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Living-wage Follies

Mises Daily: Wednesday, February 05, 2003 by

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Sympathy and justice are wonderful. I'm all for them. But neither is furthered by the "living wage" movement. My own university, to its great credit, hasn't surrendered in undeserved guilt, as a couple of letters in the student newspaper and our Interim President's appropriate and courageous response to protestors illustrate. But I think the proper role of a professor is to focus on basics. There's room for just a few here. 

First, one must not identify a person with that person's labor. This mistake sounds vaguely Marxist; certainly nobody who understands capitalism confuses the two. I wouldn't pay a Nobel laureate more than $10 to clean my gutters, but that's not my judgment of his worth as a human being and neither intends nor conveys any disrespect. This error pops up in the "living wage" argument that respect for workers as human beings requires a higher price for their labor. Human beings are so much more than their labor, and it's interesting that capitalists seem to understand that better than do the living-wage protesters.

Second, any argument must be rejected if it involves "real worth (or value)" determined independently of markets. This error, again found in Marx's "labor theory of value," was cleared up in the 1870s with Carl Menger's insight that value is always an individual's subjective judgment shaped by context. Here's the principle: If I'd pay $100 to have a task done, and you'd do it for $2, we might bargain to $60, a price at which I'm paying less than it's worth but you're receiving more than it's worth. Paradox or contradiction? Not with "to me" and "to you" properly inserted. And the question "Yeah, but what's it really worth?" has no meaning whatsoever.

If many more buyers and sellers jumped in, their competition would establish a price (say $6 per hour) for this type of labor at which the buyers to whom it is worth more, and the sellers to whom it is worth less, are equal in number (say 1,000 person-hours per day). That thousandth hour is worth barely more than $6 to its buyer and barely less than $6 to its seller. Prudent economists are a little uncomfortable concluding that this market price "measures value," but it's the best anyone can do. So whether your interest is "the living wage," economic systems without markets, or "comparable worth" legislation, keep in mind that "worth" or "value" cannot be determined except by voluntary market exchange.

Rather than pursuing economic issues that were nicely addressed by our student letter-writers, I'll conclude my short list of basics with a couple of related implications of the moral foundation of capitalism. They may be less familiar and more controversial, but it's vital that our judgments of equity be consistent with our widely held value of freedom.

Third, it's important to appreciate that traders deal essentially as equals. That's because voluntary exchange requires each participant to make the trade beneficial to the other. Consider a rich executive who's negotiating for the care of her lawn. Distracted by her wealth, we might stop with the insight that the contractor must meet her terms, suggesting her power over him. But he has terms too, and she must meet them or he walks, so he has the same power over her.

Of course differences in wealth, education, gender, race, or social status are relevant to many issues, but not to the principle that traders deal as equals. Again, the thoughtful scholar of capitalism is aware of this; it's various protesting critics who seem to view the less‑wealthy as second‑class citizens. That's curious, but not really surprising.

Fourth and finally, everyone who's genuinely concerned about human dignity must take seriously the implications of capitalism's "trader ethic." It requires each party to respect the other, to acknowledge that what one receives must be earned by providing the other greater value in return. (Indeed, that's what "earning" means.) Neither receives nor grants charity; each honestly pays for the value he receives.

This is how to treat others with dignity, not by paying more for labor than its market price and thereby turning an honestly earned (even if not very high) wage into a mixture of wage and dole. Many proud workers, like some I've dealt with, are insulted if they are offered more than they asked for or think a job is worth. If one wants others to have both dignity and more money, that money has to be earned through greater skill and responsibility. One doesn't respect others as equals by posturing as a noble grantor of charity without whose gifts the weak recipients of one's welfare couldn't make it.

It's encouraging to see energetic and intellectually curious members of our community caring about others, but feelings not properly directed by reason can do more harm than good. The university shouldn't put its workers on its own welfare system. To respect their dignity we must pay them what they earn, and that can be established only on the market.


John Egger teaches economics at Towson State University. Send him MAIL.