and losses, are incredible sources of information and signals that guide the efficiency of the free enterprise system.

Contrary to the economic philosophy of the Marxist socialists’ model, reason seems to bear out that what is good for the capitalist is also good for the worker.

Next Week: Not Raising Hogs

(Research ideas from Dr. Jackson’s new writing project on Cultural Economics) 

© Dr. James W. Jackson   

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